Part 5: Legality of the payments
5.1
There has been public concern that payments associated with the Partnership might have been a bribe or otherwise corrupt. We concluded in Part 3 and have discussed in Part 4 that the decision to use a contract for services created confusion and suspicion about how the compensation elements of the arrangements were actually addressed. As a result, it was not surprising that questions were raised about the legality of the payments to Sheikh Hmood.
5.2
In this Part, we consider the lawfulness of the payments, including:
- whether corruption or bribery was present;
- whether the money spent by the Government was properly appropriated; and
- how the money was spent.
Was there corruption or bribery?
5.3
The Crimes Act 1961 provides for several offences of bribery. Each offence has slightly different elements. A bribe does not have to be money – it can be any benefit that a person will receive, but it must involve corruption. Corruption can be described as "the abuse of entrusted power for private gain".29
5.4
Ministers and officials have power entrusted to them because of their involvement in government decision-making and their responsibility for public money. That entrusted power must be used for proper purposes and with integrity and honesty. Ministers and officials must not privately benefit from using their entrusted power; to do so would constitute an abuse of it.
5.5
To understand whether there was corruption, we looked at whether a Minister or an official had abused that entrusted power in preparing the Partnership, signing the contract, and making the associated payments, and for private gain. We also looked at whether anyone involved in the Partnership had tried to influence a foreign public official in a way that offended against the Crimes Act 1961. In many instances, receiving a bribe will be an offence, as will offering a bribe.
5.6
In Parts 2, 3, and 4, we outlined the policy outcomes that the Ministers and officials were trying to achieve. As we said in Part 2, those outcomes were the resolution of the following issues:
- the relationship with the Gulf Cooperation Council – in particular, the free trade agreement;
- the current and future bilateral relationship with Saudi Arabia;
- the tensions about exporting sheep for slaughter and its effect on other trading relationships;
- animal welfare considerations;
- international trade and domestic legal obligations;
- the concern of investors in New Zealand; and
- Saudi Arabian food security concerns.
5.7
The interviews we conducted and the documents we reviewed showed that, although this was a long and convoluted process full of the shortcomings that we have mentioned in previous Parts, it did not involve corruption. We did not find any evidence that any Minister or official involved with the Partnership:
- had an improper motive;
- intentionally or otherwise acted against the law; or
- obtained a private gain.
5.8
Therefore, we do not consider that an offence of bribery could be established. We found no evidence or reason to refer the matter on to an appropriate agency to carry out a criminal investigation into corruption and bribery.30
Was there a facilitation payment?
5.9
We were also asked whether there were any facilitation payments. The Ministry of Justice has explained a "facilitation" or "grease" payment as a small payment made to a foreign public official to speed up a service to which the payer is already entitled.31 Two payment phases were agreed to under the contract for services. The first was for $4 million, and it was made directly to Sheikh Hmood's company, HAATT Est. The second was for $6 million (later increased to $7.5 million) to be spent on delivering New Zealand services to the Agrihub. The payments made under the contract for services were not small payments to speed up a service to which the Ministry was entitled. They were not facilitation payments.
Appropriations for the Saudi Arabia Food Security Partnership
5.10
We also reviewed whether the payments were lawfully authorised, because all spending of public money must be lawfully authorised by an appropriation. An appropriation is a statutory authority from Parliament allowing the Crown or an Office of Parliament to incur expenses or capital expenditure.
5.11
Neither the Crown nor an Office of Parliament can legally incur any expense or capital expenditure – as those terms are defined in the Public Finance Act 1989 – unless it is expressly authorised by an appropriation or other authority by or under an Act of Parliament. Appropriations are generally viewed as both an authority (to incur an expense or capital expenditure) and a constraint (on how and on what that money is spent).
5.12
The Treasury's guidelines on appropriations note that:
Each appropriation has a defined scope that limits the uses or activities for which the expenses or capital expenditure can be incurred. The scope should be sufficient on its own to establish the nature and extent of the authority to incur expenses or capital expenditure. The wording of the appropriation scope should achieve the balance between being sufficiently precise to act as an effective constraint against non-authorised activities and not so specific that it inadvertently limits activity intended to be authorised. …
Except in a very limited number of cases (e.g. permanent appropriations or revenue dependent appropriations) an appropriation also limits the amount of expenses or capital expenditure that can be incurred, and the time period within which those expenses or capital expenditure can be incurred.32
5.13
On 18 February 2013, Cabinet noted that the costs of the Partnership would be met through the Ministry's existing baselines. That is, new money was not budgeted, and the Ministry's departmental appropriation Policy Advice and Representation—other countries (Vote Foreign Affairs and Trade) would be used for the entire $10 million. As noted earlier, $4 million would be paid directly to HAATT Est under the contract for services, and $6 million would be provided through goods and services purchased under the funding agreement.
5.14
At the time of the February 2013 Cabinet paper, the relevant Cabinet guidelines said that "a departmental chief executive's authority to incur expenses and capital expenditure applies to departmental appropriations only".33 Mr McCully considered that he and the Secretary of Foreign Affairs and Trade had the authority to approve the $4 million expenditure. This appears to be why Cabinet was asked to note the expenditure rather than agree to it in the February 2013 Cabinet paper.34
5.15
Mr McCully told us that he considered that responsibility for the $6 million arrangement was going to be transferred to NZTE and that Cabinet approval was needed because of this. Cabinet Manual guidance asks that Ministers "keep their colleagues informed about matters of public interest, importance, or controversy".
5.16
The Ministry analysed the two payment phases that were part of the contract for services against the appropriation scope. These were the $4 million payment for Phase 1 and the $6 million spending on services under Phase 2 (which was arranged by the funding agreement). The Ministry determined that the spending was within scope.
5.17
In February 2014, NZTE officials asked the NZTE Board to note the transfer of funding of $6.5 million and approve the transfer of responsibility for managing the funding agreement from the Ministry to NZTE. The paper to the Board noted that $10 million was approved for investment into the Partnership and that a further $1.5 million was before Ministers for approval. The additional $1.5 million was to transport pregnant ewes to Saudi Arabia by air. This airfreight would replace the originally intended subproject of the Partnership that involved transporting pregnant ewes by sea. Figure 2 shows how the NZTE Board noted the components of the transferred $6.5 million.
Figure 2
Breakdown of the money transferred to New Zealand Trade and Enterprise
| Agri-business Hub: Calculation of funds transfer to NZTE | |
|---|---|
| Initial Agri-business investment | $5,500,000 |
| + expansion investment [airfreight] | $1,500,000 |
| + NZTE investment | $500,000 |
| Total Agrihub investment | $7,500,000 |
| Less [BAGL] costs to date | ($500,000) |
| Less NZTE investment | ($500,000) |
| Transfer from the Ministry to NZTE | $6,500,000* |
* We note that these are rounded figures. The actual transfer figure was $6,547,000.
5.18
The Ministry transferred $5 million to NZTE's budget for 2013/14. In the March 2014 Baseline Update, the Ministry transferred $1.5 million (to meet airfreight expenses) to NZTE, after Cabinet agreement to do so on 7 April 2014. NZTE's $500,000 contribution and $250,000 project management and operating costs were met from NZTE's existing budget.
5.19
NZTE's budget for the Partnership has been under Vote Economic Development and Employment in the International Business Growth Services appropriation.35 This appropriation was later included as a category in a new multi-category appropriation titled Support the growth and development of New Zealand firms, sectors and regions.36 The overarching purpose of this appropriation is "to provide support for the growth and development of New Zealand firms, sectors and regions to maximise international business opportunities".
5.20
We continue to consider that the money budgeted for the Partnership was within the scope of the relevant appropriations, based on:
- our 2013 review into the $4 million payment phase;
- the Ministry's advice on it; and
- our consideration in this inquiry of the $4 million, $6 million, and $1.5 million payment phases.
How was the money spent?
5.21
The Ministry made a $4 million payment to HAATT Est on 21 February 2013. The rest of this Part covers the spending of the remaining $7.5 million allocated to the Partnership.
5.22
We have reviewed NZTE's spending from the time the funds were transferred from the Ministry and found that the spending was made with appropriate financial authorities in place. This included our sighting evidence of appropriate expense and capital transfers and approvals.37 We discuss the reasons behind delays in delivering some of the goods and services under the funding agreement in Part 7. Although underspending has been transferred between financial years, Parliament has not separately appropriated money for the Partnership above the $11.5 million.38
5.23
Figure 3 shows how the money has been spent on the Partnership from 2013/14 to the end of June 2016. The listed projects are further explained in Appendix 2. Projects listed have been completed, except for the abattoir.
Figure 3
Budgeted and actual spending on the Saudi Arabia Food Security Partnership, to June 2016
| Item | What was purchased | Budget amount | Total actual spending to June 2016 |
| Contract for Services with the Al Khalaf Group – Phase 1 | |||
| MFAT spend | Representation in Saudi Arabia Awassi sheep genetics in New Zealand Assistance with business delegation to Saudi Arabia and options for investment Business plan development and implementation (for the $6 million) |
$4,000,000 | $4,000,000 |
| Contract for services with the Al Khalaf Group – Phase 2: Delivered by a funding agreement with BAGL Demonstration farm in Saudi Arabia (the Agrihub)* | |||
| MFAT spend | Milestone 1** | $500,000 | $453,000 |
| NZTE spend | Sea freight | Budget included above as part of the Milestone 1 budget | $7,531 |
| NZTE spend (i) – (vi) | (i) Export breeding ewe supply chain | Reallocated to (ii) and the airfreight below | |
| (ii) Awassi breeding and genetics programme | $718,628 | $581,977 | |
| (iii) Forages and nutrition | $83,446 | $26,634 | |
| (iv) New technologies | $1,525,926 | $1,490,068 | |
| (v) Abattoir and feedlot design and construction | $3,172,000 | $489,460 | |
| (vi) People development | - | - | |
| Subtotal | $6,000,000 | $3,048,670 | |
| Airfreight of 900 breeding ewes to Saudi Arabia* | |||
| NZTE spend | Purchase of ewes Airfreight and associated costs |
$1,500,000 | $1,630,340 |
| Subtotal | $7,500,000 | $4,679,010 | |
| Total | $11,500,000 | $8,679,010 | |
* See paragraph 7.20, which explains that the Governance Group could vary the budget for each milestone.
** See paragraph 7.16.
Our comments on these matters
5.24
We found no evidence of corruption, bribery, or a facilitation payment.
5.25
The arrangements entered into were a lawful use of public resources, and public money was spent with appropriate financial authorities in place.
5.26
However, as we have said in Parts 3 and 4, the use of the contract for services was problematic because it was trying to achieve many outcomes that were not included in the terms of the contract for services.
5.27
When public funds are involved, transparency is paramount. The public had no visibility of the other outcomes that Cabinet was seeking to achieve by this arrangement. As a result, concerns were raised about the lawfulness and appropriateness of these payments.
5.28
Without transparency, it is easy for allegations of corruption to flourish.
5.29
Figure 4 shows, in more detail, a framework for considering corruption and bribery matters. We have included the Figure to help people to understand:
- what might constitute a corrupt payment, including a bribe under the Crimes Act 1961; and
- what compensation or "ex gratia" payments are and the process public agencies must follow to make those payments.
5.30
The Serious Fraud Office and the Ministry of Justice have published information for public and private sector agencies about corruption and bribery. We have used some of that information in Figure 4, with a focus on the application of the Crimes Act 1961 to the administration of law and justice, specifically actions of Ministers of the Crown, public officials, or people dealing with them.
Figure 4
Framework for considering bribery and corruption matters
| This material is for guidance purposes and is current as at the date of publication. | ||
| Illegal payments: corruption and bribery | What to consider | |
| What is corruption? | The abuse of entrusted power for private gain.* Behaviour on the part of officials in the public or private sector in which they improperly and unlawfully enrich themselves or those close to them, or induce others to do so, by misusing the position in which they are placed.** The lack of integrity or honesty (typically involving bribery) or the abuse of a position of trust for dishonest gain. *** |
If a person is in a position of power or influence, then they should consider whether they or another will privately benefit from exercising that power or influence. If a person attempts to influence another person in a position of power, then they should consider whether they or another will privately benefit from that exercise of power or influence. If a person attempts to influence a foreign public official to use their power or influence in a particular way, they should consider whether they or their business will benefit from that exercise of power or influence. |
| What is bribery? | Corruption often involves bribery, which, generally speaking, is the giving or receiving, whether directly or indirectly, of something of value to influence a transaction.† A bribe does not have to be money. It can be a benefit that a person will receive but it must involve corruption. Each offence of bribery in the Crimes Act 1961 includes the requirement that the person committing the offence acts "corruptly". |
If any person is intending to offer or agree to make payment, or to provide any benefit, to an individual to influence them or another, they should consider whether:
|
* In its guidance, the Ministry of Justice explains that there is no legally binding definition of corruption and refers to the Transparency International definition. The guidance is available on the Ministry of Justice website, www.justice.govt.nz.
** The Serious Fraud Office explains that there is no legally binding definition of corruption. It refers to the Asian Development Bank definition.
*** The Ministry of Justice explains that this is corruption on the website page Combating bribery and corruption "How to create a fraud and corruption policy". The explanation goes on to say that it can include bribery (both domestic and foreign); coercion; destruction, removal, or inappropriate use or disclosure of records, data, materials, intellectual property, or assets; or similar forms of inappropriate conduct.
† The Ministry of Justice uses this description in the guidance document Saying No to Bribery and Corruption – A Guide for New Zealand Businesses.
| Legal payments | What to consider | |
| What is a facilitation payment? | A "facilitation" or "grease" payment is a small payment made to a foreign public official to speed up a service to which the payer is already entitled.†† A facilitation payment is currently legal under New Zealand law. |
If any person is intending to offer or agree to make payment, or to provide any benefit, to an individual to influence them or another, they should consider whether:
|
| What is compensation or "damages in settlement of claims"? | The Oxford dictionary definition of compensationincludes:
|
If Ministers of the Crown and public officials want to make a compensation payment, then there are procedural requirements that must be met. These are set out in Cabinet Office Circular CO (15) 4. CO (15) 4 requires that any compensation or damages in settlement of claims that is more than:
|
| What is an "ex gratia" expense? | A payment made out of goodwill or a sense of moral obligation. A commonly known example of an ex gratia payment is a payment made to an individual by the Government to compensate that individual for wrongful imprisonment. |
If Ministers of the Crown and public officials want to make an ex gratia payment, then there are procedural requirements that must be met. These are set out in Cabinet Office Circular CO (15) 4‡ CO (15) 4 requires that:
|
†† The Ministry of Justice, www.justice.govt.nz/policy/criminal-justice/bribery-and-corruption: Facilitation payments and New Zealand's anti-bribery laws.
††† The predecessor of this Cabinet Office Circular was CO (11) 6, which was in place from June 2011 to April 2015. That Cabinet Office Circular said that "Expenses for compensation or damages for settlement of claims should be endorsed by Crown Law Office or a court judgement (sic)".
‡ The predecessor of this Cabinet Office Circular was CO (11) 6, which said that "an ‘ex gratia' payment is made in respect of claims that are not actionable at law, but for which there exists a moral obligation and payment should be made".
29: This is the Transparency International definition – see Figure 4 following paragraph 5.30.
30: We also note that it is not our role to make, or attempt to make, binding decisions about the legality of actions, to give detailed assessments about the legality of decisions by public entities, or to attempt to function as a court.
31: See www.justice.govt.nz/policy/criminal-justice/bribery-and-corruption: Facilitation payments and New Zealand's anti-bribery laws.
32: See the Introduction sections, page viii, of the 2015 Estimates of Appropriations sector volumes on the Treasury's website, www.treasury.govt.nz.
33: Cabinet Office Circular CO (11) 6, page 5. The current version of the Cabinet Office Circular on Proposals with Financial Implications and Financial Authorities (CO (15) 4), paragraph 68, explains "Cabinet has authorised departmental chief executives and their delegates to incur expenses or capital expenditure under departmental output expense, departmental other expense and departmental capital expenditure appropriations on behalf of the Crown, in accordance with the terms, and subject to the restrictions, set out in this circular."
34: See paragraph 3.41.
35: NZTE's funding under relevant appropriations is as non-departmental output expenses through Vote Economic Development and Employment (and later Vote Business, Science and Innovation).
36: Vote Economic Development and Employment was merged into Vote Business, Science and Innovation in Budget 2015.
37: NZTE transferred the unspent funds of $4.5 million (a mix of fixed and in-principle transfers) from 2013/14 to 2014/15 by an expense and capital transfer. Because funds were also not fully spent in 2014/15, $2.9 million was also transferred to 2015/16. An expense and capital transfer of $2.8 million was also made from 2015/16 to 2016/17.