Why does Scott stop short of Thatcher?: The arms-to-Iraq inquiry seems to have gone soft on one line of investigation, argues Ole Hansen

HOW CLOSELY was 10 Downing Street involved in the arms-to-Iraq scandal? The Scott inquiry, now sifting the evidence from its 82 days of hearings, has focused its attention on middle-ranking civil servants and relatively junior ministers, such as William Waldegrave and Nicholas Lyell. But there is evidence that Margaret Thatcher misled Parliament over the sale of arms to Iraq and that Sir Robin Butler, the Cabinet Secretary, played a crucial role in the strategy that led to the cover-up. There is also some doubt as to whether Lord Justice Scott wants to investigate fully Baroness Thatcher's involvement.

The Scott inquiry was set up after the collapse of a Customs prosecution against three executives of the Matrix Churchill machine tool company. They were charged with evading controls on arms sales to Iraq, but evidence, which the Government had tried to suppress, showed that ministers and civil servants had connived in the exports.

The strategy that almost led to the imprisonment of the three innocent men had been decided by Sir Robin Butler and Sir Peter Gregson, Permanent Secretary at the Department of Trade and Industry. They met at No 10 in November 1988 as the Gulf crisis was becoming urgent and Customs officials were starting to question DTI officials about the Matrix Churchill exports. Sir Robin and Sir Peter realised that if the Customs inquiries were to lead to a prosecution of Matrix Churchill, there would be some awkward public repercussions, not least on the matter of misleading Parliament about the control of arms sales to Iraq and the claim that Alan Clark, when a DTI minister, had given 'a nod and wink' to machine tool manufacturers that the Government would allow the sale of arms-making equipment, provided it was labelled as being for 'general engineering purposes'.

The two civil servants hatched a twin-track strategy to block any damaging leaks of information. First, Sir Robin would have a word with Sir Brian Unwin, the head of Customs, to impress upon him the need to be careful because of the 'potential public interest element' in the case. This element, Sir Robin explained to the Scott inquiry, was the need to protect secret intelligence information passed to Mr Clark before his meeting with the machine tool manufacturers.

Sir Brian's note of the conversation, however, made no mention of the need to protect intelligence information. Instead, it suggests that he felt he was being leant on because of Mr Clark's indiscreet words to the manufacturers. None the less, the prosecution went ahead.

The second part of the Butler/Gregson strategy involved asking government lawyers to advise what information and documents could be withheld from Customs and the court. This led eventually to the signing of Public Interest Immunity certificates by five ministers and accusations that the Attorney-General, Sir Nicholas Lyell, had confused the public interest with that of the Government.

Even more seriously, it led to civil servants and Mr Clark signing witness statements that were incorrect and culminated in Eric Beston, the former head of export control at the DTI, giving evidence on oath in court which he later admitted was mistaken. Andrew Leithead, from the Treasury Solicitor's Department, has told how he advised that witness statements should be changed to show 'the correct position' as seen by the DTI.

As head of the Civil Service, as well as Cabinet Secretary, Sir Robin Butler is likely to be criticised by the Scott inquiry. However, the inquiry is unlikely to have much to say about Lady Thatcher's involvement, even though Lord Justice Scott said at his inaugural press conference that her role had become a matter of public interest that 'must be dealt with'.

The evidence shows clearly that it was on the direct instructions of Lady Thatcher that three junior ministers, William Waldegrave, Alan Clark and Lord Trefgarne, implemented a more relaxed regime on the supply of arms to Iraq. A letter from her Private Secretary, Charles (now Sir Charles) Powell, also told them that 'The Prime Minister wants to be kept very closely in touch at every stage and consulted on all relevant decisions.' Over the following months, when the junior ministers wrote to each other about changing the guidelines and the grant of export licenses to Matrix Churchill, they copied their letters to the Prime Minister.

Mr Clark has told Lord Justice Scott that the wording of a Parliamentary Answer that Mrs Thatcher gave to Harry Cohen MP in 1989, when she said government policy on defence sales had not changed, showed she had been told of the new approach. Alan Barrett, a Ministry of Defence civil servant, has testified that he believed Mrs Thatcher was involved in decisions to allow Matrix Churchill machines to go to Iraq, even though they were known to be destined for munitions production.

Lady Thatcher has denied it all. The junior ministers' letters, she says, would have gone to Charles Powell, and she did not see them or know that there had been a change in policy. She never had anything to do with Matrix Churchill.

This is where doubts begin to creep in about Lord Justice Scott's approach. Both he and his counsel, Presiley Baxendale, were noticeably more polite and less persistent in their questioning of Lady Thatcher than of other ministers, let alone officials. Apart from Lady Thatcher herself, only one other person can give evidence about what she was told: her Private Secretary, Charles Powell. During her last six years as Prime Minister he had become her most trusted adviser and, perhaps, the second most powerful person in No 10. He controlled her foreign policy in-tray and, by her own evidence, decided what she needed to be told.

Thus, any investigation of Lady Thatcher's involvement should start with Sir Charles. But he is has not been among the 166 people so far called, and with the hearings almost over, the inquiry team has been unable to confirm that it has any plans to call him. It seems, therefore, that while the Scott inquiry has given every indication of wanting to get to the bottom of the arms-to-Iraq scandal, it does not have the same determination to get to the top.

The writer is the producer of 'Whitehall on Trial', a reconstruction of the Scott inquiry being shown tonight in a 'Dispatches' special, 9pm, Channel 4.