Return to an Address of the Honourable the House of Commons
dated 18 July 1996 for the Appendices to the Report of the Inquiry into the Export of Defence Equipment and Dual-Use Goods to Iraq and Related Prosecutions laid before The House on 15 February 1996*

Volume One
Section D Arms and Defence-Related Exports to Iraq
Chapter 2 Applications of The Guidelines in the period
December 1984 to August 1988

Excerpt:
Specific Cases - (xvii) Machine Tools

D2.260 The manner in which exports to Iraq of machine tools were dealt with is one of the major matters to be covered by this Report. The topic, for the most part, belongs to the post- ceasefire period but a survey of exports to Iraq in the period preceding the ceasefire would be incomplete without some reference to the early machine tool ELAs and to the Government’s attitude to and treatment of those ELAs. As will later become apparent, that attitude and treatment had a strong and continuing influence on the manner in which the post-ceasefire machine tool ELAs were dealt with.

D2.261 Computer numerically controlled (CNC) machine tools are quintessentially dual use in character. They can be put to the manufacture of whatever engineering product may from time to time be desired. They may be switched from the manufacture of one product to that of another. The products may be civil in character or defence-related. Machine tools have been described as the essential building blocks of any modern industry.

D2.262 Machine tools were subject to export licence control for COCOM reasons. Those that represented the most advanced technology were licensable. Licences would not normally have been granted for export to any of the COCOM proscribed countries. Whether licences would be granted for export to other, non-COCOM proscribed, countries would depend on the degree of the risk of technology transfer from the recipient country to a COCOM proscribed country. Machine tools that incorporated technology that, by Western standards, was out of date would sooner or later, be released from licence control (by an appropriate amendment to the current EG(C)Os), or, pending release from licence control, export licences would be granted.

D2.263 Machine tools were not regarded by the DTI as “defence equipment” or “defence- related equipment” so as to be subject to the Howe Guidelines. Before the introduction of the Guidelines, ELAs relating to machine tools for Iraq (or Iran) would have been referred by the DTI to the FCO for advice on technology transfer risks but would not normally have been referred to the MOD.

D2.264 The first mention of machine tools in the departmental papers submitted to the Inquiry is to be found in a letter dated 15 August 1985 from the Bank of England to the Treasury relating to an application for ECGD support for the supply of machine tools to Iraq. The supplier was not one of the companies whose supplies of machine tools later came to the attention of the departments and in due course, of Customs and Excise. The Treasury, in reply, agreed that the supply was suitable to be covered under the UK-Iraq Financial Protocol. *377 The transaction was not submitted to the IDC for approval. The reason, no doubt, was that it was not considered to involve defence-related equipment. *378 Nothing of interest turns on the supply of these machine tools. The eventual use to which they were put in Iraq is not known. Much more important were the ELAs relating to the supply of machine tools to Iraq that were submitted in 1987 and became the subject of an important Intelligence Report issued on 30 November 1987 to the DTI, to a number of FCO and MOD desks and to the JIC. *379

INTELLIGENCE REPORT OF 30 NOVEMBER 1987

D2.265 The Intelligence Report of 30 November 1987 had derived from information supplied to Intelligence agencies by Mr Mark Gutteridge, a senior executive employed by Matrix Churchill Ltd (at that time known as TI (UK) Ltd. a subsidiary of Tube Investments plc). 380 As early as May 1987 Mr Gutteridge had informed his contact, Mr P *381, of “TI Matrix dealings with a London-based Iraqi company” and that “This company is buying milling machines specifically tooled up for arms production”. The information was included by Mr P in a note dated 11 May 1987. The note recorded, also, Mr Gutteridge’s concern “that we should not interfere with this business since it is of high value and will be taken up by the West Germans if TI Matrix withdraw”. *382 The 30 November 1987 Report disclosed that the Iraqi Government had been signing contracts with British and other European firms “for the purchase of general purpose heavy machinery for the production of armaments in Iraq”. Five British companies were named. They included Matrix Churchill Ltd, Wickman Bennett (UK) Ltd, B.S.A. Tools Ltd and Colchester Lathes Ltd. The total value of the contracts attributed to those four British companies was £44 million. Each of the companies, or one or more of its directors, was subsequently prosecuted or threatened with prosecution for export control offences. Only the Matrix Churchill prosecution reached the door of the Court. 380 The source of the information in the Report became public knowledge at the Matrix Churchill trial. Mr P, the intelligence officer to whom Mr Gutteridge supplied the information gave evidence in open Court and Mr Gutteridge made himself available as a witness for, and supplied a witness statement to, the defence. None of the information in the Report was derived from Mr Henderson, Matrix Churchill’s chief executive.

D2.266 The Report went on to say that “Iraq intends to use the machinery purchased to manufacture its own munitions” having previously “been paying inflated prices for finished products from the Soviet Union”. “Cartridges, shell cases, mortars and projectile nose cases” were mentioned as products that would be manufactured. And, in paragraph 4, the report named two Iraqi factories, the Hutteen General Establishment in Iskandariyah, and the Nassr General Establishment in Taji, as the factories at which the manufacture would take place. Projected annual production targets for the Nassr factory were specified in the Report, namely 10,000 122mm missiles, 150,000 130mm shells, 100,000 mortar shells (60, 80 and 120mm) and 300,000 fin- stabilised 155mm shells.

D2.267 This was not the first intelligence regarding Hutteen and Nassr that had been received. DIS had known for some years that Hutteen was an armaments factory and had suspected that Nassr had an arms production facility. The Report was, however, the first intelligence regarding Hutteen and Nassr which had been passed on to the export licensing departments.

D2.268 By the time of the issue of the Report, a number of ELAs for the export of machine tools comprised in the contracts had already been approved.

WICKMAN BENNETT

D2.269 In May 1987, a batch of ELAs had been submitted by Wickman Bennett. In each, the named consignee was the Nassr Establishment at Taji. In each, the “Nature of user’s business” was stated to be “Manufacture of Precision M/c Parts”. In each, the “Precise purpose for which the goods are to be used” was stated to be “Precision Turned Parts”. The latter answer was, on its face, not a statement of a “Precise purpose”. Indeed, a less informative answer can hardly be imagined. But no further detail was sought. The ELAs were referred by the DTI to the FCO, but not to the MOD. The FCO raised no objection to the grant of the licences. The ELAs were never brought before the IDC and the licences were granted on 10 July 1987.

D2.270 A second batch of ELAs was submitted by Wickman Bennett in August 1987. These were accompanied by a written undertaking signed on behalf of Nassr notifying that the goods “are for our own use and will not be re-exported or sold for export”. This form of certificate was in regular use and was intended to provide some assurance that transfer of the goods to a COCOM proscribed country would not take place. It is important to notice that this form of certificate, commonly requested and commonly supplied, and known sometimes as an “end user” and sometimes as an “end use” certificate, did not identify, let alone certify, the use to which the goods would be put. The certificate simply identified the intended user of the goods and contained an assurance against re-export. I shall refer to certificates in this form as ‘end user’ certificates and confine the term “end-use” certificate to the very rare case of a certificate intended to certify the use to which the goods would be put. Each of the second batch of ELAs named Nassr as the Iraqi consignee. The details given of “Nature of user’s business” and of “Precise purpose for which the goods are to be used” were identical to those given in the earlier ELAs. Unlike the earlier batch of ELAs, the ELAs submitted in August were referred by the DTI to the MOD as well as to the FCO. On 24 September and 19 October 1987 the August ELAs were considered by the MODWG and were assessed A(I). Mr J, the DIS representative at the MODWG meeting, in a Note dated 20 October 1987 to DESS2a described the machines as “sophisticated 5-axis precision milling machine[s] which could be used in a variety of industries, including missile production”. Mr J went on to say that “Normally DIS would have objected to this going to Iraq because of the dangers of transfer to the USSR but the transfer by [a Japanese Company] of a 9-axis machine gives us no substantive reason to do so.” *383 It seems clear that the extent of concern over the proposed export of the machines related only to the risk of technology transfer. Otherwise some clarification of the proposed use of the machines would surely have been sought. The ELAs were recommended for approval at the 23 October 1987 IDC meeting. The recommendation was accepted by FCO and MOD Ministers without comment or question.

MATRIX CHURCHILL

D2.271 The Matrix Churchill ELAs were submitted in August 1987. *384 The named consignee was the Hutteen General Establishment. The nature of the consignee’s business was stated to be “General Engineering Products”. The “Precise purpose for which the goods are to be used” was stated to be “Manufacturing of General Engineering Products”, the antithesis of a ‘precise’ purpose. Here again, no further detail of the purpose for which the machines would be used was sought. The ELAs were accompanied by an end-user certificate from Hutteen certifying that the goods were for Hutteen’s “own use and [would] not be re-exported or sold for export”.

D2.272 The Matrix Churchill ELAs first came before the MODWG at a meeting on 15 September 1987. The meeting did not come to any conclusion about the proposed export. A note of the discussion reads “High spec. Possible Soviet end-user. RM2 to obtain full specifications.” *385 An IDC meeting was held on the same day. The Summary Record of the meeting records that “The MOD noted that this machine tool equipment was of a very high specification. They noted that there was a possibility that the USSR was the diversionary destination. It was agreed that the application should remain pending while the MOD investigated further.” *386 These Notes make clear that, as with the Wickman Bennett ELAs, the concern raised by the Matrix Churchill ELAs was nothing to do with the weapon or munition making potential of the goods, a potential of which Mr J, in particular, and the MODWG as a whole must have been well aware, but was concentrated on the risk of technology transfer to the Soviet Union. On 9 October 1987, full specifications of the Matrix Churchill equipment were circulated to MODWG members *387 and at its meeting on 19 October 1987 the export of the equipment to Iraq was assessed to be ‘A(I)’. At the IDC meeting on 23 October 1987 the IDC recommended approval of the export. *388 The recommendation was accepted by MOD and FCO Ministers. No further comment was made or question raised.

BSA TOOLS LTD

D2.273 BSA Tools Ltd submitted one ELA. It was submitted on 12 October 1987 and was accompanied by an end-user Certificate from Nassr, the named consignee. *389 In response to a pro forma request for information made by DTI on 22 October 1987, BSA stated, on 30 October 1987, that the “Nature of [Nassr’s] business” was “General Mechanical Engineering” and that the “Precise purpose” for which the goods were to be used was “Turning operations on wide variety of mechanical components.” 390 The answer to the latter question was uninformative. It was consistent both with the making of components for civil purposes and with the making of components for military purposes. The uninformative character of the answer is obvious on its face. But no request for further details was ever made.

D2.274 The managing director of the company, Mr K A Bailey, expressed his concern at the length of time being taken to deal with the ELA. In a letter dated 10 November 1987 to Mr Cooke (OT2), Mr J E Cammell, a senior DTI official, *391 asked whether the ELA could be given special treatment in order to speed up a decision. In manuscript notes on two separate copies of Mr Cammell’s letter, DTI officials (Mr Beston and Mr Gall) drew attention to the potential of the machine tools for military production and to the need for the ELA to be approved by the IDC and by FCO and MOD ministers. *392 In a letter dated 11 November 1987, Mr Draper (OT2/ELB) estimated that the licensing procedures would take until “late December.” *393 Mr Draper’s estimate led to pressure from Mr Bailey, via a telex to Lord Young, the Secretary of State, for speedier progress for the ELA. In a Note dated 16 November 1987 to Mr Cooke (OT2), Mr Steadman (OT2/3) said that “it may be possible to get the FCO and the MOD to accept, as a general principle, some by-passing of the IDC procedure in cases of this sort where there is no obvious military connection”. But Mr Steadman went on to comment that “They [i.e. the FCO and MOD] may however see pitfalls. The employment of British-made CNC machines in Iraqi or Iranian munitions factories for example could be politically embarrassing”. He ended the Note by saying that “... no applications for CNC machines have been refused where a non-military end use has been stated.” *394 This last remark carries the inference that BSA had stated a “non military use”. BSA had done no such thing. It had stated a broad use which might have been civil or military or both. Mr Steadman’s remark does, however, make clear the DTI approach, namely, that if a general neutral purpose was stated the exporter was treated as declaring a civil purpose. *395 This approach was subsequently to be the basis upon which Customs and Excise instituted prosecutions against, among others, BSA and Mr Bailey.

D2.275 By 16 November, BSA’s ELA had been sent to the FCO and to the MOD. On 23 November 1987, the FCO informed the DTI that the FCO had no objection to the issue of export licences in respect of a number of specified ELAs. These included BSA’s ELA (3M/3491/87). *396 BSA’s ELA was one of the ELAs considered by the MODWG at its meeting on 17 November 1987. It was assessed A(Nil) and the DTI was so informed on 23 November 1987. *397 Manuscript notes made by DTI officials on the application form record IDC approval of the ELA as having been given on 26 November 1987. *398 The lists of ELAs dealt with at the 26 November IDC meeting, do not, however, include BSA’s ELA. And, in a letter dated 30 November 1987 to Mr Cammell, Mr Steadman referred to his attempt “to get the FCO and MOD to accept the general principle of by-passing the IDC procedure in cases where licence applications for industrial goods indicated no intended military application” and informed Mr Cammell that “This was agreed and, as a result, with all the other approvals in place, the licence was issued on 27 November 1987.” *399 There was no supporting evidence for the proposition that FCO and MOD had agreed as a general principle to the suggested by-passing of normal IDC procedures or that that proposition had ever been put to them. There is, however, a manuscript Note made by Mr Hextall (DESS2a), who had been present at the 26 November 1987 IDC meeting, which reads “3M/3491/87 - BSA Tools Ltd... Considered at MODWG 17 Nov ‘87, recommended A(nil) but deleted by IDC at mtg 26 Nov. ‘87 because it is civil equipment for civil end-user.” *400 There was, in fact, no evidence that the BSA machine tools were “civil equipment for civil end-user”, bar the uninformative neutral answers that BSA had given to the pro forma questions. This Note infers that the proposition had been put, presumably by Mr Steadman, that the BSA machine tools were not defence-related goods and so were not subject to the Guidelines and need not be considered by the IDC. It is difficult to think of any other reason why the ELA should have been deleted from the IDC lists.

D2.276 In the case of the BSA ELA, therefore, the export licence was granted, the FCO and MOD having expressed no objection to the export, without the ELA having been considered by the IDC and without the concurrence of FCO or MOD Ministers having been sought.

COLCHESTER LATHES AND 600 SERVICES LTD

D2.277 Colchester Lathes Ltd, another of the UK companies named in the Intelligence Report, was a manufacturing subsidiary of The 600 Group Plc, another of whose subsidiaries was 600 Services Ltd (later called Contractors 600 Ltd). 600 Services Ltd was the group’s main exporter to Iraq. ELAs for goods manufactured by Colchester Lathes Ltd were made by 600 Services Ltd. Two ELAs relating to the export of machine tools to Iraq had been made by 600 Services Ltd, one in 1986 the other in 1987. The 1986 ELA, 3M/2609/86, related to vertical milling machines and sought a licence for the purpose of exhibiting the machines at the Baghdad International Trade Fair. The FCO raised no objection to the grant of the licence. The DTI’s notes on the application form record that the company “stated that machine would probably be sold - if not sold then not returned to the UK.” *401 Presumably, therefore, the application was treated as an application for a permanent licence. The licence was duly granted. The machines were, apparently, sold in December 1986.

D2.278 On 14 August 1987 600 Services made a second ELA. This, too, related to vertical milling machines and, again, the stated purpose of the export was for exhibition of the machines at the Baghdad Fair. This ELA, however, does seem to have been treated as an application for a temporary licence. Mr Steadman’s manuscript Note dated 8 October, records the following: “In order to consider a temporary licence we would need an undertaking that the goods would remain under company control and be returned to the UK. The company could not give this because the machines would be sold for use within Iraq. They had no idea who they would be used by. The assumption by the company was that the railway market at whom they will be pitching their marketing would probably be a low priority in Iraqi terms. I said that without an end user we could not consider a full licence and without u/t [i.e. an undertaking for return of the goods to the UK] a temporary licence was not on”. By the time that the 30 November 1987 Intelligence Report came to the attention of officials in the three departments, 600 Services’ 1987 ELA had still not been dealt with. According to a minute dated 8 October 1987 made by Mr Steadman the company was proposing to withdraw the application. *402

SUMMARY OF MACHINE TOOL ELAS AT TIME OF 30 NOVEMBER 1987 INTELLIGENCE REPORT

D2.279 In summary, at the time the Intelligence Report was issued, licences for the export to Iraq of machine tools capable of making components for the munitions referred to in the Report had been granted to Wickman Bennett, Matrix Churchill and BSA. The machine tools had not yet been exported, but, in view of the expressions of urgency that had been received, the export of some must have been known to be imminent. The licences had been granted in the knowledge that the machine tools were capable of use in making components for munitions. Intelligence that the machine tools were intended for that use had not, pre 30 November 1987, been received by the departments, but there had, nonetheless, been a remarkable lack of concern about the possibility of that use. In each of the ELAs the statement of the “Precise purpose” for which the machines would be used had done no more than indicate a general, neutral use. No attempt to obtain more precise details had been made. The DTI had been pressured into expediting the normal IDC procedures in order to facilitate the grant of the BSA licence but an obvious quid pro quo, namely, a properly detailed answer to the “Precise purpose” question was not sought.

D2.280 The officials, in particular Mr Steadman and Mr Barrett, in evidence to the Inquiry said that they did not regard machine tools as defence equipment and that they took the answers to the “Precise purpose” questions to represent a statement that the exports were intended for a civil industrial use. *403 In my opinion, however, the truth of the matter is that the possibility that the machines might be used for conventional military production was not a matter to which they had directed any attention. I have concluded that in respect of these 1987 machine tool ELAs neither had any positive belief, one way or the other, as to whether the machines were intended for civil production or for military production. Moreover, it must not be forgotten that at the time in question, October and November 1987, Iraq was in the throes of a desperate war against an implacable enemy and was suffering under a crisis of liquidity and of credit with which to purchase the imports the country needed. The likelihood that the machine tools, to be acquired by the Iraqis at a cost of several million £s, were for the purpose of civil industrial production does not seem high. In any event, if Mr Steadman and Mr Barrett, or any other officials, did believe that the machine tools were destined for civil production, I do not accept that that belief would have been significantly induced by the answers given by the exporters to the pro forma questions. The belief would I conclude, have been in part self-induced, in that references to “general engineering purposes” and the like were taken, contrary to the natural meaning of the words, to exclude military production, but would have been mainly attributable to a basic lack of concern as to whether the machines were destined for civil industrial production or for military production. *404 The failure to seek more detail of the “Precise purpose” answers is, in my opinion, not otherwise explicable.

D2.281 The concern of the MODWG in relation to these ELAs was that technology transfer to the Soviet Union should be guarded against. The concern of the DTI was that the licensing procedures should be completed as expeditiously as possible. The FCO’s concern was with presentational or political difficulties and none seemed raised by these ELAs.

D2.282 It was generally agreed by witnesses to the Inquiry that if the contents of the 30 November 1987 Intelligence Report had been known by the officials in MOD, FCO and DTI at the time the Wickman Bennett, Matrix Churchill and BSA ELAs were dealt with, export licences would not have been granted. It was open to government, once the contents had become known, to revoke the licences and thereby prevent any machine tools not yet exported from being exported. In the event nothing was done in response to the Report until in early January 1988 a special meeting of the IDC at which the matter could be discussed was arranged for 8 January. In the meantime a number of machine tools had been exported under the licences that had been granted. It is necessary to examine the reasons for the delay as well as the steps and decisions which were, eventually, taken.

DISTRIBUTION OF 30 NOVEMBER 1987 INTELLIGENCE REPORT

D2.283 The Report was distributed to the DTI, the MOD and the FCO. It was not distributed to Customs and Excise. The MOD received three copies, two of which went to DIS Desks and the third of which went to MOD’s Defence Arms Control Unit (DACU). One of the DIS copies came to the attention of Mr J, the incumbent at the DIS Defence Sales desk. Mr J attended MODWG meetings but not IDC meetings. Mr J gave evidence that, after reading the report, he perused the available documentation regarding the ELAs that had been granted and then consulted a senior DIS official, Mrs E, about what should be done. Mrs E and Mr J agreed that Mr J should brief Mr Barrett. *405 Mr J said that he then briefed Mr Barrett orally. Mr Barrett’s evidence was that he had not been briefed until early January 1988. He could not remember by whom he had been briefed. *406 He recalled being shown by Mr Hextall (DESS2a) a Note recording information which Mr Hextall had been given by Mr J on 6 January 1988. The Note (in Mr Hextall’s handwriting) contained a summary of the history of the Matrix Churchill and BSA ELAs, referred to Hutteen and Nassr and mentioned the other UK companies named in the Report. *407 On the Note are jottings in Mr Barrett’s handwriting. Mr Barrett’s evidence was that on reading the Note he spoke to Mr J and was given more details which he jotted down on the Note. He (Mr Barrett) then telephoned Mr Patey (FCO), on 7 January, and arranged the special meeting for the next day, 8 January.

D2.284 This evidence suggests that Mr J initially briefed Mr Hextall, not Mr Barrett, on 6 January 1988 and did not speak to Mr Barrett until 7 January 1988.

D2.285 Mrs E, after speaking to Mr J, minuted the Private Secretary to the Chief of Defence Intelligence (CDI) on the matter. In her Minute she summarised the content of the Intelligence Report and gave the DIS view “that these exports contravene the Ministerial Guidelines laid down for sales to Iran Iraq. They permit a significant military enhancement of Iraqi capability to prolong the conflict by giving them an indigenous capability to produce in excess of 500,000 rounds per annum”. Under the heading “Action”, she said that Mr J had alerted DESS to the matter and that “They [presumably DESS] propose to submit the information to Ministers with a view to revoking the export licences”. The minute was marked by CDI “Noted. 8 Jan.” *408

D2.286 In a letter dated 6 October 1993 to the Inquiry, Mr Keen, head of the MOD Inquiry Unit, gave the result of his enquiry into the history of the copy of the Report that had been shown to Mr J. In addition, Mr J, in a written statement submitted to the Inquiry on 1 November 1994, gave further evidence about the DIS copies. The position seems to be as follows:

(i) The copy of the Report that went to DACU was, after perusal, placed on DACU files where it remained until, after the lapse of the requisite period of time, it was destroyed. No action was taken by DACU to refer it to DESS. DACU may reasonably have supposed that it was for DIS to initiate any wider distribution of the Report.

(ii) One of the DIS copies went to the branch of DIS responsible for weapons research, development and production in foreign countries. Here, too, the copy, after perusal, was simply filed.

(iii) The other of the DIS copies went to the branch of DIS responsible, among other things, for technology transfer. One of the officers in the technology transfer section of the branch was Mr G. The copy was perused, first, by the head of the branch and, on about 18 December 1987, found its way to Mr G’s desk. Mr J, in the course of his duties at the DIS Defence Sales desk, had frequent discussions with Mr G and, on a date after 18 December, Mr J and Mr G discussed the Report and its contents. Mr J, prior to the grant of the machine tool export licences in November 1987, had considered the technology transfer implications of the proposed exports. It is likely that he discussed the implications with Mr G. On reading the Report, he recollected the machine tool ELAs and, after consulting his records, made the connection between the ELAs and the machine tools referred to in the Report. He then consulted Mrs E who, on 8 January 1988, briefed CDI. I conclude from this evidence that Mr J did not become aware of the contents of the Report until late December 1987 or early January 1988 and that he cannot be criticised for failing to take prompt action on the Report. This evidence confirms, also, Mr Barrett’s evidence that he was not briefed by Mr J on the Report until 7 January 1988.

D2.287 The failure of anyone in MOD to take prompt action on the Report as soon as it was received within the department was, in my opinion, a failure of system within DIS rather than a failure on the part of any individual. There was, at the time, no clearly understood system within DIS under which intelligence with implications for export sales policy would be brought to the attention of the incumbent at the Defence Sales desk or to the attention of a suitably cleared official at DESS. Mr J’s knowledge of the 30 November 1987 Report derived from his visit to and discussion with Mr G in late December. Mr G did not have any special responsibility to brief Defence Sales on relevant intelligence. Nor did any other specialist DIS desk have that responsibility. Whether Mr J, as incumbent of the Defence Sales desk, would be made aware of intelligence coming before one or more of the desks in other DIS sections would depend on the incumbent of the desk in question making the appropriate connection between the content of the intelligence and export sales policy. The system was, in my opinion, unsatisfactorily haphazard. The 30 November 1987 Report did, albeit tardily, come to Mr J’s attention. Other important intelligence Reports with clear implications for export sales did not. I shall come to these later. This was, in my opinion, a failure of system. I should record, however, that institutional reforms and changes within DIS, instituted mainly by Air Marshal Sir John Walker during his time as CDI, *409 but also to some extent by his predecessor, Admiral Sir John Kerr, have produced a system which ought to be proof against the failures in regard to distribution of intelligence that seem to have occurred in the period 1987 to 1990.

D2.288 In the FCO, the Report was distributed to “PUSD, Middle East, Trade Relations and Exports, Information Department, RD (Middle East)”. Mr Patey was, at the time, the FCO chairman of the IDC. He was the desk officer in MED responsible for bilateral relations between the UK and Iraq and Iran. *410 Sir David Miers was from January 1986 to January 1989 the Assistant Under Secretary supervising MED and NENAD.

D2.289 The distribution of the Report to MED would have brought it to the attention of Mr Patey. Mr Patey accepted in his evidence that that was so but could not recall when first he saw the Report. *411 His surmise was that he had received the report in about the middle of December. It is known that he must have read the report before 6 January 1988 for, in a memorandum of that date, an SIS officer has noted that “The MED desk officer for Iraq commented ‘This is a very useful report which should be seen by all departments represented in the [IDC]’.” *412 Mr Patey drew the inference from this memorandum that he had read the Report shortly before Christmas. *413 But he could not satisfactorily explain why he had taken no action on the Report until telephoned by Mr Barrett on 7 January 1988. His explanation for his failure to deal with the report was that in the period just before Christmas there was “a tremendous amount of activity” and that a two week Christmas holiday would have intervened. *414 These explanations are, plainly, unsatisfactory. If the system in the FCO for the distribution of intelligence (for which PUSD would bear responsibility) was working properly, then Mr Patey ought to have received the Report in early December, rather than mid December. But, in either event, his failure to react to it until early January 1988 was, in my opinion, a failure for which no adequate explanation has been offered.

D2.290 Mr Blackley, as Assistant Head of MED, has told the Inquiry that his job was to help the Head of MED to supervise the work of Desk Officers in managing the relationship between the UK and, inter alia, Iraq. *415 As to the 30 November Report, Mr Blackley’s oral evidence was to the effect that he could not remember whether he “saw it at the time” but he accepted that it was “very relevant to the work of the IDC.” *416 Mr Blackley also accepted that the matters arising from the Report could and should have been acted upon more quickly than they were. It was, in his view, a pity that, assuming that there had been time for the documents to be circulated to the relevant departments, the bureaucratic action did not start before Christmas. *417

D2.291 Sir David Miers, too, was probably a recipient of a copy of the Report. He said, in his oral evidence, that he thought he was one of the people to whom it was distributed. *418 But a document *419 supplied to the Inquiry by PUSD shows that Sir David was not sent a copy of the Report until June 1988. Sir David was asked in the course of his oral evidence whether the period until 7 January before any FCO action was taken on the Report was excessive. He replied that “in an ideal world it would have been appropriate to have tried to do something about it more quickly.” *420 In my opinion, Sir David’s “ideal world” qualification should be omitted. There was nothing in the world in which he, Mr Blackley, Mr Patey and the FCO in general found themselves in December 1987 that could excuse the inattention paid to this important Report. Mr Patey should, in my opinion, have read the Report immediately on receipt of it and, on reading it, should have called an immediate meeting of the IDC to discuss what, if anything, was to be done. Mr Blackley, as Mr Patey’s line manager, might have been in a position to correct Mr Patey’s failure, and, if he did see the Report in December 1987, ought, in my opinion, to have done so. It is very possible, however, that the Report did not come to Sir David’s attention until later.

D2.292 The Report was distributed to the DTI. Under the system then in place in the DTI (the system was changed in 1989) the existence of the Report should have been brought to the attention of those whose departmental duties made it desirable for them to see it. *421 These would have included Mr Beston and Mr Steadman. Mr Beston assumed that he would have read the Report at some time between 8 and 18 January 1988 (although he could not remember doing so). *422 He does not believe he read it before 8 January because if he had, he would have mentioned it at the REU meetings in December. *423 Mr Steadman, although he took up the post of Director of the ELB in May 1987, did not receive the security clearance necessary to permit him to see such documents as the 30 November 1987 Intelligence Report until 8 January 1988. The Report would not have been made available to him to read until that date. I should mention that, under cross-examination at the Matrix Churchill trial, Mr Steadman did himself an injustice. He said that on 12 December 1987, after reading the Report, he had communicated with the companies named in the Report to warn them that their licences might be in danger. If that evidence had been right, his failure to take any other action on the Report would have raised very serious questions. But that evidence was not right. He did not see, and was not cleared to see, the Report until 8 January 1988. His telephone calls to the companies took place on 11 or 12 January 1988, following the meeting on 8 January. In summary, therefore, the position in the DTI was that Mr Beston probably did not read the report until mid-January 1988 and that Mr Steadman could not have done so until 8 January 1988. Even if Mr Beston had read the report in December 1987, I would not rate his failure to take immediate action on it as particularly culpable. It was apparent on the face of the Report that it had gone to the MOD and the FCO. The problems associated with the supply of machine tools to Iraq for the purpose of making munitions were, primarily, problems for those departments to address. It would have been understandable, in my opinion, for DTI officials to take the view that if the information in the Intelligence Report was of an importance to warrant immediate action being taken to stop the exports, then one or other of those departments would initiate that action. *424 If, as is probable, Mr Beston did not read the Report until mid-January 1988, any criticism of him for failure to take prompt action on reading the Report falls away. But, in that event, the inadequacy of the DTI system for bringing intelligence to the attention of those who needed to see it is exposed. The system in force in 1987 was improved in 1989. Mr Beston described the 1987 system as “frankly hit and miss.” *425 If the Report was not brought to Mr Beston’s attention until mid-January it is a clear example of a “miss”.

D2.293 Moreover, a state of affairs under which Mr Steadman, the head of the ELB since May 1987, was not until January 1988 cleared to see intelligence such as the Report of 30 November 1987, was plainly unacceptable. Mr Beston was Mr Steadman’s line manager. He described the procedure for security clearance as “very long, very slow and quite costly.” *426 But he said that to protest about the delay to those in the DTI unit who were responsible for liaising with the vetting officers had, in his experience, very little effect. *427 He also explained that Mr Steadman’s deputy, who had also been Mr Steadman’s predecessor’s deputy, was cleared to read intelligence reports. The ELB was, therefore, not “entirely uncovered” while Mr Steadman’s security clearance was outstanding. *428 However, the delay was avoidable and it is to be hoped that delays of that sort cannot now occur.

D2.294 A regular IDC meeting was held on 6 January 1988. No mention of the Report was made at this meeting. Questions were asked of some witnesses why the Report was not raised and discussed at this meeting. I did not receive any clear answers but the reason may well have been that the IDC members who might have been expected to raise the matter were not aware of the Report at the time of the meeting.

D2.295 The 8 January 1988 meeting was attended by Mr Patey, Mr Barrett, Mr Steadman and Mr Paul Haston (OT4/1). The discussions at the meeting are the subject of a brief Note made by Mr Haston. No other record was made. *429 It was agreed that ELB would ascertain to what extent the machine tools had already been exported and that the MOD would then put up a submission to the Minister (DP), Lord Trefgarne, who would write to the Foreign Secretary and the Minister for Trade. It was agreed that the options were (a) to “do nothing but stop all further licences for lathes to Nassr” *430 or (b) to “rescind the licences and/or invite companies to return them”.

MR STEADMAN’S LETTER OF 13 JANUARY 1988

D2.296 By letter dated 13 January 1988 from Mr Steadman to Mr Barrett (copied to Mr Patey and Mr Beston), the result of the ELB investigations was given. *431 Mr Steadman obtained the information through his telephone calls to the companies on 11 or 12 January 1988.

D2.297 The BSA licence had authorised the export of 50 lathes of which 6 had been delivered and 44 remained to be exported at a proposed rate of 6 per month until August 1988. The Wickman Bennett licences had authorised the export of 9 five-axis CNC machines, of which 2 had been delivered and 2 were en route to the docks, and 6 ‘CNCs’ of which 4 had been shipped. The Matrix Churchill licences had authorised the export of 141 machine tools of which only 13 had been exported. Each of the companies warned of serious financial problems for itself and of redundancies among its workforce if it were to be unable to complete its contracts.

D2.298 It is of some significance that Mr Steadman reported Mr Abraham, a Matrix Churchill executive, as saying that “Not all of the machines would be used on munitions”. This seems a clear acceptance that some of the machines would be so used. Mr Steadman had warned Mr Abraham that the Matrix Churchill licences were at risk of being suspended on account of concern over end-use.*432

D2.299 In his letter of 13 January Mr Steadman argued that the licences should be allowed to stand so that the companies could fulfil their contracts. He made the following points:

(i) “...the consequence of cancellation [of the licences] in each case... would be catastrophic for the companies involved” which were “heavily committed to fairly substantial contracts”;

(ii) the export licences had been issued “before the knowledge of the consignees’ activities became known to Departments”;

(iii) “The Iraqi policy of self-sufficiency [in munitions production] could be said to have a prolonging effect on the conflict, but as against this it is in effect a substitute for Soviet supplies. Its significance may not therefore be as great as at first it would seem”;

(iv) “The machine tools in themselves are not defence equipment, they are used in a variety of general engineering purposes.... They do not therefore fall precisely within the Iran/Iraq guidelines, although that is not to say we should not consider the implications of a use such as that which has now come to light”;

(v) “The guidelines also allow for the overriding consideration that we should attempt to fulfill existing contracts”;

(vi) “To revoke the existing licences... would virtually kill off any hope of other non-sensitive business in this market.... and let in foreign competition”.

D2.300 In conclusion, Mr Steadman expressed the view that “there is scope for the balanced approach of allowing existing commitments but refusing for the present future licence applications for munitions or other military programmes from the consignees.” *433

D2.301 The points put forward by Mr Steadman under (i), (ii) and (vi) above were points of substance; those put forward under (iii), (iv) and (v), were, in my opinion, of less weight. As to (iii), Mr Steadman was in no position to judge the likely effect on the duration of the war of Iraqi self-sufficiency in munitions production. MOD experts were later to express a very different view. As to (iv) machine tools intended to make weapons or munitions were, even if not ‘defence equipment’, plainly “defence-related”. The DTI, in referring ELAs for dual use machine tools to the MOD and the IDC, had implicitly accepted that they were subject to the Guidelines. A fortiori in the case of machine tools known to be intended for the manufacture of munitions. As to (v), the existing contracts exception in guideline (ii) had been designed to apply to contracts in existence when the Guidelines were adopted. The intention behind the guideline might have permitted its extension to contracts entered into after licences had been granted. There is no evidence that any of the contracts to which Mr Steadman was referring fell into this category.

MR STEADMAN’S BRIEFING OF 18 JANUARY 1988

D2.302 The intimation Mr Steadman had given to Mr Abraham about the risk to the licences led to representations being made, both directly and through Mr John Butcher MP, by the Machine Tools Trade Association (the MTTA). A meeting between representatives of the MTTA and the Minister for Trade, (Mr Alan Clark) was arranged for 20 January 1988. Mr Steadman put up a briefing dated 18 January 1988 to Mr Clark for the meeting on 20 January. *434 The Briefing referred to the Intelligence Report and, under “Line to Take”, said that the MTTA companies should be advised to “maintain a low profile” until a government decision had been taken: “Press or public attention would make it more difficult to permit fulfilment of contracts”. Paragraph 10 of the Briefing told the Minister that “Had the IDC known of the use to which the machines were to be put it would have recommended refusal of the licences on the grounds that the machine tools for munitions manufacture would enable Iraq to prolong the Gulf conflict and as such would breach HMG’s guidelines on the supply of equipment to the combatants. Presentationally, it would be difficult to defend doing nothing since there is the likelihood of further substantial orders”. Paragraph 11 pointed out the financial, economic and employment consequences to the companies and their employees if the licences were cancelled and paragraph 12, marked “Not For Disclosure”, advised that “... it would be difficult to continue to approve licences for new business unless there was conclusive proof that the machines would not be used for the manufacture of military equipment”.

D2.303 The Briefing, taken as a whole, was, in my opinion, a fair and balanced submission which drew to the Minister’s attention the salient points arising out of the Intelligence Report. It is to be noted, however, that paragraph 10 was not consistent with Mr Steadman’s remarks in his letter of 13 January to Mr Barrett about the implications of Iraqi self-sufficiency in munitions production. In paragraph C.7.5 of his written statement to the Inquiry, Mr Steadman explained the inconsistency by saying that “The views put to Mr Barrett were set out so as to explore what might have been possible grounds for allowing the exports. [He] might have changed [his] views as a result of discussion with the other Departments.” *435

D2.304 The Briefing went to the Minister together with a Note, also dated 18 January 1988, by Mr Beston. Mr Beston expressed complete agreement with the Briefing but added that “The providers of the intelligence are most anxious that their source should not inadvertently be put at risk by anyone referring to the detailed information provided in, say, a meeting with the companies. For this reason, they, like DTI and other officials, would favour allowing the present contracts to be completed and export licences refused only for any future suspect business.” *436 Mr Beston had obtained this information during the course of a telephone conversation on 18 January 1988 with Mr C3, the SIS officer who had prepared the Intelligence Report. Mr C3 noted, in an internal SIS minute dated 26 January 1988, *437 that he had explained to Mr Beston “our concern that [Mr Gutteridge]’s identity would be revealed if export licences were revoked retrospectively”. The Minute went on: “We said that we would prefer it if Whitehall only took action to prevent future orders but that in any case details in para 4 of [the Report, i.e. details of the annual production targets for Nassr] were not to be used in any action taken against the firms involved. This actually suited Beston who was himself reluctant to implement any retrospective action. He was pleased to have our view to use in support of his own....”

D2.305 The meeting between the Minister for Trade and the MTTA on 20 January 1988 is recorded by two documents. One is an official DTI Minute prepared by Mr Steven Phillips, one of the Minister’s Private Secretaries. The other is a Report prepared by Mr Nosworthy, the Director-General of the MTTA. Neither Mr Phillips nor Mr Nosworthy has any significant recollection of the meeting that would permit any amplification of their respective records. The meeting was attended on the MTTA side by Mr Nosworthy, Mr Bailey (of BSA), Mr Henderson (of Matrix Churchill) and Mr Carter (of 600 Services). Besides Mr Clark, Mr Steadman, Mr Morgan and Mr Phillips of the DTI were present.

D2.306 The main importance of Mr Clark’s remarks at the meeting lies in the impression that they may reasonably have conveyed to his audience and that, in turn, is important in considering the basis on which the prosecution against, in particular, the Matrix Churchill directors was brought. I will leave to a later part of this Report a detailed consideration of those remarks. It suffices for present purposes to notice that Mr Clark made clear that he would support the companies in resisting revocation of their licences and in being allowed to complete their existing contracts.

D2.307 At a meeting of the Restricted Enforcement Unit (REU) on 22 January 1988 the issue of the Intelligence Report of 30 November 1987 and the export licences was discussed. The Minutes of the meeting record an officer of the Security Service saying that “it was important that the source be protected”. Mr Barrett was not present at the meeting but received a copy of the Minutes.

MR BARRETT’S SUBMISSION OF 25 JANUARY 1988

D2.308 On 25 January 1988 Mr Barrett put up a submission on the issue to the Minister (DP), Lord Trefgarne. Copies of the submission went (inter alia) to Mr Patey (FCO), Mr Steadman (DTI) and all the members of the MODWG. Prior to preparing the submission Mr Barrett had discussions with Mr McDonald. But Mr McDonald was not shown the submission in draft nor was a copy sent to him. This may seem unusual, given that Mr McDonald was, as head of DESS, Mr Barrett’s line manager, and that the submission was a DESS submission to a Minister, but is entirely consistent with Mr McDonald’s style of management, as described to the Inquiry both in his written and oral evidence. Mr McDonald said that he was content to allow Mr Barrett “a comparatively free hand”, that “it would have been counter productive to insist on a more intrusive management style” and that his style of management “was to hold [himself] ready to give advice and support when required.” *438 In his oral evidence, Mr McDonald described his management style as “non-hierarchical”. In comments submitted to the Inquiry on 15 February 1995 Mr McDonald said that while he did not “insist on signing or countersigning in a hierarchical way minutes or submissions going from his subordinates to higher authorities”, he relied “on very frequent conversation with them” in which “a wide range of business interests and problems” could be discussed as they presented themselves. In Mr Barrett’s case, he said, informal discussions between them on subjects relevant to Mr Barrett’s work, including export licensing problems, took place on a daily basis. This style of management must be kept in mind in considering the manner in which various export licensing problems were dealt with in DESS.

D2.309 In paragraph 1 of his submission of 25 January 1988, Mr Barrett referred to the relevant ELAs and said that the MODWG and the IDC “had satisfied themselves that the lathes and tools were, as the companies have claimed, civilian items of general purpose not destined for a military end-user....” *439 This was, in my opinion, a misrepresentation of the true position. The truth was that neither the MODWG nor the IDC had concerned themselves with or investigated the possibility that the machines might be intended for military production. Otherwise they would have asked for more informative “Precise purpose” details. The committees had confined their concern to the risk of technology transfer to the Soviet Union. And to suggest that the companies had claimed that the machines were “not destined for a military end-user” was an unwarrantable distortion of the uninformative information given in the ELAs.

D2.310 In paragraph 2, Mr Barrett summarised the intelligence “thought by the DIS to be reliable” contained in the 30 November 1987 Report, and indicated that the MODWG would have assessed the supply of the machine tools as a “significant enhancement of Iraq’s capability to prolong the conflict with Iran”. This was consistent with the view expressed in Mrs E’s Note to CDI. In paragraph 4, Mr Barrett said that “the companies were warned not to say anything to the Press because this would make it more difficult to let the licences stand”; in paragraph 5 he set out seven “good reasons for letting the licences stand”; and in paragraph 6, he recommended the Minister “not to intervene to have the licences revoked”. The Minister was told that “DTI and FCO officials would be recommending in similar terms”.

D2.311 Mr Barrett’s seven “good reasons” included:

(i) under (b), that the importance of the Iraqis becoming self-sufficient in munitions production was diminished by the fact that the self-sufficiency was merely a substitute for Soviet supplies. This was a repeat of a point made by Mr Steadman in his letter of 13 January 1988. It was not a point supported by any of MOD’s operational experts and was contrary to the views held by Mr J. *440 For Mr Barrett, in a submission to his Minister, to have reproduced this DTI argument without any prior attempt to check its soundness with his own department’s experts was, in my opinion, unacceptable. It is fair, however, to point out that a copy of the submission went to Mr J, the DIS representative on the MODWG, and that Mr J did not intervene to correct the point.

(ii) under (c), that the machine tools were not themselves “defence equipment” and did not fall strictly within the Guidelines. This was a DTI argument, somewhat surprisingly adopted by Mr Barrett.

(iii) under (d), that the Guidelines allowed the fulfilment of existing contracts. This was a bad point. Guideline (ii) had not been intended to cover contracts such as these. On the other hand, it was, perhaps, not unreasonable to regard contracts entered into in reliance on existing licences as within the point of Guideline (ii).

(iv) under (f), that “the intelligence community recommends against revoking the licences as they fear for the safety of their source and they also believe that far more important information could cease to become available as a result”. The language of the first part of this sentence suggests a fear for the life or limb of the individual who provided the information. Mr Barrett confirmed that that was indeed his understanding of the situation. He said that “source protection was to do with protecting the life of an individual.” *441 This understanding was shared by Mr McDonald and also by Mr Beston and Mr Steadman. Evidence was given to the Inquiry by a number of members of the Intelligence agencies to the effect that the concern was not for the personal safety of Mr Gutteridge (which they did not believe to be at risk) but was that, if Mr Gutteridge were known to be the source, his value as a source would be at an end. There was, in addition, concern that if the licences were revoked, with the consequent collapse of Matrix Churchill or, at best, serious redundancies involving Mr Gutteridge’s colleagues, Mr Gutteridge’s employment prospects would be damaged and he would be unwilling to continue as a source. These twin concerns are reflected by the statement in the Minutes of the REU meeting of 22 January that “it was important that the source be protected”. On the other hand, the evidence of the intelligence officer who was Mr Gutteridge’s contact (Mr P) was that he (the officer) thought that Mr Gutteridge would be in personal danger if his identity as the source of the information became known. Mr P’s view was made known to Mr C3, an SIS officer, and, through Mr C3, influenced departmental officials such as Mr Barrett, Mr Beston and Mr Steadman. Mr Barrett, throughout, thought that references to the need to protect the source indicated that the informant’s personal safety would otherwise have been at risk. This was, often, not the meaning intended. But the misunderstanding was not, in my opinion, Mr Barrett’s fault.

D2.312 I should add that the identity of Mr Gutteridge as the informant was not known outside the intelligence agencies. Mr McDonald assumed that the “source” was an Iraqi resident.

D2.313 Lord Trefgarne agreed with the recommendation in the submission, namely, that the licences be allowed to stand. *442 Notwithstanding that the supply of the machine tools would breach the Guidelines, Lord Trefgarne had, in my opinion, in view of the indication in the submission that the safety of the informant would otherwise be at risk, no alternative but to do so.

MR PATEY’S SUBMISSION OF 28 JANUARY 1988

D2.314 In the FCO the issue whether or not to revoke the licences was the subject of a submission dated 28 January 1988 put up by Mr Patey to Mr Blackley and Sir David Miers. *443 Mr Patey, too, recommended that the licences be allowed to stand. He, too, said in his submission that the IDC “satisfied itself that the lathes and tools were, as the companies had claimed, civilian items for general industrial purposes”. For the same reasons as related to the similar passage in Mr Barrett’s submission to the Minister (DP), this passage in Mr Patey’s submission was an unwarranted example of wishful thinking. Mr Patey repeated the argument, started by Mr Steadman in his letter of 13 January and adopted by Mr Barrett in his submission to the Minister (DP), that, since Iraqi self-sufficiency was a substitute for Soviet supplies, it was “arguable that Iraqi capability will not be significantly enhanced”. Mr Patey, however, may reasonably have supposed that the adoption of the argument in Mr Barrett’s submission indicated its endorsement by MOD experts. He went on to draw attention to the commercial arguments for allowing the contracts to be completed and recommended that “we should allow the contracts to proceed but tell the companies that this does not mean any commitment to issue further licences if we have reason to believe the equipment is for the manufacture of munitions”. It is interesting that Mr Patey did not refer to the “source protection” argument for allowing the contracts to be completed. It may be that the Minute of the REU meeting of 22 January had not been brought to his attention.

D2.315 Mr Blackley and Sir David Miers agreed with Mr Patey’s recommendation. I have earlier referred to Mr Blackley’s manuscript comments about the exports becoming public knowledge. *444 Mr Patey’s submission, accompanied by Mr Blackley’s and Sir David Miers’ manuscript comments, was placed before the FCO Minister, Mr David Mellor, in early February. Mr Mellor agreed with the recommendation that the licences should stand. *445

D2.316 The decision that the licences should stand was communicated by Mr Steadman to the MTTA by telephone. This, surprisingly, was done on 27 January, after Lord Trefgarne’s agreement had been communicated to the DTI but before the FCO decision had become known. *446 The companies’ exports of the machine tools, notwithstanding Government knowledge that they were to be used by Iraq in the manufacture of munitions and notwithstanding that the exports were, in Mr J’s assessment, in breach of the Guidelines, were allowed to continue.

D2.317 So far as Lord Trefgarne, in the MOD, was concerned, the main reason for accepting the recommendation to leave the licences standing was the “source protection” reason. And Lord Trefgarne, naturally enough, interpreted sub-paragraph (f) in Mr Barrett’s submission of 25 January 1988 as referring to a fear for the personal safety of the individual who had provided the information. *447 In these circumstances, any overt collateral information, confirming that the machines were to be used for munitions manufacture or confirming the military nature of the manufacturing processes being carried on at Hutteen and Nassr, became important. The importance lay in the possibility that the collateral information might enable the refusal of licences for the export of machine tools to Hutteen or Nassr to be justified without any reference being made to the information contained in the 30 November 1987 Report and, consequently, without identifying or endangering the source of that information.

LETTER FROM A MATRIX CHURCHILL EMPLOYEE DATED 22 JANUARY 1988

D2.318 Collateral information did, very soon, become available. On 22 January 1988 a Matrix Churchill employee wrote to Sir Geoffrey Howe and said that the company was “working on a thirty million pound order for CNC lathes to be used for munitions production in Iraq,” and that “These machines are going to be used to machine shell cases....” *448

D2.319 In a letter dated 28 January Mr Cowell (MED) informed Mr Barrett of the gist of the Matrix Churchill employee’s letter and commented “We do not think this information need affect our attitudes to licences which have already been approved. However we will need to bear this in mind when considering future licence applications and any assurances which the company may give.” *449 The letter was copied to Mr Steadman at the DTI and to PUSD (the route to the SIS).

D2.320 Mr Barrett failed to bring this important collateral information to the attention of Mr J or to that of Lord Trefgarne. Mr Barrett, in a written statement to the Inquiry, said that he did not do so because Mr Cowell’s letter (to which Mr Cowell had not appended a copy of the employee’s letter) added nothing to the intelligence report of 30 November 1987: it did not mention Nassr or Hutteen. *450 Mr Barrett added that it was not for him to judge whether the employee’s letter provided sufficient collateral to protect the SIS source. In Mr Barrett’s view, it was “raw intelligence” and it was a matter for SIS, who had been sent a copy of the letter, to advise whether the information could be used. With hindsight, however, Mr Barrett did accept that he should at least have informed Mr J and the MODWG of Mr Cowell’s letter. In my opinion, the information provided in Mr Cowell’s letter, which identified Matrix Churchill as a company currently working on an order for £30 million worth of CNC lathes to be used in munitions production in Iraq, should have been recognised as highly significant even if it did not mention Hutteen or Nassr by name. Moreover, it was no part of SIS’s function to volunteer advice on whether information which was not based on intelligence provided by their sources could be used in support of a recommendation that ELAs should be revoked. *451 If Mr Barrett had drawn Mr J’s attention to the letter, it would have given the DIS an opportunity to reconsider the recommendation with which they had reluctantly agreed. *452 If Mr Barrett had informed Lord Trefgarne, it is possible that the Minister might have reopened the question of whether the Matrix Churchill export licences should be allowed to stand.*453

D2.321 At the REU meeting held on 5 February 1988, the machine tools issue was mentioned. The Minutes of the meeting record that “FCO were still waiting to hear whether their Ministers agreed the submission which recommended that the licences should not be revoked. This recommendation had been made so as not to prejudice the information source. But in light of recent developments from a different, overt, source the recommendation could be altered.” *454 This last sentence must be a reference to the 22 January 1988 letter from the Matrix Churchill employee.

D2.322 The MOD representatives at the REU meeting included Mr Barrett. FCO representatives from TRED were present but there were no MED representatives. Mr J was not present at the meeting but received a copy of the minutes. The discussion recorded by the Minutes is noteworthy for a number of reasons. First, Mr Steadman had already informed the MTTA by telephone that the licences would not be revoked, notwithstanding that agreement by the FCO had, apparently, still not been obtained. Second, Mr Patey’s brief to Mr Blackley and Sir David Miers, recommending that the licences be allowed to stand, had not relied on “source protection”. The REU seems to have been misinformed on that point. It may be there was a confusion between the FCO recommendation and the MOD recommendation. Third, the language of the Minutes “...so as not to prejudice an information source” was consistent with the SIS desire to keep open the intelligence channel and is not apt to convey an understanding that the personal safety of the individual was at risk. Mr Barrett, perhaps not surprisingly, did not notice this important nuance and continued to labour under a misapprehension about the nature of the “source protection” concern. Fourth, the discussion seems to have been on the explicit basis that the collateral information that had become available might lead to the recommendations being reversed.

D2.323 Notwithstanding the REU discussion, Mr Barrett did not bring to Lord Trefgarne’s attention the fact that the situation had changed. In his oral evidence Mr Barrett contended that it was for SIS to consider whether the new collateral information removed the “source protection” impediment against revocation of the licences and that unless and until SIS stated that the impediment no longer applied the MOD, and the other departments, were obliged to proceed on the footing that it did still apply. *455 I do not accept this evidence. If the MOD had wanted to revoke the licences and were uncertain whether the new collateral met the SIS concerns about “source protection”, the MOD should have put the question directly to the SIS. On this point I prefer the evidence to that effect given to the Inquiry by the SIS witnesses, Mr C3 and Mr O. In any event, the SIS, with the other intelligence agencies, had been present at the REU meeting on 5 February at which there seems to have been a clear consensus that the new collateral could be used as the basis for revocation of the licences if that was what the departments decided upon. Mr Barrett said in evidence that he did not recall the discussion at the meeting. *456

D2.324 In my opinion, Mr Barrett was at fault in failing to bring the new collateral immediately to the attention of Mr J and of the Minister, Lord Trefgarne. No input into any of these decisions had been provided by Mr McDonald. This absence was consistent with Mr McDonald’s “non- hierarchial” management style. *457 In a submission dated 15 February 1995 made on behalf of Mr Barrett the point is made that, in any event, bringing the collateral to the Minister’s or to Mr J’s attention would not have made any difference. So far as the 1987 licences and the decision not to revoke them are concerned, I agree.

D2.325 On 17 March 1988 Mr Cowell wrote again to the MOD. *458 Copies of his letter went to Mr Gallaher (DTI) and PUSD. In this letter, Mr Cowell reported that he had been telephoned by a businessman and given information about Hutteen, “widely known to be an arms and munitions manufacturing organisation”. Mr Cowell, in paragraph 3 of his letter, referred to the “information, from secret sources” i.e. the Report of 30 November 1987 about Hutteen and Nassr, and said “...while we have received independent and usable collateral about Nassr we have, until now, lacked similar verification of Hutteen’s activities. While this information need not affect licences already approved, we shall have to bear this in mind when considering future applications, or assurances which the companies may give”.

D2.326 The growing concern about the munitions manufacturing capacity of Hutteen and Nassr was reflected in a telegram sent on 12 April 1988 by Mr J to the Defence Attaché in Baghdad, seeking additional information. The Defence Attaché’s telexed reply, *459 sent on 14 April 1988, said that “Iskandara [i.e. Hutteen] is one of the main ammunition production factories in Iraq whilst Taji [i.e. Nassr] is one of the main research and storage areas” and that “It is unlikely that Iskandara has a general engineering facility although parts of Taji (there are three) could have such a facility, but unlikely”. The telex concluded with the Defence Attaché saying that he could “not see any reason for granting export licences for anything connected with these two areas unless you are devious enough to wish to gain unique entree!”

D2.327 The circumstances attending the decision to allow the 1987 machine tool export licences to stand, coupled with the additional information that had become available in early 1988, might be thought to have made it unlikely that in future, or at least while the Guidelines remained as part of Government policy, licences for machine tool exports to Hutteen or Nassr would be granted without firm evidence for the belief that the machines would not be used in manufacture of munitions or weapons. This expectation was not, in the event, realised.

PART PLAYED BY THE PRIME MINISTER IN ALLOWING THE ELAS TO STAND

D2.328 There is one final matter, regarding the 1987 licences and the question whether or not they should be revoked, that I should mention, namely, whether, and if so to what extent, the Prime Minister, Mrs Margaret Thatcher, played a part in the decision to allow the licences to stand.

D2.329 In a submission to the Minister (DP) preparatory to a ministerial meeting to be held on 21 December 1988, Mr Barrett, after referring to the intelligence Report of 30 November 1987, said that “The Prime Minister agreed that in order to protect the intelligence source, the licences already granted should not be revoked”, and, later in the same submission said “More disturbing intelligence coming to light. Press for a separate submission to go to the Prime Minister as she was involved last time.” *460 The “last time” was a reference to the discussions as to whether or not the 1987 licences should be revoked.

D2.330 It would have been a matter of some significance if the Prime Minister had played a personal part in the discussions about the 1987 licences. Bar the briefing to which I have referred, none of the documents submitted to the Inquiry by the departments or by the intelligence agencies suggest any participation by the Prime Minister in those discussions or in the eventual decision. Given the nature of the usual Whitehall paper trail, the absence of any contemporary documentary reference to the Prime Minister’s participation casts some doubt on Mr Barrett’s references in his December 1988 submission. Lady Thatcher (as she had become) had no recollection of participating in the discussions or the decision. 461 Mr Barrett believed that the references in his December 1988 submission derived from something he had been told late in 1988. But he could not recall who had told him or on what occasion. He agreed that in January 1988, when the discussions were taking place and the decision was being reached, he had no knowledge of any participation *462 by the Prime Minister. Sir Charles Powell, her Private Secretary, had no knowledge of any such participation *463 by her. In the circumstances I am satisfied that Mr Barrett’s references to her participation in the discussions and decision regarding the revocation of the 1987 licences was an error, and that she played no personal part in the reaching of the decision. *464

MATRIX CHURCHILL ELA REFERENCE NO 3M/0439/88

D2.331 A number of ELAs relating to machine tools destined for Iraq were made by Matrix Churchill in 1988 in the months leading up to the ceasefire. Some of the ELAs did not receive substantive consideration until after the ceasefire. Four of them, however, can conveniently be mentioned now.

D2.332 On 26 January 1988 Matrix Churchill submitted an ELA (3M/0439/88) relating to HC7/45 3 Axis Lathes. *465 The consignee was named as “State Enterprise for Mechanical Industries” of “Isakandriyah” i.e. Hutteen. The nature of the consignee’s business was stated to be “General Mechanical Engineering”. The “Precise purpose for which goods are to be used” was stated to be “Turning of small batches of a wide variety of cylindrical mechanical engineering components”. The application was circulated to FCO MED and to MOD/DESS2a on 16 February 1988. The ELA was accompanied by a certificate from the consignee certifying that “the goods... are for our own use and will not be re-exported or sold for export”.

D2.333 FCO and MOD concern about the use to which the machines might be put led to delay and the ELA became one of a batch of ELAs which were to be put to Ministers for a decision. But after correspondence between the DTI and the company regarding the specifications of the machines and the degree of accuracy they could achieve, the DTI’s rating experts advised that the lathes were not licensable. The company was so informed and on 25 January 1989 the ELA was withdrawn. It was never, in the event, put to Ministers and a substantive decision was not reached. It is to be noted, however, that notwithstanding the intelligence about Hutteen that had become available and notwithstanding that Mr Steadman was corresponding with Matrix Churchill regarding the specifications of the lathes, no attempt was made by the DTI to obtain more particularity about the “Precise purpose...” for which the lathes would be used. The nature of the “cylindrical mechanical engineering components” was never the subject of any DTI query. It ought to have been, and would have been if the DTI had had any real concern about the matter.

D2.334 The FCO and MOD, on the other hand, did attempt to discover more about the intended use of the lathes. The ELA was on the list of ELAs considered by the IDC at its meeting on 24 February 1988. The lathes had been assessed A(I) by the MODWG but, according to the Summary Record of the IDC meeting, “FCO pointed out that there was evidence to suggest that Matrix Churchill are involved in the supply of machine tools for munitions production. The IDC therefore agreed that these applications should remain pending until we have fuller information about the consignee.” *466 Mr Barrett’s Note dated 14 March 1988 to the Minister (DP) on the 24 February IDC meeting said, in relation to 3M/0439/88, “Before we ask Ministers to consider this application we have asked DIS to try to discover for what the consignee of this order is likely to use the lathes. It is possible that they are for general engineering as stated on the application!” *467 In the ELA lists, ELA 3M/0439/88 was then marked “DIS being consulted.” *468 DIS enquiries about Hutteen, the consignee, led to the telex sent on 14 April 1988 by the Defence Attaché Baghdad, to which I have already referred.

D2.335 The DIS view of the use to which the lathes were likely to be put is apparent from a DIS internal note dated 18 August 1988 from Mr J to another DIS desk. The note referred to the 1987 machine tool export licences that had been granted, to the 30 November 1987 Intelligence Report and to the decision to allow the licences to stand. The note continued:

“However the Minister decided that future exports should be the subject of case by case consideration.

...

There is, currently, an outstanding export licence for machine tools which has been held pending further information about [Hutteen and Nassr]. After speaking with your branch the DIS said that this ELA should not be issued as we were of the opinion that they would be used for arms production thereby enhancing the Iraqi war machine....” *469

MATRIX CHURCHILL ELA S REFERENCE NO S 3M/0440/88, 3M/1029/88, 3M/1030/88

D2.336 The other three ELAs were attended by muddle and confusion. But, when considering these events the burden of work faced by the ELB must be kept in mind. *470 These three ELAs were 3M/0440/88, 3M/1029/88 and 3M/1030/88. A Trade Fair was to be held in Baghdad from 28 April to 5 May 1988. Under an ELA dated 27 January 1988 Matrix Churchill applied for a licence for the temporary export of a “Matrix Takisawa Machining Centre Type MACV2E with Fanuc Control”. In the ELA the consignee’s name was stated to be “Baghdad International Fair”, the “Precise purpose for which the goods are to be used” was stated to be “Exhibition Purposes Only”. It was stated, also, that the goods were to be temporarily exported and that the proposed date of return of the goods was “May 88”. The ELA was given the reference 3M/0440/88. *471

D2.337 Under an ELA dated 5 February 1988 Matrix Churchill applied for a licence for the temporary export of a “Churchill Four Series - 4 Axis 0.75 Metre CNC Lathe with Standard Equipment”. The consignee’s name was given as “Baghdad International Fair”. The “Precise purpose for which the goods are to be used” was stated to be “Exhibition Purposes Only”, and, as in 3M/0440/88, it was stated that the goods were to be temporarily exported and that the proposed date of return of the goods was “May 88”. The ELA was given the reference 3M/1030/88. *472 The DTI papers submitted to the Inquiry include a letter dated 10 February 1988 from Matrix Churchill to the ELB referring to their “application for Export Licence for a Churchill Four Series CNC Lathe - Destination Iraq.” *473 The letter is included in the papers relating to 3M/1029/88 but relates, clearly enough, to 3M/1030/88.

D2.338 Under an ELA dated 9 February 1988 Matrix Churchill applied for a permanent licence for the export of a “Matrix Takisawa V2E Machining Centre and two CNC lathes” (the lathes were later removed from the application). The application named “State Electrical Industries Establishment” of Baghdad as the consignee, described the consignee’s business as “Electrical Supply Industry” and the “Precise purpose for which the goods are to be used” as “Tool Room Applications”. This application was accompanied by a letter from Matrix Churchill to the ELB, also dated 10 February 1988. This letter was headed “Our Application dated 27 January Ref. Iraq Exhibition. One Matrix Takisawa Machining Centre Type V2E” and said: “Since submitting our application for this exhibition machine, it has been sold to the State Electrical Industries Establishment, Baghdad for use in the electrical supply industry, together with a further two lathes”. An end-user certificate, in the usual form, from the Establishment was enclosed. The letter continued “We therefore enclose a further application covering all three machines” and asked for expedition in the processing of the application. This letter was supplied to the Inquiry in the bundle of papers relating to 3M/0440/88. *474 The application was given the reference 3M/1029/88. *475

D2.339 It is clear from the date stamps on the two letters of 10 February 1988 that the ELAs, 3M/1029/88 and 3M/1030/88, were received in the ELB at the same time on 11 February. It is also clear that 3M/1029/88 was intended to replace 3M/0440/88. The machining centre comprised in 3M/0440/88 had been sold and, whether or not it was still intended to be exhibited at the Trade Fair, would plainly not be returning to the UK. *476

D2.340 On 16 February 1988, 3M/0440/88 was circulated to FCO/MED and MOD/DESS2a. The Matrix Churchill letter of 10 February 1988 relating to the machining centre was not copied to either department. 3M/0440/88 was considered by the MODWG at its meeting on 18 February 1988 and was before the IDC at its meeting on 24 February 1988. In the records of the meetings the item is marked “DTI to provide Specs.” *477 The position remained unchanged at the MODWG meeting on 18 March, but at the IDC meeting on 23 March 1988 the temporary export licence was recommended for approval and, in the ELA lists, 3M/0440/88 was marked “To be returned to UK.” *478 The IDC recommendation was accepted by FCO and MOD Ministers and the temporary licence was granted.

D2.341 On 7 April 1988 Mr Steadman endorsed the DTI cover-sheet relating to 3M/0440/88 “Allowed”. According to a manuscript note on the cover-sheet made by Mr Steadman on the same date, Mr Steadman spoke to Mr Barrett and “explained that the machine was drawn from the UK production line and was not equipped for operation in the Iraqi summer since it would not have refrigeration equipment installed. UK customers were waiting for delivery of the machine on its return”. Written on the cover-sheet also in Mr Steadman’s handwriting are the words “Note Exhibition 28 April - 5 May. Follow up early June to ensure return of equipment”.

D2.342 It is clear from these notes and records that the FCO and the MOD had been kept in ignorance of the fact, communicated by the letter of 10 February 1988, that the machining centre had already been sold to a Baghdad State corporation and would not be returning to the UK. *479 It would seem that Mr Steadman, who had written on the cover-sheet the reference to “return of equipment”, must also have been in ignorance of the sale. If so, this was unacceptable carelessness, for the letter of 10 February was on the DTI file. But, in any event, Mr Steadman’s part in the story is very difficult to understand. The letter of 10 February, addressed to “Export Licensing Branch” should have come to his attention. The letter indicated that 3M/0440/88 was superseded by 3M/1029/88. Yet 3M/0440/88 was circulated to FCO and MED and allowed to progress through MODWG and IDC procedures to Ministerial approval and the grant of a temporary licence, all on a wholly false basis.

D2.343 ELA 3M/1029/88, an application for a permanent licence, was intended by Matrix Churchill to be in substitution for 3M/0440/88, under which only a temporary licence had been sought. ELA 3M/1030/88 was an application for a temporary licence to enable the lathe in question to be exhibited at the Baghdad International Fair, due to be held from 28 April to 5 May. The two ELAs, 3M/1029/88 and 3M/1030/88, were received together by the ELB on 11 February 1988 but were not circulated to the FCO and the MOD until 24 March 1988, the day after that on which the IDC had finally, albeit on a false basis, dealt with 3M/0440/88, a delay of 42 days. If 3M/1029/88 and 3M/1030/88 had been circulated before 3M/0440/88 had been dealt with by the IDC, the contents of 3M/1029/88 might, and probably would, have alerted the FCO and the MOD to the fact that the machining centre comprised in 3M/0440/88 had been sold and would not be returned to the UK. In which case, the FCO and the MOD would not have agreed to the grant of a temporary licence. There is no evidence, however to support an inference that the 42 day delay in circulating 3M/1029/88 and 3M/1030/88 was deliberate, and I should record Mr Steadman’s written evidence that “the delays were genuine in the light of the workload endured by members of the ELB.” *480 The average delay in circulating ELAs received by the DTI in the period from February 1988 to the end of March 1988 was about 22 days. *481

D2.344 The MODWG met on 11 April 1988. ELAs 3M/1029/88 and 3M/1030/88 were on the list of ELAs to be considered. In a Note dated 22 April 1988 to the Minister (DP), Mr Barrett enclosed the lists which showed, inter alia, that both 3M/1029/88 and 3M/1030/88 had been assessed A(I). The two ELAs were considered at the IDC meeting held on 27 April 1988. The Summary Record of the meeting includes an item headed “Iraq-Matrix Machining Centre and Churchill Lathes: Churchill Lathe for Exhibition”. The text reads as follows:

“The MOD recommended that these applications should be approved as militarily insignificant. The FCO pointed out that there was evidence to suggest that Matrix Churchill were involved in the supply of machine tools for munitions production. The DTI pointed out that these applications were for promotional purposes only, (to be exhibited at the Baghdad Fair). They had received assurances from Matrix Churchill that the items would be returned. Given these assurances, the IDC recommended that the application should be approved.” *482

D2.345 Mr Cowell’s Note dated 26 May 1988 to senior FCO officials (Mr Blackley and Sir David Miers) referred to the two applications in similar terms and recommended approval. Approval was, accordingly, given. *483 Mr Barrett’s Note to the Minister (DP) reporting on the IDC meeting of 27 April was dated 24 May 1988. Mr Barrett referred to 3M/1029/88 in the following terms: “Minister (DP) will recall that a number of applications for lathes from Matrix Churchill for certain consignees in Iraq suspected of using them for weapons manufacture are being held up pending more information. This application for a machining centre and 2 lathes for the Iraqi State Electrical Supply Industry Establishment in Baghdad is not suspected of being for other than innocent industrial machining use. On this basis the IDC agreed to recommend approval as an insignificant enhancement.” *484 Mr Barrett made no express reference to 3M/1030/88. That ELA was however, on the list which Mr Barrett attached to his Note. Lord Trefgarne, the Minister (DP) accepted the recommendations. *485 Accordingly, both 3M/1029/88 and 3M/1030/88 received FCO and MOD approval and both then disappear from the lists of current ELAs.

D2.346 The DTI records, however, tell a rather different story. On the cover-sheet relating to 3M/1030/88 is a manuscript note written by Mr Steadman on 7 April 1988 recording a telephone conversation between himself and Mr Barrett. The Note reads: “Spoke to Allen Barrett. His committee had not yet considered this application but since it was for export on the same basis as that under 3M/0440/88 he said MOD would not object to approval on the basis of precedent”. Under the cover-sheet heading, “Decision”, Mr Steadman wrote “Allowed” and added his signature and the date, 7 April 1988.

D2.347 Mr Barrett had correctly predicted the MODWG’s assessment regarding the lathe intended to be exhibited at the Baghdad Fair. There is no indication, however, that Mr Barrett knew that Mr Steadman was intending to authorise the grant of a temporary licence for the export of the lathe in advance of the IDC considering the ELA and in advance of Ministerial approval of the grant of the licence. And whatever degree of assurance regarding MOD approval Mr Steadman had obtained from his conversation with Mr Barrett, he authorised the issue of the export licence before receiving any indication of FCO approval. In the result, the IDC, the FCO and MOD officials and the Minister (DP) dealt with 3M/1030/88 on a false footing. They might, if the point had been put in a straightforward way, as it should have been, have given retrospective approval to Mr Steadman’s premature action in authorising the issue of the licence. But, in the event and unknown to them, the temporary export licence had already been issued.

D2.348 There was a further matter on which the FCO and, perhaps, also the MOD, were misled. The Summary Record of the IDC meeting of 27 April 1988 records the DTI as saying that they had “received assurances from Matrix Churchill that the items would be returned”. Mr Cowell’s Note to the FCO senior officials had stressed that the DTI had received these assurances. There is no documentary evidence of any such assurances having been either sought or given. It emerged from Mr Steadman’s oral evidence that the so-called “assurances” consisted of no more than the fact that an officer of Matrix Churchill had signed a pro forma declaration in the ELA in these terms: “I have read and accept the conditions relating to the temporary exports in the appropriate guidance notes and agree to abide by them.” *486 One of the conditions included in the guidance notes was that “the goods must be returned to the UK, and ELB or SECS must be informed in writing of their return without delay.” 487 To describe the signing by the applicant for a temporary licence of the pro forma declaration contained in the application form as the giving of an “assurance” that the goods would be returned to the UK. was, in my opinion, a misdescription. Mr Steadman was not present at the IDC meeting on 27 April 1988. He would, however, have seen the Summary Record very shortly after the date of the meeting.

D2.349 The reference to “assurances” was not the only remarkable feature of the relevant paragraph in the Summary Record. The paragraph was dealing both with 3M/1029/88 as well as with 3M/1030/88. But only the latter was an application for “promotional purposes”. The former sought a licence for the permanent export of the machining centre. “Assurances ... that the items would be returned” could not have applied to the machining centre. But the language of the Summary Record suggests that both applications were for promotional purposes and that the “assurances” applied to both. Mr Cowell’s Note on the meeting to the senior FCO officials similarly indicated that both applications were for promotional purposes and that the assurances for the return of the goods applied to the machining centre.

D2.350 The FCO officials present at the IDC meeting included Mr Simmons as well as Mr Cowell. Both have puzzled over this apparent error in the Summary Record and the Note. Both have surmised that the origin of the error may have been information given by someone at the IDC meeting, to the effect that both ELAs, and not simply ELA 1030, covered goods that were to be exported for promotional purposes only under temporary licences. In support of the surmise they point to manuscript notes made on the FCO copy of the MODWG lists. The lists were used as the agenda for IDC meetings. Against ELAs 1029 and 1030 on the FCO copy of the lists is a manuscript note by Mr Simmons; “What’s changed?”. Mr Simmons has explained that he would have made this note in advance of the meeting as an aide memoire to remind him to ask why the MODWG had assessed both ELAs “A(I)”. The note shows the strong likelihood that Mr Simmons expressly asked at the meeting for information about the two ELAs. There are, immediately below Mr Simmons’ note, manuscript notes by Mr Cowell. The explanation for these is that they record information given at the meeting, presumably in response to Mr Simmons’ query. The notes read: “(1) Exhibition, Baghdad Fair (2) Assurances from company to bring them back (3) not going to Hutteen or Nassir.” *488 Mr Simmons and Mr Cowell infer from these notes that the meeting was told that the 1029 machining centre as well as the 1030 lathe was to be exhibited at the Baghdad Fair and that the “assurances” for return related to both machines. Whilst I have no doubt that Mr Simmons and Mr Cowell genuinely believed that the assurances of return related to both machines, I consider that their belief was derived from a misunderstanding of what they were told at the IDC meeting. There are two reasons why I have reached this conclusion. First, Mr Cowell’s third note (“not going to Hutteen or Nassir”) makes sense in relation to a machine that had been sold but, to my mind, makes little sense in relation to a machine or machines for export under temporary licence and then to be repatriated. Second, the fact that the MOD representatives at the meeting were not misled and were aware that ELA 1029 was for permanent export 489 makes it improbable that the IDC meeting were told that the 1029 machining centre was for temporary export only. I think it likely that Mr Cowell’s notes (1) and (2) relate to ELA 1030 but that note (3) relates to ELA 1029. I think it likely, also, that in the Summary Record and in Mr Cowell’s Note the two ELAs were confused and it was thought, erroneously, that each of Mr Cowell’s manuscript notes applied to each ELA. The IDC’s recommendations were approved by Mr Blackley and Sir David Miers in reliance on the contents of the Summary Record and Mr Cowell’s Note. In regard to 3M/1029/88 they could not have failed to be misled. They could not have known that the machining centre was for permanent export. In the event, their approval of the IDC’s recommendation on 3M/1029/88 was given on a false premise. They were not, in my opinion, to blame.

D2.351 Both Mr Simmons and Mr Cowell, were members of MED. MED was a department of the FCO to which ELA 3M/1029/88 had been circulated. Mr Simmons and Mr Cowell could have made themselves aware from the documents that the ELA sought a licence for the permanent export of the machining centre. Whether they should have done so is not so clear. Bearing in mind that Matrix Churchill and its machine tool exports had become a subject of some concern, a perusal of the licence applications in advance of the IDC meeting would have been sensible. Mr Simmons was the senior of the two and acted as chairman of the IDC meeting of 27 April 1988. Mr Cowell, by contrast, was very junior, having joined the FCO only in September 1987. In April 1988 he was an Assistant Desk Officer. Nonetheless, both I think must bear some blame for the misleading character of the Summary Record of the IDC discussion of 3M/1029/88 and of his Note of the discussion. It should be noted that, in the event, no harm was done because nothing was exported under the export licence granted under ELA 1029. *490 The machining centre had already gone to Iraq under the ELA 0440 licence.

D2.352 It is to be noted that the MOD was not misled by the relevant paragraph in the Summary Record. Mr Barrett was well aware that the references to “promotional purposes” and “assurances” applied only to 3M/1030/88 and did not apply to 3M/1029/88. In regard to the latter ELA, Mr Barrett, in a Note dated 24 May 1988 to the Minister (DP), said that: “This application for a machining centre and two lathes ... for the Iraqi State Electrical Supply Industry Establishment in Baghdad is not suspected of being for other than innocent industrial machining use. On this basis, the IDC agreed to recommend approval as an insignificant enhancement.” *491 Lord Trefgarne approved the recommendation, therefore, on the correct basis.

D2.353 The DTI cover-sheet relating to 3M/1029/88 raises another conundrum. The cover- sheet reveals that the ELA went to the FCO and the MOD on 24 March 1988. I have traced the history of the ELA through the MODWG and IDC procedures. By the end of May 1988 all necessary approvals for the grant of the licence had been given. The DTI were informed on 13 June 1988 of the MOD approval and on 22 June 1988 of the FCO approval. *492 But on the cover sheet the date of approval of the ELA is given as 16 February 1989. And in the right hand margin of the cover sheet is written “FCO and MOD Ministers have approved” with the date, 14 February 1989. These entries are in the handwriting of and are initialled by Mr Steadman. For reasons and in circumstances for which no explanation has been given, Mr Steadman, in a letter to Mr Simmons dated 16 December 1988, copied to Mr Barrett, referred to 3M/1029/88 as being one of four outstanding Matrix Churchill ELAs. *493 The ELA, with others, was then the subject of submissions to Ministers which I will refer to later. It suffices for the moment to notice that the ELA was approved in April and May 1988 but that no licence was at that time actually issued. The issue of a licence was not necessary because the machining centre had already gone to Iraq under the licence issued on ELA 3M/0440/88. 3M/1029/88, although the MOD and FCO did not realise it, was, so far as the machining centre was concerned, no more than a paper application.

D2.354 Mr Henderson, in a statement to the Inquiry dated 14 October 1994, endeavoured to cast light on the confusion surrounding ELAs 0440 and 1029. He agreed that 1029 was intended to supersede 0440 and confirmed that the machining centre to which the ELA related had gone to the Trade Fair. He said, however, that the sale of the machining centre to the State Electrical Supply Establishment had never proceeded to completion due to financing problems and that by the middle of 1988 it had become clear that the sale was not going to proceed. It seems that for that reason Matrix Churchill lost interest in ELA 1029. This might explain why a licence under ELA 1029 was never, in the event, issued notwithstanding that IDC and Ministerial approval had been obtained. However, the loss of interest in ELA 1029 was not, it seems, communicated to the DTI. *494

D2.355 Mr Henderson went on to explain that, after the sale to the State Electrical Supply Establishment had fallen through, ELA 2413 was made. The date of the ELA was 25 July 1988. The goods comprised in the ELA were the Matrix Takisawa Machining Centres that had been comprised in ELAs 0440 and 1029 plus a Two Series 2 Axis CNC lathe and equipment. ELA 2413 sought a temporary licence to enable the equipment to be exhibited at the Baghdad Fair to be held in November 1988. The ELA gave, as the “Proposed date of return”, “December 1988/January 1989.” *495 ELA 2413 was not dealt with until after the ceasefire and I will postpone until later a description of its fate. *496 Its relevance for present purposes is that it mopped up the machining centre which had gone to Iraq under the licence granted pursuant to 0440.

D2.356 In regard to the manner in which ELA 3M/1029/88 was dealt with I have expressed some criticism of Mr Simmons and Mr Cowell. Far more serious criticism must, in my opinion, be directed at Mr Steadman in respect of all three ELAs. In regard to 3M/0440/88, he allowed the ELA to go forward as an application for a temporary licence notwithstanding that it had been superseded by 3M/1029/88, an application for a permanent licence, and that, since he had been told the machining centre had been sold, he could not have thought it would, if exported, be returned to the UK. In doing so, he misled those in the FCO and MOD who dealt with the ELA. This may have been inadvertent. If it was not, I assume that his intention was a desire to assist the exporter, Matrix Churchill, by ensuring the speedy grant of a temporary licence in the knowledge that, given the trouble that had arisen regarding the licences granted in 1987, the application for a permanent licence might be extensively delayed while enquiries about the consignee and the intended end-use were made. Mr Steadman has firmly denied any intention to mislead or any such desire to assist Matrix Churchill. *497

D2.357 As to 3M/1030/88, Mr Steadman was in a position either to prevent or to correct, or to do both, the misleading references, made in the Summary Record of the IDC discussion, to assurances given by Matrix Churchill to the DTI. He has told the Inquiry that a copy of the Summary Record may not have been sent to the DTI and that so far as he is aware he did not see the Summary Record until he read it for the purposes of the Inquiry. *498 If this is correct it does not, in my opinion, excuse Mr Steadman. As Director of the ELB he ought, in my view, as a matter of routine to have glanced through the Summary Record of the meetings he attended and to have read more thoroughly the Summary Record of the meetings he had been unable to attend. To have done so would have taken no more than a few minutes each month. If, therefore, a copy of the Summary Record of the 27 April IDC meeting had, contrary to practice, not been sent to the DTI, I would have expected Mr Steadman to have noticed the omission.

D2.358 As to 3M/1029/88, Mr Steadman allowed the ELA to proceed through the usual MODWG and IDC procedures, notwithstanding that the machining centre for which (inter alia) a permanent licence was being sought had been the subject of a temporary licence granted in March 1988 and had been exported.

D2.359 Mr Steadman was, during his oral evidence to the Inquiry, asked questions about the three ELAs, but his answers did not provide any adequate answers to the questions raised as to the manner in which these ELAs were dealt with.*499 I should, perhaps, at this point, make some general comments about Mr Steadman’s evidence to the Inquiry. In April 1990, while he was still in post as head of the ELB, Mr Steadman suffered a serious illness as a result of which he was absent from work for over a month and, on return, had to accept a reduced workload. Mr Steadman gave oral evidence to the Inquiry over a period of three days. At the conclusion of his oral evidence I was satisfied that he had no consistently reliable recollection of the events relating to his work that had preceded his illness. Moreover, I formed the view that when faced with difficult questions he agreed much too readily with explanations or suggestions put to him by the questioner and that reliance could not safely be placed on some of his admissions. So while I thought he was, throughout his evidence, doing his best to assist the Inquiry, I do not feel able to place any weight on his evidence. The conclusions I have drawn have not depended on Mr Steadman’s evidence but on the contemporary documents and the inferences to be drawn from them.

Endnotes
*377 - see ECG/13.4.(Folio 79) and ECG/13.4.(Folio 80)

*378 - see paragraph D1.2 supra.

*379 - see SIS/12.1.1.6

*381 - Mr P in all his dealings with Mr Gutteridge, used the alias, ‘Mr Ford’

*382 - MI5/14.13.(157)

*383 - see MOD/13.3.83 and generally DTI/323

*384 - see DTI/100.1.6740 - 6856.

*385 - see FCO/2.5.58 and FCO/2.5.58 at 60

*386 - see FCO/2.5.50 at paragraph 5(c)

*387 - see Annex C to MOD/13.3.47 at p. C-2

*388 - see Annex C to MOD/13.3.129 at p. C-2

*389 - see CE/59.1 390 see CE/59.2.225a

*391 - Mr Cammell was head of the DTI’s Mechanical Engineering and Manufacturing Technology Division, (MMT)

*392 - CE/59.2.228 and see also the transcript of Mr Steadman’s oral evidence on Day 46, 30 November 1993 p.42

*393 - CE/59.2.230

*394 - see CE/59.2.235

*395 - see the transcript of Mr Steadman’s oral evidence Day 46, 30 November 1993, pp.97/99

*396 - see CE/59.2.237

*397 - see MOD/13.3.167 and also Annex A at p. A-3

*398 - see the ELA record sheet at CE/59.2.238 399 see CE/59.2.245

*400 - see MOD/13.3.315

*401 - DTI/654

*402 - DTI/654

*403 - see Mr Barrett’s written statement, paragraph 15(ii) of Section C and the transcript of oral evidence Day 37, 2 November 1993, pp.114, 129, 130, 133, 147. Mr Steadman’s written statement, p.34 and transcript of oral evidence Day 46, 30 November 1993, pp.47, 48, 49 & 82. Nevertheless, all the machine tool ELAs referred by the DTI to the MOD were dealt with in the MOD in accordance with the established MODWG/IDC procedure and as being subject to the Guidelines.

*404 - Mr Steadman and Mr Barrett deny that they were not concerned as to whether the machines were destined for civil industrial production or for military production: see Mr Steadman’s written statement dated 21 February 1995, page 8 and Mr Barrett’s written statement dated 15 February 1995 paragraphs 16 and 18. Mr Steadman explains that departmental procedures did not involve attempting to obtain more details in relation to the answers to the “precise purpose” questions. He says that for historical reasons the ELB tended to concentrate upon technology transfer to COCOM-proscribed countries and that the procedures used by the licensing staff were designed to prevent such technology transfer. The ELB procedures had not been altered to deal with the Guidelines due to the pressure of work: see Mr Steadman’s written statement Ibid., pages 6 and 7. Mr Barrett refers, inter alia, to the emergency IDC Meeting that he arranged as soon as he had been alerted to the intelligence report of 30 November 1987 and states that his actions belie the criticism that he was not concerned as to military use of machine tools: see Mr Barrett’s written statement, Ibid., paragraph 18

*405 - In giving evidence on 21 July 1993 in Closed Session, Mr J’s recollection was that he had read the Report in early December 1987 (p.73/74). Later, in a written statement submitted on 1 November 1994, Mr J revised his evidence and placed the time at which he had first seen the Report as being early January 1988. The January 1988 date is more consistent with contemporary documents than the earlier date.

*406 - see the transcript of his oral evidence, Day 37, 2 November 1993, p.85 to 88.

*407 - see MOD/13.3.315

*408 - see the Annex to Mrs E’s written evidence submitted on 24 August 1993.

*409 - Air Marshal Sir John Walker retired as CDI and was replaced by Lt. Gen. Sir John Foley on 21 October 1994

*410 - see Mr Patey’s written statement submitted on 19 May 1993, paragraph 1.1

*411 - see the transcript of Mr Patey’s oral evidence, Day 14, 28 June 1993, pp.53 to 56

*412 - see SIS/12.1.1.25

*413 - see the transcript of Mr Patey’s oral evidence, Day 14, 28 June 1993, pp.59 and 60 414 Ibid Day 14, pp.56 and 57

*415 - see paragraphs 1.1 and 1.2 of Mr Blackley’s written statement dated 16 July 1993

*416 - see the transcript of Mr Blackley’s oral evidence Day 20, 27 July 1993, pp.100 to 102

*417 - Ibid. pp.105-106. While Mr Blackley’s evidence, was that he did not deal with ELAs in detail himself he was familiar with the questions raised by the machine tool ELAs because he saw and commented on Mr Patey’s submission dated 28 January 1988 (see paragraph D2.314 infra).

*418 - see the transcript of his oral evidence, Day 19, 20 July 1993, p.39

*419 - see FCO/23.2.107

*420 - see the transcript of oral evidence for Day 19, p.41

*421 - The system is explained by Mr Beston in his written evidence p.30, paragraph C.3.3 and in his oral evidence Day 42, 23 November 1993, pp.162 to 175.

*422 - see the transcript of his oral evidence, Day 43, 24 November 1993, p. 1-4

*423 - CC/171 paragraph 10

*424 - see the transcript of Mr Beston’s oral evidence on Day 42, 23 November 1993, pp.125 & 176.

*425 - Ibid., p. 171

*426 - see the transcript of Mr Beston’s oral evidence on Day 43, 24 November 1994, p.19

*427 - Mr Beston’s letter to the Inquiry dated 17 February 1995, paragraph 11

*428 - Ibid.

*429 - see FCO/2.6.340A

*430 - For some reason, Hutteen was not mentioned in the Note. Nothing turns on the omission.

*431 - see FCO/2.6.337

*432 - see DTI/58.4876; Mr Steadman’s written statement submitted 25 November 1993 p.32, paragraph C.5.2.

*433 - see DTI/58.4881

*434 - see DTI/58.4887

*435 - Mr Steadman’s written statement dated 25 November 1993, paragraph C.6.2

*436 - see DTI/58.4886

*437 - see SIS/12.1.44

*438 - see generally, Mr McDonald’s written statement submitted on 10 October 1993, pp.48/9

*439 - see MOD/15.1.39

*440 - see the transcript of Mr Barrett’s oral evidence: Day 37, 2 November 1993, pp.102 to 104.

*441 - see the transcript of Mr Barrett’s oral evidence, Day 37, 2 November 1993, p.118

*442 - see MOD/15.1.87

*443 - see FCO/23.2.129

*444 - see paragraph D2.35 supra.

*445 - see the manuscript notes on Mr Patey’s submission: FCO/229.21

*446 - see DTI/58.1.4893

*447 - see the transcript of Lord Trefgarne’s oral evidence: Day 81, 29 March 1994, pp.164 to 167

*448 - see FCO/229.18

*449 - FCO/229.24, n.b. Mr Cowell is referred to in the various Requests for evidence as “Mr R”. The need for this anonymity has now disappeared.

*450 - Mr Barrett’s written statement dated 27 October 1993, paragraph C.6.5

*451 see paragraph D2.323 infra

*452 - In a note to Mrs E dated 27 January 1988 (MOD/15.1.44A), Mr J commented on Mr Barrett’s submission dated 25 January. As to the source protection point dealt with in the submission, Mr J observed that it was not “the intelligence community as a whole who recommended against the licences being revoked” but SIS alone. The DIS had supported the argument that the source should be protected but, until SIS had raised the point, the DIS had “supported the revo[c]ation line”. Mr J advised Mrs E that no open comment should be made to DESS about Mr Barrett’s submission even though the submission was “sparse in some areas. Any amendment [to the submission] could prejudice the source ....” Mrs E’s comment was: “Agreed (reluctantly).”

*453 - It is convenient to mention a point made by Mr Blackley (at paragraph 9.3.8(c) of his written statement). He has observed that the informant had asked for his information to be treated in confidence in case he lost his job. In fact, the informant asked for his name not to be identified: the information itself could, in my view, have been used without identifying its source (FCO/229.18)

*454 - see DTI/45.1.17 at paragraph 7

*455 - see the transcript of Mr Barrett’s oral evidence: Day 37, 2 November 1993, pp.159 to 162; See also D2.320 supra.

*456 - see the transcript of Mr Barrett’s oral evidence: Day 37, 2 November 1993, pp.163 to 164

*457 - see paragraph D2.308 supra

*458 - see FCO/230.1

*459 - see MOD/15.1.394A

*460 - see MOD/21.31 at 41 and 45

*461 - see the transcript of Lady Thatcher’s oral evidence: Day 48, 8 December 1993, pp.169 to 171

*462 - see the transcript of Mr Barrett’s oral evidence: Day 38, 3 November 1993, pp.25 to 28

*463 - see Sir Charles Powell’s written statement dated on 28 July 1994, p.10

*464 - The only evidence before the Inquiry that Lady Thatcher even knew of the existence of Matrix Churchill in early 1988 is that she read the SIS’ Weekly Digest of Intelligence dated 29 March 1988 (SIS/234). The Digest stated that “Churchill Matrix a UK based manufacturing company which has been heavily involved [in the supply of equipment to Iraq for use in arms production] is now 97.5% Iraqi owned and has three Iraqi on the board.”

*465 - see DTI/100.3.7083 to 7106

*466 - see MOD/15.1.235 at paragraph 2(ii)

*467 - see MOD/15.1.213, n.b. The remark was, in error attributed to 3M/0440/88.

*468 - see MOD/15.1.239 at 259

*469 - MOD/15.4.A

*470 - see paragraphs C2.19 supra and D2.343 infra

*471 - see DTI/100.3.7107 to 7132

*472 - see DTI/100.3.7160 to 7186

*473 - see DTI/100.3.7146

*474 - see DTI/100.3.7107 at 7118

*475 - see DTI/100.3.7133 to 7159

*476 - But see paragraphs D2.354 and D2.355 infra.

*477 - see MOD/15.1.169 at 175, MOD/15.1.213 and MOD/15.1.213 at 219

*478 - see MOD/15.1.279 at 301

*479 - But see paragraphs D2.354 and D2.355 infra.

*480 - As to the heavy workload in the ELB see paragraph C2.19 supra

*481 - The 22 days was calculated by the Inquiry from the details in the ELAs for Iraq sent to the Inquiry by the DTI. Mr Steadman, in comments submitted on 5 December 1995 has told the Inquiry that “an examination of records held in the DTI for Iraq ELAs circulated to the IDC for the period February and March 1988 reveals the average delay on 3M licences (which included machine tools) to have been 30 days. The average delay for 3G licences circulated to the IDC was 43 days.”

*482 see FCO/2.6.218

*483 - Mr Cowell’s Note (FCO/2.6.215) was signed by Mr Blackley on 31 May and, on 1 June, Sir David Miers wrote on it “Nothing controversial”. It does not seem to have gone up to the Minister.

*484 - see MOD/15.2.113

*485 - see MOD/15.2.147

*486 - see the transcript of Mr Steadman’s oral evidence: Day 46, 30 November 1993, p.132

*487 - DTI/219.1.17145 at 17148

*488 - FCO/2.6.219 at 235 489 see paragraph D2.352 infra

*490 - see paragraph D2.353 infra

*491 - see MOD/15.2.113

*492 - see MOD/15.2.197 at 201 and MOD/15.2.249: nb the date of the letter at page 249 is wrongly given as 22 June 1987.

*493 - see MOD/15.4.383

*494 - Written comments of Mr Steadman submitted on 5 December 1995

*495 - see DTI/100.3.7218-7227

*496 - see paragraph D6.55 et seq.

* 497 - Mr Steadman’s written statement submitted on 21 February 1995, p. 16

*498 - Ibid. p.16

*499 - see the transcript of his oral evidence: Day 46, 30 November 1993, pp.126 to 142

* The Full report is available from The Stationery Office Ltd., PO Box 276, London, SW8 5DT.