Operation Achilles, in November 2012, discovered that five out of six vessels operating off the eastern coast of the South Island had discarded quota fish - mostly gurnard and elephant fish. Between 20 per cent and 100 per cent of quota fish were being thrown out with every haul.
However, despite a recommendation by the investigator, MPI did not ptoceed with a prosecution and instead issued a warning to the boats' skippers.
This decision, and the process leading up to it, was flawed, Heron's report said.
The prosecution decision was influenced by "considerations which were not relevant", including "potential embarrassment to MPI or officials", he said.
The process was "confused, not well documented, and not well communicated", and MPI created hurdles to the prosecution, which Heron said were inappropriate "or at least unhelpful".
The ministry was supposed to follow up its warning by "drawing a clear line in the sand", but this did not take place.
MPI director-general Martyn Dunne said he accepted the inquiry's findings, which he described as "regrettable".
"It is also disappointing that the process was characterised by confusion and a lack of adequate documentation and communication," Dunne said.
Speaking at a press conference in Wellington this afternoon, he said there was no value in blaming the individuals involved and it was "time to move on".
Two senior staff who were at the heart of the investigation had recently moved on to other public sector jobs, but Dunne said this was purely coincidental.
Scott Gallacher, who fronted the media on the decision not to prosecute is leaving his role as an MPI deputy director-general to become deputy chief executive of the Ministry of Social Development.
In May, Prime Minister John Key told Paul Henry that Gallacher was "quite a star".
Andrew Coleman, another of MPI's deputy director-generals, is leaving to become chief executive of Heritage New Zealand.
MPI had already taken some steps to address problems around illegal dumping, and would take further action as a result of the findings in Heron's inquiry, Dunne said.
He also took a shot at commercial fishers over illegal dumping, saying some of them needed to "lift their game".
"There are many responsible operators out there but there are also some who have less of a commitment to observing the law."
In the other two investigations, Operation Overdue and Operation Hippocamp, Heron said it was "understandable" that no prosecution action was taken.
There were "initial errors" in the Overdue investigation into dumping, but the ministry's response was in the end "adequate" and led to a change of behaviour by the fishing company in question.
The Hippocamp investigation had limited findings and therefore the question of a prosecution did not arise, Heron said.
Events leading up to the inquiry
Fishing company Sanford, which sourced fish from the vessel owners found guilty of dumping, said that if it had known about the dumping concerns it would have addressed them earlier.
"Sanford has put these vessel owners on written warning that non-compliance with the law is absolutely not accepted and will immediately result in them no longer catching or landing fish into Sanford," chief executive Volker Kuntzsch said.
The vessels were ordered to install permanent cameras immediately if they wished to have an ongoing relationship with the company.
No one from Talley's - which was also linked to the fishing vessels - was able to comment today.
The Labour Party's fishing spokesman Rino Tirakatene said the inquiry's findings damaged the trust and credibility of the ministry, the industry and Government.
He accused Primary Industries Minister Nathan Guy of a hands-off approach, which had "failed the industry and the people of New Zealand".
Conservation organisation Forest and Bird said a culture change was needed at the ministry.
"The review confirms that the ministry is in bed with the fishing industry and is failing to ensure commercial fishing is sustainable," spokesman Kevin Hackwell said.
Greenpeace spokesman Russel Norman said the inquiry provided further evidence that MPI had been "captured" by the very industry it was supposed to be regulating.
Norman was also critical of MPI's refusal to waive legal privilege in relation to its decision not to prosecute.
"Far from being an open and transparent explanation, the New Zealand public is once again not being told the full story," he said.
