The Swiss company SMB is located in Biasco near Locarno and specializes in precision forging of high technology components. The production of high precision forgings is viewed as an art more than a science, and SMB's skill in making forgings is highly regarded. A German company director said that SMB has long been known for its high quality forgings with smaller diameters, a characteristic important to a gas centrifuge program.
Iraq's reasons for contacting SMB in the late 1980s are not fully known. The Iraqi gas centrifuge program placed a direct order for forgings ostensibly for automobile parts, but in fact they were for gas centrifuge components. Iraq may have also sought to obtain SMB's assistance in creating an indigenous capability to make forgings for gas centrifuge components. Iraqi procurement companies arranged to buy a minority share in SMB, as a condition of SMB participation in the construction of a tool shop, which was part of an effort to create an automobile manufacturing complex in Iraq. This tool shop, which was never built, may have been intended to also provide items for the nuclear program.
Building a Tool Shop
In May 1989, according to Gianni Martinelli, Director of SMB, the Matrix Churchill Group sent SMB a request for a quotation for the supply of engineering and technology for a tool shop for producing forging dies, which are devices to form metal. Martinelli said that the tool shop was part of a group of factories needed for supplying a large automotive and truck complex in Iraq that was to be built by General Motors and Daimler Benz in Iskandiriyah by the State Enterprise for Automotive Industry.
According to a May 1990 Matrix Projects document, a division of Matrix Churchill, Ltd., Matrix Projects had a turnkey contract to provide a "Hot Forging Die Workshop" to Nassr Enterprise for Mechanical Industries, near Taji. The workshop would produce dies for a range of manufacturing industries, including dies for the General Motors car production plant.
Matrix Churchill told Martinelli that a condition for obtaining the contract was to allow Durand Properties Ltd. to purchase shares of SMB. Martinelli said that he believed at this time that Durand Properties was a financial company owned by Iraqis, Saudis, and Kuwaitis, although in fact it was controlled by Safa al Habobi, one of Iraq's most senior and successful military procurement officials.
Martinelli viewed this contract as a chance to obtain other contracts and a long term cooperation with Iraq. Thus, SMB's board of directors agreed to sell a minority percentage of stock subject to the following conditions:
The investors accepted these conditions, and an agreement to sell about 18 percent of SMB's stock at a cost of 3.4 million Swiss francs was signed on September 17, 1989. The purchase of these shares was finalized in June 1990, when Habobi's representative R. K. Khoshaba and the Executive Director of Finance at TDG, visited Lugano, Switzerland.
The shareholding in SMB was in the name of the Swiss company, Fartrade Holding, S.A. The shares were to the bearer.1 Fartrade Holding borrowed 2.3 million Swiss francs from Durand Properties.2 These funds were provided by the Al Arabi Trading Company funneled through two banks and TDG. One million Swiss francs were borrowed from the Swiss Banca Del Sampione.
Fartrade had only one director, a Swiss lawyer, who acted exclusively for Habobi. In that role, the lawyer held the shares in trust for Habobi, who in turn held the shares in trust for Durand Properties.3 The document linking control of the shares to Habobi was held only by the lawyer and not filed anywhere. Thus, Iraq's partial ownership of SMB was disguised from the public and government. By this time, however, Martinelli knew that Durand Properties was owned only by Iraqis.
Habobi and Martinelli expected Fartrade Holding to acquire additional shares within six months, although Iraq's invasion of Kuwait ended this deal. If this transaction had been completed, Iraq would have owned 30 percent of SMB. After the embargo was imposed on Iraq, SMB bought its shares back.
While in Lugano, Khoshaba conducted other business. He asked the lawyer to establish companies in Luxembourg and Liechtenstein. He also arranged to set up a bank account with the Banca Del Sampione in Locarno. Although the bank expressed reluctance to establish accounts for off-shore companies, the bank official told Khoshaba that the bank now knows Habobi and would be pleased to open accounts in Habobi's name.
Purpose of the Tool Shop?
Information indicates that an undeclared purpose of the tool shop was to make forgings that would be machined into gas centrifuge components. In November 1989, Matrix Churchill submitted an export license application to the British government for the export of equipment related to a "Hot-Die Forge-K1000." The export was slated to go to Nassr Enterprise for Mechanical Industries and intended for the non-military production of forging dies.4 A reasonable conclusion is that the Hot-Die Forge-K1000 was the Hot Forging Die Workshop, or the tool shop that SMB was planning to help make in Iraq.
This equipment listed in Matrix Churchill's license application comprised a Trident center lathe, and the equipment was intended for Nassr, whose business on the application was stated to be "engineering." The expected shipment date was March or April 1990.5
Based on a set of drawings found at Matrix Churchill and supplied by Iraq, British authorities later determined that the purpose of project K1000 was to manufacture gas centrifuge components.6 The Iraqi gas centrifuge program had provided these drawings so that Matrix Churchill could make 10-30 each of over 30 pieces of components for prototype centrifuges. (Iraq also provided centrifuge component drawings to the German firm C. Plath and the Swiss firm Schaublin, both of which supplied Iraq with centrifuge components.)
During the first half of 1990, British intelligence had become suspicious that project K1000 was related to a weapon system.7 These concerns led to objections within the British government to the issuance of an export license in the case of the Hot-Die Forge-K1000. But the British export control authorities determined in July 1990 that the items in this application did not in fact need an export license. In the end, however, Matrix Churchill did not export the equipment because of the embargo that followed Iraq's invasion of Kuwait in early August.8
In April 1990, the Iraqi Industrial Projects Company (IPC) placed an order with SMB for 1,000 forgings ostensibly for an automobile parts manufacturing complex in Iraq. The true purpose of the forgings was for the manufacture of end caps and baffles for gas centrifuges, according to Iraq gas centrifuge experts interviewed after the Persian Gulf War. IPC, they said, was the first government front company created by the Iraqi gas centrifuge program.
According to Martinelli, IPC requested a price quote for 4,000 gear forgings. After receiving an offer, IPC asked to place an order for 1,000 pieces. Martinelli wanted to refuse the order, because this quantity would not justify the tooling costs. However, the Iraqis persuaded him to start with a small quantity as a "trial offer," costing 45,000 Swiss francs. SMB personnel were told that if the quality and delivery were satisfactory, SMB would receive a major order.
According to Martinelli, IPC told SMB that the steel for the parts would be delivered from Germany. He said that the Iraqis never mentioned maraging steel, or in particular the sensitive 350-grade maraging steel that has been used in gas centrifuges. In addition, Martinelli said that SMB did not check the composition of the steel. The steel was forged in the same way as tool steel, he added. An Urenco expert, however, expressed surprise in an interview in 1992 that SMB did not need to know the type of steel it forged.
The initial order was for about 250 pieces of each of four basic shapes. Figures 1, 2, 3, and 4 (thumb-nailed below) show the geometry of five parts, where they are marked K1000/1 through K1000/5 (K1000/1 and K1000/4 are similar and on the same drawing). Forging number K1000/2 could be for a bottom cap. K1000/3 may be for a top cap. K1000/5 could also be for a top cap. K1000/1 and K1000/4 appear to be for baffles. (Examples of finished parts can be found in the discussion about the firm Schaublin)
The drawings looked like transmission gears for the automotive industry, according to Maurizio Zifferero, the then head of the IAEA Action Team, in an interview in 1992. If one was not familiar with centrifuge components, one might have been fooled, he added.
In July 1990, SMB shipped Iraq, via the Zurich and Frankfurt airports, 888 forged pieces, weighing in total 1.58 tonnes. The shipment included 138 pieces of forgings K1000/1 and K1000/4 (see figure 1), and 250 pieces each of the other three forging designs.
Based on a tip, German customs officials seized this shipment at the Frankfurt airport along with a shipment from Schaublin to Iraq. The source of the tip is not publicly known, but the British intelligence agencies had penetrated Matrix Churchill, and these agents may have been the source.9
The Swiss government launched an investigation of SMB following the seizure of the forgings. However, Swiss officials dropped their investigation of SMB in 1992. SMB's export of 350-grade maraging steel was not illegal because of a loophole in Swiss export control laws. The Swiss law was based on international export control lists, but the specification that should have covered SMB's export of maraging steel was incorrectly translated from English into German, effectively creating a loophole in the export of 350-grade maraging steel from both Switzerland and Germany. Partially as a result, the full extent of SMB's participation in Iraq's nuclear program was never learned.
1Bonds that are not registered in any name but are owned by whomever carries the physical certificate of the bond. They have been used as a form of untraceable currency, and may still be used that way internationally. However, many countries have tightened their laws to prevent this practice. [back to the text]
2 See for example, June 15, 1990 memo, "Third and Final Report on SMB," to Dr. Safa from R. K. Khoshaba. This memorandum can be found in "Details on Iraq's Procurement Network," Congressional Record-House, August 10, 1992, H7877-H7878. [back to the text]
3 See for example, June 15, 1990 memo, "Third and Final Report on SMB," to Dr. Safa from R. K. Khoshaba. This memorandum can be found in "Details on Iraq's Procurement Network," Congressional Record-House, August 10, 1992, H7877-H7878.[back to the text]
4 Sir Richard Scot, Report of the Inquiry into the Export of Defense Equipment and Dual-Use Goods to Iraq and Related Prosecutions, D6.223, p. 668.[back to the text]
5 Two other license applications from Matrix Churchill were for a "hot die forge." Their relationship to the above application is not clear other than the customer is Nassr. Ibid., D6.224, p. 668. [back to the text]
6 Ibid., D5.62, pp. 545-546.[back to the text]
7 Ibid., D6.263, pp. 690-692.[back to the text]
8 Ibid., D.268, pp. 692-693.[back to the text]
9 Ibid.[back to