R v M HC Auckland CRI 2004-004-5555

[2006] NZHC 491

This case has been anonymized

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CRI 2004-004-5555

THE QUEEN

v

M
M
W

C
W
W

Hearing:         11 May 2006

Counsel:         DPH Jones QC, GA Andree-Wiltens and JE van Winden for the

Crown
PJ Davison and I Rosic for M 
J Haigh QC and PF Wicks for M 
DJ Neutze and SJ Corlett for W 

JR Billington QC and BJ Moffat for C   SBW Grieve QC and DK Abbott for W   RJ Earwaker for W 

Judgment:      11 May 2006

SENTENCING NOTES OF RODNEY HANSEN J

R V MARRA AND ORS HC AK CRI 2004-004-5555  11 May 2006

Solicitors:          Crown Law Office, Serious Fraud Office, P O Box 7124, Wellesley Street, Auckland

(GA Andree-Wiltens)

Buddle Findlay, P O Box 1433, Auckland for M   (AR Drake) Morgan Coakle, P O Box 114, Auckland for M   (K Muir) Brookfields, P O Box 240, Auckland for W   (DJ Neutze)

Mackenzie Elvin, P O Box 14016, Tauranga for W   (GW Elvin)

Copies to:           Mr DPH Jones QC, P O Box 1750, Auckland for Crown Mr PJ Davison QC, P O Box 105513, Auckland for M   Mr J Haigh QC, P O Box 1614, Auckland for M 

Mr SBW Grieve QC, P O Box 4555, Auckland for W   Mr JR Billington QC, P O Box 4338, Auckland for C   Mr RJ Earwaker, P O Box 6218, Auckland for W 

Introduction

[1]      M M, M, W, C, W and W,  you appear for sentence having each pleaded guilty to six charges under s 204(4)c) of the Customs and Excise Act 1996 of producing a document to a Customs officer which was erroneous in a material particular and which you knew to have been erroneous. The charges each carry a maximum sentence of six months imprisonment or a fine of

$10,000 or a fine of an amount up to three times the value of the goods involved.

[2]      The Crown does not seek a prison sentence.  Nor is it seeking a fine related to the value of the goods.  I consider that position to be appropriate.  Let me say at the outset that I do not intend to impose a prison sentence and I approach sentence on the basis that $10,000 is the maximum fine which may be appropriately imposed on any of the six charges.

Facts

[3]      The facts are these.   At the time of the offending the New Zealand Dairy Board had a statutory monopoly of the export of dairy produce.   It could issue licences for specific exports but generally acquired and exported all dairy produce. The general scheme of the legislation was to permit the Dairy Board to control export markets for the benefit of the New Zealand industry as a whole.

[4]      A plan was hatched to circumvent the statutory scheme for the benefit of Kiwi Group, then one of the two major players in the dairy industry.  According to the summary of facts, Kiwi saw itself as disadvantaged in relation to the other major player, New  Zealand Dairy Group.   This  view  continued  to  prevail  as  the  two competitors sought to reposition themselves for the merger which in 2001 created Fonterra.

[5]      The scheme was an elaborate one involving a number of different companies and a network of transactions but the basic mechanism was simple, effective and dishonest.  It involved exporting dairy produce as animal product.

[6]      A company was set up called SPD.  It became registered as an exporter under the Meat Act 1981 and, when it came into force, the Animal Products Act 1999, and it had obtained the necessary licences to export meat products.   It was made to appear  independent  of  Kiwi.    It  became  the  intermediary  between  Kiwi  and Australian  companies  (in  which  Kiwi  also  had  an  interest)  which  bought  dairy product from Kiwi for re-export to other overseas destinations.  Produce was sold by Kiwi  to  SPD  as  dairy  product.     Because  SPD  was  a  local  company,  these transactions attracted no interest from the Dairy Board.  Either before despatch from Kiwi or on arrival at SPD, the produce was rebagged and/or relabelled to disguise its origin.  It was usually identified as originating in Australia.

[7]      SPD created two invoices.   One, correctly described the product as dairy product and was sent to the Australian purchaser.  The other, falsely described the goods as animal product – usually stock food or “protein substances” – and was used for Customs purposes.  It was coded accordingly by SPD’s customs agency.  That enabled the products to leave New Zealand undetected by Customs or other authorities who would have referred it to the Dairy Board.  On arrival in Australia the goods were transmitted to other destinations, sometimes following repackaging and labelling in Australia.

[8]      SPD was simply an intermediary.   It did not make any profit, selling the product for the price at which it bought from Kiwi.   It recovered its operating expenses by levying a monthly administration charge to the Australian companies. Its sole purpose was to enable Kiwi to export dairy produce in contravention of the statutory scheme.

[9]      The value of the goods involved in the six charges, which cover the month

May 2001, was $3,216,951.

Further background

[10]     What I have said to this point is drawn from the agreed statement of facts. Further  background  facts  have  emerged  from  the  submissions  of  counsel,  in particular those of Mr Davison which have been adopted by other counsel.

[11]     It appears that the practise of exporting dairy products without the permission of the Board was widespread during the 1990’s and increasingly so as the merger approached.  It included companies in the New Zealand Dairy Group.  It was known to be the case by the Dairy Board.  I refer to an internal Dairy Board report dated

18 May 1998 and to the findings of a report dated 11 December 2001 prepared following  an  investigation  by  Fonterra.    That  report  identified  what  are  called “supply chains” of dairy produce exported from New Zealand other than through the New Zealand Dairy Board.  Five of those supply chains originated from a subsidiary of the New Zealand Dairy Group.   The other three were related to Kiwi.   One of those three, said by Mr Jones to be the major one, became the focus of the SFO investigation.

[12]     The genesis of the supply chain which led to the current charges lies in a joint venture company formed between Kiwi and the interests of your family, Mr C, in Australia.  Mr C’s family had been involved in the production and marketing of  primary produce  for  over  a  century.    In  1996  his  company suffered  serious financial reverses.   It was placed in receivership and liquidation.   The C companies had been active in the dairy industry for many years and had sourced dairy product from New Zealand.   Kiwi saw an opportunity to align itself with C   and to capitalise on its trading history.   A joint venture company was established – C Dairy Products.  Kiwi had a 66% interest, the C family and you,  Mr  W,  34%.    SPD  was  established  soon  after  with  Mr  W  as shareholder and sole director.

[13]     In 1999 the merger of  Bay Milk and New  Zealand Dairy Group, which together had a large volume of export permits, led Kiwi to seek to acquire a similar level of approvals or permits.  Mr M says that as a result of discussions with the New Zealand Dairy Board, an understanding was reached which would enable Kiwi

to export to and via the joint venture company in Australia.  There was a letter of understanding in which it was accepted that product from New Zealand would be rebagged and relabelled as coming from the C company.   It is not, however, suggested that the Board knew or approved of the entire arrangement, simply that one aspect of it – the rebagging and relabelling – was known and tolerated.

[14]     In 2000 Mr M   became aware of irregularities in the operations of SPD and arranged for a former Dairy Board employee to sort it out.  Soon afterwards, in April 2001, New Zealand dairy product was identified in the Italian market and a joint investigation launched by the Board and Kiwi.   It was in the course of that investigation that the May shipments, the subject of the current charges, were made as a result of arrangements already in place.

[15]     Finally,  and  as  further  relevant  background,  Mr  Davison  points  to  a prosecution brought against a Mt Maunganui businessman in 1999 for exporting dairy produce in contravention of the NZ Dairy Board Act and the Customs and Excise Act.  Fifteen charges under each Act were laid but withdrawn following the entry of guilty pleas to charges of mislabelling under the Dairy Industry Act which attracted fines of $50 on two charges.  This was said by Mr M   to have affected his response when he found out about the operations of SPD.

Effect of offending

[16]     There is no agreement as to the likely impact of the offending.  The Crown submits the scheme had potentially serious consequences for New Zealand’s export trade.  Evidence at depositions explained that the export trade, amounting to some

$14b, is crucially dependent on the accuracy of assurances provided in export documentation.   Any erosion of confidence amongst our overseas trading partners can be costly in terms of conditions of entry to overseas markets.   The Crown submits the reputation of New Zealand’s industry has been tarnished by what happened which is said to demonstrate a disregard for the standards of conduct required both in international trading and at a corporate level.  It is submitted that an important factor in sentencing is to demonstrate to the community and the exporting

world that proper and honest standards are expected, especially from those high up the corporate ladder.

[17]     The defence do not accept that the illegal export operations caused damage to international markets.  Mr Davison points out that the Dairy Board itself had used the same export code as adopted by SPD.  The defence also submit that there was no loss to the New Zealand Dairy Board as a charge of 2-3%, which the Board charged for managing exports, was not applied to companies engaged in the private export of dairy products.  Further, it is submitted that the Board’s actual costs in exporting the lower end product, which is in issue, would exceed the commission it was able to recover.

[18]     I am unable to make any firm findings one way or another.   I proceed to sentence on the basis that no demonstrated injury has been shown to have been caused to New Zealand’s reputation or to industry participants.

Culpability

[19]     The essential elements of the scheme which emerged from the summary of facts is said by the Crown to be five in total:

a)       First, the incorporation and operation of the SPD, established solely for  the  purpose  of  putting  the  scheme  into  effect.     It  had  the appearance of being a domestic entity when in reality it was a conduit for exports to C   and later to Australasian Dairy Ingredients.

b)Secondly,  the  registration  of  SPD  under  legislation  which  would permit it to export animal product.

c)       Thirdly,  the  repackaging  and  relabelling  of  the  product  so  as  to disguise its origin.

d)       Fourthly, the use of the dual invoice system.

e)        Fifthly, the use of incorrect tariff codes.

[20]     In  assessing  the  respective  roles  of  each  of  the  participants,  the  Crown suggests ranking them in the following descending order of culpability:

M   
M   
W   
C 

W   and

W 

[21]     That  submission  is  said  to  be  based,  first,  on  Messrs  M  ,  M  , C   and W   being involved in the set-up of the scheme.  Secondly, on Messrs C  , W   and W   dealing with trading under the scheme.  Thirdly, Messrs M   M   and W   having overview and control of the operation and, it is submitted, attempting to keep the scheme from being discovered.   As to that latter aspect, let me say at once that there was no evidence to support it and I disregard it.  Finally, that Mr W  ’s involvement was mainly on the financial side.

[22]     I summarise now the responses of each of the participants to the Crown’s position.

Mr M 

[23]     Mr M   was the Group General Manager, Operations of the Kiwi Group and later the Chief Executive Officer of the holding company of Kiwi Milk Products and other subsidiaries.

[24]     He accepts that he was involved in establishing the joint venture in Australia but denies knowledge of the detail of the scheme.   He says he had no direct involvement in the process or planning that led to the incorporation of establishment

of SPD.  He had nothing to do with the plan or the process by which it came to be registered under the Meat Act and Animal Products Act.

[25]     Mr M   accepts that from time to time he was aware that there would be repackaging and relabelling so as to disguise the product or its origin and that such activity would have been likely to mislead Customs officials.   He was also aware that an incorrect tariff code were used.  He says, however, that he had no knowledge of the dual invoice system.

[26]     Mr  M    maintains  he  derived  no  direct  financial  advantage  from  the additional business.   His motivation was to strengthen Kiwi’s overall commercial position.

Mr M 

[27]     Mr  M    was  the  General  Manager  of  Kiwi  Milk  Products  which controlled Kiwi’s domestic marketing of dairy product.   When he joined Kiwi in October   1997   it   had   already   entered   into   the   joint   venture   in   Australia. Mr M   does not accept that a scheme existed.  Rather, he saw the offending as evolving.  He was not aware of the details of the incorporation and operation of SPD.   His view, which Mr Haigh characterises as naïve and erroneous, was that provided the product was sold to a domestic company, the requirements of the Dairy Act were not being breached.

Mr W 

[28]     Mr W   was the Trading Manager of Kiwi Milk Products.   He had joined the company in 1994 when it only had four employees.   He moved from accounting into business sales and became Trading Manager in August 1997.   He reported to a sales and marketing manager who reported to Mr M   as General Manager.  His position is described by Mr Grieve as that of a fifth-tier manager who was authorised only to make day-to-day decisions.

[29]     Mr   W     says   he  first   heard   about   SPD   five   months   after   its incorporation.   He was not involved in any of the planning or strategy meetings behind its formation.  He was instructed to offer product to C   Dairy Products in Australia and to process orders that would be received by Kiwi from SPD.  He was aware that the product would ultimately be exported but his doubts were allayed by the fact that he was supplying a local company and acting with the full support of his superiors.

Mr C 

[30]     Mr C   and his wife were both involved with the family company and the establishment of the joint venture in 1997.  Both were shareholders with Mr W   who had joined them as financial controller.

[31]     Mr M   was the Chairman of the joint venture company.  Mr C   saw him as an experienced and professional CEO who always sought the best accounting and legal advice.  He saw Kiwi as highly disciplined and businesslike.

[32]     Mr C   says he was aware that the Dairy Board had exclusive marketing rights but saw nothing exceptional about what was being done.  He acted openly in his relationships with the New Zealand dairy industry and did not seek to disguise the nature of his involvement.

Mr W 

[33]   Mr W  , like Mr C  , is an Australian citizen.   He joined C   Corporation in late 1996, as I have said, as financial controller.  He was involved in the establishment of the joint venture company and acquired an 11.33% shareholding in the holding company.  He was new to the industry and was given to understand from the others involved that exporting without Dairy Board approval was common practise.

[34]     Mr W   became the shareholder and director of SPD.  He was aware that documentation was being produced to Customs with an incorrect tariff code but denies being the architect of the scheme or that his motivation was for personal gain. In any event, by May 2001 export to the joint venture company was bypassed and instead went to a wholly owned subsidiary of Kiwi.   As a result, Mr W   and, indeed, Mr C  , could not have benefitted from the transactions covered by the charges.

Mr W 

[35]     Mr W   had his own business in Tauranga.  He had family links with C   and, through that, was employed in 1992 to manage interests the C   family had in the leisure industry in New Zealand.  He bought the company when C   ran into financial difficulties in 1996.

[36]     Mr W   was asked by Mr W   to handle the administration work for the joint venture.  That included setting up SPD and obtaining registration under the Meat Act and Animal Products Act.  He formed a separate company to handle the contract with SPD, which carried out the handling and administration, for a fee charged to SPD.  That included the double invoicing which was the result of systems implemented or instructions given from Australia.

[37]     Mr W   was aware that the product was not described accurately on Customs documentation in order to avoid shipments coming to the attention of the Dairy Board.  He had some concerns about the legality of the operation and obtained a legal opinion which advised that SPD would be responsible for obtaining an export permit.

Assessment of culpability

[38]     As I indicated in the course of argument, the information before me does not permit me to attribute, at least to some of the accused, the level of knowledge and involvement  argued  by  the  Crown.     With  the  exception  of  Mr  W    and

Mr W  , there is, for example, nothing which would enable me to conclude that the other participants knew of the precise means by which SPD carried out its role.

[39]     Some counsel took issue with the operation of SPD being characterised as a scheme but there can be no doubt that the process, in which SPD was the key participant, was conceived and established after the joint venture was formed and for the commercial benefit of the participants.

[40]     However, for sentencing purposes, I can safely proceed only on the basis that by 2001, when the offending occurred, all accused knew that the process involved presenting false documentation to Customs.  Their knowledge of the other details of the operation and their involvement in its establishment and development obviously varied.

[41]     Mr Neutze suggested that it was not possible to attribute differing levels of culpability to the participants.  I do not agree, although I do not necessarily accept the Crown’s analysis.   I think it is open for me to distinguish, for the purpose of sentence between, for example, the directing minds of the operation and its hands. Plainly  Mr  M    was  in  the  former  category  together  with  Mr  C    and Mr W  .    In  the  latter  is  Mr W    and  Mr  W  .    Mr  M   arguably occupies an intermediate position but may more accurately be characterised as one of the guiding minds.   I consider also that some lesser degree of blameworthiness could attach to Mr C   and Mr W   who would have relied on the advice and example of Kiwi personnel.

[42]     I am disinclined to place great weight on personal benefits.   For the Kiwi personnel, they were indirect and confined to enhancement of their positions in the company.  Messrs C   and W   clearly stood to benefit from the scheme as a whole  but  derived  little  or  nothing  from  the  charges  I  am  concerned  with. Mr W   is in a similar position.

Range of penalty

[43]     In determining where within the available range the financial penalty should fall, I must plainly give due weight to the essential elements of the scheme.   The May 2001 transactions were part of a sophisticated and elaborate scheme, carefully designed to conceal the true nature of the transactions.   The deceit practised on Customs was an integral part.  The penalty must reflect society’s abhorrence of any operation which systematically flouts or evades the law however justified or laudable the objective.  The deterrent aspect of sentence is important.

[44]     Against that I take into account that the offending under the Customs and Excise  Act  was  incidental  to  the  main  purpose  of  the  scheme  which  was  to circumvent the Dairy Board Act.   Charges under that Act would have attracted a maximum fine of $400.   I accept, of course, Mr Jones’ submission that the end cannot justify the means.  But in considering penalty I bear in mind that the Customs and Excise Act is generally directed to ensuring that the revenue is not defrauded. The level of penalties reflect that, including the provision for a fine of up to three times the value of the goods involved.  I note also that a charge of defrauding the revenue attracts the same maximum penalty as producing a false document.   The penalty in this case should, in my view, reflect the absence of any intent to defraud or other financial motive.

[45]     It  is  relevant  too  that  during  the  1990’s  there  appears  to  have  been widespread avoidance of the statutory regime which permitted export of dairy products only with the permission of the Board.  There was, it seems to me and as described in the course of submissions, something of a culture or climate of non- compliance with a number of schemes involving the export of dairy produce without a licence.  No counsel sought to excuse their clients’ conduct on this account.  Nor do I.  But it is properly part of the context in which the offending should be assessed.

[46]     Some of those schemes involved members of the New Zealand Dairy Group. I do not go so far as to suggest that the accused have been victimised because they were associated with Kiwi.  Indeed, some of the supply chains which are alleged to have emanated from New Zealand Dairy Group also involve C   Corporation.

However, I have the uncomfortable feeling that others involved in similar operations may have escaped prosecution.  And I acknowledge that the former Kiwi personnel in  particular  feel  a  deep  sense  of  grievance  that  they  have  been  singled  out. Mr M   calls himself a scapegoat.

[47]     These considerations persuade me that in determining the appropriate level of a fine, I should be looking towards the mid to lower order of the range, depending on my assessment of culpability in individual cases.

Mitigation

[48]     The mitigating factors are substantial and weighty.  All deserve full credit for guilty pleas at the earliest opportunity and so avoiding a long and costly trial.

[49]     With the exception of Mr W  , all are entitled to rely on an unblemished record.   In the case of Messrs M  , M   and Mr C  , in particular, you have behind you distinguished careers of service to industry and to the community. Time does not permit me to comment individually on your careers, your record and your character.   Suffice to say that you are all entitled to full credit for your considerable past achievements.

[50]     Mr W  , you fell from grace some years ago.  It was regarded then as an aberration.    You  are  fully  rehabilitated.    I  place  no  weight  on  your  past  for sentencing purposes.

[51]     I  accept  that  you  have  all  carried  a  massive  burden  as  a  result  of  the prosecution and the investigation which preceded it.   It has blighted your careers. The financial cost has been substantial.  It has been damaging to your personal lives. You have had a serious fraud charge hanging over your head for years now.  You have been through a lengthy deposition hearing and you have had the Damocles sword of a High Court trial confronting you.

[52]     In your case, Mr W  , the consequences have been aggravated by your residence in the United States.  You were arrested and spent eight days in custody.  I

accept that would not have occurred if you had been facing the charges you have now admitted.  As a resident of the United States, the cost of travel, accommodation and restrictions on work while bail issues were resolved has brought a loss which Mr Neutze advises me is of the order of $60,000.

[53]     These considerations lead me to the view that in all cases except Mr W  , the fines which would otherwise be imposed should be discounted by a factor of

50%.   In  the  case  of  Mr  W  ,  for  the  reasons  I have  given,  I consider that allowance should be increased to two-thirds.  Those discounts have been taken into account in reaching the fines which, for the reasons I have given, I now impose on you.

Sentence

[54]     Mr M  , on each of the charges of which you have been convicted, you are fined the sum of $2,500.  In total, $15,000

[55]     Mr M   and Mr C  , on each of the charges of which you have been convicted, you are fined $2,000 or a total of $12,000.

[56]     Mr W  , on each of the charges of which you have been convicted, you are fined $1,250 or a total of $7,500.

[57]     Mr W   and Mr W  , on each of the charges of which you have been convicted, I impose a fine of $1,000 or $6,000 in total.

[58]     Mr W  , as requested by your counsel, I direct the immediate release of your bail bond of $60,000 and also order that your solicitors may now release your British passport to you.