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212 SPACE, SPY SHIPS AND SCANDALS
Fundamentals were at stake. Meanwhile, they asserted, the cost
of supporting the NSA plan was a relatively small amount of
compensation to British companies such as Plessey for the free
licensing of its new Alvis machine. 40 In the event GCHQ won
the day, and equipment was supplied to NATO nations at a
highly subsidised COSt. 41
As an additional backstop, GCHQ and NSA quietly encouraged
their NATO allies to introduce legislation that regulated the
export of cypher machines in the same way that arms exports
were tightly controlled. However, there was an alarming loophole.
The restrictions did not apply to neutral countries such as
Sweden or Switzerland. Switzerland was one of the world's most
advanced manufacturers of a range of technical defence equipment,
from optical instruments to radar. It had a longestablished
record as a manufacturer of excellent cypher
machines, the reputation of which was enhanced by public confidence
in Swiss neutrality. This 'neutrals problem' was being energetically
addressed by GCHQ and NSA. The main issue was a
well-known Swiss company called Crypto AG, which was owned
by a Swede, Boris Hagelin Senior, one of the world's top experts
on cypher machines and a significant innovator in the field of
cryptography. Crypto AG had become an increasingly important
supplier of cypher equipment after the Second World War, trading
on the Swiss reputation for excellent technology and neutrality.
How NSA and GCHQ 'neutralised the neutrals' is an extraordinary
tale. The story seems to have begun on 4 September
1956, when the Australian Embassy in Washington 'had a ring
from a character who wanted to sell us some cipher
machines'Y The 'character' was none other than Boris Hagelin
Junior, who represented two of his father's companies - Crypto
AG in Switzerland and AB Cryptoteknik in Sweden - and ran
a sales office in Maryland. He boasted that, together, the two
companies had manufactured over 150,000 cypher machines
which were in service with over thirty countriesY
Hagelin Junior was busy moving around Washington selling
cypher machines to the many foreign embassies there. He