WASHINGTON — In September of 1990, Customs Service agents padlocked the doors of an Iraqi front company in a Cleveland suburb and, in response to a presidential order, froze its $2 million in assets.
Customs Commissioner Carol Hallett said the action against Matrix Churchill Corp. came after agents learned that Iraq, which had invaded Kuwait one month earlier, had bought the firm "for the specific purpose of illegally acquiring critical weapons technology."
But, unknown to Customs officials, government intelligence agencies had been aware of Matrix Churchill's role in Baghdad's arms procurement network for more than a year and had warned Bush Administration policy-makers, according to newly obtained documents and sources interviewed by The Times.
The Administration, however, allowed Matrix Churchill to continue operations, in keeping with President Bush's decision to try to influence Iraqi President Saddam Hussein through favorable policy on high-tech exports and economic incentives.
Administration officials maintain that any military assistance to Iraq was an inadvertent consequence of the attempt to moderate Iraqi actions. They said that they were unaware of the extent of the network's operations in this country and that top officials were distracted by other foreign policy concerns.
But Rep. Henry B. Gonzalez (D-Tex.), whose House Banking, Finance and Urban Affairs Committee has been investigating Matrix Churchill and the Administration's policies toward Iraq, said: "The Administration knew a great deal about Saddam Hussein's military procurement program and made a conscious decision to tolerate it, and in many cases facilitated the effort."
As early as June, 1989, a top-secret U.S. intelligence report had identified Matrix Churchill's British parent company as a key component of the Iraqi network, according to a newly disclosed document.
And two months later, Defense Department analysts discovered that the Cleveland operation had funneled tens of millions of dollars worth of U.S. technology to Iraq's nuclear weapons and ballistic missile programs, according to sources.
Recently declassified State Department documents show that after Iraq's invasion of Kuwait, Administration officials calculated that the Iraqi regime spent $10 billion to $20 billion acquiring nuclear weapons and missile technology in the 1980s. Most of the buying took place through a series of front companies and shadowy agents operating in Europe, but some occurred in the United States.
The Iraqi network here depended heavily on financing from the now-notorious Atlanta branch of Italy's Banca Nazionale del Lavoro. The branch provided Iraq with $5 billion in illicit loans, much of it used to buy military goods and technology, congressional and federal investigators say.
The contact point between BNL and the network was Safa Haji al-Habobi, who has been named in intelligence reports as the person who ran the daily operations of the procurement network worldwide. Court records identify him as the director of one of Iraq's top military facilities and an officer of numerous commercial front companies set up by Iraq to buy technology.
Habobi was one of four Iraqi government officials indicted along with three BNL employees at the end of the Persian Gulf War in the bank case. They were charged with conspiring to defraud BNL and U.S. regulators by concealing the Iraqi loans. Authorities believe that Habobi is now in Iraq.
Among the front companies he headed were Matrix Churchill and its British parent, Matrix Churchill Ltd., the indictment says. The British company was a leading manufacturer of high-technology lathes with commercial and military uses.
Habobi appears to have used the Ohio subsidiary to try to procure U.S. items from an ambitious shopping list. Court records and other intelligence reports allege that the Cleveland firm helped Iraq obtain U.S. technology for such projects as the development of a nuclear-capable ballistic missile, enhancement of Scud missiles and construction of the famous "super-gun" by Gerald Bull, a renegade military designer from Canada.
"Materials were exported to Iraq through Matrix Churchill that we believe had military uses," said Steve Hartkop, a Customs supervisor in Cleveland, who declined to provide additional information because the investigation is continuing.
Among the technology and equipment listed in court records was a $14-million carbide-tool manufacturing plant able to cut precise parts for nuclear weapons and aircraft, a $40-million brass-casting factory and a $26-million ductile-pipe plant. Iraq did receive some of the equipment.
In each case, financing came from BNL in Atlanta. And, federal investigators say, many of the contracts required the sellers to pay kickbacks to Matrix Churchill of up to 10% of the project's price. Some investigators suspect that the fee was demanded by the Iraqi government, demonstrating the government's role in the network.