KEY POINTS:
Fonterra won an exemption to indirectly export dairy products to Iraq after giving a cast-iron assurance to the Government that its Vietnamese intermediary was operating legitimately under the UN's oil-for-food programme.
That assurance - revealed in documents released to the Herald - subsequently went into meltdown after an inquiry by former US Federal Reserve chairman Paul Volcker into widespread corruption surrounding the UN programme.
In Volcker's 2005 report, the intermediary - Vietnam Dairy Products (Vinamilk) - was alleged to have paid US$23.5 million ($34 million) in illegal kickbacks to former Iraqi dictator Saddam Hussein's regime.
Fonterra has denied knowing any bribes were being paid by Vinamilk and the Ministry of Foreign Affairs and Trade (Mfat) said in 2005 its officials had not seen any evidence to suggest the co-op knew of illicit payments to the Iraqi authorities.
But Fonterra - and one of its predecessors the NZ Dairy Board - are now being investigated by the Serious Fraud Office to find out whether they had any prior knowledge the Vietnamese Government-owned company had allegedly paid kickbacks to get repackaged New Zealand milk powder into Iraq.
The documents - released under the Official Information Act - raise questions over just how deep an inquiry was made by foreign affairs officials before they drafted a press release for Foreign Minister Winston Peters headed "Oil for Food - no evidence of NZ corporate wrongdoing" in November 2005.
The Mfat documents reveal Mfat began talking with Fonterra in October 2001 over the substantial amounts of its milk products that were being exported to suppliers in third countries for onward supply to Iraq.
Mfat officials advised Fonterra a ministerial exemption lifting the prohibition on indirect exports to Iraq could be granted but they would require copies of official UN documentation for recent consignments to show the third parties were operating under the oil-for food programme.
Fonterra told Mfat it could not provide the documentation for the following reasons:
* Its "customers" (Vinamilk) did not only supply the Iraqi Government with whole milk powder, but they also repackaged Fonterra products for other markets and were thus not able to give the exact volumes they intended to onship to Iraq at the time supply contracts were negotiated.
* Its "customers" also purchased milk powder from other suppliers making it difficult to trace exactly how much NZ-sourced product was among the Iraq shipments.
* Its "customers" did not always deal through the UN's programme but would consolidate various parcels awarded to smaller trading companies supplying the volume on their behalf.
Despite the fact Fonterra's customers did not always have the UN documentation issued in their name, the ministry accepted Fonterra's assurances it had confidence they were operating legitimately under the oil-for-food programme.
On October 16, 2002, then Foreign Affairs Minister Phil Goff signed the exemption notice.
The UN oil-for-food programme - set up on a temporary basis to provide urgent humanitarian relief to Iraq - clocked more than US$100 billion in transactions over seven years until it was phased out in 2003, after the fall of Saddam's regime.
After the regime fell, Vinamilk was requested to reduce the value of one of its contracts by 10 per cent. "Based on the available evidence, Vinamilk knowingly paid kickbacks to the Iraqi regime," said the UN report.
