THE GRAY MARKET IN NUCLEAR MATERIALS: A GROWING PROLIFERATION DANGER

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00287R000601230001-1
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 10
• Document Creation Date: December 22, 2016
• Document Release Date: August 18, 2010
• Sequence Number: 1
• Publication Date: November 1, 1983
• Content Type: MEMO

4
SECRET /J n
Sanitized Copy Approved for Release 2010/08/18: CIA-RDP85T00287R000601230001-1
1 NOV 1983
MEMORANDUM FOR: (See Addressee List)
FROM:
SUBJECT:
A Growing Proliferation Danger
The "Gray Market" in Nuclear Materials:
1. The attached memorandum examines the growth and importance
of the international clandestine market in nuclear materials. A
number of Third World proliferators have used West European brokers
to acquire sensitive nuclear-related technologies. At the same
time, these brokers have become increasingly sophisticated in
exploiting ambiguous domestic export control laws and nonprolifer-
ation guidelines. We plan to devote further resources to study
this growing proliferation threat and will report our findings
periodically.
2. This memorandum was prepared by
Security Issues Division, Office of Global Issues.
3. Comments and queries regarding this, subject are welcome and
may be addressed to the Chief, Weapons Proliferation Branch, OGI, on
25X1
25X1
25X1
25X1
25X1
Attachment:
The "Gray Market" in Nuclear Materials: A Growing
Proliferation Danger GI M 83-10255, October 198
Sanitized Copy Approved for Release 2010/08/18: CIA-RDP85T00287R000601230001-1
 Sanitized Copy Approved for Release 2010/08/18: CIA-RDP85T00287R000601230001-1
Central Intelligence Agency
The "Gray Market" in Nuclear Materials:
A Growing Proliferation Danger 25X1
Summary
Several developments in the last decade have facilitated the
growth of an international clandestine market in nuclear
materials. Competition for sales, which increased with the
emergence of new suppliers of these materials, has helped to
erode the Western exporters' consensus on the regulation of trade
in nuclear materials. At the same time, some proliferators--
generally working with one of the small number of international
brokers--have become increasingly sophisticated in their efforts
to circumvent established nonproliferation guidelines. These
"gray market" activities strain the global nonproliferation
regime which is not now comprehensive enough to regulate such
activity.
This memorandum was prepared by International
Security Issues Division, Office of Global Issues. This analysis
is based on information as of 27 October 1983. Comments and
queries are welcome and may be addressed to Chief, Weapons
Proliferation Branch, OGI
GI M 83-10237
October 1983
Sanitized Copy Approved for Release 2010/08/18: CIA-RDP85T00287R000601230001-1
 Sanitized Copy Approved for Release 2010/08/18: CIA-RDP85T00287R000601230001-1
Eme,rgence of the Gray Market
Gaps in the coverage and effectiveness of the global
nonproliferation regime have facilitated the development of a
gray market in nuclear materials.' The regime prohibits
government sales of certain sensitive nuclear materials and
technologies to non-nuclear weapons states in order to discourage
the use of nuclear technology for nonpeaceful purposes. It
operated reasonably well as long as the suppliers of nuclear
materials were few and they shared acommon.view on the types of
materials and assistance requiring regulation. In the last
decade however, several developments have contributed to the
spread of nuclear technology to many countries, which made it
easier for a clandestine nuclear market to develop and operate.
These changes include the:
-- emergence of new suppliers of nuclear materials;
-- erosion of the Western suppliers' consensus on a
"philosophy" of regulation in the face of economic
competition; and
-- growing sophistication of Third World proliferators in
circumventing established nonproliferation guidelines. 25X1
The gray nuclear market thrives in this environment. Venturesome
entrepreneurs have made large sums of money. in recent years by
brokering clandestine nuclear sales.
they operate by exploiting ambiguous 25X1
domestic export control laws and less than comprehensive
international regulations. 25X1
Motivations
Governments or firms in countries that pose a proliferation
threat generally use the gray market to acquire nuclear materials
or assistance because it offers opportunities to conceal or
partially conceal nuclear transactions
Specifically, buyers turn to the gray market because it
may provide:
-- the only source of a nuclear material that is legally
embargoed to a potential proliferator;
'The gray market in nuclear materials involves the sub-rosa
transfer of nuclear equipment, materials or technologies. Many
gray market activities are technically legal under national
export laws but violate the spirit of a country's nonpro-
liferation policies and/or international agreements.
SECRET
Sanitized Copy Approved for Release 2010/08/18: CIA-RDP85T00287R000601230001-1
 Sanitized Copy Approved for Release 2010/08/18: CIA-RDP85T00287R000601230001-1
-- an unregulated source of; a nuclear material for a country
that wants to acquire unsafeguarded materials for its
indigenous program; or
-- a convenient way for a country to disguise its nuclear
intentions and avoid the political and diplomatic problems
of dealing on a formal government-to-government level.
From the seller's perspective, clandestine nuclear-related
sales have helped maintain the financial solvency of many West
European nuclear firms. Nuclear firms in West Germany, Italy,
Switzerland, and Belgium increasingly use middlemen to mask sales 25X1
of potentially sensitive nuclear products to developing
countries' nuclear programs
Anatomy of a Gray Market Transaction
A typical gray market nuclear transaction generally follows
a set pattern, First, the govern- 25X1
ment of a proliferating country either directly or through a
cover firm solicits price quotations for the nuclear material 25X1
souuht. Governments vary in how they carry out this first step,
Pakistan, for example, frequently deals through dummy 25X1
firms set up by their procurement officers who operate under
diplomatic cover out of Pakistani embassies in western Europe.
India, however, usually does not go to such elaborate ends to
launder its nuclear purchases, usually listing legitimate private
firms rather than government facilities as the purchaser.
Argentina's Atomic Energy Commission, on the other hand, nego-
tiates directly with Western European firms and brokers. 25X1
In the second step, a procurement official may go directly
25X1
- i.t
t LE
r
a
l
r f i rm
r ma
mi
i
a br
k
r t-
es
u
ope
n nuc
e
o
y com
ss
on
o
e
to
arrange the nuclear-related purchase.
the more sensistive the acquisition, the more likely a 25X1
broker will be used to-disguise the sale. A line of credit at a
? bank subsequently is opened in the broker's name, and delivery
of the goods is arranged. the 25X1
three most common methods of making gray market deliveries are:
-- Export of nuclear equipment as component parts where the
components alone appear innocuous and may not require an
end-use declaration under national export laws.
SECRET 25X1
Sanitized Copy Approved for Release 2010/08/18: CIA-RDP85T00287R000601230001-1
 1 -1
Sanitized Copy Approved for Release 2010/08/18: CIA-RDP85T00287R000601230001-1
-- Falsification of end-use statements if delivery is made
directly to a country of obvious proliferation concern,
such as Pakistan.
-- Transshipment of the nuclear-related goods to a third
country with lax national export control laws. The United
Arab Emirates and Turkey often are used as third-country
transshipment points because of their loose export control
scrutiny.
the general
pattern of a well-known Dutch broker, for examp e, is to set up a
line of credit in the Netherlands, funded by Pakistan's
Engineering Research Laboratory, to buy nuclear material from
West German or Swiss firms. This material is then exported to
another West European or Middle Eastern country for ultimate
delivery to Pakistan.
SECRET 25X1
Sanitized Copy Approved for Release 2010/08/18: CIA-RDP85T00287R000601230001-1
 Sanitized Copy Approved for Release 2010/08/18: CIA-RDP85T00287R000601230001-1
Prospects
We believe sub-rosa procurement networks in nuclear
materials will likely grow, as the financially lucrative business
of brokering nuclear materials trade attracts more
entrepreneurs. As long as domestic commercial pressures to
permit a wide gamut of nuclear exports remain high, West European
suppliers are unlikely to view the proliferation impact of gray
market activities as a serious political problem. Furthermore,
the difficulties all Western governments face in regulating the
transnational dealings of private firms within their borders also
are unlikely to lessen. Even when illegal activities become
known to a government, it is hard to prosecute because of the
transnational nature of the broker's activities. The lack of
effective international regulation of their activities
facilitates the business of gray market operations. Confidence
in the nonproliferation regime may be seriously strained as gray
market activities continue because the regime has few, if any,
regulatory mechanisms to stop such activities.
SECRET
Sanitized Copy Approved for Release 2010/08/18: CIA-RDP85T00287R000601230001-1
 Sanitized Copy Approved for Release 2010/08/18: CIA-RDP85T00287R000601230001-1
Addressee List for Typescript: The "Gray Market: in
Nuclear Materials: A Growing Proliferation Danger r
The Honorable Richard T. Kennedy
Ambassador at Large (S/NP)
Room 7531
Department of State
The Honorable James C. Malone
Assistant Secretary, Bureau of Oceans
and International Environmental and Scientific Affairs (OES)
Room 7 831
Department of State
James Devine
Deputy Assistant Secretary for Nuclear Energy
and Energy Technology Affairs (OES/N)
Room 7 831
Department of State
Michael Guhin
National Security Council
Room 365
Old Executive Office Building
Washington, D. C. 20506
Lucian Pugliaresi
Policy Planning Staff
Room 7 312
Department of State
Frederick F. McGoldrick
Director, Office of Nuclear
Proliferation and Export Policy
Room 7828
Department of State
Thomas Gabbert
Agency Director for Science and Technology (IO/SCT)
Room 5336
Department of State
Carlton Thorne
Chief, International Nuclear Affairs Division
Arms Control Disarmament Agency
Room 4 678
Department of State
W. Dean Howells, Jr.
Director, Office of Politico-Military Analysis (INR/PMA)
Room 6638
Department of State
Sanitized Copy Approved for Release 2010/08/18: CIA-RDP85T00287R000601230001-1
 - Sanitized Copy Approved for Release 2010/08/18: CIA-RDP85T00287R000601230001-1
Addressee List for Typescript: The "Gray Market: in
Nuclear Materials: A Growing Proliferation Danger
Robert Gallucci
Director, Office of Regional Security Affairs (PM/RSA)
Room 7815,
Department of State
George Bradley
Principal Deputy Assistant Secretary
for International Affairs (IA-2)
Mail Stop 7C016, Forrestal Building
Department of Energy
Harold Jaffe
Acting Deputy Assistant Secretary
for International Energy Cooperation
and Nuclear Non-Proliferation Policy
Mail Stop 7C034, Forrestal Building
Department of Energy
Sheila Buckley
Director of Multilateral Negotiations
Office of the Under Secretary of Defense for Policy
Department of Defense
Room 4C762 Pentagon
Washington, D. C. 20301
Richard Eddy
Lawrence Livermore Laboratory
P. O. box 808 L-389
Livermore, CA 94550
Sanitized Copy Approved for Release 2010/08/18: CIA-RDP85T00287R000601230001-1
 Sanitized Copy Approved for Release 2010/08/18: CIA-RDP85T00287R000601230001-1
SUBJECT: The "Gray Market: in Nuclear
. Materials: A Growing Proliferation Danger
OGI/ISID/WP/
(27 October 83)
Distribution: (Attachment with each copy)
Each Addressee
SA/DDCI
ExDir
DDI
ADDI
DDI Registry
DDI/PES
CPAS/ILS
NI O/AL
D/G I , DD/GI
NESA/SO/I
OSWR/NED
OEA/CH/FOR
ALA/SAD
OGI/ISID/Ch
OGI/ISID/WP/Ch
OG I PS
Sanitized Copy Approved for Release 2010/08/18: CIA-RDP85T00287R000601230001-1
 Sanitized Copy Approved for Release 2010/08/18: CIA-RDP85T00287R000601230001-1
le
Next 5 Page(s) In Document Denied
Sanitized Copy Approved for Release 2010/08/18: CIA-RDP85T00287R000601230001-1