MAF calls in the Serious Fraud Office over Powdergate

By PHILIPPA STEVENSON agricultural editor

Major commercial fraud, not just breaches of minor export rules, is now suspected in the illegal export of more than $50 million worth of dairy products through a web of transtasman companies.

The Ministry of Agriculture and Forestry said yesterday that it had referred the "Powdergate" transactions to the Serious Fraud Office.

MAF's investigation, begun in September, is considering breaches of export rules under the now defunct Dairy Board Act (with maximum fines of $400 a person or $2000 for a company), and labelling requirements under the ongoing Dairy Industry Act (maximum fine $20,000).

Yesterday MAF spokesman Tim Knox said that early in its investigation MAF had recognised that the deals could have graver implications.

"We've had some discussion with the Serious Fraud Office," he told the Business Herald.

"Given the extent of the alleged offences here, we thought it was important to brief them."

Serious Fraud Office director David Bradshaw would neither confirm nor deny that the SFO was investigating the deals that have scandalised the dairy industry.

The SFO's broad criteria for investigating an allegation of serious or complex fraud is that it involves more than $500,000, be perpetrated by complex means, and be of major public interest and concern.

Mr Knox said MAF had also briefed other regulatory authorities, including Customs.

The Australian Quarantine Inspection Service has already confirmed that MAF requested it, Australian Customs and the New South Wales food regulator, FoodSafe, to investigate a NSW company at the centre of the scandal, Cottee Dairy Products.

Cottee is 75 per cent owned by new, giant dairy company Fonterra, through its predecessor Kiwi Dairies.

Meanwhile, Act list MP Stephen Franks, an expert in company law, said there was widespread anxiety about what "Powdergate" might mean for the integrity of Fonterra's culture if the scandal was tolerated, or covered up.

The primary question was whether "the dodgy practices" were aimed at personal gain, or were for company benefit.

It was crucial to know whether Kiwi or New Zealand Dairy Group staff designed exporting structures to "scrape off any personal, undisclosed gain as the product went through", he said.

"The second question is who knew, when Kiwi or Dairy Group sold the product, that their subsidiaries would later be involved in illegal export. On that we have yet to hear."

He said Fonterra had to strike the right balance by competing hard but avoiding any hint of corrupt behaviour.

Most of the company's supplier shareholders understood it "has to ride dangerous horses" but they would not want its directors being naive.

"They want the company to stand behind cunning executives who find borderline ways to get the better of foreign market regulators, as long as that is all they use their black arts for."

Mr Franks, a long time critic of the mega co-op, said his views were not designed to undermine the company.

"It is such an important part of New Zealand now. We certainly can't afford another corporate failure."

Fonterra needed people who could work in "legal thickets shading into ethical no man's land".

He said the company would always have trouble with activity of debatable legality.

"The group's culture has to be gung-ho. They want aggressive people, willing to push the boundaries, turning their inventive minds to ways of getting around the unfair trade barriers we face."

But that approach inevitably risked generating a culture that encouraged people who saw rules as a nuisance, to be avoided where profitable.

Employees needed to know how the company would treat those caught on the wrong side of the line.

A simple two-step test would suffice, he said.

If they were pursuing the interests/profit of the company, they were eligible for support from the company if they passed the second test.

The second test was whether the scheme depended on genuinely debatable interpretations of the relevant law, or worked only because it was covert and relied on conscious deceit or other dishonesty.

"If there is no excuse or defence when all the facts known to the relevant executives become known to the relevant authorities, the line has been crossed."

The executives must ensure a good faith argument was available to try to justify their conduct.

Without that an organisation as big, and as exposed around the world as Fonterra, could not condone it, publicly or privately.

"Public defence of the indefensible is a waste of time and reputational capital.

"People who think outright lying is okay, and that their company thinks it is okay, will sooner or later justify among themselves stealing from the company and its owners."