The case of MCS Technologies – did Iran use a German factory for illicit procurement?

MCS’s factory. Image via MCS-Int.de

Iran’s illicit procurement of goods and technology has been a longstanding hallmark of its nuclear and missile programmes. While procurement agents working for these programmes have regularly been caught attempting to purchase goods and materials from foreign companies, one modus operandi Iran is not known to have undertaken is the purchasing of overseas factories to produce sensitive components for nuclear- or missile-related end-users.

This method was used by Iraq’s Ministry of Industry and Military Industrialisation in the 1980s, which purchased factories in the UK (including, notoriously, a machine tool manufacturer, Matrix Churchill) as well as in the US and Europe: the factories then produced precision components that were covertly supplied to Iraq’s uranium enrichment programme (see Mark Fitzpatrick, ed, Nuclear Black Markets: Pakistan, A.Q. Khan and the rise of proliferation networks – A net assessment, (London: International Institute for Strategic Studies, 2007), pp.45-46).

While there are no conclusive signs that Iran’s nuclear- or missile-related developers have successfully adopted these tactics, there are some signs that Iranian officials may have attempted to do so, albeit for unknown end-users. In at least two cases dating back to the mid 1990s, Iranian government affiliated entities have attempted to buy European factories with nuclear relevant, dual-use manufacturing capabilities. The first of these cases involved an apparent Iranian attempt to purchase a machine tool manufacturer, but it was not known to have proceeded beyond negotiations (see Andrew Koch and Jeanette Wolf, ‘Iran’s nuclear procurement program: how close to the bomb?’ The Nonproliferation Review, Fall 1997, pp.123-135). The second case is that of MCS Technologies.

MCS Technologies GmbH is the operator of a factory in Dinslaken, in the industrial area of Western Germany, which operated under the management of Ralph Deselaers between 2003 and 2011. The company was responsible for the design and manufacturing of high pressure gas cylinders and pressure vessels. Its products included steel cylinders and vessels; compressed natural gas cylinders, such as steel and composite cylinders for cars, buses, trucks, transportation, and filling stations; and industrial and medical gas cylinders for fire prevention and industrial gas producers. It also produced accumulator shells; breathing apparatus; jumbo tubes for the storage and transportation of large quantities of compressed gases; square frames, gas storage modules, ready to fill gas storage units, and tube and composite trailers for gas transportation; and devices for the vertical installation of pressure vessels.

The company was originally founded as the first rolling mill in 1897 in Western Germany, where it operated heavy machinery such as a steel strip rolling mill, a wire-rod rolling mill, a cold rolling mill and a pipe rolling mill. In 1911, it began production of steel cylinders – an activity which continued until its closure one hundred years later. In 1990, the factory was renamed as Mannesmann Stahlflaschen GmbH and then again as Mannesmann Cylinder Systems in 1998. In 2000, the Mannesmann corporate group was dissolved and the company was sold to another group of investors. In 2002, the consortium declared bankruptcy. One year later, its assets were bought by Iranian-operated companies, which changed the company name again – this time to MCS International. According to Iranian sources quoted by the German newspaper Der Westen, the company’s new owner was Reyco, a German affiliate of an Iranian firm called Rey Investment – a conglomerate affiliated with a well-known business mogul known for his close ties to Iranian secret service minister Mullah Mohammadi Reyshahri and the Iranian Revolutionary Guard. Rey Investment Company was a $40-billion investment arm of a religious trust companies run by a religious charity known as Shah Abdulazim owned by Iran’s Supreme Leader Ayatollah Khamenei. It is therefore part of Khamenei’s financial empire, known as the Headquarters for the Execution of Imam Khomeini’s Order, estimated at a total of $100 billion.

Rey Investment Company was initially run by Ayatollah Mohammad Mohammadi Reyshari. When Reyshari was linked to an embezzlement scheme, the US Treasury said the Iranian government ousted him and appointed a new managing director. Washington then placed Rey Investment Company‘s own subsidiary, Reyco GmbH, on its sanctions list, also targeting Reyco’s two German subsidiaries, MCS International GmbH and MCS Engineering, which makes industrial measuring equipment. The nominal owners of both firms were appointed by Tehran and answered to senior officials there, Treasury said at the time.

Almost immediately after the takeover, the new proprietors reportedly began construction of a sister-company in Esfahan, Iran, known as Pars MCS, which started manufacturing gas tanks with the help of German-imported know-how. Former employees of MCS International alleged that soon thereafter, the German company’s new stakeholders lost interest in the Dinslaken factory and focused solely on investing funds in the Iranian production facility. Despite this, in 2004, MCS International acquired a new roll-former (also known as a flow-forming machine) – an expensive piece of machinery precise enough to produce components for centrifuges and missiles. In February 2005, the company tried to export the dual-use machine to Pars MCS for the alleged production of natural gas cylinders in Iran. However, its export license application was repeatedly denied by BAFA, the German Federal Office for Economic Affairs and Export Control.

In 2010, the Canadian government placed Pars MCS on its sanctions list for allegedly aiding Iran proliferation-sensitive nuclear activities.

In 2011, MCS International declared bankruptcy. Its assets were purchased by Eshagh Hajizadeh, a Canadian citizen, in partnership with another Canadian-Iranian businessman and was renamed as MCS Technologies. Hajizadeh claimed that all ties were severed between the German operation and Pars MCS and Reyco – however, records showed that Hajizadeh remained a manager of Reyco until at least 2013, even though the company was not conducting business at that time.

In an exposé published by the Washington Post, former employees of MCS Technologies were quoted as saying that two German engineers flew to Iran as recently as December 2011 to consult with Pars MCS. Hajizadeh said that “only one German engineer went to Iran and that his only job was to service a machine sold to Pars MCS many years earlier”.

In March 2013, Hajizadeh announced the official closure of MCS Technologies as the company had suffered yearly losses of $2 million to $3 million. German newspapers reported that several investors from Oman and Dubai were interested in taking over the prevailing assets – however, this has so far remained in the realms of speculation. As the plant was shutting down, a shipment of lightweight, carbon-fiber-wrapped gas tanks was sent to Dubai, according to shipping manifests documenting the transaction.

In 2013, a Washington Post reporter visited the shuttered plant and found that 2,600 pounds of carbon fibre were still sitting in cardboard boxes on the factory floor – enough to build more than 550 top-of-the-line centrifuges. However, Hajizadeh claimed that the remaining parts were to be returned to the manufacturers, Toho Tenax of Japan and Toray of France in the hope of recouping lost revenue.

Was the Iranian involvement in MCS designed to benefit Iran’s nuclear or missile programmes? It is unclear. The evidence linking MCS to UN-proscribed end-users is scant at best, and this scheme may well have been intended to benefit Iran’s military or civil industries. Still, the case stands as a warning of the need to ensure careful vetting of outside investment in sensitive dual-use industries.