IFAJ Web Feature                                                       For the IFAJ/ACDC Partnership August 2007 Powdergate How an IFAJ member unearthed and investigated an international trade scam By Philippa Stevenson Agricultural Journalist New Zealand (Note:  A former president of the New Zealand Guild of Agricultural Journalists and Communicators, Philippa Stevenson shares a remarkable investigative reporting experience.  She explains how she broke - and pursued - the story of a $45-75 million scam that rocked the dairy industry. Winner of 15 journalism awards, Philippa has been agricultural editor of the New Zealand Herald and the Waikato Times, editor of two rural newspapers, a reporter for National Radio and host for "Farming Edition" on Coast to Coast Television.  A freelance journalist and columnist, she is based in Hamilton, New Zealand.) Imagine - a six-year investigation How do you report one story for six years? Not one topic. One story. How do you stay with it through several changes of employment, media technology and personal circumstances? Why would you stay with a story for that length of time?             The story that I stuck with from September 2001 to its end in May 2007 is known as Powdergate.  It is one of the many stories, sagas or scandals to be linked, at least in nomenclature, to the great 1970s journalistic investigation - Watergate - that brought down a U.S. president.             Powdergate (the name was coined by another journalist and happily adopted by my paper, the New Zealand Herald) does not have such grand claims to fame as its seminal namesake. But perhaps other agricultural journalists will find interest in a description of how an investigation of an illegal trade scam within New Zealand’s dairy industry arose, progressed and – after six years - ended in the country’s courts of justice. Context             New Zealand has a reputation for agriculture. Historically, it’s been known for having many more sheep than people (currently 10 times more) and in more recent decades for dominating world dairy trade.  New Zealand’s Fonterra Group is the world’s leading exporter of dairy products, responsible for one third of international dairy trade.             New Zealand also has a reputation for its type of agriculture. A temperate climate allows animals to graze outside year-round. Farmers use a low-cost, all-grass farming system which, since 1987, has had no government subsidies other than to scientists. The success of its subsidy-free farming has, in turn, led New Zealand to be a staunch advocate for freer international trade in agricultural products, and it is a member of the Cairns Group of free traders.             New Zealand’s economy is dependent on exports, particularly agricultural and horticultural exports. They consistently account for more than half of all merchandise exports - 53% in 2006, the same as in 2001 when Powdergate first hit the headlines. "This move would create a company easily dwarfing what to then had been New Zealand's biggest company, Telecom."             In 2001, after years of steady consolidation, the last two of what once had been hundreds of small manufacturing dairy companies were preparing to merge. The great and bitter rivals were Kiwi Dairies and New Zealand Dairy Group. As well as contemplating a merger, in a major upheaval of a 75-year-old industry structure, the manufacturers proposed to absorb into a new entity the dairy industry’s statutory exporting arm, the New Zealand Dairy Board. This move would create a company easily dwarfing what to then had been New Zealand’s biggest company, Telecom.  It would create a monopoly farm milk buyer.  As a result, it required the consent of government and the passing of special, enabling legislation.             In plain terms, once there had been hundreds of regional dairy co-ops, each owned by and serving a few hundred farmers. They competed for milk supply by running their factories in the most efficient way they could in order to pay their suppliers more than their neighbouring co-op. Farmers frequently changed companies to get a higher return for their milk. But as a whole, the industry calculated that while competition might be good business at home, that was not the case in world markets. There, a New Zealand company competing with another New Zealand company was considered counterproductive. The answer was the New Zealand Dairy Board, a producer board created by law to export all dairy products manufactured by the co-ops. It had its own thousands-strong staff within New Zealand and in 120 countries around the world, but was governed by a board of directors made up of manufacturing co-op representatives.             But by the beginning of the 21st century, New Zealand’s then-14,500 dairy farmers were shareholders in either one of only two manufacturing co-operatives. As a result the industry structure was unstable and the choice became between (a) those two  competing in the world market – in the process breaking up the highly successful Dairy Board – or (b) a merger, pulling the Dairy Board into the new “mega co-op” as they united.             After years of acrimonious and wasteful debate, positioning, game playing and brinkmanship, the final talks between the adversaries were being held in September 2001. Discovering the story             That month I was alerted by a contact to a short passage in a Kiwi Dairies internal newsletter that suggested the company, or someone within it, had exported a few thousand tonnes of milk powder, in contravention of the industries’ agreed rules as well as the law.             The tone of the newsletter suggested the matter was unimportant, historic, inconsequential, and only being put on the record to quash any rumours it was anything but these things. Initially, I had no way to check how significant the matter was, either. The camps were so entrenched during the merger negotiation process, and many a person’s job so tenuous, that among my contacts few dared open their mouths to comment. Among those willing to talk, I could trust few not to have an axe to grind (i.e., take the opportunity to bolster their position or undermine their opponent).             I had to make my own assessment of the importance of the information before me. I decided to frame it as potentially significant for the proposed merger mainly because, in the inflamed environment, allegations of wrongdoing of any nature by either side was like pouring petrol on a fire. Economical with the truth             My first story ran on an inside page of the NZ Herald’s business section. The publicity brought a bit more information to light, firstly detailed self justification by Kiwi Dairies, which only served to highlight how economical with the truth the first announcement had been.             With what information I had I began making phone calls to older and peripheral contacts. I was given a company name, searched the online Companies Office (http://www.companies.govt.nz/cms) records for it and drew a blank. Things didn’t look hopeful but in a long shot I went back to my contact who, when questioned again, realised he’d made an error with the name. This one proved more fruitful.             Crucially, I discovered online the annual accounts of the company. They – and checks that showed the company (South Pacific Distributors or SPD) had no premises, stock or staff - revealed it was a shell whose owner simply pocketed money for stamping the SPD name on the exported milk powder. This disguised the fact that it was really Kiwi Dairies that was exporting the powder – the role that was the Dairy Board’s preserve.             Studying Kiwi Dairies’ annual reports, I found SPD’s owner was also on the staff of one of its Australian subsidiaries. With more online searching of NZ and Australian (http://www.asic.gov.au/asic/asic.nsf) company offices - and trawling through annual reports - I drew up a web of companies and people related to each other through business or family connections who were involved with the powder transactions.             Old and current rivalries, and the desire to settle old scores, also brought new (to me) dairy industry informants to the fore. The trick was to extract the relevant facts from the opportunism, and at times to decipher extremely cryptic comments. Where possible I tried to get three separate verifications of information (the standard adopted by Woodward and Bernstein in the Watergate investigation). But New Zealand is a small country of four million people, and I often settled for two trusted sources.             Although I was making strong allegations against individuals, no story was ever checked by a lawyer. Neither my editor nor I considered it necessary. I made sure facts were accurate. I always gave those named an opportunity to give their side before going to print, and to respond once the story had been published. Those accused never took the opportunity. We were never threatened with legal action nor were any of my facts ever disputed. "Interest was high, not only in NZ but also throughout the worldwide dairy industry."             Subsequent stories appeared on page one of the NZ Herald business section and barely a story in the years ahead did not lead the section. Interest was high, not only in NZ but also throughout the worldwide dairy industry as several of those implicated in the story were very high profile.             Exporting, of course, is an international operation. So, my investigation went international, too. The milk powder whose value during the course of the stories was put at between $45 million and $75 million went from New Zealand to Australia to Italy and Mexico.  A key Kiwi Diaries subsidiary in Australia also exported to the USA. I searched online U.S. records to find details of the company’s activities there. Then, again online, I familiarized myself with the workings of the U.S. Freedom of Information Act to obtain documents from the U.S. Food and Drug Administration. These showed that the Australian company had made false declarations to the U.S. authorities. As a result, the Australian Department of Agriculture and the Australian Chamber of Commerce and Industry had also wrongly certified the products. Investigations and outcomes.             In New Zealand, the stories prompted the Ministry of Agriculture and Forestry (MAF), which policed the export laws, to launch an investigation. Across the Tasman, the Australian Quarantine Inspection Service also investigated the companies there. Eventually, the Powdergate transactions were investigated and the perpetrators successfully prosecuted by NZ’s Serious Fraud Office. (www.sfo.govt.nz)             Powdergate delayed but did not halt the formation of Fonterra. However, it proved a career killer for some, a limiter for others. Here's where you can read details of the coverage and litigation             You can follow the full saga on the NZ Herald’s online Powdergate story archive http://www.nzherald.co.nz/feature/headlines.cfm?c_id=609             I also reported new developments in the story as a freelance journalist in two publications, the NZ Listener, and the NZ Farmers Weekly. The stories can be viewed at http://www.stevenson.net.nz/articles.html             When the final installment occurred in May 2007, I blogged on it in my role as Dig ‘n Stir blog editor on the Rural Network. You can read it at: http://www.ruralnetwork.co.nz/BlogDetails.aspx?id=1970   Why did I stick to the story?             I’m dogged in pursuit of most stories and this one was better, more interesting than most. Also, because of the amount, depth and thoroughness of the digging I did on it I had more information than any other reporter. By and large, that put me in a field of my own. Two other reporters contributed very good stories to the overall pre-trial coverage but I don’t think it would be disputed if I claimed to have made 99 per cent of the running on the story.             I had dug up all I could on the scam by the time the MAF and Serious Fraud Office investigations were underway. A MAF investigator told me a NZ Herald flow chart I designed showing the path of the transactions was the centerpiece of a wiring diagram the investigators created to guide them.             There was, however, political fallout within Fonterra, and because the newly formed monopoly mega co-op was sanctioned by government, ripples from the board room ructions were felt right to the Prime Minister’s office. "I hoped to see as justified my efforts in bringing the saga into the open.             So, day after day, week after week, year after year staying on top of Powdergate provided fresh scoops – a good reason to stick to any story.             Finally, there was an important personal reason to stay with it. I hoped to see as justified my efforts in bringing the saga into the open.             The entire time I was reporting Powdergate a strong counter-theme argued that the whole saga was being overblown. Those voicing it argued that the penalties for illegal exporting were light and by the time the saga emerged the dairy export laws had all but ceased to exist (with the formation of Fonterra). Some argued that many others had similarly flouted the rules, that only the Powdergate perpetrators were unlucky enough to get caught, and that the perpetrators had gained little or nothing personally from the transactions.             The latter arguments failed at trial and with many of Fonterra’s shareholders. They did not want to see unethical business practices and practitioners become part of the new company. And the former arguments missed the most crucial point – that Powdergate was important not only to the dairy industry, but also to New Zealand.             It was essential house-cleaning. The government had allowed Fonterra to be formed against some opposition. The allegations, which raised questions about senior executives in the new company as well as those ultimately proved guilty of them, needed to be put to the ultimate test.             Even more importantly, New Zealand needs to be seen, internationally, to uphold its trade laws and obligations. By word and action, it needs to take a strong stance in international forums in favour of rules-based trade.  The Powdergate transactions breached legal requirements in at last three countries and New Zealand authorities were duty bound to ensure that justice was not only done but that it was seen to be done.             I reported the story for six years in four different media to ensure that whatever was done, including ultimate action of the courts - was seen to be done, too.   (Note:  This professional development feature is provided through a partnership of IFAJ and the Agricultural Communications Documentation Center, University of Illinois.) TOP