Part 3: The due diligence findings

Inquiry into Callaghan Innovation’s procurement process.

In this Part, we describe:

Figure 3 sets out the stages of the due diligence process that we describe in this Part.

Figure 3
Stages of the due diligence process, from May 2022 to June 2022

Stages of the due diligence process, from May 2022 to June 2022

How Callaghan Innovation considered the due diligence findings about Manaaki

In this section, we describe how Callaghan Innovation considered the due diligence findings about Manaaki. Where it is necessary to, we also describe the findings and the evidence that the findings were based on.

The initial due diligence report about Manaaki

The contractor reported the findings of the due diligence to Callaghan Innovation on 11 May 2022.13 The report concluded that the application from Manaaki (care of its parent company We Are Indigo) did not satisfy "reasonable due diligence expectations".

The report stated that several stakeholders and previous business associates had provided information that put Manaaki in a "show cause" position14 because of multiple allegations of historic performance issues and professional misconduct (which constitute grounds for elimination under section 6.22 of the RFP).

The report also stated that:

… the contents of section 4 (Company review), if validated, showcase some of the most serious unethical practices I have investigated in a commercial capacity [and] if further investigations were to occur, we reasonably expect to identify further information that would support our findings.

The report contained several serious allegations about Manaaki's business conduct, supported by statements from individuals who the contractor had interviewed. It included allegations of:

  • failing to honour agreements and pay accounts;
  • a lack of concern about data and privacy protection;
  • unauthorised business behaviour and practices;
  • intimidation, harassment, and bullying of suppliers and stakeholders;
  • unauthorised spending of business capital; and
  • using misleading data for investment purposes.

The report recommended that Manaaki not progress in the Start-up programme procurement.

The procurement team met with the legal team to discuss the due diligence report about Manaaki. A member of the legal team told us that she was concerned that the report did not have enough evidence to support the allegations. A member of the Callaghan Innovation procurement team said that the findings were a surprise – but noted that the report contained the caveat "if evidenced".

Callaghan Innovation told us that it did not have a process for dealing with the due diligence findings because, when it decided to carry out more intensive due diligence, "there had not been anything to suggest a process would be needed".

Callaghan Innovation got advice from its external probity advisor about the due diligence findings. We have been given differing explanations of the advice it provided.

The procurement team told us that the external probity advisor said that the findings from the due diligence were enough to justify Callaghan Innovation's decision to not use Manaaki as a provider for the Start-up programme. However, the probity advisor told us that it raised concerns about the lack of evidence to substantiate the reported findings with Callaghan Innovation at the time.

The probity advisor told Callaghan Innovation that, to support a decision to eliminate Manaaki from progressing further, Callaghan Innovation needed to consider how confident it was in the findings of the due diligence and how much reliance it could place on those findings.

Callaghan Innovation also told us the probity advisor said that Manaaki would likely ask for a right-of-reply meeting but that Callaghan Innovation was under no obligation to offer it. The probity advisor told us that its advice was that, at a minimum, it would expect the tenderer to be given a right of reply before Callaghan Innovation considered eliminating the tenderer from the process.

The report about Manaaki was sent to the Chief Executive and Callaghan Innovation's Chief Product Officer on 11 May 2022 and the chairperson of the Board on 12 May 2022.15 The Chief Executive told us that, after reading the report, it would have been difficult to appoint Manaaki to its panel without further discussions with Manaaki.

On 13 May 2022, Callaghan Innovation's procurement team wrote to Manaaki saying that it could not give Manaaki a contract and that it would need to collect more information. It also told Manaaki that it would be publicly announcing the tenderers who had been successful in the procurement. Callaghan Innovation suggested that Manaaki might want to ask for a formal meeting, which Manaaki did.

Callaghan Innovation did not give Manaaki a copy of the report or an outline of the report's allegations. Between 15 and 17 May 2022, Manaaki emailed Callaghan Innovation offering to explain the concerns that it thought the due diligence process might have identified.

Callaghan Innovation and Manaaki met to discuss the due diligence findings

On 25 May 2022, Callaghan Innovation's Chief Executive, the procurement team, and the external probity advisor met virtually with the Manaaki management team to discuss the due diligence findings.

Callaghan Innovation did not share the report with Manaaki. Callaghan Innovation verbally summarised the allegations in the report and gave Manaaki the opportunity to respond.

The meeting's minutes, which Callaghan Innovation prepared,16 record Callaghan Innovation asking high-level questions about some of the concerns raised in the due diligence report.

In the meeting, Manaaki responded to the allegations put to it. However, Manaaki told us that, because the questions were not specific, it had to guess what the concerns were. In summing up at the end of the meeting, Manaaki said:

We get good results, but we can reflect on the manner where we do our mahi. It has given us cause to really think about and something we need to work on.

Manaaki told us that it left the meeting with the impression that it was unlikely to resolve the issues within the time frame of the procurement. Afterwards, Manaaki sent several emails to follow up, providing further information and contact details of other organisations Manaaki had worked with.

In these emails, Manaaki acknowledged that it had had disputes in some of its partnerships but said that these had been fully resolved.

Callaghan Innovation commissioned more due diligence on Manaaki

After meeting with Manaaki, the Chief Executive told Callaghan Innovation's legal team that she wanted more due diligence on Manaaki. The Chief Executive told us that doing more due diligence work was "giving Manaaki the benefit of the doubt".

On 26 May 2022, Callaghan Innovation sought external probity advice on whether it could do a second round of due diligence. Callaghan Innovation was advised that:

… there are sufficient clauses in the RFP document (including the RFP process, terms, and conditions) that allows Callaghan Innovation to undertake further due diligence checks to obtain more information to help determine the preferred respondent. If the respondent has been officially informed by Callaghan Innovation that they have been unsuccessful, then further due diligence cannot be undertaken, and [Callaghan Innovation will] need to seek legal advice on any further enquiries that Callaghan Innovation may wish to undertake.

The same day, Callaghan Innovation verbally instructed the contractor to do further due diligence on Manaaki. Callaghan Innovation asked the contractor to provide as much information as possible and follow up on the lines of inquiry set out in the first due diligence report.

Callaghan Innovation gave the contractor the minutes from the 25 May 2022 meeting with Manaaki and follow-up emails from Manaaki, which included additional referees. A member of Callaghan Innovation's legal team told us that they asked the contractor to contact the referees that Manaaki provided to ensure that the due diligence process was fair and balanced.

In its emails to Callaghan Innovation, Manaaki raised concerns that some of the parties involved in the due diligence had a vendetta against Manaaki. It cited social media posts by Mr B insinuating that Manaaki were "bad actors" as evidence of this.

Manaaki also considered that there was an alignment between blogs published by Mr B and the claims made in the 25 May 2022 meeting with Callaghan Innovation. Mr B was the business contact who had given the Chief Executive the contractor's contact details.

After receiving Manaaki's correspondence, the Chief Executive asked the contractor to interview Mr B. The contractor said that he told Callaghan Innovation that Mr B was known to him.

While the second due diligence was under way, an article published in the National Business Review (NBR) reported that Manaaki was facing more questions from Callaghan Innovation for this procurement.

The Chief Executive alerted Callaghan Innovation's Board to the article, sent it a copy of the first due diligence report about Manaaki, and told it that a second round of due diligence was under way. The chairperson of the Board told us that the Board was engaged with the matter from that point on.

Callaghan Innovation received a second due diligence report about Manaaki

On 16 June 2022, the contractor sent a second due diligence report about Manaaki to Callaghan Innovation. The contractor told us that he had tried to contact all the referees that Manaaki had provided to Callaghan Innovation and that he had referred to the minutes of the 25 May 2022 meeting between Manaaki and Callaghan Innovation when talking to the interviewees.

The Executive Summary of the second due diligence report said that "it was more probable than not that any ‘risk issues' identified are corroborated by evidence and therefore require the subject of the investigation to be placed in a show-cause position".

The report contained strongly worded descriptions of Manaaki's business conduct and alleged poor behaviour. Some of the allegations in the second report were new, including an allegation about unauthorised acquisition of company shares to gain majority control.

The report also said that the investigation had identified "serious issues and potential misconduct", which included an allegation that Manaaki had attempted to misappropriate government funds. We discuss this allegation in Part 4.

The report included the statements from the initial due diligence report, some supporting information for those original statements, as well as statements from additional interviewees, including several referees suggested by Manaaki. It was accompanied by exhibits that included copies of each interviewee's original statement.

Callaghan Innovation's legal team told us that it read the report and reviewed the supporting exhibits to determine whether the information gathered appeared to have been collected lawfully.

The second due diligence report cited a 7 June 2022 NBR article as corroborating evidence. This article featured the same people who the contractor had interviewed for the report.

The Chief Executive said that she was shocked by the findings and behaviours outlined in the second due diligence report and decided that she would not pursue working with Manaaki.

Callaghan Innovation considered whether the information in the second due diligence report met the reasons for excluding an otherwise compliant tenderer under the Procurement Rules. In Callaghan Innovation's view, the information in the report justified excluding Manaaki from the procurement.

Callaghan Innovation's Board was informed of the decision to reject the proposal from Manaaki and was given a copy of the second due diligence report on 17 June 2022. The Board told us that it subsequently questioned the Chief Executive about the due diligence process so that it could be sure that the process followed had been fair.

The outcome of the procurement for Manaaki

Callaghan Innovation decided that it could exclude Manaaki from the RFP for the following reasons (which are valid reasons under Rule 44 of the Procurement Rules):

  • serious performance issues;
  • professional misconduct in the form of unethical behaviour;
  • offences against the New Zealand Government Procurement Supplier Code of Conduct; and
  • issues that led to materially diminished trust and confidence.

On 17 June 2022, the Chief Executive signed a memorandum prepared by the procurement team recommending that Manaaki not be awarded a contract. The memorandum noted that "the findings represent an evidenced and ongoing trend of intolerable behaviours".

Callaghan Innovation wrote to Manaaki to say that it was rejecting its proposal. Callaghan Innovation stated that:

[Callaghan Innovation's] reservations are too significant to be comfortable appointing [Manaaki] to a government panel which will have many touch points with small businesses and entrepreneurs across New Zealand.

Manaaki told us that it did not know that more allegations had been made against it as part of the second round of due diligence. Manaaki became aware of the second due diligence report after the procurement was complete through an Official Information Act request.

On 1 July 2022, Callaghan Innovation had a feedback meeting with Manaaki that was described as a "wrap-up" phone call. At that meeting, Callaghan Innovation explained its reasons for excluding Manaaki from the procurement. These were the conclusions reached in the second due diligence report. As a result, Manaaki became concerned that further allegations had been made against it that it had not been told about.

In the meeting, Manaaki accepted that it had had challenges in some of its past commercial relationships but said that it considered that it had resolved them. Manaaki also accepted that the RFP terms enabled Callaghan Innovation to exclude Manaaki from the procurement. However, Manaaki told Callaghan Innovation that it was concerned about the potential for ongoing commercial risk and information getting into the public domain.

Our observations about Callaghan Innovation's response to the due diligence findings

Due diligence checks will often find matters that are of concern, and the process is complete only when decisions are made about how to manage those concerns. Some concerns will be "deal breakers" that automatically exclude a supplier.

However, a public organisation might disregard other concerns after further investigation. Many concerns raised will simply alert the public organisation to a characteristic of the supplier that warrants closer management or a watching brief.

The process of considering the results of due diligence must be fair, transparent, and reasonable, as Rule 2 of the Procurement Rules requires. The PSC Code of Conduct on fairness, which is referred to in the Procurement Rules, also states that public organisations must base their decisions on accurate information and observe the principles of natural justice.

There was a lack of natural justice and balance in Callaghan Innovation's process

There was a lack of natural justice in the due diligence process. By natural justice, we mean being procedurally fair, which includes allowing someone the opportunity to comment on the fairness, accuracy, and balance of what has been said about them and/or to identify any errors.

Manaaki had limited opportunity to give its version of events in response to the first due diligence report. We acknowledge that some of the information in the due diligence reports could be considered sensitive – in particular, allegations of poor behaviour.

However, in our view, from a fairness perspective, Callaghan Innovation should have given Manaaki a description of the allegations made in the first due diligence report in enough detail for Manaaki to understand the concerns that had been raised and prepare a response to them before the 25 May 2022 meeting.

This would have enabled a more open, balanced, and fair discussion because Manaaki would have had a better understanding of the matters that were concerning Callaghan Innovation and could have responded to them in a considered way.

Callaghan Innovation has explained that it carried out more intensive due diligence in response to concerns about unethical behaviour that had been raised with it. Therefore, it could have reasonably foreseen that the more intensive due diligence process might collect information of a sensitive nature.

However, Callaghan Innovation did not give any thought to how it would handle the information from the more intensive due diligence process. This included any actions that it could take to address adverse findings, precautions it might need to keep information secure, or how it could best give effect to the principles of natural justice.

Despite having the minutes of the 25 May 2022 meeting between Callaghan Innovation and Manaaki, and correspondence from Manaaki that gives its account of the disputes in its previous business relationships, we could not see any evidence of the contractor testing this information with the interviewees, apart from asking further questions about one aspect of the concerns raised.

Although the second due diligence report included some positive feedback about Manaaki from some of its referees, the contractor did not speak to all the additional referees that Manaaki provided. In the report, the contractor concluded that he did "not believe [the evidence in support of Manaaki] is satisfactory to outweigh the overwhelming body of evidence that has been discovered".

Callaghan Innovation told us that it took the information Manaaki gave it at the 25 May meeting and subsequent emails into account when making its decision. However, the final procurement memo quoted the conclusions set out in the second due diligence report (which were different from those in the first report) as its reasons for excluding Manaaki from the procurement.

Callaghan Innovation did not document how it had considered and responded to the information Manaaki had provided or give Manaaki any opportunity to comment on the second due diligence report.

Callaghan Innovation did not act fairly in how it excluded Manaaki from the RFP

New Zealand Government Procurement's guidance on conducting due diligence states that, if the due diligence process identifies serious issues, the public organisation must consider excluding the supplier under Rule 44 of the Procurement Rules.

Rule 44 sets out several reasons for exclusion, and Callaghan Innovation highlighted these reasons for exclusion in the due diligence section of the RFP document. Rule 44 also states that a public organisation must not exclude a tenderer from a contract opportunity before it has evidence to support the reason for exclusion.

The Procurement Rules do not define what level of evidence is needed. However, when deciding to exclude a supplier, a public organisation would have to consider the overarching requirement of the Procurement Rules, which is that procurement processes must be fair.

Even though Callaghan Innovation had considered Rule 44 while planning its more intensive due diligence, we saw no evidence that it had considered what level of evidence it might need to support a decision to exclude a tenderer from the RFP. In our view, the requirement for fairness puts an obligation on public organisations to consider whether they have enough evidence to support serious allegations before they act on them.

Callaghan Innovation's final procurement memo set out four reasons for excluding Manaaki from the procurement (see paragraph 3.43). The memo said that Callaghan Innovation relied on the findings in the due diligence reports.

Callaghan Innovation told us that its decision to exclude Manaaki was based mainly on the allegations of poor conduct and behaviour that had been raised. It is not clear from the procurement memo which findings support each of the reasons for exclusion or whether Callaghan Innovation considered that some findings and conclusions were more relevant to the decision than others.

The findings in the due diligence reports were mostly based on statements made by the people the contractor interviewed. We are not disputing that individual testimony is a valid form of evidence, and we acknowledge that poor behaviour often occurs without witnesses.

Manaaki also acknowledges that it has had disputes with some of its partners. This could have reasonably led to Callaghan Innovation having "diminished trust and confidence"17 in Manaaki as a supplier, especially because the contract was to support founders who might be vulnerable.

However, we question whether it was fair to rely on testimony alone when other serious findings were capable of being independently verified. The probity advisor also told us that it raised these concerns with Callaghan Innovation at the time.

Manaaki accepted that Callaghan Innovation was entitled to make the substantive decision it did about the procurement (although it raised concerns about the process and the accuracy of some aspects of the findings). Unfortunately, the information collected, the judgements made, and the reasons for excluding Manaaki set out in the procurement memo were later shared with other government agencies and subsequently made public. We discuss this in Parts 5 and 6.

Rule 44 also states that a public organisation should tell a supplier of its exclusion and the reasons for it.18 The letter Callaghan Innovation sent to Manaaki did not clearly explain that it was excluding Manaaki under Rule 44 and the reasons why.

For these reasons, including that Callaghan Innovation did not have a fair process for Manaaki to respond to the allegations made in the due diligence reports, we do not consider that Callaghan Innovation's process for excluding Manaaki from the procurement was fair and transparent.

13: The due diligence report was on We are Indigo and Startmate. The report stated that "We have not found anything adverse about Startmate Ops Pty Ltd, primarily because they are an Australian based company and data holdings are limited."

14: This means that Manaaki would have to give reasons why a certain action (for example, removal from the procurement) should not be put into effect.

15: The then Chief Product Officer is now the Chief Executive of Callaghan Innovation.

16: Callaghan Innovation's probity advisor confirmed that the meeting's minutes were a fair reflection of what was discussed at the meeting, and Manaaki has subsequently confirmed that the minutes are consistent with its notes.

17: See "Rule 44: Reasons to exclude a supplier", at

18: See "Rule 44: Reasons to exclude a supplier", at