Whitehall stood by as men were jailed: Exclusive: MI6 encouraged businessmen to pursue Iran missile deal in case with close parallels to Matrix Churchill

THREE men went to prison for illegal arms trading with Iran, despite Whitehall knowledge of their missiles deal.

The Independent has discovered that MI6 officials encouraged one defendant to continue his involvement in the project, and evidence of government knowledge of the arms trading was suppressed during an Old Bailey trial. The role of senior figures in the City, including a former Lord Mayor, was also concealed.

Next month, one of those found guilty is applying for leave to appeal against conviction. The grounds of the application have not been disclosed, but if it is allowed the Government could face embarrassment as damaging as that provoked by evidence of its knowledge of sales of arms equipment to Iraq by Matrix Churchill.

In 1988, four men stood trial for attempting to defraud Iran by offering missiles for sale which they could not supply. Three defendants repeatedly protested their innocence and insisted that the British and American authorities knew of the project. They were convicted and sentenced to between two and six years in prison.

The fourth, John Taylor, a businessman from Camberley, Surrey, was acquitted. He has now provided new evidence of a long-term relationship with MI6. He says that he revealed his involvement with the arms sale to Iran and was instructed to remain involved.

Mr Taylor's involvement with MI6 was not disclosed to the jury, , although it was discussed in the judge's chambers by prosecution and defence.

His solicitor, Adrian Neale, sought before the trial to establish the authenticity of Mr Taylor's claim. He wrote to the Home Secretary and was visited by a lawyer working for the security services, whose identity is known to the Independent. The lawyer confirmed that Mr Taylor helped MI6 for more than a decade.

In further new evidence, a former director of a Lloyd's insurance broking firm, Lyon Traill Attenborough, which obtained insurance cover for the sale to Iran, has revealed how the firm, which is no longer functioning, failed to disclose its knowledge of the deal during the trial.

A principal in the firm was Sir Alan Traill, Lord Mayor of London in 1984-85, who said on Thursday that he may have hosted a meeting in the Mansion House at which the project was discussed, having previously denied knowledge of it. The former director of Sir Alan's firm described the trial as a 'stitch-up'. He was willing to testify for the defence, he says, but was never called.

William Harper, formerly an associate director of Lyon Traill Attenborough, was convicted of fraud after the jury accepted that he had created false insurance documents to elicit advance payments from middlemen who claimed they were acting for the Iranian government. Mr Harper has always claimed he did not falsify these documents and that senior management of Lyon Traill Attenborough were well aware of the project, as were the British and American authorities.

He has also claimed that a statement signed by him before the trial was taken while he was under sedation. He is now seeking leave to appeal against the verdict for which he served two years in Pentonville prison before being released. A hearing date has been set for 12 April.

Among the judges hearing the application is Lord Justice Laws, who was one of the three lawyers to advise Sir Nicholas Lyell, the Attorney General, to issue public interest immunity certificates barring evidence from the Matrix Churchill trial which showed that the Government knew arms were being exported to Iraq.

Mr Taylor claims that he became involved in the project to sell 5,000 anti-tank missiles in early 1985. He joined Mr Harper, and two others: Lt-Col Eric Matson and Michael Aspin, a Norwich- based arms dealer. The three were already negotiating to supply the missiles via intermediaries, who later claimed that they were the victims of an elaborate fraud.

The defendants claimed Col Oliver North had initiated the project in 1984. Col North, who is running for the Republican nomination for a Virginia seat in the US Senate, declined to comment.