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FIRST: MILITARY SUPPLIES Who Sold What to Iraq? The U.S. aims to hunt down companies that supplied Saddam. FORTUNE Sunday, March 30, 2003 By Nelson D. Schwartz

When the first wave of American soldiers swept out of the desert and headed north toward Baghdad, the Iraqis weren’t the only ones who experienced shock and awe. In the thick of battle, U.S. commanders discovered that the Iraqi army was able to jam the global-positioning systems the military uses to pinpoint everything from cruise missile attacks to the location of troops on the ground. “It was a technological preemptive strike,” says a senior military source.

It was also a prime example of how private companies violated the embargo that the U.S. and the United Nations imposed on Iraq more than a decade ago. Russian firms supplied the jammers to Iraq in the past few years–they didn’t exist during the first Gulf war–prompting a personal protest from President Bush to Russian leader Vladimir Putin.

The news about the GPS-blocking devices is just the beginning of what’s likely to be a series of revelations detailing how companies–including American ones–helped supply Saddam Hussein’s war machine during the past decade. That’s because in addition to searching for weapons of mass destruction, U.S. forces are scouring Iraq for evidence of who sold what to Saddam. Military sources have told FORTUNE that special teams are already on the ground, sifting through files to determine where Iraq got everything from rocket parts to fiber-optic technology.

Despite both U.S. laws and UN sanctions that prohibited all but a handful of commercial dealings with Baghdad, there have been persistent reports that companies from Russia, France, and China, among others, were breaking the embargo. And when the evidence in Iraq is analyzed, says a top Washington official who deals with trade policy, it’s likely that at least a few U.S. companies will face fines or perhaps even criminal prosecution. “The fact that American companies have broken the embargo with Iran suggests that there will be some leads in Iraq,” adds the government official, who spoke with FORTUNE on condition of anonymity. “Those of us in law enforcement certainly contemplate that things will be found in Iraq.”

Probing the byzantine web of deals that kept technology flowing to Iraq is a complex job. It’s likely to involve teams from the Treasury, State, and Commerce departments, as well as the Pentagon and the CIA. For now the main task is locating the forbidden goods–and their paper trail. Sources say units made up of both military personnel and representatives of the CIA and other agencies have been trained to operate in volatile areas inside Iraq, taking inventory of contraband items and poring over records.

Similar task forces operated after the U.S. invasion of Panama in 1989 and NATO’s intervention in the Balkans in the mid-1990s, but this time the job is much bigger. Because of Iraq’s oil riches, Saddam had a far easier time of evading the embargo than did former dictators like Manuel Noriega and Slobodan Milosevic. Fixing blame can be tough, however. Business transactions with embargoed nations are usually conducted through intermediaries, with China and the United Arab Emirates as common transshipment points.

To further complicate matters, U.S. companies might innocently sell something to a Chinese buyer, only to learn later that it ended up in Iraq. For example, says Kelly Motz of the Wisconsin Project on Nuclear Arms Control, China’s giant Huawei Technologies is believed to have supplied Saddam’s army with sophisticated communications hardware even as it was doing business with the likes of IBM, Motorola, Hewlett Packard, and Qualcomm. “These companies might have thought they were just selling telecom equipment into an emerging Asian market,” says Motz. “However, it’s been known since early 2001 that Huawei has had dealings with Iraq. So any deals that might have been done since then are questionable.”

If it turns out that companies intentionally evaded the ban, government officials say they are loaded for bear. “We won’t tolerate the breaking of the embargo,” says Richard Newcomb, director of the Treasury’s Office of Foreign Assets Control. “If there’s a knowing violation, we would prosecute to the full extent of the law.” In 2001, the Commerce Department hit McDonnell Douglas, a unit of Boeing, with a $2.12 million fine for improperly selling machine tools to China. Fines for dealing with Iraq are likely to be larger. And if evidence turns up that a particular firm knowingly sold items like night-vision goggles or gas masks to Iraq, federal agencies might impose what they call the “death penalty”–a total ban on all exports by the guilty firm. Criminal charges for executives are also a distinct possibility.

It’s going to take time to determine just who did business with Iraq. But the military, for one, seems eager to shine a light in some otherwise dark corners. “We will have everything at our disposal,” says Maj. Max Blumenfeld, an officer with Army’s V Corps in Kuwait. Documenting Iraq’s deals, he says, “will justify this operation and show the world what we’ve been saying all along about Saddam Hussein and his efforts to acquire weapons of mass destruction.” It could also cause a lot of companies to wish they’d never done business with Baghdad.

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