Illegal export scandal widens

By PHILIPPA STEVENSON, Agricultural Editor

The dairy industry's Powdergate scandal widened yesterday with the revelation that illegal exports go back several years and involve at least $50 million of sales - more than $10 million higher than thought.

It may also embrace the former NZ Dairy group as well as its rival, Kiwi Dairies.

Fonterra chairman John Roadley responded to growing farmer outrage by issuing a letter saying the more than 9000 tonnes of products from Fonterra forerunner Kiwi illegally exported in the past two years was sold for $50.3 million.

In addition, Fonterra spokesman Matthew Hooton told the Business Herald he understood much smaller quantities of Kiwi exports in previous seasons "may not have had the necessary approval".

Mr Roadley also revealed that another 794 tonnes of product from the other Fonterra predecessor, Dairy Group, is under investigation for being exported without Dairy Board permits in the last dairy season. It allegedly left the country through different companies to those handling the Kiwi products.

Fonterra deputy chairman and former Kiwi chairman Greg Gent had previously indicated the total export tonnage caught up in the scandal was worth $39 million.

But Mr Roadley said in his letter that was the value of a 6000-tonne shipment, while nearly 3000 tonnes exported the previous season was worth another $10.8 million.

The admission came as the Ministry of Agriculture and Forestry said its probe into illegal exports could go back several years, beyond the "Powdergate" shipments.

Spokesman Tim Knox said MAF would investigate "any line of inquiry which identified potential offending".

Critical decisions on the scope, scale and strategy for the next phase of the investigation were determined this week. It would continue with vigour and as many resources as MAF could muster, he said.

Information was being exchanged with Australian authorities, including Australian Customs and the country's quarantine inspection service which are investigating the Kiwi subsidiary at the centre of the scandal, Cottee Dairy Products in New South Wales.

Mr Roadley told shareholders their concerns had prompted the release of more information on the company's investigations.

The catalyst for the inquiry had been the discovery in April by the Dairy Board's Italian partner that a competitor had rennet casein from Kiwi's Maungaturoto factory.

Board and Kiwi staff found that the product had come from Kiwi's Sydney subsidiary, Australasian Dairy Ingredients (ADI), which last year took over trading operations for Cottee Dairy Products.

ADI bought the product from Tauranga-based SPD, or South Pacific Distributors, which had bought it from Kiwi.

As already shown by the Business Herald, SPD was owned by Terry Walter, a director and then chief executive of Cottee.

ADI's directors are Kiwi senior executive Paul Marra and Australian-based Sandy Cottee, now the general manager of Cottee Dairy Products.

Mr Roadley said investigations into the Italian find by Dairy Board executive Grant Waterhouse and former Kiwi chief executive Craig Norgate led to disciplinary action against employees, including Ross Cottee, a director and executive of Cottee Dairy Products. Mr Cottee, Sandy Cottee's husband, ceased "to have any day-to-day management responsibilities at Cottee". As that occurred in June, Dairy Board directors Marise James and Murray Flett discovered milk protein concentrates from Kiwi's Hawera site in plain paper bags at a Mexican company, La Mesa. (In August, Dairy Board subsidiary NZ Milk, now part of Fonterra, bought La Mesa, one of Mexico's largest dairy companies.)

Mr Roadley said that, at that point, Mr Norgate ordered Cottee and ADI to stop buying product from SPD and to return unsold stock.

In July, Mr Norgate was named chief executive of Fonterra, but Mr Roadley said that before he was prepared to ratify the appointment he "sought and received from Craig categoric assurances that he had no prior knowledge of these matters".

Mr Norgate had no further involvement in investigations.

In September, the board asked other companies about illegal exports and Dairy Group responded that its subsidiary, NZ Dairy Ingredients, had sold 794 tonnes of dairy products last season to Biocorp and Probiotech "that may also have been exported without the necessary approval".

Companies Office records show that Stephen John McRae, of Remuera, is director and sole shareholder of Biocorp NZ and several other companies with similar names whose registered offices are in Palmerston North.

Mr McRae was unavailable for comment when the Business Herald called his Parnell office yesterday.

Mr Roadley said a study of the valuations of Kiwi and Dairy Group by accounting firms KPMG and Deloitte Touche Tohmatsu, which were evaluated by Arthur Andersen, concluded that the suspect transactions had no material impact on the valuation of the two companies preparing to merge and form Fonterra.

Inquiries were being made by KPMG, Deloitte and former police detective John Hughes, who expected to report this month.

Mr Roadley said: "The end result I seek from this investigation is the ability to stand before any shareholder, any official from any Government in the world, any joint venture partner, any employee and any customer, and say that Fonterra, its board and its executives practise high standards of integrity, consistent at all times and in all respects with our newly adopted code of conduct."