Only in recent months did the full scope of the ruse become apparent. The destination for the specialty steel was not China but Iran, and the order had nothing to do with toy horses, U.S. investigators say.
“We are certain,” said a law enforcement official familiar with the case, “that the metal was meant for advanced centrifuges in Iran’s nuclear program.”
Last month, the Justice Department announced indictments against two people, one Chinese and the other Iranian, for conspiring to acquire maraging steel and other restricted American technology. U.S. officials say the case is part of a broader effort by Iran to dramatically expand its capacity to enrich uranium — with Chinese firms serving as willing accomplices.
The United States and its European allies have imposed ever-escalating sanctions intended to cut off Iran from sensitive technology and restricted material required for its nuclear program and to reduce its access to the global oil market. The goal is to stop Iran’s progress toward what the West believes is a nuclear arsenal, even as Iran maintains that its nuclear efforts are strictly part of a civilian energy program.
Maraging steel is a critical material in a new, highly efficient centrifuge that Iran has struggled for years to build. Barred by sanctions from buying the alloy legally, Iranian nuclear officials have sought to secretly acquire it from Western companies. In recent years, U.S. officials say, an increasing number of Chinese merchants have volunteered to help, serving as middlemen in elaborate schemes to obtain the steel and other forbidden material for Iran’s uranium enrichment plants as well as its missiles factories.
“They are not just stumbling on opportunities,” said Steve Pelak, the Justice Department's counterespionage chief. “They are professional, studied procurement agents and shippers. They know precisely what business they’re in and how to go after it.”
The Seattle case is at least the fourth in the past two years in which companies based in China have been accused of helping Iran try to purchase sensitive technology. Although Iran has used Chinese go-betweens in the past, U.S. officials said sanctions have forced the isolated and besieged Iranian government to rely increasingly on China for economic help and access to restricted goods.
A senior Justice Department official, speaking on the condition of anonymity to discuss ongoing investigations, said, “As some countries have retreated from the Iranian market with the imposition of increased sanctions, many Chinese companies appear to have moved into the void.”
Although the Obama administration has praised China for reducing its imports of Iranian oil in recent months, bilateral trade between Tehran and Beijing surged in the previous decade, from $2.5 billion in 2000 to $29.3 billion in 2010. The increase has softened the impact of international sanctions, U.S. officials and independent analysts say.
With the latest case, however, U.S. warnings about Iranian-Chinese collusion have gained new urgency. If Iran can buy enough maraging steel on the black market, it can build more-efficient centrifuges, which will enrich uranium much faster than the machines it now uses.
“It is a major bottleneck in Iran’s production,” said David Albright, a former U.N. weapons inspector and author of a new study on Iranian procurement of nuclear technology. While Iran appears to have the know-how to make better centrifuges, the shortage of high-strength materials demanded by the new version — particularly maraging steel and carbon fiber — has prevented its scientists from producing more than a few hundred for testing, he said.
Officially, the Chinese government opposes a nuclear-armed Iran, and U.S. officials say Beijing has been a helpful ally during recent international negotiations aimed at pressuring the government to scale back its nuclear program. In addition, there is no evidence that China has provided nuclear assistance to Iran directly since the early 1990s.
Yet, despite repeated U.S. protests, Chinese businessmen continue to offer crucial assistance to Iran’s procurement efforts without fear of punishment or censure, U.S. officials and nuclear experts say.
An unusual order
Perhaps the most striking fact about the toy-horse plot, investigators say, is that it was discovered at all. The tip came in late 2008 from an obscure Homeland Security program that involves occasional factory visits by U.S. officials to guard against foreign pilfering of sensitive U.S. technology.
During a visit to a Puget Sound steelmaker, an export manager there told a U.S. official about a bizarre query he had gotten from China.
“It was a gigantic order: 20 tons of maraging steel,” recalled a law enforcement official familiar with the case.
The mention of maraging steel raised eyebrows because of the alloy’s use in missiles and centrifuges. Months passed with no follow-up to the initial inquiry from the prospective buyer, and efforts by U.S. officials to investigate the unusual order reached a dead end.
In the spring of 2009, a new query from China turned up in the steelmaker’s inbox. This time, the buyer claimed to represent a toy company, Monalila Co., a maker of playground equipment. The company Web site showed photographs of real toys, including its premier product, Model HF450, the “Magic Horse.”
“No gas, no battery, no power, but can be ride [sic] as a horse and run smoothly on squares, parks, alleys and any other flat grounds,” read the product description, displayed beneath a photo of a black-and-white toy pony with a saddle and cottony mane.
To make its ponies, the company needed the bulk order of maraging steel, wrote the purchasing agent, who identified himself as “Yi.” Except for the names and products, the $2 million order was identical to the one from the previous year.
U.S. investigators were alerted, and they set up a sting. In a chain of e-mails, federal agents posing as salesmen teased out details about the order and who was behind it. Eventually Yi excused himself and handed over the correspondence to his boss, a man he called “Martin.” It quickly became apparent that Martin was not Chinese and had no interest in toys.
“We were able to determine that Martin’s e-mail originated in Iran,” said the law-enforcement official familiar with the case.
Over the following months the shopping list grew, as the Iranian, with increasing boldness, piled on requests — other specialty metals used in uranium enrichment, an array of machines and instruments with known nuclear applications, even a mass spectrometer specifically calibrated to measure uranium fluorine gas, a key part of the enrichment process.
Investigators determined Martin’s real identity — Parviz Khaki. As part of the subterfuge, they confronted him about the possibility that the materials would be shipped illegally to Iran. Khaki did not appear to care, Justice Department officials said in an indictment handed down last month around the time of the man’s arrest.
“Khaki discussed his motivation to make money from this transaction,” the indictment stated.
On July 13, authorities in the Philippines arrested Khaki as he was boarding a plane in Manila. He had been indicted by a U.S. grand jury on charges of running a $30 million scheme to acquire banned U.S. technology for Iran. His alleged Chinese associate, Zongcheng Yi, was also indicted. Khaki remains in custody in Manila. Yi’s whereabouts are unknown.
Persistent flow of material
Khaki’s alleged plan to ship maraging steel to Iran through China was stopped, but federal officials concluded that the network delivered other nuclear-related components and tools to Tehran. Among them were corrosion-resistant nickel alloy and special lathes to manufacture centrifuge parts.
U.S. officials say the items are among several million dollars’ worth of material and parts — from missile components to electronics for roadside bombs — that have passed through China to Iran in the past five years. The flow of Western technology to Tehran is so persistent that it has emerged as an irritant in relations between Beijing and Washington, prompting the Obama administration to dispatch two delegations to Beijing since 2010 to complain.
Chinese officials have made occasional arrests but say they can’t always know of every attempt by a Chinese entrepreneur to make a profit by helping Iran shop for technology. But given the stakes, current and former U.S. officials and Iran experts continue to press Beijing to do more.