Industry fears EU backlash

By PHILIPPA STEVENSON agricultural editor

Fears are arising that Fonterra's $50 million "Powdergate" illegal exporting scandal could escalate into an embarrassing international incident, despite company claims that it has ended the matter.

The Business Herald understands that the detection in April of incorrectly labelled rennet casein in Italy has come to the attention of European Union officials.

One commentator concerned about the effects on trade suggested that the matter was "just the sort of thing that could spark non-tariff trade barriers".

Five shipments of whey protein concentrate have already been under investigation in the United States, after being detained by the American Food and Drug Administration in April and June because of misbranding.

Tim Knox, a spokesman for the Ministry of Agriculture and Forestry, which is co-ordinating transtasman investigations, would not comment on any international effects from the shipments.

"Those are matters that we are investigating in the context of this investigation, and I'm not willing to make any specific comment on that."

Fonterra spent well over $1 million on its own inquiry into the illegal export of high-value milk proteins through a web of companies mostly associated with its Kiwi Dairies forerunner.

Two of its Australian subsidiaries, Cottee Dairy Products and Australasian Dairy Ingredients, have been put into liquidation.

The fate of their nine staff has yet to be decided by the liquidator.

Yesterday, on the anniversary of the announced intention to form the giant co-op, Fonterra chairman John Roadley said Powdergate had been "brought to closure" by the company's board.

Actions taken included the resignation of two senior Kiwi Dairies executives, Paul Marra and Malcolm McCowan, who were suspended during the company's investigations of the companies involved in illegal exporting, companies with which they were closely involved.

The company also fired a second Australian-based employee, bringing departures over the scandal to four after the earlier dismissal of New South Wales-based Ross Cottee, another senior executive tied to Powdergate.

A staff member of Australasian Dairy Ingredients was sacked for serious misconduct, Mr Roadley said.

Others would have suffered similar fates, but they were contractors and therefore beyond the company's reach.

An employee of New Zealand Dairy Group - the other Fonterra predecessor - was to be disciplined, but would stay on with the company, he said.

A company spokesman could not confirm that the Dairy Group employee was involved with the company's suspect sale of 794 tonnes of product this season, highlighted by Mr Roadley last month.

But the company had taken action only over the transactions already acknowledged, which involved $50.3 million originating from Kiwi in the past two seasons.

The main findings of the investigation showed no evidence of improper personal gain from the transactions, although there remained concerns about "adherence to industry protocols to varying degrees right across the industry under the old structure", the company said, referring to export rules under the now defunct Dairy Board Act.

Other companies, so-called third parties and direct export supply chains originated in the early 1990s and were most active in the period from 1998 to early this year, Fonterra said.

"These arrangements were not unique to any of the Fonterra predecessor organisations. There were structural and competitive tensions within the historical industry structure that drove the desire to export, on occasion, around the fringes, rather than via the Dairy Board."

The company described those involved in the illegal transactions as "lower level personnel" - a seemingly ill-fitting description of at least three staff who have departed during the inquiry.

The findings said knowledge on the part of senior personnel was generally after the event and related to "risk management action".

"There have been deficiencies in management practices, including reporting systems, ensuring the prompt actioning of directives, and monitoring the competence and conduct of lower level personnel."

Mr Roadley said the board had "strongly reaffirmed its confidence" in Fonterra chief executive Craig Norgate, who previously held the same role at Kiwi.

The inquiry was satisfied that Mr Norgate had not acted improperly, and was the right person to head Fonterra.

The company said a confidential agreement had been reached with Mr Marra and Mr McCowan, after their situation was referred to the Employment Relations Authority and an order made by mediator and QC Kit Toogood.

Their resignations take effect from the end of the month.



Mr Roadley said the investigation by private investigator and former CIB senior detective John Hughes and staff from accountancy firms KPMG and Deloitte Touche Tohmatsu, had taken hundreds of hours, involved interviews with more than 30 people, and the examination of more than 100,000 e-mails spanning several years and a huge volume of documents.

MAF still had an investigative job to do, with which the company would co-operate fully, he said. Mr Roadley said it was critical to note when the actions took place.

"It took place under the legislative regime that governed the pre-merger industry, and it reflected a reaction to the competitive tensions and imperatives driving the industry at that time.

"In that era, the commercial imperative was to outperform rival New Zealand dairy co-operatives by any reasonable means. Under pressure, the definition of 'reasonable' was stretched, as it sometimes is."

The industry had now moved on with the creation of Fonterra, and the commercial imperative was different. The transactions were a minor proportion of the business done by the $12 billion industry, and the investigation's findings did not support any contention that such conduct was widespread, he said.

Feature: Powdergate