Our spies have broken the law accessing Customs and Immigration data and have resisted explaining to the intelligence oversight body why they have done so.

That's the blunt statement spelled out in the latest annual report from the Inspector General of Intelligence and Security.

It suggests two of the country's most capable public service lawyers are at a standoff with former deputy Solicitor-General Cheryl Gwyn holding the role of Inspector General and former Cabinet secretary Rebecca Kitteridge as the head of the NZSIS.

The details are revealed in the latest annual report from Gwyn into the NZ Security Intelligence Service and the Government Communications Security Bureau.

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In it, Gwyn said the NZSIS had "unlawfully obtained Customs data" until mid-2016 and it had not properly explained why.

She said practices had since changed with the new law governing the intelligence services allowing the NZSIS to get Customs and Immigration data through a "Direct Access Agreement".

But Gwyn said the argument over its earlier method had dragged out over three years and was "excessive", in part because the NZSIS took "considerable time to obtain legal advice on all of the issues that this matter raised".

Gwyn said "it was difficult to elicit a comprehensive and fully reasoned response from the NZSIS" to her May 2016 report or other correspondence over access of the Customs data.

"I found the agency was reluctant to engage with my office on the substantive issues."
Instead, in August 2017 the NZSIS told Gwyn [it was] "its final view as to the lawfulness of some of its access to information".

It was a position Gwyn said she disagreed with.

Gwyn said that the NZSIS had shown "some reluctance about disclosing its own internal legal advice" on key issues which was "contrary to the clear words of the legislation and longstanding practice".

The NZSIS decision to withhold the details "impeded my ability to understand fully the operational situation at the particular time".

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Gwyn said it was for her and not the NZSIS to find the information needed for oversight.

She said "historically legal opinions have been provided by both agencies to my office" and it was "essential" for the IGIS to know how the law is being interpreted and applied by the agency.

Gwyn said the NZSIS must be able to act lawfully and it was still unclear whether the NZSIS could "lawfully treat immigration information collected by it previously" as if it were collected under the new "Direct Access Agreement".

The difference of opinion between the NZSIS and the IGIS pits Gwyn against Kitteridge on a legal point, argued over three years.

The annual report of the Inspector General of Intelligence and Security is the nation's primary health-check on the activities of our spies.

Gwyn said her office was preparing to public findings on "allegations of GCSB surveillance in the South Pacific". It was also expected early 2018 would see the release of the IGIS inquiry "into possible New Zealand engagement with CIA detention and interrogation".

There were also findings about to be released into the status of warnings delivered by staff working for the NZSIS and another into information collected under the Customs and Excise Act and the Immigration Act.

Gwyn said her office had noted an increase in the amount of information provided by the agencies when seeking warrants. She said applications for interception and surveillance warrants now included greater detail which allowed the person granting the warrant whether it was "necessary and proportionate".

An earlier inquiry by Gwyn had raised issue with the level of detail in NZSIS warrant applications.

Gwyn also noted the turnaround of the GCSB practices and systems since an adverse inquiry in 2013 - by Kitteridge as Cabinet Secretary - found the bureau was following a misinterpretation of its own law.

A statement from Kitteridge didn't deal with the Customs and Immigration data but focused on Gwyn's broad finding legal compliance was good.

"NZSIS staff are committed to protecting the safety of New Zealanders and always strive to work within the law.

"Our legal compliance systems are in a much better place. In 2014, when I started in this role, the NZSIS did not have a compliance team; nor did it have a compliance framework for staff to follow.

"We now have both, and I believe this has played a significant role in encouraging a strong compliance culture."