Alan Barrett, a former official in the Ministry of Defence's Export Services Secretariat, told the Scott inquiry that he could not recall who told him in 1988 that Lady Thatcher had approved the export of pounds 16.5m worth of lathes to an Iraqi munitions factory by the Matrix Churchill company.
Mr Barrett linked the former prime minister to the approval decision in an aide-memoire he wrote for Lord Trefgarne, then a defence minister. In it he said she agreed not to revoke the licences despite the breach of government guidelines restricting defence-related exports to Baghdad to protect an intelligence source.
It was the first time Lady Thatcher had been directly implicated in the arms-to-Iraq scandal.
In a written statement to the inquiry Mr Barrett said he had found no other reference to her involvement despite extensively searching MoD papers and suggested he had made a 'mistake'. Questioned yesterday he said he believed a Foreign Office official told him of her involvement.
'Around about October 1988 something or somebody told me the Prime Minister had been involved in that decision. I cannot remember who told me, I suspect somebody in the Foreign Office. I cannot remember. I certainly did not make it up. It was not a typing error,' he told the inquiry. He said he had not asked anyone in the Foreign Office because he understood 'we weren't supposed to collude'.
The document which referred to Lady Thatcher was sent to several senior MoD officials as well as Lord Trefgarne but none of them queried his inclusion of her name. The minister did not raise the matter when Mr Barrett accompanied him to a ministerial meeting the following day, Christmas Eve 1988, he said.
The inquiry heard that intelligence warnings alerting officials to the fact that exports were destined for munitions manufacture were not acted upon. Mr Barrett said this was because MI6 wanted to protect a flow of sensitive information about Saddam Hussein's missile and nuclear proliferation plans and ensure the safety of their source.
Reasons for agreeing subsequent exports from Matrix Churchill to Iraq 'focused entirely' on preventing the company going out of business in order to keep sensitive information from two of its executives flowing. Failure to permit the exports might have led to the closure of the Coventry-based company and the loss of hundreds of jobs, officials were warned.
He admitted that other intelligence which might have convinced ministers to stop the export of the lathes was not revealed to them.
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