Wayward governance : illegality and its control in the public sector / P N Grabosky
Canberra : Australian Institute of Criminology, 1989
ISBN 0 642 14605 5
(Australian studies in law, crime and justice series); pp. 185-195
The mid 1970s were not the best years for Australian dairy farmers. In addition to problems of overproduction, the British decision to join the European Economic Community made the matter of developing new markets for Australian primary products a matter of urgency.
Despite their not infrequent protestations, Australian primary producers are often the beneficiaries of considerable government largesse. Indeed, under the Dairy Bounty Scheme which existed between 1943 and 1975, Australian dairy farmers received $795 million. As was the case with many other sectors of primary industry, Australian dairy farmers also benefited from the existence of statutory authorities created for the purpose of promoting and marketing Australian dairy produce.
Such a body was the Australian Dairy Corporation (ADC) which came into existence on 1 July 1975 as a statutory authority within the portfolio of the Australian Minister for Primary Industry. The ADC inherited subsidiaries of its predecessor body, the Australian Dairy Produce Board. Among these was a Hong Kong based company, Asia Dairy Industries (HK) which had been a wholly-owned subsidiary since 1971. Asia Dairy was a large operation indeed, with an annual turnover in the late 1970s of $120 million. Asia Dairy's primary operations consisted of marketing Australian dairy produce throughout south-east Asia.
Business practices in the Far East have long enjoyed a reputation of being somewhat rough and tumble. Asia Dairy had engaged in business practices which were to attract considerable attention. Its sales of dairy produce to Thai Dairy involved accounting arrangements structured in such a way that they resulted in the avoidance of withholding tax normally payable to the Thai government.
In 1975 Asia Dairy contracted to supply skim milk powder to a company in the Philippines, Holland Milk Products Incorporated (HOMPI). As it happened, this was a company in which Asia Dairy had a 13.33 per cent shareholding. Despite the close relationship between the two companies, and in the light of a world over-supply of skim milk powder, Asia Dairy was required to pay a $US25 per tonne rebate in order to secure the contract. The rebate was paid not to HOMPI, but to a bank account in Hong Kong controlled by two principals of the company which held a majority of HOMPI's shares. Whilst the rebate was to have been distributed to HOMPI shareholders on a pro rata basis, this did not occur. But Australian dairy farmers were thus assured a market in a highly competitive environment.
When the world price of skim milk powder fell, the contract price with the rebate taken into consideration placed Australia in violation of the 1970s skim milk powder arrangement within the General Agreement on Tariffs and Trade (GATT). The situation persisted for more than one year, from April 1976 to June 1977, when the world price of milk powder recovered. Thus, not only was the wholly-owned subsidiary of an Australian government statutory authority engaged in the evasion of taxes due to the government of Thailand, it had also placed the Australian government in violation of an agreement pursuant to an international treaty to which it was a signatory. Such conduct threatened Australia's status in the eyes of the world, and ran the risk of inviting similar behaviour on the part of Australian taxpayers and foreign companies trading in Australia. Admittedly, under-the-table concessions are not unusual in Asian commerce; but most Australian multi-nationals have stringent guidelines regarding tax compliance and inducement commissions.
The internal accounting procedures of the Australian Dairy Corporation and its subsidiaries also came into question. Reviews of Corporation accounts revealed ex gratia payments made along with retirement benefits. An overpayment of $10,000 to a former expatriate staff member was written off without any apparent evidence of attempts to affect recovery. Expenses were incurred with Corporation credit cards; their accounts were unaccompanied by supporting details, and were apparently unrelated to conventional travel expenses. Directors of Asia Dairy were hired as consultants by the Company without any record in minutes of the Company's Board meeting of any declaration of interest, and without any evidence of competitive tendering.
The Deputy Chairman of ADC, who was only a part-time board member, obtained a car for his personal use at Corporation expense which violated a number of official guidelines. It cost more than the maximum allowable value. It did not meet Australian content requirements, and it was made available for the Deputy's exclusive personal use, and not for other employees of the Corporation. In addition, the vehicie's speedometer was disconnected, and the gentleman in question claimed operating expenses from both the Australian Dairy Corporation and the United Dairy Farmers of Victoria, with which organisations he was also affiliated.
A Parliamentary committee subsequently noted
We are not able to conclude whether Mr Pyle did in fact disconnect the speedo or whether he used this statement to attempt to explain the duplicated claims for expenses. Certainly, it makes it impossible to establish the extent of the duplication. The Committee considers that Mr Pyle's behaviour in relation to the disconnection of the speedo speaks for itself. We are not concerned to decide whether Mr Pyle's actions were, in his words, 'stupid more than dishonest' or whether they were dishonest more than stupid, they were certainly a combination of both (Australia 1981, p. 355).
Whether such indulgent practices differ significantly from those which characterise the Australian business world is an interesting question. After all, Australian farmers are renowned for their informality and their generosity. Whether such practices were in the best interests of Australian dairy farmers, might also be asked. There can be no question, however, that the travel and entertainment expenditures were inconsistent with those which were normally incurred by officers of Australian statutory authorities in the course of their official duties.
At the very least, circumstances which underlay the breach of GATT indicated significant lapse in communications. The existence of the rebate arrangement between Asia Dairy and HOMPI was not made apparent to the ADC board for more than one year, despite the fact that the Chairman of ADC was also the Chairman of ADI. Although an officer of the Australian Department of Primary Industry (DPI) sat on the ADC board, nearly five months passed before DPI notified ADC of the difficulties posed by the rebate. More than two months later, the Minister for Primary Industry requested the Chairman of ADC to cease the rebate arrangement.
The Chairman of ADC was in an uncomfortable position. To terminate the rebate arrangement and bring Australian exports into compliance with the GATIF agreement would lose a valuable contract for Australian dairy farmers. In November 1976 he went to Manila, seeking to renegotiate the contract in a manner which would be consistent with Australia's treaty obligations. HOMPI executives stood their ground, and continued to receive their rebate.
The then Chairman of ADC later testified under oath that he had explicitly informed the Minister at a face to face meeting of the continuing rebate arrangement and concomitant treaty violation. Declining to testify under oath before the Senate Committee inquiring into the matter, the Minister denied that he had been so advised, and cited the only written record, a letter from the Chairman of ADC which, in referring to negotiations with HOMPI concerning the rebate, stated 'I am pleased to advise that it was possible for us to arrive at an amicable solution to our outstanding difficulties' (quoted in Australia 1981, p. 145). The Minister then sought to rationalise the apparent lack of oversight by his Department.
There were a number of companies under the umbrella of the Australian Dairy Corporation, and a number of similar statutory authorities within the portfolio of the Australian Minister for Primary Industry. As Mr Sinclair, the Minister at the time of the alleged treaty violation, was to say in a letter to Senator Peter Rae of 16 March 1981: 'it is neither physically nor administratively possible for the Minister for Primary Industry or his Department (DPI) to examine or to be familiar with all such transactions'. The Rae Committee was not entirely convinced by this excuse. Their report commented wryly that 'in the course of the inquiry the Committee was shown that Ministers were not loath to become involved in the affairs of the ADC if they felt it was necessary.' (Australia 1981, p. 266).
In any event, the vast organisational terrain of Australian primary industry appeared to exceed the oversight capabilities of the Department of Primary Industry. Despite the presence of DPI officers on the Board of the Australian Dairy Corporation, the Department was too slow in perceiving that a treaty violation had occurred, and was insufficiently attentive to whether or not the violation had ceased. The problem was compounded by the fact that many of those working for ADC did not regard themselves as public servants or as accountable to the Australian government. The Dairy Produce Act 1975 (Cwlth) was insufficiently explicit in specifying not only the obligations and responsibilities of the ADC and its subsidiaries, but also the duties of ADC Board members.
One of the central problems which underlay the difficulties encountered by Asia Dairy, by its parent authority, and by the Minister for Primary Industry were impediments in the flow of information.
As was later observed,
The evidence suggests that there were many occasions when the Minister was not fully informed and when the Parliament had no real idea about what was happening in the ADC, ADI (HK) Ltd., or the other subsidiaries (Australia 1981, p. 292).
information flow was selective, and imperfect:
At the same time as attempts were made to provide information to some members of Parliament about ADI (HK) Ltd. and the other Asian operations, the minutes of the ADI (HK) Ltd. Board meeting were being withheld from the Departmental representative on the ADC (Australia 1981, p. 294).
The Department, moreover, was faulted for lack of persistence in pursuing the information. One could perhaps be forgiven for speculating that there were those who had an interest in not knowing precisely what was going on in Hong Kong and Manila.
Yet another impediment to wider knowledge about the difficulties of Asia Dairy was the secrecy attached to the special audit (Section 63p) which had been requested by the Minister. Were it not for a 'leak', parliament might not have learned of the problems at hand.
Media coverage of the Asia Dairy issue was slow to develop for two reasons. First, rural issues tend not to be of great interest to the metropolitan media. Australia's rural press, moreover, dominated as it is by country interests, was disinclined to delve too deeply into matters which might embarrass the country establishment or reflect adversely on rural interests generally. Thus, the inquisitiveness which had begun to characterise media attention to more urban issues was, in this case, initially lacking.
The excessive expenditures on travel and entertainment arose from the lack of adequate guidelines or regulations within the ADC or its subsidiaries. Decisions tended to be taken on an ad hoc, personal basis. The Chairman of the ADC issued credit cards and authorised payment of credit card accounts, including his own. Clinging tenaciously to what they perceived to be commercial autonomy, ADC officials did not look to the Commonwealth government for standards.
The Department of Primary Industry had previously expressed some reservations about Asia Dairy's relationship to the ADC and to the Australian government. A minute to the Minister in February 1975 noted that neither the government, nor the Dairy Products Board had control of Asia Dairy's operation, and recommended that the accounts and records of the company be subject to audit by the Auditor-General (Australia 1981, Appendix 1). The existence of problems within ADC first became publicly apparent in 1977. An article in the Australian Financial Review which called attention to the possible treaty violation (Simson 1977), came to the notice of Senator Peter Rae, Chairman of the Senate Standing Committee on Finance and Government Operations. The Committee had been concerned generally with the accountability of Australian government statutory authorities.
For reasons which were never publicised, Ian Sinclair, the then Minister for Primary Industry, asked the Australian Auditor-General to conduct a special investigation of Asia Dairy in March 1979. Word of the enquiry, which had not been publicly announced, reached the Leader of the Opposition, Mr Hayden, in August. Mr Hayden asked a number of questions about the enquiry, but without receiving much in the way of an informative response.
The report, still secret, was presented to the Federal government in September 1979 and referred by the Minister for Primary Industry to the Management Committee of the Australian Dairy Corporation. Peter Nixon, Ian Sinclair's successor as Minister for Primary Industry, intended to keep the report from public view. Portions of the report however, came into the hands of the shadow Minister for Primary Industry, Senator Peter Walsh, who tabled them in the 1980 Budget session of Federal Parliament.
On 20 November 1980, Senator Rae announced a full investigation of the Dairy Corporation and its subsidiaries. Possible breaches of the law arising from inappropriate accounting practices within ADC were referred to the Commonwealth police by the Minister for Primary Industry.
A police report was presented to the government in November 1980, but rejected by the Minister for Primary Industry, who ordered that a second report be produced. The second report, presented to the government in March 1981, was reviewed by officers of the Attorney-General's Department, and by senior counsel in Melbourne who apparently concluded that no successful prosecution could be launched against the former Chairman of the Australian Dairy Corporation. Although Minister Nixon was keen to release this report quickly, police objections that its disclosure would jeopardise additional investigations prevailed, and the report remained secret. Toward the end of October 1981, the police report was finally tabled in Federal Parliament. It concluded that there was insufficient evidence available to establish beyond reasonable doubt the commission of any criminal offence by the former Chairman of ADC.
The Rae committee report recommended new expenditure control procedures for the ADC, including the requirement that the ADC Board approve all future capital expenditure over $25,000 in value. The Committee also recommended the establishment of guidelines for expenditure on travel, accommodation and personal expenses by Board members, and corporation staff. It recommended that procedures be devised for resolving conflict of interest by Board members. Additional recommendations called for procedures for regular reporting by subsidiary companies to the Dairy Corporation and to the Australian Parliament. A further recommendation called for financial control and auditing procedures consistent with requirements of the Australian Auditor-General.
The Rae report made a number of insightful comments on, and important recommendations about, ministerial communications. It noted that there were no satisfactory guidelines within the DPI or ADC regarding what constituted a ministerial direction, how this might differ from a ministerial request, and how each should be treated. Moreover, the Rae report was particularly critical of reliance upon oral communications:
Serious problems arise with oral communications. Their intended force is uncertain to the recipient. The possibility of them being reported is remote. The Committee considers that communications should therefore be in writing. However, we are conscious of the apparent reluctance of some Ministers to issue written communications. The temptation to issue oral communications can be great, as they enable Ministers to have the best of both worlds i.e. to direct the affairs of the authority when so desired while maintaining the facade of the authority's independence. As stated above, we believe the Minister should have the power to direct the ADC. However these directions must be brought to the attention of the Parliament and the Public. In the absence of any ministerial direction the Parliament will assume that an authority is entirely responsible for its activities and will therefore be able to hold the authority itself accountable for its activities and decisions (Australia 1981, p. 275).
Perhaps the most sensational aspect of the Rae report was its criticism of the former Minister for Primary Industry, Ian Sinclair. The Committee, faced with the contradictory evidence of Sinclair and the former Chairman of ADC, chose to believe the latter. It concluded, 'on the balance of probabilities Sinclair was told of the terms of the compromise which necessarily involved a continuing breach of GATT.' (Australia 1981, p. 174).
Ian Sinclair sought to discredit the Rae report and its conclusions concerning the credibility of his statements. He referred to the 'slipshod way' in which the conclusion was reached. Sinclair was fortunate to continue to enjoy the support of his Prime Minister and Cabinet colleagues, who closed ranks around him and attacked the former Chairman of ADC.
In the aftermath of the Senate Standing Committee Report, the government acted to rectify those managerial and accounting procedures which had proven so embarrassing. Not the least important were instructions issued to the Australian Dairy Corporation and to Asia Dairy Industries to adhere at all times to the taxation requirements of the countries in which they operate. Borrowing and investment by ADI became subject to ministerial guidelines. In addition, guidelines were drawn up which clearly defined the powers and authorities of ADC and ADI management, and which specified salary rates and conditions of service, as well as travel and entertainment expenses for ADC and ADI management and staff.
A minor casualty of the Asia Dairy scandal was the Deputy Chairman of ADC, who was relieved of his executive responsibilities for the alleged abuses surrounding the vehicle provided for his personal use. Despite the committee's conclusions regarding the gentleman's dishonesty and stupidity, the government did not regard his actions as so heinous as to warrant the extreme step of removing him from the Board of ADC altogether. Indeed, he remained in that capacity, defending the interests of the dairy farmers of Victoria. The former chairman of ADC was requested to repay an amount of $6,425.20 to ADI which had been claimed in connection with travel and accommodation of family members.
In the end, the Asia Dairy scandal blew over. Files in ADC which might have resolved some of the questions which had been raised, turned out to have disappeared or to have been altered. The government of Thailand was reimbursed, with interest, for the $215,247 in taxes which Asia Dairy had earlier avoided, and the discovery by American authorities of kangaroo meat in a shipment of what was labelled Australian Beef, created new headaches for the Minister for Primary Industry and his Department.
- Australia, Senate Standing Committee on Finance and Government Operations 1981, The Australian Dairy Corporation and Its Asian Subsidiaries, Australian Government Publishing Service, Canberra.
- Simson, S. 1977, 'Strange Philippines Dairy Deal', Australian Financial Review, 16 September.