Plaintiff v Defendant

CORPORATIONS - Duty of directors and officers to inquire into possible wrongful conduct being engaged in by the company.

CORPORATIONS - Six-year limitation period - Whether a breach of duty to inquire into possible improper conduct by officers of AWB imposed on the chairman Flugge continued whilst he continued to serve as a director such that his conduct fell within sixyear limitation period imposed under the Act.

EVIDENCE - Application of Jones v Dunkel in a civil penalty proceeding.

EVIDENCE - Use of inferences to establish breach of the Act.

Mr N J O'Bryan AM SC with Mr J P Moore QC, Mr C H Truong and Ms C E Klemis

Mr N J O'Bryan AM SC with Mr J P Moore QC, Mr C H Truong and Ms C E Klemis

1 ASIC alleges that two former officers of AWB Limited (AWB), Trevor James Flugge (Flugge) and Peter Anthony Geary (Geary), breached their duties under ss 180 and 181 of the Corporations Act 2001 (Cth) (the Act). ASIC seeks civil penalties against the defendants.

2 In this judgment I have used ASIC's reproduction of the terms of the relevant emails contained in the written submissions and have assumed that they are correct. There was no suggestion at the trial that ASIC had incorrectly reproduced the emails.

3 AWB was incorporated on 1 May 1998 and took over the business of the Australian Wheat Board. During the period relevant to these proceedings, AWB held an effective monopoly over the export of Australian grown wheat. One of AWB's largest customers was Iraq. During this period, the sale of wheat to Iraq was subject to United Nations (UN) sanctions arising out of the First Gulf War.

4 In the period 1999 to 2003, ASIC contends that AWB sold wheat to Iraq in a manner contrary to UN sanctions. Initially during the First Gulf War in 1990, the UN imposed strict sanctions on trading with Iraq or the provision of internationally traded currencies to Iraq. In 1995, the UN established the Oil-for-Food Programme (OFFP). Under the OFFP, moneys from the sale of Iraqi oil was placed in an escrow account under the control of the UN, and moneys from the account could be applied towards the sale of wheat to Iraq (along with other humanitarian uses).

5 The case against Flugge and Geary relates to the alleged misuse of the moneys obtained by AWB from the escrow account. In particular, ASIC says that AWB sold wheat to Iraq under the OFFP in a manner contrary to UN sanctions. Under the OFFP, subject to UN approval, AWB could obtain the price of the wheat agreed to be purchased by Iraq from the UN escrow account (the escrow account established for the purposes of Resolution 986 of the United Nations Security Council, adopted on 14 April 1995 (Resolution 986) to which funds paid from the sale of Iraqi petroleum and petroleum products where required to be paid into (the UN escrow account)).

6 ASIC alleges that under contracts for the sale of wheat by AWB to Iraq entered into after June 1999, AWB was to pay Iraq an inland transportation fee(purportedly for the wheat to be distributed within Iraq). Under the arrangement, AWB was to compensate itself for the payment of the inland transportation fee by correspondingly inflating the price of the wheat to be paid by Iraq and obtaining the inflated price from the escrow account operated by the UN.

7 ASIC alleges that the payment of the inland transportation fee was a sham and a means by which Iraq could obtain internationally traded currencies. ASIC alleges that the payments of the fee to Iraq by AWB was contrary to UN sanctions. Further, ASIC says that AWB obtained the inland transportation fees from the UN escrow account and applied the moneys for a purpose, not permitted for the funds in the escrow account, by using the money to pay inland transportation fees.

8 Flugge was the chairman of AWB in the period 1999 until he lost office in March 2002, when he failed to win re-election to the board. Geary was an executive of AWB during the period 1999 to 2003.

9 In substance, ASIC's case against Flugge is that he knew that AWB was acting contrary to UN sanctions in paying the inland transportation fees and using moneys obtained from the UN escrow account to do so, or alternatively, that if he did not know, that he was put on sufficient notice such that he ought to have made enquiries which would have alerted him to the breaches of UN sanctions. In either case, Flugge ought to have put a stop to AWB's conduct.

10 In substance, ASIC alleges that Flugge breached his duties under ss 180 and 181 of the Act by failing to stop the offending conduct, or by failing to make adequate enquiries that should have led him to stopping the offending conduct.

11 Flugge left AWB in March 2002. The limitation period applicable to the allegations against Flugge means that his conduct in the last few months of his term as chairman of AWB is the only conduct that is subject to ss 180 and 181. Nevertheless, ASIC alleges that Flugge had a continuing duty to stop the offending conduct, or make enquiries that should have led him to stopping the offending conduct.

12 The case against Geary differs in that it involves two further transactions. These transactions occurred after Flugge had left AWB, and are not the subject of allegations made against Flugge.

13 ASIC describes the first transaction as the Iron Filings wrongdoing. In substance, ASIC alleges that AWB agreed to pay Iraq compensation for iron filings that were allegedly found in shipments of wheat made to Iraq by AWB under the OFFP. ASIC alleges that AWB and Iraq agreed on compensation and also agreed that AWB could inflate the price of wheat sold to Iraq under later contracts, recover the inflated price from the UN escrow account, and pay Iraq the agreed compensation. ASIC alleges that the payment of the compensation was in breach of the UN sanctions against paying internationally traded currencies to Iraq and also a misuse of the UN escrow account.

14 ASIC describes the second transaction as the Tigris wrongdoing. In brief, shortly after the First Gulf War, BHP sold some wheat to Iraq for humanitarian purposes. BHP was not paid for the wheat. Subsequently, the debt owed by Iraq to BHP was assigned to a company called Tigris. ASIC alleges that, AWB for a fee, with the agreement of Iraq, inflated the price of wheat to be purchased by Iraq under several contracts and used the inflated element to pay Tigris the money owed by Iraq to Tigris. ASIC alleges that this transaction was contrary to UN sanctions, as the escrow account moneys were being used for a purpose other than for humanitarian aid. There is no allegation that internationally traded currencies were paid to Iraq, as the money was to be paid to Tigris.

15 ASIC alleges that Geary, who was a senior executive in AWB, knew of the Iron Filings transaction and knew that it was contrary to UN sanctions but failed to stop it, or alternatively ought to have known and failed to stop it. Further, AWB alleges that Geary knew of the Iron Filings transaction and that it was contrary to UN sanctions and failed to stop it, or alternatively ought to have known and failed to stop it.

16 Further, ASIC also alleges that Geary knew of, or ought to have known of, the payment of the inland transportation fees and failed to stop them as alleged against Flugge.

17 In substance, ASIC alleges that Geary breached his duties under ss 180 and 181 of the Act, by failing to stop the Iraqi Grain Board (IGB) fees wrongdoing, failing to stop the Iron Filings wrongdoing and the Tigris wrongdoing, or failing to make proper enquiries which should have led to him doing so.

18 After the United States of America led the coalition invasion of Iraq in March 2003, AWB's conduct was exposed. The Australian government established a Royal Commission to investigate the conduct of AWB. The Royal Commission made damning findings against AWB and many of its officers. As a result of the Royal Commission and the publicity surrounding the exposure of AWB's conduct, AWB's reputation was greatly sullied. The Australian government withdrew AWB's monopoly on the export of wheat. AWB suffered financially and was eventually taken over.

19 The summary I have given is very general. The pleadings distinguish between Iraq and its agencies, such as the IGB. The inland transportation fees were increased over time and another fee, called the after sales service fee, was also imposed.

20 In my reasons below, I fully set out the pleadings and deal with each of the allegations. It would serve little purpose to more fully summarise the pleadings at this stage.

21 For the reasons given below, I find that Flugge did breach his duties as a director under s 180(1) of the Act, by failing to make adequate enquiries about the propriety of the payment of inland transportation fees and as a consequence, failing to stop AWB engaging in improper conduct in paying the inland transportation fees. I also find that the breach occurred during the period in which the Act permits penalty proceedings to be instituted against Flugge.

22 For the reasons given below, I find that Geary did not breach his duties in relation to the payment of the inland transportation fees to Iraq by AWB, or in relation to the Iron Filings Claim (the Iron Filings wrongdoing) and the payment of the Tigris Debt (the Tigris wrongdoing).

23 The judgment proceeds as follows. I examine the evidence relating to Flugge, which also includes some facts relevant to Geary. The evidence includes both documentary evidence and evidence of witnesses. I then set out the matters pleaded against Flugge and make findings in relation to each pleaded fact. Finally, based on those findings, I reach my conclusions on the breaches of duty alleged against Flugge.

24 I then consider the evidence, both documentary and from witnesses, against Geary. I then set out in detail the pleadings against Geary and make findings in relation to each pleading. Finally, based on those findings, I reach my conclusions on the breaches alleged against Geary.

25 ASIC describes 'the IGB fees wrongdoing' as AWB's increasing of the contract price of wheat sold to Iraq to obtain payment of that increased price from the escrow account and then paying those moneys to Iraq.

26 ASIC alleges that Flugge knew of the IGB fees wrongdoing and that he had a duty to stop the IGB fees wrongdoing.

27 In many instances, ASIC seeks to establish Flugge's knowledge by drawing inferences from documents that it contends that Flugge read of from conversations he had with certain witnesses. ASIC also seeks to rely on Jones v Dunkel[1] to more readily draw those inferences, as Flugge did not give evidence to seek to rebut inferences that ASIC sought to draw.

28 Importantly, ASIC also seeks to more readily draw the inference that Flugge knew of the IGB fees wrongdoing from the fact that the IGB fees wrongdoing was well known within AWB.[2]

29 ASIC alleges that the certain matters were widely known in AWB. In particular, ASIC alleges that by late October 1999 it was widely known in AWB:

(a) the inland transportation, or trucking, fee was fixed by the IGB;

(b) the President of Iraq required funds on account of the trucking fee to be paid to Iraq before any cargo of wheat was unloaded in Iraq;

(c) the fee was to be paid to Iraq, being a 'refund' of trucking charges to Iraq;

(d) because payments of US dollars to Iraq could not be made because of UN sanctions, a method of payment to circumvent those sanctions had to be found;

(e) payment of the fee could be hidden by having the shipowners pay it to the entity nominated by Iraq, with the charter party (between AWB and the shipowner) being amended to accommodate that payment; and

(f) payment of the fee to a Jordanian entity nominated by the IGB would further disguise the fact that the payment was being made to Iraq and represented an obvious breach of the sanctions.[3]

30 There are other matters that ASIC alleges were widely known within AWB relating to the alleged IGB fees wrongful conduct and by which ASIC seeks to infer that Flugge also had the same knowledge. I will deal with these at the appropriate point in the discussion of the relevant facts.

31 ASIC's final closing oral submissions submit that AWB knew that it was acting in a manner that was flagrantly in breach of its obligation, as imposed upon Australia under UN sanctions.[4]

32 ASIC contends that within AWB it was widely understood that money for the inland transport fees was being paid to the Iraqis. ASIC submits that it is very relevant when the Court is considering the likelihood that Flugge or Geary did not hear on any AWB grapevine about the existence of the IGB fees or what was happening. ASIC submits that given the extraordinary number of people within AWB who knew what was going on, it is highly unlikely that Flugge, a chairman with the direct hands-on interest in the market that Flugge had, did not know that the IGB fees were being paid.[5]

33 I will come to similar submissions that were made by ASIC as I go through the evidence.

34 The importance of these allegations is that although they were not pleaded, ASIC nevertheless relies on them to make out its case against Flugge and Geary. The allegations will require me to make findings as to whether the matters alleged by ASIC to be widely known within AWB were in fact so.

35 There was no submission by either Flugge or Geary that ASIC's submissions and evidence that certain matters were widely known within AWB, were not open to be made. On reflection, I consider that the evidence, on whether the IGB fees wrongful conduct was widely known within AWB, was admissible, and the submissions made by ASIC that the IGB fees wrongdoing was widely known within AWB was an evidentiary matter going to the issue of whether I could more readily draw the inferences that either or both of Flugge and Geary knew the matters that ASIC alleged each knew.

36 ASIC tendered in evidence, a large quantity of documents that it is not alleged either Flugge or Geary read or was aware of. Evidence was led from former employees of AWB on events and discussions that Flugge and Geary were not alleged to be party to.

37 It is apparent from the way that ASIC conducted its case that it led this evidence in part to seek to establish what it alleges was widely known within AWB, and to support its case that the inference should be drawn that Flugge and Geary knew of the IGB fees wrongful conduct.[6] ASIC also submits that such inferences can be more readily drawn, as Flugge and Geary did not give evidence to rebut the inference.

38 AWB was a major corporation that exported wheat to buyers throughout the world. As discussed below it was initially a government corporation but it was later privatised. AWB's main office was based in Lonsdale Street, Melbourne.

39 The wheat sold by AWB was sold on behalf of Australian wheat growers. AWB had a near monopoly on the sale of Australian wheat overseas. Iraq was a major buyer of Australian wheat from AWB. The state instrumentality that purchased the wheat was the IGB. Wheat trade to Iraq was interrupted by the First Gulf War when the USA and its allies drove Iraq out of Kuwait that it had recently invaded.

40 As a consequence of Iraq's invasion of Kuwait, the UN imposed sanctions on trade with Iraq. Those sanctions interfered with AWB's sale of wheat to Iraq. In 1996, however, the UN introduced the OFFP. Under this program, the proceeds of the sale of Iraqi oil was placed in a UN controlled escrow account and with UN approval the moneys could be used to buy goods and services for Iraq. The AWB thereupon was able to make sales of wheat to Iraq under the oil for food program administered by the UN and obtain payment from the UN escrow account.

41 Prior to 1999, AWB delivered wheat to Iraq on terms described as CIF or C & F, which involved the supplier paying for cost, maritime insurance and freight (in the case of CIF trade) or cost and freight (in the case of C & F). AWB would recover those costs from the contract price. In June 1999 Iraq, however, the IGB informed AWB that it would have to pay an inland transportation fee of US$12 per tonne of wheat sold to the IGB to an Iraq instrumentality and that the AWB could add the fee to the price of the wheat sold to the IGB. Further details of UN sanctions and the dealings that led up to the payment of the fee are discussed below.

42 When the IGB sought the payment of the inland transportation fee Trevor Flugge was the chairman of the board of AWB. He remained chairman until early 2002 when he lost office as a director of AWB. Flugge hailed from Western Australia and was a major wheat grower in his own right. Flugge was not engaged in executive duties for AWB although as chairman he did represent AWB on activities outside his board functions. Flugge held other board positions and had a wide range of interests. Flugge was a man of some standing in the community and with the Australian Government. Peter Geary was a full time senior officer of AWB who had been representing AWB in New York and in particular in AWB's dealings with the UN. In June 1999, however, Geary was back in Australia holding executive functions.

43 In June 1999, when the IGB sought the payment of the inland transportation fee, AWB had several divisions, as well as a wholly owned subsidiary, AWB International Ltd (AWBI). AWB handled the sale of wheat that was supplied to AWBI by growers. Within AWBI was a division known as the 'Pool'. AWB was retained by the Pool to market and sell the wheat.

44 The Pool administered the distribution of proceeds from the sale of wheat to the growers who contributed their wheat. The Pool received the so-called Free on Board (FOB) proceeds, which described the proceeds before costs such as insurance, freight and demurrage, from the sale of the wheat and divided the proceeds up between the suppliers.

45 The division within AWB that administered sales to Iraq and internationally generally was known as International Sales and Marketing (IS&M). Wheat supplied to AWB was administered by the Pool.

46 The IS&M division included Nigel Officer (Officer), who was the Global Sales and Marketing General Manager.[7] Dominic Hogan (Hogan) was the Account Manager for Iraq and was stationed in Cairo. Hogan answered to Mark Emons (Emons), who was the Regional Manager Marketing, for the Middle East and Africa. Emons answered to Officer.

47 The Chartering Manager was Michael Watson (Watson), who answered to Officer in the IS&M division.

48 Geary worked in the Pool section of the AWB business. Geary was the Manager Export and answered to Ted Laskie (Laskie), the General Manager, AWB International Pool, who answered to the Chief Operations Officer, Michael Tighe (Tighe).[8]

49 From 1 July 1999 to 30 June 2008, AWBI was 'nominated company B', as it was referred to in the then Wheat Marketing Act 1989 (Cth). As a result, AWBI was authorised to export wheat in bulk from Australia without the prior permission of the Wheat Export Authority, also known at different times as the 'Export Wheat Commission' and 'Wheat Exports Australia' (WEA).[9]

50 In addition, for the period up to approximately December 2006, WEA could not grant permission for the export of bulk wheat by an exporter other than AWBI without first obtaining AWBI's prior permission. AWBI's veto power over bulk export of wheat by others was commonly referred to as the 'Single Desk' (discussed below).

51 WEA's first report to growers in 2001 states that WEA was established on 1 July 1999, among other things, to:

(b) monitor, examine and report on AWBI's performance in relation to the export of wheat; and

(c) examine and report to the federal government and the growers on the benefits to all wheat growers that result from its performance.[10]

52 AWBI held the benefits of the Single Desk. AWBI was responsible for the operation of the national pools through the existing wheat export arrangements, which arrangement included the Single Desk.

53 AWBI was obliged to maximise net pool returns for growers. A new pool was opened for each annual wheat harvest season, and each pool usually operated for approximately two years commencing several months prior to each harvest (with pre-harvest hedging of commodity and foreign exchange exposures) and then for approximately 12 to 15 months after harvest until all the wheat in that pool had been sold and proceeds were distributed to pool participants. The Pool sold wheat principally to the export market through AWBI, although some wheat was sold domestically. The pools operated for the purpose of producing a maximum net return to growers.

54 In practice, the grower was paid an amount per tonne of grain delivered into the relevant pool at the time of delivery, which represented the sale price less the cost of marketing, risk management, storage, handling and delivering the grain to its final destination.

The service agreements between AWBI and AWB Ltd

55 AWBI contracted with AWB to provide AWBI services under a service agreement.

56 As a result, AWB provided to AWBI all the necessary staff, management (commodity and currency hedging) marketing operations and infrastructure (computers, finance and supply chain) in order to market and execute grains contracts and so as to maximise the returns for the growers delivering wheat into the pool. AWBI did not have its own employees until October 2006.

57 At the times relevant to this proceeding, AWB through its wholly owned subsidiary AWBI, held a statutory monopoly for the marketing and export of bulk wheat to international markets. As noted above, this monopoly was described as the Single Desk.

58 Prior to 1988, the Single Desk was controlled by the Australian Wheat Board, a statutory wheat marketing authority. In 1988, the Australian Wheat Board was corporatized, and was subsequently privatised in 1999. The Single Desk was controlled by AWB's subsidiary AWBI. On 22 August 2001, AWB listed on the Australian Stock Exchange.

59 ASIC submits that AWB's control of the Single Desk assumed relevance in at least three respects. First, ASIC submits that it is an important surrounding circumstance when considering the content of Flugge's and Geary's duties to AWB, and the foreseeability of some of the harm which eventually accrued to AWB as a result of the revelation of its misconduct.

60 Secondly, ASIC submits that the fact of the Single Desk and the accompanying corporate reforms that AWB undertook in the period between 1999 and 2001 brought with it greater internal and external scrutiny on its activities, which made it more important that AWB conduct all its operations ethically and with propriety, a fact well known within AWB and reflected in AWB's code of conduct and corporate governance documents.

61 Thirdly, ASIC submits that the benefits that flowed from the Single Desk were valuable to AWB and were lost following public revelation of its wrongdoing.

62 ASIC referred to the High Court's decision in Neat Domestic Trading Pty Ltd v AWB Ltd,[11] where the High Court held that no public law obligation was imposed on AWBI in connection with its power to refuse consent to other companies exporting bulk wheat. ASIC submits that the decision provides a useful summary of AWB's position as the holder of the Single Desk at the relevant times and its historic transformation from a statutory wheat board to a publicly listed company.

63 ASIC submits that this decision highlights the importance of the Single Desk to AWB, important circumstances surrounding the Single Desk that are relevant to the duties owed by the officers to AWB in this case, and reasons why the public revelation of AWB's wrongdoing was likely to, and did, cause it to lose the Single Desk as a consequence of conduct the subject of these proceedings.[12]

64 In their plurality judgment, McHugh, Hayne and Callinan JJ observed:[13]

The object of AWB, stated in its constituent document was 'to be primarily involved in the business of Grain Trading.' This was further defined as the undertaking of grain trading activities and investments with a view, among other things:

in relation to wheat growers who sell pool return wheat to the company or its subsidiaries, to maximise their net returns from the pools by securing, developing and maintaining markets for wheat and wheat products and by minimising costs as far as practicable.

The reference to 'pool return wheat' was a reference to arrangements by which Growers and others sold wheat to a single purchaser which would then negotiate the sale of that wheat overseas. At the times relevant to these proceedings that purchaser, or pool company, was AWBI. The pool company would take the amounts it received from sales of wheat of a particular grade and divide the returns (net of costs) rateable among those who had supplied the grain that was sold. These arrangements were often referred to as 'Single Desk' selling arrangements. There was to be a single seller of Australian wheat in overseas markets and thus no competition between sellers of Australian wheat in those markets.

...

Regulation of wheat marketing

Since the end of World War 2 there has been a series of federal Acts dealing with aspects of the marketing of wheat. (There had been earlier federal legislation affecting the wheat industry but the War of 1939-45 marks a convenient point at which to begin reference to past legislation.) As originally enacted, the 1989 Act provided a very different regime for the marketing of wheat from that provided by it at the times relevant to this matter. The Australian Wheat Board, a statutory corporation tracing its roots to the Wheat Industry Stabilization Act 1948 (Cth), played a central role in the marketing scheme for which the 1989 Act originally provided. As enacted, the 1989 Act provided for the Australian Wheat Board to control the export of wheat. By s 57, as it then stood, export of wheat, without the Board's consent, was forbidden.

In 1997 and 1998, significant changes were made to the 1989 Act and the scheme for which it provided. The Explanatory Memorandum and the Wheat Marketing Legislation Amendment Bill 1998 (by which the second part of these changes were made) described their purpose as being to 'restructure' the Australian Wheat Board 'from a statutory marketing authority to a grower owned company.' From 1 July 1999, there were to be three grower-owned companies involved in the marketing of wheat - AWB, AWBI and a third company undertaking domestic trading of grains and other non-pool commercial activities not handled by AWB. A Wheat Export Authority was to control export of wheat and to monitor the performance of AWBI in relation to the export of wheat.

...

AWBI and the Act

AWBI does not owe its existence to the Act; is a company limited by shares incorporated under the Corporations Law. To a very great extent, its powers, and the powers and obligations of its organs, are regulated by the applicable companies legislation. So, for example, at the time of the events giving rise to this appeal, its board of directors owed duties to its sole shareholder, AWB. The content of those duties was to be found in the Corporations Law (Vict) and the considerable body of judge-made law affecting directors' duties. The central duty of the board of AWBI was to observe its constitution and to pursue the interests of the company as expressed in that document. As a wholly owned subsidiary of AWB those duties would, no doubt, have required the board of AWBI to pursue the interests of its parent (and thus, its parent's shareholders) to the extent that those interests were compatible with other obligations of AWBI. In fact the interests of the two companies coincided. The constituent documents of both AWB and AWBI required that AWBI seek to maximise returns to those who sold wheat into AWB wheat marketing pools.

65 AWB's initial public offering prospectus, dated 6 July 2001, explained the importance of the Single Desk to AWB as follows:

The Australian Wheat Board was established as a statutory authority by Wheat Acquisition Regulations contained in the National Security Act 1939 (Cth). It continued in existence as a Government controlled marketing authority under successive legislation until 1 July 1999.

In 1989, the Government established the Wheat Industry Fund imposing compulsory levies on wheat sales. This fund was held and managed by the Australian Wheat Board and by July 1999 was approximately $600 million.

In June 1998, the assets and liabilities of the statutory authority (other than the Wheat Industry Fund) were transferred to AWB and AWBI, then wholly subsidiaries of the statutory authority.

In July 1999, the Wheat Industry Fund was transferred to AWB and B Class Shares were issued to the holders of units in that fund. A Class Shares were issued to persons who met the definition of 'grower' in AWB's constitution. Upon the issue of these A Class and B Class Shares, AWB became a grower-owned and controlled corporation.

As part of the restructure, Government guarantees of borrowing for the pools ceased and AWB commenced directly financing pooling and commercial activities using its own capital and credit enhancement.

OPERATION OF THE NATIONAL POOL

AWBI was established as separate wholly owned subsidiary of AWB and is responsible for the operation of the National Pool on behalf of growers who deliver to it through the Single Desk. AWBI's responsibility is to maximise net pool returns for growers who sell wheat into the National Pool, by securing, developing and maintaining export markets for wheat and minimising costs as far as practicable.

The Single Desk is established under the Wheat Marketing Act in which AWBI is appointed as the sole marketer of Australian export bulk wheat. The performance of AWBI is monitored by the Wheat Export Authority, a Commonwealth Government statutory authority. ...

The operation of the Single Desk was recently reviewed in the NCP Review of the Wheat Marketing Act, which reported in December 2000. The Government responded to this review in early 2001 by retaining the existing arrangements under which AWBI is responsible for the operation of the Single Desk. The Single Desk legislation is not scheduled to be reviewed under NCP guidelines until 2010, although there will be a review of the performance of AWBI in managing the Single Desk in 2004.

...

In operating the National Pool, AWBI utilises a number of services provided by AWB. The provision of these services is covered by a Service Agreement that details the nature of the services and sets out the manner in which AWB is to be compensated for providing them. ...[14]

66 ASIC submits that AWB's annual reports between 1999 and 2003 each emphasised the importance of retaining the Single Desk and maximising returns to the National Pool.[15] ASIC submits that AWB greatly valued the Single Desk and made great efforts to retain it, as evidenced by AWB's own business records.[16]

67 Iraq was at all relevant times a major buyer of Australian wheat. Prior to the Gulf War in 1990 and 1991, Iraq was a major buyer with annual purchases in excess of 1 million tonnes. In 1990, Iraq was Australia's largest wheat market and Iraq's preference was for Australian Hard wheat, with prices achieved at a premium to other markets and sold at freight delivered (C&F) basis.[17]

68 A number of internal information papers and Iraq briefs prepared during the OFFP revealed the importance of the Iraq trade to AWB.[18]

69 Iraq continued to be a primary overseas market for AWB during the OFFP, and AWB became Iraq's largest supplier of wheat, increasing its percentage of the market to 85 per cent.[19] The annual reports of AWB noted Iraq as a key market.[20]

70 For the period 1 October 1999 to 30 September 2000, AWB exported 2,516,776 tonnes of wheat to Iraq (Wheat Exports Australia: Statistics 1999-2000[21]). Over the period 1 October 2000 to 30 September 2001, Australia exported 2,500,893 tonnes of wheat to Iraq.[22]

71 In the 2003 Investor Fact Book, it was estimated in 2001 that the Middle East (including Egypt) contributed to 25 per cent of the AWB National Pool, and the fact book set out the role of the Single Desk and the details of the wheat supply process to Iraq.[23]

72 An AWB document setting out 'success stories' for inclusion in the 2002 to 2003 Pool Performance Report (covering the period 1 October 2002 to 30 September 2003) states that Iraq was 'one of AWB's strategically important markets.'[24]

73 When the Iraq market was threatened because of the impending Iraq war, AWB undertook a number of steps to try to protect this market and also undertook detailed calculations of what the Iraq market meant for the Pool. These matters are dealt with more fully in the section dealing with the alleged IGB fees wrongdoing.

74 UN Resolutions were, and are, not binding upon Australian nationals, including AWB, unless adopted and imposed by Australian law. The UN Resolutions typically called on member states to prevent certain activities by their nationals. Whether the member states did or did not pass laws to prevent such activities was up to the particular state. In the case of the relevant resolutions to this proceeding, the Australian Government did not pass any laws to give effect to the Resolutions save requiring AWB to obtain Australian Government approval to export goods to Iraq.

75 The substance of ASIC's case is that if AWB as an Australian national did not comply with what the UN had called on its member states to prevent, then AWB's reputation would be tarnished to the detriment of AWB and its financial welfare.

76 On 2 August 1990, Iraq invaded Kuwait. The UN immediately, by Resolution 660 of 1990,[25] condemned the Iraqi invasion of Kuwait and demanded that Iraq withdraw immediately and unconditionally all its forces to the positions in which they were located on 1 August 1990.

77 Shortly thereafter, on 6 August 1990, under Resolution 661 of 1990,[26] the Security Council passed Resolutions with the aim of bringing the invasion and occupation of Kuwait by Iraq to an end.

78 The Security Council noted that Iraq had failed to comply with Resolution 660 of 1990 and had usurped the authority of the legitimate government of Kuwait. The Security Council resolved as follows:

(a) The import into their territories of all commodities and products originating in Iraq or Kuwait exported therefrom after the date of the present resolution;

(b) Any activities by their nationals or in their territories which would promote or are calculated to promote the export or trans-shipment of any commodities or products from Iraq or Kuwait; and any dealings by their nationals or their flag vessels or in their territories in any commodities or products originating in Iraq or Kuwait and exported therefrom after the date of the present resolution, including in particular any transfer of funds to Iraq or Kuwait for the purposes of such activities or dealings;

(c) The sale or supply by their nationals or from their territories or using their flag vessels of any commodities or products, including weapons or any other military equipment, whether or not originating in their territories but not including supplies intended strictly for medical purposes, and, in humanitarian circumstances, foodstuffs, to any person or body in Iraq or Kuwait or to any person or body for the purposes of any business carried on in or operated from Iraq or Kuwait, and any activities by their nationals or in their territories which promote or are calculated to promote such sale or supply of such commodities or products;

1. Decides that all States shall not make available to the Government of Iraq, or to any commercial, industrial or public utility undertaking in Iraq or Kuwait, any funds or any other financial or economic resources and shall prevent their nationals and any persons within their territories from removing from their territories or otherwise making available to that Government or to any such undertaking any such funds or resources and from remitting any other funds to persons or bodies within Iraq or Kuwait, except payments exclusively for strictly medical or humanitarian purposes and, in humanitarian circumstances, foodstuffs.

79 The Security Council also called upon all states to act strictly in accordance with the provisions of the Resolution. The Security Council decided to establish a committee, and it decided to keep this item on its agenda, and to continue its efforts to put an early end to the invasion by Iraq. The committee was called the 661 Committee and was to undertake the following tasks:

To examine the reports on the progress of the implementation of the present resolution which would be submitted to the Secretary-General;

To seek from all States further information regarding the action taken by them concerning the effective implementation of the provisions laid down in the resolution.

80 Resolution 661 contains three separate requirements on member states:

(a) first, that member states not make available to the government of Iraq, or to any commercial, industrial or public utility undertaking in Iraq or Kuwait, any funds or any other financial or economic resources;

(b) second, that member states should prevent their nationals and any persons within their territories or otherwise making available to the government of Iraq, or to any commercial, industrial or public utility undertaking in Iraq or Kuwait, any such funds or other financial or economic resources; and

(c) third, that member states should prevent their nationals and any persons within their territories or otherwise from remitting any other funds to persons or bodies within Iraq or Kuwait, except payments exclusively for strictly medical or humanitarian purposes and, in humanitarian circumstances, foodstuffs.

81 The effect of the Resolution was, first, a blanket prohibition on the provision of any funds or financial or economic resources to the government of Iraq, or to any commercial, industrial or public utility undertaking in Iraq; and second, a prohibition on remittance of funds to any other person or body within Iraq, unless for exclusively medical or humanitarian purposes. ASIC says that this was presumably to ensure that private citizens and aid agencies were not prevented from receiving funds for food and medicine.

82 On 4 April 1995, the UN Security Council adopted Resolution 986 of 1995,[27] which set up the OFFP and procedures for export of foodstuffs to Iraq and payments from the UN escrow account.[28] The OFFP was subsequently extended by UN Security Council Resolutions 1111, 1143, 1153, 1210, 1242, 1275, 1280, 1281, 1302, 1330, 1352, 1360, 1382, 1409, 1443, 1447.[29]

83 Resolution 986 approved the sale of petroleum and petroleum products originating in Iraq, with payments to be made into the escrow account.[30] The funds in the escrow account were to be used as follows:[31]

1. ... the funds in the escrow account shall be used to meet the humanitarian needs of the Iraqi population and for the following other purposes, and [the Security Council] requests the Secretary-General to use the funds deposited in the escrow account for:

(a) To finance the export to Iraq, in accordance with the procedures of the Committee established by resolution 661 (1990), of medicine, health supplies, foodstuffs, and materials and supplies for essential civilian needs...

84 Taken together, Resolutions 661 and 986 established a regime, the sole purpose of which was to allow Iraqi oil to be sold, and the proceeds used to buy humanitarian supplies, without hard currency being made available to the government of Iraq, or any business or public undertaking in Iraq. A key component of the scheme was that the proceeds from the sale of Iraqi oil would be held by the UN in an escrow account and it was these moneys that would be used to buy humanitarian supplies to be made available to the government of Iraq.

85 By these UN Resolutions, the UN had called on member states to prevent their nationals from:

(a) transferring funds into Iraq or to any Iraqi government, public, industrial, or commercial entity;

(b) obtaining funds from the UN escrow account , unless it was for the supply of foodstuffs and health supplies under the OFFP to meet the humanitarian needs of the Iraqi population.

86 Regulation 13CA of the Customs (Prohibited Exports) Regulations 1958 (Customs Regulations) was enacted by the Australian Government to give effect to the UN Resolutions. Regulation 13CA provided:

(1) Except in accordance with a permission granted under subregulation (2), a person must not:

(a) export goods if the immediate or final destination of the goods is, or is intended to be, the Republic of Iraq; or

(b) export goods that originated (wholly or in part) in the Republic of Iraq.

(2) The Minister of State for Foreign Affairs and Trade (in this regulation called the Minister) may grant a permission for the exportation of specified goods, or goods of a specified kind, where the exportation without the permission would contravene subregulation (1), if the Minister is satisfied that permitting the exportation will not infringe the international obligations of Australia.

(3) A permission granted under subregulation (2) may specify, in relation to the exportation of goods that it permits:

(a) conditions or requirements, including times for compliance, to which the exportation is subject; and

(b) the quantity of goods that may be exported; and

(c) the circumstances in which goods may be exported.

(4) The Minister may revoke or modify a permission granted under subregulation (2) if the Minister is satisfied on reasonable grounds that:

(a) a condition or requirement of the permission has not been complied with; or

(b) permitting, or continuing to permit, the exportation of goods in accordance with the permission would infringe the international obligations of Australia.

(5) The powers of the Minister under this regulation may be exercised by a person in writing by the Minister to exercise those powers.

87 The approval process for Australian companies wishing to supply goods under the OFFP involved the following UN approval and approval by the Australian Government through the Department of Foreign Affairs and Trading (DFAT).[32]

(a) Australian suppliers would complete a pro-forma application form entitled 'Notification or Request to Ship Goods to Iraq', and forward this form, together with a copy of the relevant contract, to the Middle East and Africa Branch (MAB) within DFAT.

(b) MAB staff would check that the application form had been filled in properly and was accompanied by a copy of the relevant contract. Apart from checking that the goods to be supplied under the contract were not obviously outside the OFFP, MAB staff did not examine the detailed terms of the contract, as responsibility for contract approval lay with the UN itself.

(c) This documentation was then forwarded to Australia's UN Mission in New York (UN Mission) for submission to the relevant UN body for assessment and approval.

(d) The UN Mission would receive a fax from DFAT Canberra comprising the 'Notification or Request to Ship Goods to Iraq' and a copy of the relevant contract. The UN Mission then checked that all areas of the pro-forma application had been completed in full and the application would also be briefly checked to ensure that the goods to be exported were on the UN list of approved goods under the OFFP. The 'Notification or Request to Ship Goods to Iraq' would then be stamped by the UN Mission and a UN Mission coversheet attached to the documents, and they were then sent to the Office of Iraq Programme (OIP) to be examined and processed.

(e) Customs experts at the OIP reviewed the contracts submitted under the OFFP for accuracy, price, value and conformity with the Distribution Plan and UN Resolutions and guidelines of the 661 Committee. The review conducted by customs experts included an assessment that the goods were included on the distribution plan for the relevant phase, that the quantities were within the distribution plan limits specified within the plan and querying the price of goods where it appeared unreasonable. At the conclusion of the review process the customs expert prepared a report summarising the detail of the contract application together with any causes for concern which the 661 Committee might wish to consider. Contracts for foodstuffs were generally standard form contracts and given priority due to their humanitarian importance.

(f) Following OIP processing, if the 661 Committee (or, under an expedited procedure designed for humanitarian items that was introduced in 1999, the OIP) approved the application, a written authority to export was issued by the UN and sent to the relevant country's UN Mission. The written authority had attached to it a copy of a report prepared by the OIP for the 661 Committee concerning the OIP's examination and assessment of the application.

(g) Once the Australian UN Mission received a written authority to export from the OIP, it faxed a copy to DFAT Canberra for forwarding to the exporter and, if it was urgent, also faxed a copy directly to the exporter.[33]

89 In the case of each contract there were two versions. One the AWB version, and a longer one described as the IGB version. The procedure laid down by the 661 Committee required the AWB contract to be provided to the Committee by the Australian government. This function was carried out by the Australian Mission to the UN in New York where the 661 Committee was based.

90 AWB completed an application with the contract annexed, which was delivered to DFAT for the Australian Mission to lodge with the 661 Committee.

91 The Committee had an executive that vetted the applications. If in order, and many were not, they were given to the Committee in formal meeting to approve or decline.

(a) Once the written UN authority to export had been issued by the OIP, AWB would then request DFAT Canberra to issue a 'permission to export' under the Customs Regulations in respect of each shipment.[34]

(b) However, with effect from July 1999, during Phase VI of the OFFP, the IGB proposed a significant change to the terms on which it would purchase wheat (see 'The commencement of the IGB fees wrongdoing' below).

93 In addition to UN sanctions, viva voce evidence was given by former AWB employees of US sanctions involving Iraq. The exact terms of the sanctions were not tendered. Hogan said that the US sanctions prevented the use of the US banking system to transfer moneys to Iraq. The sanctions may have gone beyond this but, as I said, no specific evidence was tendered about them.

94 It is the US sanctions that some AWB employees said raised difficulties with making payments of the inland transportation fees to Iraq. ASIC, on the other hand, did not tender any evidence about the US sanctions and contended that it was the UN sanctions that raised difficulties with AWB paying the inland transportation fees to Iraq.

95 For the reasons discussed below, I find that it was probable that there was a perception among some AWB employees, particularly in 1999 when AWB tendered on the new trade terms, that the difficulties AWB encountered in paying the fees were in fact US sanctions rather than UN sanctions. Some of the emails tendered by ASIC, discussed in detail below, demonstrate that some difficulties with payment were acknowledged by employees of AWB. On ASIC's case, it was known within AWB that a method of payment to Iraq needed to be found to circumvent UN sanctions, which prevented the payment of US dollars into Iraq. On this case, the fact that AWB employees acknowledged difficulties with payments into Iraq would demonstrate that there was knowledge of impropriety and a potential breach of UN sanctions. The evidence was that US sanctions presented practical difficulties in transferring the transportation fees to Iraq as according to Hogan if there was any mention of Iraq in a transfer of money that involved the USA transfer system the transfer would be frozen.

96 As discussed below, the prevailing view in AWB was that the UN had approved the payment of the inland transportation fees. The evidence on the US sanctions suggests an explanation for the difficulties that some in AWB nevertheless acknowledged they faced in making those approved payments. Although there was no evidence and no pleadings relating to the US sanctions, I consider that this evidence becomes relevant in light of ASIC's submissions and evidence concerning what was widely known within AWB.

97 ASIC did not tender any evidence to rebut the evidence given by the AWB employees that US sanctions presented difficulties in AWB transferring funds to Iraq.

98 From mid-1996, information concerning the UN Resolutions, including their effect and procedures, was being circulated from AWB's New York offices to AWB's offices in Melbourne. Geary was the main conduit of this information to AWB as he was in New York at the time.

99 In May 1996, a Memorandum of Understanding (MOU) between the UN and Iraq was reached in relation to the OFFP.[35] The document recorded Iraq's undertaking in respect of a distribution plan and following procedures in accordance with the UN escrow account.

100 The distribution plan[36] itself set out the procedures and obligations on the UN and Iraq for distributing humanitarian supplies within Iraq, and amounts were specifically allocated for the purchase and distribution of food. An amount of US$207 million was allocated 'to ensure the procurement of the current needs of the sector' in relation to the transport of food, including provision for 1000 trucks to transport grain.[37]

101 The distribution plan underwent various revisions with the different phases of the OFFP.[38] Importantly for present purposes nothing in the MOU, or in any version of the distribution plan, impacted on the prohibitions in Resolution 661.

102 On 3 May 1996, Geary forwarded a memo from AWB employee R J Storey (Storey) entitled 'IRAQ-UN Sanctions' to a number of AWB employees (including Officer) regarding a meeting held that day between Storey, Tony Mott (Mott), Richard Rowe (Rowe) (Deputy Permanent Representative of the Australian Mission to the UN in New York) and Anastasia Carayanides (Carayanides) (First Secretary of the Australian Mission to the UN in New York) to discuss the progress of the Resolution 986 negotiations.

Australian officials are quite optimistic for an outcome ... It seems Iraq is keen to do a deal and all parties are more optimistic than ever before.

The sticking point last time was UN (especially the U.S. and UK) surveillance of food distribution in both the North and South of Iraq. If agreement can be reached on this issue and the audit requirements for the escrow account, then there will be an oil for food/medicine deal done. ...

In regard to the apparent increase in bureaucratic involvement from Canberra with our applications, there is no pressure from the UN quarter except that the U.S and UK hold very strong on their position regarding the Sanctions rules. For example, an application stipulating payment by a 'Letter of Credit with up to five-year terms' (a la BHP) would be flatly blocked by the U.S. and UK. An application, however, which stated payment to be by 'Letter of Credit' with no details as to terms, would probably be approved.

We were advised that other nations clearly provide limited information in their applications to avoid the potential embarrassment of an application being rejected. There is political risk, of course, that should one go down the minimal information route and being subsequently found out, of being branded a Sanction buster.

The Australian Government will obviously not sanction such an approach.

...

1. Humanitarian aid includes medical supplies, food products, agricultural equipment to produce food (including pesticides and the like).

104 On 9 and 10 July 1996, Flugge and Michael Long (Long), with Emons and Greg Harvey (Harvey), travelled to Iraq. As reported to the Australian government,[40] the main purpose of this visit was to re-establish high level AWB contacts with the Iraqi government and to attempt to secure sales of Australian wheat, following the agreement by the UN to allow sales of wheat to Iraq under Resolution 986.

105 As a result of these meetings, AWB and the IGB reached an in-principle agreement for the supply of a minimum of 100,000 tonnes per month of Australian wheat to be shipped to Umm Qasr port in Iraq during the first six months of the operation of the OFFP, with further supply to occur if Resolution 986 was extended.

106 During this visit, Flugge met with the Iraqi Minister for Trade, during which meeting, the Minister expressed concern that AWB may lose the Single Desk. Flugge quickly dispelled these concerns, and the Minister replied that Iraq was very pleased, as this made their procurement planning more certain.[41]

107 On 17 March 1997, Geary sent an email entitled 'UN 90-day review of sec.986 operation' to various AWB employees, detailing the operation of Resolution 986 of 1995 and the impact on AWB. It referred to 'changes made to the Sanction's Committee approval procedures which potentially could have ramifications for the AWB ...'[42]

108 On 24 March 1997, Geary sent an email entitled 'IRAQ 986 PROCEDURES' to a number of AWB employees, including Emons, Hogan and Officer, advising that he had attended a briefing arranged by the UN Secretariat 'regarding UN procedures under 986 "Oil for Food".'[43] Geary stated that the UN had advised on application procedures, including (amongst other things) the requirement that:[44]

1 Make sure all pages of a contract are submitted.

....

1. Contractual terms (i.e. C&F or CIF to be clearly spelled out etc., etc., etc.).

....

Whilst the Sanctions Committee will prescreen applications before monies are available in the Escrow Account, there can be no que jumping unless the UN decides the commodity is urgently required as earlier advised.

Regards

Peter Geary

109 At around the same time, Geary also faxed to Hogan and another senior AWB employee in the contracts area, Mr Rex Lister (Lister), a set of papers that were handed out at the UN briefing. The procedures also referred to matters the UN expected to find in a contract, such as whether it was CIF or CIP or some other contract and also what transport conditions applied, such as air or road or rail.[45]

110 On 17 April 1997, Geary received a fax sent by Carayanides of the Australian Mission to the UN which attached:[46]

(a) a chronology of the implementation of Resolution 986;

(b) an explanatory note regarding the Oil-for-Food Programme Distribution Plan, which materially stated that the distribution of foodstuffs under the Oil-for Food Programme would be undertaken by the Iraqi Ministry of Trade through the existing rationing system;

(c) a copy of the text of Resolution 986; and

(d) a copy of the procedures to be followed by the 661 Committee in implementing the Oil-for-Food Programme, including the procedures for the payment of humanitarian food contracts from the UN escrow account , which procedures:

(i) did not contain any provision permitting payment to be made from the UN escrow account on account of funds paid to the Government of Iraq or its instrumentalities; and

(ii) stipulated that any payments in favour of the IGB arising out of any commercial dispute should be paid into the UN escrow account.

111 Consistent with the above, Hogan recalls that he received a lot of information regarding the OFFP - including UN documents, MOUs and distributions plans - initially from the New York office of AWB.[47]

112 Emons recalls a lot of broad-ranging discussion within AWB at this time about the methodology and the requirements of the UN Resolutions/legislation with the finance department, the Pool and the legal department.[48]

113 On 7 November 1997, Hogan prepared an information paper on Iraq which described the effect of Resolution 986. He noted that:

(a) AWB had negotiated eight contracts with Iraq since the OFFP started and sold 1.45 million tonnes of wheat;

(b) there was a longstanding trade relationship with Iraq;

(c) Iraq was an 'excellent premium market' for AWB; and

(d) there were problems with the market given the non-commercial nature of the UN, the Sanctions Committee was both slow and cumbersome - the two main costs were the procedure and the difference between Bill of Lading weights and discharge weights, and that AWB was investigating discharge facilities at Umm Qasar.[49]

114 On 10 November 1997, Flugge wrote a letter to the Iraqi Minister for Trade[50] which referred to:

(a) AWB's commitment to continuing its supply of wheat to Iraq despite all the difficulties experienced by AWB and the IGB in operating 'under United Nations requirements;'

(b) the considerable delays in the receipt by AWB of payment from the UN caused by the payment arrangement imposed on AWB and the IGB by the UN; and

(c) AWB's recognition that the 'United Nations requirements create special circumstances for the people of Iraq.'

115 On 2 April 1998, Flugge wrote to the Honourable Tim Fischer, Minister for Trade, outlining AWB's ongoing concerns as to the future of Australian wheat sales to Iraq, and to seek Mr Fischer's assistance with a visit to Baghdad the following month. In this letter, Flugge advised that he will be in Baghdad the following month to meet with the IGB and Minister Mohamed Medi Saleh (Minister Saleh), and expected this to be 'a difficult and problematic series of meetings for the AWB.' Flugge noted that the visit would be 'critical in trying to ease some of the tensions in our relationship not only to protect existing contracts and future Australian wheat sales, but also to ensure that we have a close working relationship with Iraq in order to best ensure the repayment of outstanding debt once sanctions are lifted' and requested that the Minister consider providing a message to pass to Minister Saleh indicating the importance of the wheat trade between Australia and Iraq.[51]

116 For each of the first five phases of the OFFP, the usual basis on which AWB (and the Australian Wheat Board before it) sold wheat to the IGB was 'CIF free out Umm Qasr' or 'C and F free out Umm Qasr'.

117 Between 1995 and June 1999, AWB and IGB executed:

(a) 'Standard Terms and Conditions' which stated that payment was to be on CIF terms;[52]

(b) a number of contracts for the sale of bulk wheat on C and F terms[53] and on CIF terms.[54]

118 Under the CIF element of those terms, the price per tonne for which the wheat was sold included:

(ii) the freight, or the cost of the carriage of the wheat from Australia to Umm Qasr (the ocean carriage); and

(iii) the cost of insuring the shipment against the risk of loss of or damage to the wheat during its carriage to Iraq (marine cargo insurance).[55]

119 As the seller of the wheat on such terms, AWB was required to arrange, and in the first instance pay for, both the cost of the ocean carriage and the cost of the marine cargo insurance for each shipment. It would in turn recover those costs from the proceeds of the sale of the wheat.

120 In determining the price at which it was prepared to sell its wheat, AWB took into account the anticipated costs of the ocean carriage and marine insurance that would need to be recouped from the proceeds, as well as the FOB price it wished to obtain.

121 During this period, AWB sold wheat to the IGB that did not include in the sale price any allowance for the cost of the discharge of the wheat from the vessel on its arrival at Umm Qasr. That was because the IGB had full responsibility for operation of the port facilities at Umm Qasr, as well as for the wheat's accumulation, storage and distribution to flour mills.

122 Under the terms of the IGB's contracts with AWB, the obligation to effect or arrange for the discharge of the wheat from the vessel at Umm Qasr rested with the purchaser, the IGB. The costs of discharge, along with the usual port dues, were also to be borne by the buyer (the IGB).[56] AWB therefore had no obligation to discharge the wheat shipped to Iraq or to arrange for its discharge. Nor did it have any obligation to pay for the cost of the wheat's discharge or the costs of distributing the wheat within Iraq. Under the terms of its contracts with the IGB, AWB had no obligation to make any payments in or to Iraq.

123 Both Flugge and Geary held longstanding positions with AWB.

124 In 1984 Flugge was appointed to the Board of AWB. In 1991 he was appointed Deputy Chairman of AWB, and on or about 28 March 1995 he was appointed as Chairman of AWB, which appointment was referred to and confirmed in a letter to Flugge dated 21 August 1995.[57]

125 Flugge was Chairman of AWB from 1995 until March 2002. ASIC alleges that while he was notionally a non-executive chairman, his experience, work and hands-on approach to international markets such as Iraq (as set out below) demonstrate that on occasions he assumed executive duties. ASIC contends that the true nature of Flugge's role is a key consideration in the Court's determination of his knowledge and the content of his duties in the relevant period.

126 On or about 30 July 1985 Geary was offered a position with AWB as a Registration/Payments clerk.[58]

127 On or about 21 June 1990, Geary received a letter confirming his appointment as Assistant Manager based in London, and this letter includes an acceptance of the appointment, apparently signed by Geary, dated 28 June 1990.[59]

128 On or about 19 May 1992, Geary received a letter confirming his appointment in Middle East Marketing, and this letter includes an acceptance of the appointment, apparently signed by Geary.[60]

129 On 10 August 1995, Geary's appointment as manager of AWB's New York office was detailed in a letter from AWB. The extension of the appointment was confirmed in a facsimile from Officer to Geary dated 1 August 1997.[61] Geary's role in that position was 'to represent AWB political interests in the US and to manage US operations including grain marketing.' His key working relationships included the US government and agricultural industry associations and he was responsible for providing analysis on US and Canadian agricultural policy. While in New York, Geary was at the forefront of AWB's dealing with the UN regarding the introduction of the OFFP, and fed information back to the IS&M team in Melbourne regarding the effect of UN Resolutions on Iraq and the operation of the OFFP.

130 In around September 1998, Geary returned to Australia from New York to replace Phil Pyle as Pool Manager. In 1999, Geary was still working in the Pool. On 2 June 1999, Geary entered into a new 'Employee Service Agreement' witnessed by Ted Laskie (Laskie).[62] Laskie was Geary's supervisor at this time.

131 In this role, Geary reported to the general manager of AWBI and his responsibilities included managing the Single Desk on a day to day basis and the wheat export program, as well as ensuring that policies and procedures were in place to protect the integrity of the Single Desk. He was also required to exercise the powers and carry out the duties appropriate to the appointment and to use his best endeavours to further the prosperity and enhance the reputation of the group.

132 From June 2000 until 2006, Geary was a member of an executive committee known as the Small Executive Group, the Small Executive Management Group and the Executive Leadership Group (ELG), comprising the Managing director and senior executives of AWB. The ELG set out the strategy for the business of AWB, executing against strategy, reviewing activities and keeping abreast of strategy. The following documents show Geary's continuous membership of the ELG (in its various guises): Small Executive Management Group minutes 6 June 2000[63] - Geary in attendance; Full Executive Management Group minutes 20 June 2000[64] - Geary attended; ELG action list 19 March 2002[65] - Geary responsible for items; ELG Agenda 30 September 2003[66] - Geary a member.

133 Geary occupied a number of senior positions within AWB and was Group General Manager of Trading from 2001 until 2006. In that role, from February 2002, he took over direct responsibility for IS&M, including trade with Iraq.

The introduction of the trucking fee or cost of discharge

134 We have now arrived at the beginning of the alleged inland transportation fee wrong doing.

135 The following part of the judgment describing the documentary evidence is essentially taken from ASIC's written closing submissions which set out in great detail the correspondence and events relied on in chronological order.[67] ASIC's written closing submissions were in two parts. In substance, the first part dealt with the alleged payment of the inland transportation fees and evidence and against Flugge and Geary. In substance, the second part dealt with the Iron Filings claim and the payment of the Tigris debt which relate solely to Geary.

136 I have relied heavily on ASIC's written closing submission seeking to identify ASIC's submissions on findings I should make as well as adopting ASIC's summary of the relevant documents relied on by ASIC. In many cases, I do not comment on ASIC's submissions on conclusions I should draw. My failure to do so does not necessarily mean that I accept the submission. In many instances the evidence and comment is not related to the case pleaded against Flugge or Geary. The relevance to the case against Flugge and Geary is limited to the case expressly pleaded against each of them which I detail below. ASIC also submit that certain matters were 'well known' or 'widely known' within AWB and thus I should be more readily able to draw the inference that Flugge and Geary knew the relevant matters which are specifically pleaded against each of them. ASIC rely on the documents and chronology of events that I set out in support of its case that certain facts were 'well known' or 'widely known' within AWB.

137 I now turn to the chronology of events relied on by ASIC.

138 By a tender dated 16 June 1999, in accordance with the memorandum of understanding between Iraq and the UN and the resolution implementing Phase VI of the OFFP, the IGB sent to AWB an invitation to tender for the supply to the IGB of 200,000 tonnes of wheat. This tender sought to introduce a different term to those previously agreed that would have AWB pay US dollars to Iraq as a term of the contract for the sale of wheat by AWB to the IGB.

139 The tender document included a term stating: 'CIF free on truck to silo at all Governorate. Cost of discharge at Umm Qasr and land transport will be USD12 per metric tonne. To be paid to the Land Transport Co. For more details contact Iraqi Maritin in Basrah [sic].'[68]

140 This was the first time that the IGB had requested such a payment be made by AWB for inland transport. The IGB apparently sought to have AWB pay Iraq a fee of US$12.00 per tonne, described as being for the cost of the discharge of the wheat from the vessel at the port of Umm Qasr and the cost of transporting the wheat by road from the port of Umm Qasr to the various Governates throughout Iraq.

141 As will be discussed below, AWB agreed to pay the fee. The payment of the fee is alleged by ASIC to be conduct that the Australian Government was called on to prevent by the UN resolutions. As discussed above, the Australian Government did not pass any laws prohibiting Australians from engaging in the conduct that the UN had called on Australia to prevent, save for passing the regulation referred to earlier whereby Australians were prohibited from exporting wheat to Iraq without an export approval.

142 There are a number of important early emails within AWB as to the new pricing terms contained in the 1999 Iraqi tender and what AWB should do in response to this term.

143 Geary was the recipient of many of these early emails in which the IGB fees were being discussed within AWB and the methodology to pay the fees formulated and implemented.

144 On 16 June 1999, Hogan, from Cairo, circulated an email addressed to Geary (and others including Watson), seeking information in preparation for Hogan and Emons' imminent visit to Baghdad.[69] The information he sought related to UN restrictions on trade with Iraq. He wrote:

Hence Mark [Emons] requires - copy of contract, copy of their contract, copy of MOU (Copy of MOU is in a folder - I know that much) and copy of UN contract conditions - not sure how much I stipulated on UN docs regarding the contract conditions - but if you find anything relevant regarding please fax through.

145 The email also stated that Zuhair Daoud (Zuhair), the Director General of the IGB wanted to discuss some contract terms and conditions in person. There is also a note directed specifically to Geary and Ms Sarah Scales (Scales), who worked in the Pool and was pricing manager of AWBI, informing under the topic of 'price levels and tonnages for September to February' that, 'although Zuhair did not want to discuss pricing - goog [sic] to know.'[70]

146 On 17 June 1999, Geary replied to Hogan's email of 16 June 1999 referring to details of the IGB Wheat Tender which had been received that morning.[71] Under the heading '10. Price', the tender referred to payment of:

CIF Free on Truck to Silo at all Governorate. Cost of Discharge at UMM QUSER and Land Transport will be U.S.D. 12 per metric ton. To be paid to the Land Transport Co. For more Details contact Iraqi Maritin in Basrah. [sic]

There are some things in the tender doc we cannot offer against, Darryl will go through these with you.

147 The wheat tender also contained terms, the material effect of which were that each contract required UN approval and the payments to AWB would be made to the UN escrow account upon receipt from the 661 Committee.[72]

148 On 17 June 1999, in an email to another IS&M employee, Darryl Borlase (Borlase) and copied to Emons and Hogan and others,[73] Graham Owen (Owen) (AWB's National Trade Finance Manager) commented on the IGB's wheat tender, including the proposed new price terms (item 10):

Our price has to include Land transport costs of USD12 per tonne. Why??? and how do we pay Land Transport company when all Iraqi funds frozen????????.

149 The problem that Owen referred to may also have been the separate US sanctions imposed on the transfer of funds to Iraq. As discussed below at paragraph 1289 and following, the US sanctions were identified by Hogan and Emons as the primary reason that AWB could not transfer US dollars to the Iraqi body nominated by the IGB, rather that UN sanctions.

150 On 21 June 1999, Hogan and Emons visited Iraq to discuss the 1999 Iraqi tender. Emons took handwritten notes of a meeting with Zuhair and Hogan in Iraq in the IGB office.

151 One of his entries is 'Iraq meeting 21 June 1999.' The reference to 'Distribution plan, contract terms, through banking system, subject to UN approval. Check New York' was in reference to the distribution plan that was going to be subject to UN approval. AWB would have to check with its New York office. All the parties present spoke about these matters.[74] The particular provision 'CIF free on truck to silo at all governorates' in the 1999 Iraqi tender[75] was an issue. It was discussed with Zuhair.[76]

152 AWB objected to the payment of the inland transport fee during this first meeting in June 1999 and on subsequent trips also. Zuhair's response at any time there was an objection was that this was a decree by the president and it was going to be a standard contract term for all suppliers into Iraq.[77]

153 On 24 June 1999, following his return from Baghdad to Cairo, Hogan sent an email to Emons, copied to Geary and others, reporting on the outcome of the meeting with the IGB. Hogan included in this email a report on the new terms for the price at which wheat was to be supplied, which included the following:[78]

1. FREE IN TRUCK

IGB have requested that the offers are submitted CIF, FREE IN TRUCK, IRAQ. The cost for this is USD 12.00 per tonne which the supplier adds to their offer.

Hence this part is not an issue.

The problem which still needs to be resolved is the payment mechanism as all Iraq accounts have been frozen. IGB have stated that we will be required to pay the Maritime Agents, and one possible way would be to pay this to an Iraq bank in Amman.

IGB will provide details of the banks which we can pay this through.

MICHAEL - as mentioned to you, there may be a way to pay this through the vessel owners. Mark will discuss this with you, so you have to think about the possibilities.

Reason for wanting suppliers to pay this amount is due to the excessive amount of Iraqi Dinars placed into the market by the Ministry of Finance for every Phase (Phase V = 23 billion Dinars, which has an impact on their currency rates).

154 ASIC submits that the need to find a means to pay the fee to Iraq, other than directly, necessarily involved absence of UN approval of such payments.

155 Emons explained in his evidence that, as well as UN sanctions, the United States had placed restrictions on currency transfers to Iraq. Emons says that the US restrictions were the source of AWB's concerns about transferring moneys to Iraq or its entities.

156 A possible solution was to pay the US dollars into an account in an Iraqi bank situated in Jordan.

157 According to Hogan, discretion was required in relation to implementing the inland transportation fee of US$12.00:[79]

The USD12.00 will be added onto CIF price - so no skin off our nose - however we need to find a way to implement the payments as Iraq a/c's frozen. Discretion is required here.

158 As Hogan explained in his evidence, the problem with making a payment to an entity in Iraq by AWB was that payment could not be made using US banks. AWB would receive US dollars from the escrow account in New York. On the other hand, the existence of UN sanctions meant that payments of US dollars to Iraq or its instrumentalities should not be made, rather that they could not be made.

159 Initially, the first payment of the fee was made into the bank account of a transport company that had contacted AWB regarding inland transport, Alia for Transportation and General Trade (Alia) in Jordan, at the direction of Zuhair. Subsequently payments were made via shipowners to parties nominated by Iraq, then through Ronly Holdings Limited (Ronly), and finally via Alia to the Iraqi government.

160 ASIC submits that Hogan's email made clear two things:[80]

(a) the 'Maritime Agents' to whom the US$12.00 fee was to be paid was an Iraqi entity; and

(b) the purpose of the fee (as reported to Hogan) was to reduce the impact on the Iraqi Ministry of Finance of having to print more dinars.

161 ASIC submits that conspicuous by its absence is any suggestion that the payments were necessary to provide for transportation of wheat which, given the separate $207 million provision made for transport under the Phase VI Distribution Plan, was scarcely surprising.[81]

162 ASIC also submits that the email made clear that Emons and Hogan had discussed with Zuhair the problem of making payments of US dollars to an Iraqi entity in Iraq. A possible solution was to pay the US dollars into an account in an Iraqi bank situated in Jordan. Irrespective of into which account the sums were to be paid, or where that account may have been situated, ASIC says that it is apparent that the payment was to be, directly or indirectly, to an Iraqi entity. ASIC says that was prohibited by Resolution 661.

163 ASIC submits that Hogan's email did not discuss:

(a) which company was to perform the discharge or physical transportation of the wheat within Iraq;

(b) the need to obtain quotations from companies either within or outside Iraq for the discharge or transportation of grain within Iraq;

(c) the need to enter into a contract with a company, wherever situated, to perform the discharge or transportation that AWB was, by the contract, undertaking to perform.

164 ASIC says that the only discussion was how to pay the funds to Iraq, possibly to an Iraqi bank in Amman, Jordan. ASIC submits that the reason for this is that, from the outset of the introduction of the inland transportation fee, it was understood by AWB that, notwithstanding the terms of the 1999 Iraqi tender and of the contracts AWB subsequently concluded with the IGB, AWB had no obligation to arrange or effect the discharge or transportation of the wheat within Iraq. Its obligation was to pay a fee to an Iraqi entity. The difficulty was how to achieve that when payments to an Iraqi entity were prohibited by UN sanctions.

165 ASIC submits that it might be asserted that the AWB employees involved believed in 1999 that contracts would require approval from the UN, and that the fee to be paid was a fee required to address the cost of transportation in Iraq. ASIC submits that it is impossible to understand, if that was the case, why there was difficulty in paying the fee directly to Iraq if the UN approved of the payment. As mentioned above, Hogan explained that the difficulty was the existence of US sanctions on transfers of hard currency to Iraq. Hogan said that even though he believed that the UN was approving the payments to Iraq, his view of the UN was such that it wouldn't surprise [him] that the UN would implement something like that and not understand the mechanics that it can't physically be done.'[82]

166 Hogan concluded his 24 June 1999 email with a 'To do' list. The last item on the list was directed to the Manager of AWB Chartering, Michael Watson. It read:[83]

4. Watson - payment method of USD 12.00 Free in Truck (via owners).

ASIC submits that the reference to 'owners' was a reference to the owners of the ships used to carry the wheat from Australia to Iraq.[84]

167 ASIC submits that it was therefore plain to AWB from the outset that the purpose of the fee was for the government of Iraq to obtain hard currency and thereby mitigate the effect of economic sanctions.

168 Thus, ASIC says that AWB had either to agree to the new conditions of tender or risk losing its Iraq market. According to Hogan, AWB at first rejected the amended terms and complained to the IGB but was told that it was a presidential decree and that every supplier supplying Iraq would be operating under the same terms and conditions.[85]

169 ASIC submits that but for that initial reluctance, there is no evidence that suggests that AWB ever contemplated the possibility of losing the Iraq trade. Indeed, ASIC says that AWB was determined to do what it had to in order to safeguard that trade. ASIC says that finding a method of satisfying the conditions of tender was required. This was reflected in conversations within AWB. In particular, ASIC submits that Officer spoke of the new contract terms with Flugge, and Flugge's response reflected an attitude of 'do whatever you have to in order to secure the trade with Iraq:'[86]

Q: What did you say to the chairman about the payment of the $12 a metric tonne?

A: Well, as I recall, to the best of my ability, this was an imposition that was placed upon us by the buyer, the Iraqi Grain Board. There was no option. There was no choice. It was $12 or not, or if you don't make that payment then, of course, there would be no business. That was made very clear. It was in that context that I discussed it with the chairman, and that was the nature of those discussions.

170 Thus, from June 1999, ASIC submits that AWB knew:

(a) the purpose of the newly imposed inland transportation fee was to extract US dollars from the escrow account to be paid back to Iraq;

(b) AWB did not have to arrange or effect transportation of the wheat within Iraq. The IGB would attend to that, as it had before, but now using in whole or in part the US dollars so provided to it; and

(c) no question existed of AWB having to enter into a trucking contract - that is, an agreement with a transportation company to transport the wheat for AWB or on its behalf within Iraq.

171 ASIC submits that within AWB it was widely understood that the money for the inland transportation fees was going to the Iraqis.

172 According to Hogan, AWB at first rejected the amended terms and complained to the IGB but was told that it was a presidential decree and that every supplier supplying Iraq would be operating under the same terms and conditions.[87]

173 As discussed below at paragraph 1289 and following, some within AWB perceived the main problem facing AWB was the difficulty in transferring the funds to Iraq in view of the US sanctions. ASIC contends that the problem was how to make payments to Iraq in light of the existing UN sanctions. I am not satisfied that this was the case. As discussed below, Hogan said the problem was the US sanctions.

174 Emons says that he discussed this problem of how to pay the inland transportation fee to the Iraqis with others at AWB, including Paul Ingleby (Ingleby), the Chief Financial Officer, Watson, Owen and Officer.[88] Although for the reasons discussed below, I have said I am not prepared to accept Emons' evidence unless corroborated by other evidence, I accept that it is inherently likely that the problem of paying the fee was discussed with other sales and marketing employees of AWB.

175 Tim Snowball (Snowball) (from AWB's New York office) also responded to Hogan's email of 24 June 1999. This was in an email dated 25 June 1999,[89] in which he sought advice in relation to the proposed changes to the contract conditions:

Can you advise what proposed changes to contract terms and conditions are to be agreed between IGC and UN, and what will be agreed between AWB and IGC only.

176 According to ASIC, Snowball contemplated, as early as June 1999, arrangements with Iraq that were not to be disclosed to the UN.

177 According to the Storey memo earlier circulated by Geary in May 1996,[90] this minimal information approach being proposed by Snowball in June 1999 was inherently risky because the Australian government would not sanction such an approach and AWB could later be branded a sanctions buster. ASIC says that AWB, through Geary and others, knew this and did nothing to stop the IGB fees being paid or adopting the minimal information approach.

The Australian mission to the UN spoke to the UN today. The UN said that they were looking at some proposed changes to contract terms and conditions, but we will not find out much more until it is finalised.

179 On 25 June 1999, Geary (and others including Emons, Officer and Watson) received an email from Hogan entitled 'Re: IRAQ'[91] in response to Snowball's email. The email passed on the proposed changes to the terms and conditions and comments Hogan had received from Owen on 17 June 1999, annotated with his own comments. The email reproduced Owen's comment from his email of 17 June 1999 (referred to at paragraph [[92]](#_Ref4687765 > Freight

reverting on this regarding payment of USD 12.00 I will discuss this with Mark [Emons] upon his return to find a suitable method.

My concern re CIF to trucks is that we are also now insuring cargo once unloaded from the vessel - i.e. truck - tfore our liability does not cease upon passing the ship's rail.

This leads to next problem, regarding shortage as I anticipate loss will take place from ship to truck.

Above for reflection, not insurmountable but we need to ensure that we fully aware and put into place suitable procedure etc.

187 On 25 June 1999, Geary received an email from Snowball, the material effect of which was that Snowball asked which proposed changes to the contract terms and conditions would be agreed between the IGB and the UN, and which contract terms and conditions would be agreed between AWB and the IGB only.[97]

188 On 28 June 1999, AWB sent a telex to the IGB setting out an offer to supply Iraq with 600,000 metric tonne (mt) of wheat on terms 'Free into Truck to all silos within all Governates of Iraq ... the discharge cost will be a maximum of USD12.00 and shall be paid by seller's to the nominated maritime agents in Iraq.'[98] This was the first time AWB offered to pay inland transportation fees under the OFFP. The tender was sent by Emons to Zuhair at the IGB.

189 On Monday 5 July 1999, Zuhair rejected the tender and counter offered at US$155.00 for 700,000 tonnes of wheat at 'CIF F.O.T. to silo.'[99]

190 On 6 July 1999, AWB submitted to IGB a revised offer of 700,000 at US$167.00 'CIF, Free in Truck' with the same discharge cost of US$12.00 payable to nominated maritime agents in Iraq.

191 On 9 July 1999, AWB submitted a fresh offer of US$162.00 per tonne 'CIF, Free in Truck'.[100]

192 On Tuesday 13 July 1999, Emons faxed Zuhair, referring to another counter offer of USD155 by the IGB, informing Zuhair that discussions had taken place at the highest level with Flugge, who confirmed the importance of the longstanding relationship between both parties and noting that he was authorised to offer USD158 per metric tonne, CIF Umm Qasr 'delivered onto truck at a cost of USD12.' Emons said that 'this clause remains subject to UN approval of the Iraq distribution plan.'[101]

193 On the following day, on Wednesday 14 July 1999, the contracts were agreed at USD155 per tonne (A4653, A4654 and A4655). Under price, each contract provided 'The CIF, Free in Truck price per tonne of 1000 kilos is United States of America dollars as follows: US$155.00 per tonne.'[102]

194 Each contract provided that 'The cargo will be discharged Free into Truck to all silos within all Governates of Iraq ... The discharge cost will be a maximum of USD12.00 and will be paid by Sellers to the nominated Maritime Agents in Iraq. This clause is subject to UN approval of the Iraq distribution plan.'

195 Two written contracts were prepared and signed for each of the three contracts comprising this sale. The first was a single-page contract prepared by AWB (short-form contract).[103] The second was a contract several pages long and prepared and signed by the Iraqi 'Ministry of Trade, Grain Board of Iraq' (long-form contract).[104]

196 The AWB short-form contract identified the quantity and quality of wheat sold under that contract. It specified that the wheat was to be shipped to one safe berth at Umm Qasr, Iraq, during the period from 1 October to 31 December 1999, subject to receipt of UN approval.

197 The short-form contract was substantially in accordance with the short-form contracts AWB had prepared for the sales it had concluded with the IGB under earlier phases of the OFFP. That is, except for one difference.

198 The shipment clause in the short-form contract for these three contracts also contained the following provision:

The cargo will be discharged Free into Truck to all silos within all Governates of Iraq at the average rate of 3,000 metric tons per weather working day of 24 consecutive hours. The discharge cost will be a maximum of USD 12.00 and shall by paid by Sellers to the nominated Maritime Agents in Iraq. This clause is subject to UN approval of the Iraq distribution plan. [emphasis added].

199 An identical clause had also appeared in AWB's 'electronic message' of 14 July 1999.[105] This provision, and in particular the emphasised sentence, had not previously appeared in AWB's earlier contracts.[106] Despite the inclusion of this reference to 'discharge cost', this clause (and short-form contract) made no mention of 'land transport' or 'the land transport co.' (see clause 10 of the IGB's wheat tender[107]).

200 ASIC submits that contrary to the text of the contract, no approval was ever sought or obtained by AWB from the UN in relation to any discharge cost or inland transportation costs, and no confirmation was ever sought that the Iraq distribution plan authorised the payment of cash in hard currency to Iraqi government instrumentalities. ASIC says that as the distribution plan made plain, $207 million was allocated for the costs associated with transport, including trucks and spare parts in Phase VI from 25 May 1999 to 20 November 1999 of the OFFP alone.[108]

201 The long-form contract was not in identical terms to the short-form contract prepared by AWB. In particular, the IGB long-form contract contained no clause equivalent to either the shipment clause in the AWB short-form contract (quoted above at paragraph 198) or clause 10 of the IGB's wheat tender. The IGB longform contract contained no mention whatsoever of the costs of discharge or land transport or any obligation on AWB to pay those costs or the IGB nominated fee of US$12.00 per tonne. This was notwithstanding that the obligation to pay this fee was part of both the terms of the wheat tender and the subsequently concluded agreement for the sale of the wheat. Nor did the IGB long-form contract mention that a component of the purchase price was the US$12.00 per tonne fee payable in respect of such costs.

202 The price for which the wheat was sold was also expressed in terms slightly, although not materially, different from the terms used in the short-form contract. It was described in clause 6 of the IGB long-form contract to be 'CIF F.O.T. to silo at all governorate of Iraq via Umm Quser port' [sic].

203 ASIC submits that although this carried with it the implication that the price included the cost of discharge and transportation of the wheat within Iraq, it did not disclose the amount of that cost or that the 'cost' was in truth a fee nominated by the IGB to be paid to the person nominated by the IGB and which was added to the CIF price of the wheat.

204 ASIC says that although the use of these terms to describe the price in the long-form contract may have carried with it the implication that AWB was responsible for the discharge and transportation of the wheat within Iraq and was including the costs incurred by it in discharging those obligations, the reality was that under the contract AWB concluded with the IGB these obligations remained with the IGB, and AWB's only obligation was to pay the fee nominated by the IGB to the person nominated by the IGB (which obligation the long-form contract did not disclose).

205 ASIC contends that neither AWB's short-form contract nor the IGB's long-form contract expressly provided for the payment of an 'inland transportation fee' - or, more particularly, the inland transportation fee AWB had agreed to pay (and which had been added to the price of the wheat to be paid from the UN escrow account ).[109]

206 ASIC says that it was implicit in the terms in which the price was quoted in both the signed and approved long-form and short-form contracts that responsibility for discharging the grain from any vessel into trucks and for transporting the grain from the discharge port to the silos in each of the governorates of Iraq (or for arranging for that discharge and transportation) rested contractually with AWB.[110]

207 ASIC submits that the reality, however, was that AWB had no responsibility for either the discharge of the wheat from the vessel at Umm Qasr or the inland transportation of the wheat within Iraq. This was notwithstanding the terms in which the price was expressed. Every aspect of the arrangement for the discharge and transportation of the wheat rested with the Iraqis, as it had under contracts concluded before July 1999 and under earlier phases of the OFFP. Under the terms of the agreement it concluded with the IGB, AWB's only obligation in these respects was to pay the Iraqis a fee as dictated by the IGB.

208 In an email dated 11 October 1999 to Emons, Borlase and Owen, Hogan described the origins of the fee as being a direction issued by 'the President' that all suppliers must pay the US$12.00 before the ship bringing the produce into Iraq arrived.[111] Emons likewise described the origins of the fee as being a 'Presidential decree.'[112] In email exchanges between Watson, Emons, Officer, Lister and Owen on 20 October 1999, AWB's obligation was variously referred to as an obligation to 'refund the trucking charges to Iraq', or a contractual obligation to pay a 'trucking fee'. Emons described it as being 'the payment of the trucking cost as per our contract back to IGB'.[113]

209 ASIC submits that AWB understood that it was not responsible for trucking. On 4 November 1999, Emons emailed Officer saying:

To date IGB have not advised the trucking co. to whom payment should be made. We have been approached by a company in Jordan but our response has been to ask for confirmation from IGB before discussing further.

We are not responsible for trucking in Iraq only the payment. Payment to us occurs as per existing contract after UN inspectors cert is issued at discharge.

When I see Zuhair at the end of Nov I hope to clear a number of the details up.[114]

210 ASIC says that AWB was not itself responsible for the trucking of the wheat within Iraq. At no time prior to late 2003 did AWB seek to make any arrangements with any contractor for the discharge or transportation of grain within Iraq.

211 ASIC submits that, in summary, following AWB's receipt of the wheat tender for Phase VI of the OFFP and the visit of Emons and Hogan to Iraq in June 1999, there had been widespread communication amongst Officer, Lister, Emons, Owen, Watson, Geary and Hogan regarding the terms of the new tender and how they could be met.

212 ASIC says that it was understood by those discussing these terms within AWB that:

(a) the inland transportation fee (or trucking fee) was fixed by Iraq;[115]

(c) it was being paid for the benefit of the Iraqis;[117]

(d) imposition of the inland transportation fee would form part of the contract price, and accordingly, would be recovered from the UN escrow account;[118]

(e) AWB did not have to arrange or effect the discharge of the wheat at Umm Qasr;[119]

(f) AWB did not have to arrange or effect the transportation of the wheat within Iraq;[120]

(g) AWB was not required to enter into a contract with any transport company;[121]

(h) the Iraqis would continue to organise the discharge, transportation and distribution of wheat in Iraq, as they had under the earlier phases of the OFFP and under their earlier contracts with AWB;[122]

(i) AWB's obligation was limited to payment of the fee set by the Iraqis;[123]

(j) the Iraqis had said they either had obtained or would obtain UN approval for the payment of the inland transportation fee;[124] and

(k) the method of payment of that fee had not been approved.[125]

213 ASIC says that under the terms of the proposed sale, AWB was not required to discharge the wheat and effect delivery to all or any governorates in Iraq, despite the specification of the price in terms to that effect in the wheat tender (and subsequent written contracts).[126] The obligation to transport the wheat sold by AWB to all governorates within Iraq was to rest upon the Iraqis, as it always had.

214 ASIC says that according to Officer, the question of sanctions and the issue of the trucking fee was one that evolved within the Iraq market.[127] It was the first time such a fee had been imposed on AWB anywhere in the world.[128] The question of not agreeing to the inland transport component meant no business.

215 Officer said that this was a generally held view within the AWB business.[129]

216 On 14 July 1999, Emons sent an email to Flugge and others noting that AWB had concluded a sale of 700,000 tonnes at USD155.00 CIF Umm Qasr with the IGB.[130]

217 That sale was divided into three contracts numbered A4653, A4654 and A4655, which were submitted to the UN for approval. The UN reviewed the contracts on or about 10 August 1999.[131]

218 Felicity Jane Johnston (Johnston), the UN reporting officer,[132] reviewed the contracts and recommended their approval. I find that she either overlooked, or did not understand the meaning or relevance of, the clause in these three AWB short-form contracts that included the words:

The cargo will be discharged Free into Truck to all silos within all Governates of Iraq at the average rate of 3,000 metric tons per weather working day of 24 consecutive hours. The discharge cost will be a maximum of USD 12.00 and shall by paid by Sellers to the nominated Maritime Agents in Iraq. This clause is subject to UN approval of the Iraq distribution plan.

219 The UN 661 Committee approved these three contracts without it having been noted by those charged with checking the contracts that they provided for a discharge cost to be paid in US dollars to an Iraqi entity.[133]

220 There is no evidence, however, that AWB or any of its officers knew or believed that the contracts had been approved by the UN by mistake.

221 Nevertheless, the discharge cost clause did not clearly, fully or accurately disclose the true nature of the fee payable and the arrangements actually in place between AWB and IGB in relation to it.

222 ASIC submits that the clause misleadingly described the fee as a 'discharge cost', connoting that it was a payment referable to the actual cost of discharging the cargo incurred at the port by maritime agents in Iraq. ASIC says that moreover, the approvals were issued in circumstances where the UN inspectors had no knowledge that it was proposed that AWB would pay a fee to the IGB or its nominee, although it would have been known, had the two inspectors properly checked the contracts, that a fee of up to US$12 per tonne was to be paid to 'Maritime Agents in Iraq'.

223 ASIC submits, and I agree, that it is less likely that the clause would have been overlooked if it had clearly, fully and accurately disclosed the true nature of the fee payable by AWB and the actual arrangements between AWB and IGB in relation to its payment.[134]

UN approval of IGB fees in first three contracts

224 In August 1999, the UN confirmed that contracts A4653, A4654 and A4655 were eligible for payment from the UN escrow account,[135] being the first contracts incorporating trucking fees.

225 ASIC submits that the defendants presumably seek to make much of the fact that these contracts included a clause 'Free into Truck to all silos within all Governates of Iraq ... the discharge cost will be a maximum of USD12.00 and shall be paid by seller's to the nominated maritime agents in Iraq' and therefore contend that the UN implicitly at least approved the inland transportation fees.

226 ASIC says that this is wrong in at least the following respects.

227 First, the UN approved the contracts but never approved the inland transportation fees being paid to the government of Iraq or one of its instrumentalities. ASIC submits that all the key witnesses agreed that the UN was never approached on this issue. ASIC submits that no document suggests that the UN was ever asked to approve this.

228 ASIC says that unlike other issues such as demurrage or how to pay compensation for iron filings, the UN's position was never explicitly sought by AWB on the inland transportation fees.

229 ASIC submits that secondly, Resolution 661 was never qualified by any distribution plan between the UN and Iraq, or by any contractual clause. The prohibition on funds to Iraq was always present.

230 ASIC says that thirdly, the clause referring to the trucking fees was removed from all future wheat contracts between AWB and the IGB in January 2000.[136] ASIC says that if there was no concern with the clause and there was a genuine belief that the UN had approved the fees, the clause would have remained in the contracts and would have been more frank to begin with.

231 ASIC submits that none of the IS&M witnesses recalled any confirmation from, or the need to discuss confirmation with, the UN that it had approved the free in truck arrangements or the inland transportation payments.[137]

232 As discussed below at paragraph 1859 and following, Flugge believed that the UN had approved the payment of in the inland transportation fees. So did other AWB executives that gave evidence, although Officer said there initially was a 'grey area' about the fees, suggesting that something may have been amiss, but subsequently became reassured that the UN had approved of the payment of the inland transportation fees.

233 In late August 1999, Flugge received a document entitled 'Chief Financial Officer's Report' prepared by Paul Ingleby (Ingleby) which referred to an AWB marketing delegation that had visited Iraq at the 'urgent request' of the IGB to discuss 'changed terms and conditions being sought by Iraq for the distribution of food under the OFFP'. This report was tabled at a board meeting of AWB on 25 August 1999.[138]

The AWB Code of Conduct promulgated in August 1999

234 Shortly after the introduction of the IGB fees, AWB promulgated a company-wide corporate code of conduct.[139] It was discussed at a board meeting on 26 August 1999[140] and later approved by the board and adopted by AWB.[141] A presentation was given to staff in December 1999. ASIC submits that it is impossible that Flugge was not aware of the code of conduct and its requirements.

235 Relevantly, the code of conduct emphasised the following:

(a) AWB maintaining a reputation for high standards of business conduct, professionalism and integrity;

(b) acting in accordance with the highest standards of integrity and propriety was the fundamental principle of AWB's operations and business affairs;

(c) that AWB was not to engage in any illegal or unethical agency payments, the test being if its disclosure would cause embarrassment to the company.

236 Flugge made it clear with a new board that he wanted the company to be seen and to operate under the highest levels of governance, the highest levels of performance in business, business ethics, accountability and behaviour.[142]

237 The issue of conducting operations legally, ethically and in accordance with the highest standards of integrity was discussed at board level.[143] The code of conduct was discussed at board level in circumstances where it was incumbent on the company to express to its officers, directors and employees the expectation of the company in the modern world where corporate misdemeanours are quickly seized upon by the press.[144]

238 The topic 'adherence to the values and standards at all times as set down is considered essential towards ensuring that AWB maintains a reputation for high standards of business conduct, professionalism and integrity' was discussed at board level.[145]

239 The board discussed the code of conduct policy and there was a general agreement with the need for a code of conduct in light of recent examples in the press of individuals and companies being in embarrassing situations where people had not behaved ethically. The board was aware of what could happen in a foreign land with foreign cultures.[146]

240 According to Mr Stewart, the AWB's code of conduct and the requirement that its business affairs and operations be conducted legally, ethically and in accordance with the highest standards of integrity and propriety was absolutely important to AWB because, from Mr Stewart's perspective, the actions of the individuals, both at board and at management level, should always be ethical and passes the smell test or the front page test.[147]

241 The phrase, 'You should consider if payment would be ethical or if its disclosure would cause embarrassment to the company' accords with Mr Stewart's understanding of the code of conduct policy at that time; Stewart believed that the test was not whether conduct was legal and within policy - there must be a value judgment on whether the person would be happy for it to be in the public arena and to defend it in the public arena.[148]

242 The code of conduct was discussed widely within AWB at the time of implementation,[149] and the issue of agency payments or payments to third parties was raised, which was of considerable concern to members of staff including Emons.[150]

243 After contracts A4653, A4654 and A4655 had been concluded and approved by the UN and the details of the letters of credit had been settled, there were two matters that required further consideration before the contracts could be fulfilled.

244 One was the method by which the inland transportation fees were to be paid to Iraq by AWB. This had already been the subject of some discussion in June 1999, before the contracts had been negotiated. The other matter was through whom those fees were to be paid.

245 On 30 September 1999, in preparation for an upcoming Iraq visit, Emons sent an email to Hogan discussing matters that would need to be discussed with the Iraqis. Emons wrote:[151]

1. There is the issue of the USD 12 inland transport payment that we are required to make under the new contract. Speaking with [Owen] he suggests that the only way we can make the payment would be either hold the money in an account in Australia until sanctions etc. are lifted or, we can make a payment into a Jordanian account. Because of sanctions we can't do any of this thru an OECD country. Alternatively we drop the USD 12 from the contract. Suggest that you discuss with Zuhair.

246 Emons recalls discussing this issue with Hogan at this time.[152] Hogan was asked to discuss with the IGB the method of payment and the US sanctions that prevented payment through any OECD country.

247 In October 1999, Flugge headed a further AWB delegation to Iraq. The delegation comprised Flugge, Murray Rogers, (Rogers) (the then CEO of AWB) and Hogan, at that time Manager-AWB Cairo and 'back-up' account manager for Emons. The visit was to coincide with an IGB grains conference in Baghdad. Hogan was standing in for Emons who was unable to attend. I deal with this trip in detail below at paragraph 1346 and following as it constitutes an element of ASIC's pleaded case of Flugge'[153]nowledge.153 What follows is merely a brief summary of the trip and its outcome.

248 On 9 October 1999, Hogan, Flugge and Rogers met with Zuhair in Baghdad and discussed matters including the trucking fee.

249 On 10 October 1999, Hogan sent an email to Emons and others including Geary. The email reported on the outcome of the meeting with Zuhair. At the conclusion of his email, Hogan stated, 'Mark, I will send a separate note on the FIT [free in truck] payment system.'[154]

250 The email referred Geary ('Peter') to despatch and demurrage issues and noted that Iraq had no mechanism to settle any amounts:

Sarah/Peter/Stu - I will explain the no despatch/demurrage. Iraq have no mechanism to settle any amounts ... we will need to do some work on the IGB to introduce carry into contracts, which I believe can be included under 986???

251 I infer the reference to 986 to be to Resolution 986.

252 The email then refers to '1 CIF contract, new contract FIT'.

253 ASIC says that the UN sanctions, and the changed contract terms with the IGB, were thus to mind.[155] The evidence suggests, however, that it might have been the US sanctions that presented the problem with payment.

254 On 11 October 1999, Borlase sent a facsimile to Zuhair, signed by Emons, the subject of which was 'Wheat Offer', which makes reference to 'recent discussions with Dominic Hogan, AWB Chairman Trevor Flugge and AWB Managing director Murray Rogers' but does not otherwise refer to the content of those discussions.[156] Under the heading 'Shipment' the document states that 'The cargo will be discharged free into truck to all silos within all Governates [sic] of Iraq ... The discharge cost will be a maximum of USD12.00...'

255 The fax refers to 'recent discussions with Hogan, Flugge and Rogers.' Emons said he was informed about those discussions having occurred by Hogan. According to Emons, Hogan told Emons that the discussion in Baghdad had revolved around tonnage, the shipment period, the price and the trucking payment methodology, which Hogan said was for further discussion within the staff, Graham Owen (Owen), Terry Aucher (Aucher) and Officer, 'basically across the board.'

256 On 12 October 1999, as promised in his earlier email, Hogan sent an email to Emons, Borlase and Owen in relation to the inland transport fees in the following terms:

I did have a brilliant idea how to settle the USD12 Free in Truck payment to the transport CO's - we do a contract with them when enough equity was built up and then they sell to IGB and IGB pay them in USD (via 986 system).

However Zuhair advised that the President has issued to all ministers bringing product into Iraq that suppliers must pay the USD 12.00 before ship arrive so that unloading could proceed. If the USD 12.00 was not in place then they would not be unloaded.

I voiced our protest to this system as we already wait so long for payment, that we would be unhappy to prepay this amount. Also with the weight discrepancies - there would be a lot of juggling with payments etc.

Zuhair could understand this point and was approaching the minister for a special concession for AWB. We will wait upon outcome.

The system that will be the most workable would be that AWB create an account in Jordan and transfer funds to this account. From this account, we would transfer to a special account (nominated by IGB) for each vessel.

(We could probably by pass the Account in Jordan and transfer directly to the 'special' nominated account - as long as the link is not apparent that the funds were going into Irq.

I will let you and Graham have a think abt it and wait for Zuhair s decision from the Minister.

(other option is to use Maritime agents/vessel owners account/or buy a very large suitcase).[157]

257 On 12 October 1999, Owen replied to Hogan, copying in Emons and Borlase, asking, 'Why do we try and make our business more difficult?' In his email, Owen reported that he had checked the possibility of opening an account in 'our name' in Jordan and set out the requirements where such an account was to be opened with a friendly bank, such as the ANZ. One requirement was 'copy of board resolution authorising the opening of an account and nominating signatories. This assumes senior management/audit will sign off on opening an account.' Owen concluded that in view of these requirements:

I do not think that this proposal is a possibility to handle the payment of USD 12 per tonne for inland transport costs to Iraq.

I do not think that we need to open an account, I think that we could effect payment to the Iraqi transport companies USD account with a bank in Jordan from Australia. Despite the problems with USD payments to Iranian companies we are able to effect USD to GTC [the Iranian Grain Trading Company] for monies owed to them via their bankers in Europe. To enable payment, we would need to know the Banks name in Jordan and also where the bank conducts its USD account in USA. On payment for each shipment, we arrange the USD payment to the Iraqi transport company via ANZ thru their office's in Jordan.

[emphasis added by ASIC]

258 ASIC contends that the emphasised words show an understanding that Iraqi entities were to perform the transportation but that they should be paid through Jordan since payment to them in Iraq was not possible.

259 Emons responded to Owen's email on 12 October 1999, with a copy to both Hogan and Borlase,[158] suggesting 'a couple of ideas to follow on with:'

If we had an operable L/C could we not prepay the USD 12 prior to discharge in Iraq? I know we are risking USD 12 if the vessel does not get UN inspectors approval but with our ongoing shipping program are we really risking that much?

Iraq should then be in a position to put in place an L/c that does not require truck receipts.

We would then not be needing UN approval as we already have this for the existing contract and if we are to pay/or have another contract with IGB or a third party we would then need approval. Am I correct?

Thoughts any way, please revert.

260 ASIC contends that the recognised difficulty was the absence of UN approval for a payment AWB intended to make. It is not clear, however, that the recognised difficulty did not refer to US sanctions on currency transfers to Iraq.

261 Emons had a discussion with Owen about the issue of opening an account in Jordan. They discussed Owen's suggestion, 'Why not retain the US$12 per tonne and then supply them with additional wheat at no cost. Pay the money to the UN so that they can add to the process of the oil sales used to purchase other requirements that in the list of approved products so Iraq can purchase additional products under this program.'[159]

262 On 13 October 1999, Borlase sent an email to Snowball concerning the payment for the clause 'Free in Truck'. Borlase wrote, 'We are getting closer to a solution on how we pay the transport companies in Iraq without jeopardising the current procedure of getting paid.'[160]

263 On 14 October 1999, AWB and the IGB entered into contracts A4821 and A4822. Significantly, contract A4821 was under Phase IV of the OFFP,[161] and so did not include the 'CIF Free in Truck' clause or obligation to pay the USD12.00 fee; accordingly despite being entered into at the same time (and for a much smaller amount of wheat) the price was exactly USD12.00 per tonne lower than contract A4822, which included the CIF Free in Truck clause and obligation to pay USD12.00 to nominated Maritime Agents in Iraq.[162] The IGB confirmed both contracts by facsimile on 17 October 1999.[163]

264 By 20 October 1999, AWB had decided that the inland transportation fee for shipments of wheat to Iraq under contracts A4653, A4654 and A4655 would be paid via the shipping companies that were to carry that wheat to Iraq. The plan included a component whereby the shipowners would debit AWB for the trucking charge, together with a handling fee and the cost of the freight.

265 On 20 October 1999, Watson sent to Emons an email headed 'Iraq' in which he stated:[164]

Further to our discussion concerning the best means in which to arrange to refund the trucking charges to Iraq, I have arranged with the various shipowners to handle this on behalf of AWB Limited.

Therefore the Owners will debit AWB this extra trucking charge, plus their handling fee together with the freight which has been finalised, upon completion of loading.

I therefore would suggest that you amend the contract system to reflect both the agreed freight rate and the required trucking charges, as Chartering will need to debit the pool for both amounts and pay same to the Owners.

Please let me know in due course the banking details that Iraq will require as will then ensure that Owners remit the 100 pct of trucking costs directly to that a/c upon completion of loading.

Assume this will overcome the current difficulty that arising from L/c wording etc.

266 ASIC says that this was explicit recognition that the trucking fees were being paid to Iraq and that AWB was arranging the fees to be paid through shipping companies.

267 Also on 20 October 1999, Emons sent an email to Officer, copied to Watson, Lister and Owen. This followed a discussion between Emons and Zuhair the previous evening.[165] Emons wrote:

Subject: Private and Confidential: Iraq trucking fee

I had a lengthy discussion last night with Zuhair. I needed to resolve quickly the amendments that we have requested with L/C and the payment of the trucking cost as per out contract back to the IGB.

With payment of the trucking fee we are prevented of doing this direct to Iraq for obvious reasons. Our contract which complies with the tender document details approved by the UN does not specify how this payment will be undertaken. As a result of this we requested of Zuhair that he supply us with suitable bank details to facilitate this payment.

We have always been aware from the outset that this issue is somewhat grey however I realised during my conversation with Zuhair that we need to be particularly careful on the execution of the contracts. Zuhair stated that he will supply details of the company to be paid and the account details. He also stated that the trucking fee may vary in the future.

To remove any potential criticism potentially of AWB or longer term considerations relating to facilitation payments etc as previously discussed I have recommended that the Charter Party be amended to include the trucking fee and therefore the payment of this fee will be carried out by the shipping companies.

I trust that this action meets with your approval.

268 It should be noted that Emons says that the UN had approved the payment but not how it would be paid.

269 ASIC contends that the reference to 'Private and confidential - Iraq trucking fee'[166] was because it was a very sensitive matter - Emons believed there were still a lot of hurdles.[167] AWB was unsure of any response from the UN or from any other party involved so wanted to keep the matter confidential.[168]

270 ASIC submits that the reference to 'aware from the outset that this issue is somewhat grey' is to the payment of the trucking fee and the actioning of the trucking fee.[169] ASIC says that the reference to 'any potential criticism of AWB' was a reference to criticism of facilitating a payment to Iraq.[170]

271 In the email, Emons records that Zuhair told Emons that the trucking fee may vary in the future.[171]

272 Owen responded to this proposal on the same day setting out his concerns to Emons and others.[172] In this email, which was copied to Officer, Watson and Lister, Owen stated:

I have a number of problems with the suggested proposal in regards to payment of USD12 per tonne to Iraqi trucking company. I details below my comments on this issue.

1. I believe it is contractual obligation of AWB to pay the fee and we are transferring that responsibility to a 3rd party.
2. I am concerned if the shipping company incorrectly effects payment the money will be frozen in New York, then Iraq may not release the vessel, until money is received in their nominated account. What happens then.
3. What happens if shipping company goes broke, (this has already happened to us a number of times in the last 18 months) and payment has not been effected to Iraq's.
4. At any one time, we could have 5-6 vessel on the water and if they are all Panamex vessels we could be talking about approx. USD3.3 million to USD4 million and payment doesn't have to be made prior to vessel's arrival in Umm Qasr. Shipping company would have the benefit of that money.
5. Over all the contracts we are talking about USD11.34 million why can't we remit those funds to BNP for use by the Iraqi Government to purchase approved commodities as is done with the Oil for food agreement. If the UN has approved the USD12 per tonne payment. Or get a one off approval to allow payment of the USD12 per tonne back to Iraqi trucking company.
6. Hold funds in an account with AWB for buyers benefit. Even if we have to pay interest on the funds and repay funds back once sanctions removed. They still owe us in excess of USD400million, so they should be able to trust us for USD11 million.

Mark I trust you find my comments constructive I just have a problem relying on a 3rd party to perform this administrative function of our contract and worry if they stuff-up, we have to explain, why we had to pay the USD12- twice.

I am happy to discuss further if required.

273 Owen does not identify UN sanctions as a problem. Rather, his concerns are more practical about paying the fee in advance. The sanctions he refers to were presumably the US sanctions about transferring funds to Iraq, as so understood by Owen in the following reply email.

274 Emons responded to Owen in an email later the same day.[173] He rejected Owen's concern about shipping companies going broke. He stated:

1. This is not an issue that the Iraqi Government recognise as the funds are frozen in US accounts by the US Government.
2. The UN is an unnecessary complication and would delay the Current contracts by some 3 to 6 months. Are you prepared to wear the storage and finance costs?
3. Presidential decree requires prepayment of the fee prior to arrival. Therefore we have to resolve payment in the least potentially damaging method to AWB.
4. Companies going bust are natural commercial risk, however our Iraq trade is conducted by a small number of reputable companies that have to date shown no evidence of financial stress. Also without payment being made there could be no discharge and I would therefore expect that we could arrest the vessel, after all we do have the dox's.
5. Good point but that is a manageable issue within the time frame of shipment to Iraq.
6. Correct, that is why we put the requirement in the charter party.

275 Emons first observation about funds being frozen in US accounts appears to be a reference to US sanctions, not UN sanctions.

276 Watson also responded to Owen's email dismissing Owen's concern about 'shipowners going bust.'[174]

277 Owen sent a further email to Emons on 20 October 1999.[175] It stated, 'How can we manage somebody else doing a payment ????????' Owen did not receive a response.

278 According to Officer, in October 1999 the inland transportation fee was a somewhat 'grey' issue - AWB was relying on a well-respected, longstanding erudite individual (Zuhair) who told AWB that the UN were on board.

279 ASIC submits that was not clear whether the UN were in fact on board and AWB did not test that directly with the UN.[176] ASIC contends that the 'greyness' problem was a general concern within AWB amongst at least those people who attended Officer's office in mid-1999 - Emons, Watson, Ingleby and probably Tighe.[177]

280 I do not accept that the 'greyness' was or at least remained a general concern. Officer gave evidence that he was conscious of the 'greyness' of the trucking issue in mid-1999. Officer said, however, that the fact that the contracts stated that they were subject to UN approval gave 'us a high level of comfort that it was within - it had been approved by the UN.'[178]

281 ASIC submits that as a result of the foregoing, by late October 1999 the following was widely known within AWB:[179]

(a) The inland transportation, or trucking, fee was fixed by the IGB.

(b) The President of Iraq required funds on account of the trucking fee to be paid to Iraq before any cargo of wheat was unloaded in Iraq.

(c) The fee was to be paid to Iraq, being a 'refund' of trucking charges 'to Iraq'.

(d) Because payments of US dollars to Iraq could not be made because of UN sanctions, a method of payment to circumvent those sanctions had to be found.

(e) Payment of the fee could be hidden by having the shipowners pay it to the entity nominated by Iraq, with the charter party (between AWB and the shipowner) being amended to accommodate that payment.

(f) Payment of the fee to a Jordanian entity nominated by the IGB would further disguise the fact that the payment was being made to Iraq and represented an obvious breach of the sanctions.

282 I do not accept that propositions (d), (e) and (f). The prevailing view in AWB was that the UN had approved the payment of the inland transportation fees, the difficulty perceived by some within AWB with payment was due to the US sanctions and UN sanctions and that the payment of the fee to a Jordanian entity nominated by the IGB was affected to avoid difficulties with the US sanctions.

283 ASIC says that what remained was to receive from the IGB the name and account number of the company to whom Iraq required the money to be paid.

284 On 19 October 1999, AWB received a facsimile from Alia. The facsimile was addressed to 'Australian Wheat Board', to the attention of 'Mr Murray Rogers Manager Director' [sic].[180] It read:

We would like to introduce to you our company being one of the Jordanian Establishments specialized on the fields of overland and ocean freight transportation moreover, our company is a member of the syndicate of shipping agents in Jordan also we are agents of the state company for Iraqi land Transport and Iraq.

We have informed officially that your company won a contract to supply Iraq by (921000) tons of (Wheat).

So, we are pleased to offer our services on the field of transport form Um Qaser port in Basrah to the other governorate in Iraq and we well return all the documents of the goods to you.

285 The copy of the facsimile from Alia bears a manuscript note 'Mark Emons', suggesting that it had been passed on to Emons.

286 ASIC submits that there is no evidence that either AWB or the Australian Wheat Board had previously dealt with Alia. This is consistent with the sentence in the facsimile from Alia[181] saying, 'We would like to introduce to you our company...' Emons gave evidence that he recalls seeing this fax, but noted that:

We had classified it in the initial stages as what we used to call a wood duck, being something that looked like a duck but had no substance.[182]

287 The email also supports the view that Emons did not discuss with Flugge, in London in June 1999, that payment of the trucking fee might be made through Ronly, but rather Ronly was mentioned in June 2000. The email is inconsistent with ASIC's case that Ronly and the inland transportation fee had been mentioned in June 1999 in discussions with Flugge.

288 On 27 October 1999 Alia sent a further facsimile to 'Australian Wheat Board', this time addressed to Emons.[183] It was in similar terms to the earlier facsimile. It repeated that Alia was one of the Jordanian establishments specialising in the field of overland and ocean freight transportation, a member of the syndicate of shipping agents in Jordan, and 'agents of the state company for Iraqi land Transport and Iraq.'

289 On 13 November 1999 Alia (which according to an email from Alia to Chris Whitwell (Whitwell) (marketing manager in IS&M) of 19 October 2004, was part owned by the Iraqi Ministry of Trade,)[184] entered into an agreement with the Iraq State Company for Water Transport (ISCWT) to collect inland transportation fees on behalf of the ISCWT (the collection agreement).[185] The agreement provided:

(a) Alia was to provide to the Basra branch of the ISCWT the following information before a vessel's arrival at Umm Qasr and the ISCWT would supply any new information about the following matters to Alia - vessel's name and nationality, supplier's name, beneficiary, carrier's name, tonnage, quantity and kind, and total transportation fees.

(b) The ISCWT was to provide the following to Alia upon the vessel's arrival at port - arrival and berth date, completion of discharge date and departure date, tonnage, discharge port, and discharged quantity.

(c) Alia would deposit the full amount (less 1 per cent commission) of the transportation fee into the ISCWT's account at the Rafidain Bank in Jordan within five days of receipt.

(d) The services to be provided by Alia were described as being 'restricted to receiving amounts and depositing them into the ISCWT's account.'

290 ASIC submits that this agreement discloses that Alia had no transport obligations in respect of arriving goods. The only obligation Alia had under its agreement with the ISCWT was the provision of information about future shipments and the receipt and payment on to the ISCWT of the inland transportation fees payable in respect of those shipments.

291 ASIC says that although AWB was not aware of Alia's agreement with the ISCWT at this time, it was known that the IGB had said it would provide details of the name and account into which the inland transportation fee was to be paid, for payment back to Iraq.

292 ASIC contends that consistent with the collection agreement, Iraqi Ministerial records show that the amounts paid by AWB to Alia were received by Iraq, Alia acting as mere conduit for the payments. ASIC submits that those same records suggest that the majority of the hard currency thus obtained ended up with Iraq's Ministry of Finance.[186] ASIC says that these documents are also consistent with the information provided to Hogan suggesting that the purpose of the inland transportation fees was to benefit the Ministry of Finance.[187]

293 ASIC submits that the reason AWB agreed to the payment of the IGB fees in this way was in order to preserve its Iraq trade - management was imposing pressure to maintain sales to Iraq.[188] ASIC says that AWB knew that if it did not agree to the payment of inland transportation fees it would not secure sales to Iraq. Having agreed to sell wheat to Iraq on those terms, AWB also knew that - due to 'Presidential decree' - if it did not pay the IGB fees in respect of a shipment, the vessel would not be discharged, the vessel would be delayed and AWB would incur significant demurrage costs. ASIC submits that AWB was well aware of UN sanctions and their effect. ASIC says that AWB knew that the fees could not be paid directly. ASIC contends that a method of payment of the IGB fees that circumvented the UN sanctions and did not attract the attention of the UN had to be found. ASIC says that that method was the payment of these fees via shipowners and Ronly to Alia in Jordan.

294 As mentioned earlier, the evidence (canvassed below) suggests that the method of payment was perceived by some within AWB to be necessary to avoid US sanctions, not UN sanctions, and that AWB believed that the payment of the inland transportation fees had been approved by the UN.

295 On 3 November 1999, Hogan in Cairo submitted to Emons a report for the benefit of Rogers' forthcoming report to the Board. Emons forwarded that email to Marise Wilson, Officer's personal assistant.[189] Under the heading 'Iraq' Hogan reported:

AWB is currently negotiating the Free in Truck clause that Iraq has included in all new contracts. Whilst AWB does not have an issue with the actual clause, there is some disagreement as to when the transport company should be paid and what tonnage. This is a concern for the AWB as Iraq is the only market contracted on final weight and quality after inspection by UN inspectors at Umm Qasr. (all other markets in the world are contracted on weight and quality final at load port). Subsequently, AWB do not wish to pay for transport costs upon Australian Load Port weight, as these invariably differ to the UN Inspectors discharge weights.

Two vessels have been loaded under the new contracts that include Free In Truck clauses, and the issue will be resolved in the near future.

296 ASIC contends that while it does not appear that this putative report ever went to the Board, it is apparent that neither Emons nor Hogan was seeking to keep the trucking fee and FIT contract terms from senior management. As discussed below, this is not the case. In mid-2000, the board of AWB was informed of the payment of the inland transportation fees and was expressly informed by the managing director that the payments had been authorised by the UN.[190]

297 Later, on 4 November 1999, Emons and Officer exchanged emails about payment to the trucking company.[191] Officer emailed Emons, asking:

Where are we with the trucking fee issue? Even if we find a way through this issue do we take on any increased risk/exposure by contractually being responsible for trucking within Iraq?

298 Emons replied 30 minutes later:[192]

To date IGB have not advised the trucking co. to whom payment should be made. We have been approached by a company in Jordan but our response has been to ask for confirmation from IGB before discussing further.

We are not responsible for trucking in Iraq only the payment. Payment to us occurs as per existing contract after UN inspectors cert is issued at discharge.

When I see Daoud [Zuhair] at the end of Nov I hope to clear a number of the details up.

299 ASIC contends that Emons' view is supported by the fact that in correspondence with the IGB or discussions with Zuhair it was never suggested that AWB had any obligation beyond merely paying the fee or that AWB was obliged to do anything further than it previously did before June 1999 under the simple CIF contracts.

300 On 18 November 1999, Emons spoke with Zuhair about payment of the first instalment of the inland transportation fee. Emons recorded the outcome of his conversation in an email, headed 'Iraq trucking fee', to Watson on 19 November 1999:[193]

More confusion as ever with the trucking fee and my Iraqi's.

I spoke twice last night with Zuhair. I explained that without the L/c amendments nothing was going to happen. He assures me that this will take place and Rex this morning tells me that two of the contract l/c's amendments have come through.

On the trucking fee, I am still having some problems with him. He understand that we can't pay Iraq direct but he says he wants to tell me personally when I see him how it should all operate. This all well and good but as I said to him we have a vessel arriving before we see him and the IGB will not discharge until the money is rec'ved.

He then came back to me and said for the first vessel only that we should pay 90% (USD 10.80) to:

ALIA for Transportation and General Trade Account No. ........

ARAB LAND BANK

............. JORDAN ...............

I know this is a little to direct but he assures me that it is a one off and that the full details will be supplied when we meet him of the company that will be handling this matter in the future.

So if you can make it you can make the payment as above rather than the shipping company immediately and we can sort the detail when in Iraq.

301 On 26 November 1999, US$453,600 was remitted to Alia pursuant to an internal AWB US dollar payment request dated 25 November 1999.[194] The payment request was signed by Officer and authorised by Laskie.

302 This was the first of many payment requests for trucking fees payable to Alia.[195] The direct payment method to Alia was one of three methods that AWB employed for paying trucking fees.

303 The second method AWB used to pay trucking fees was to make payments to shipowners. AWB entered into arrangements with several shipping companies whereby AWB would pay to them not only the cost of sea freight, but also the so-called inland transportation or trucking fee, which the shipping companies would then pay on to Alia. There are numerous AWB payment requests to different shipowners in respect of trucking fees.[196]

304 The third method AWB used to pay trucking fees was to make payments to Ronly or a subsidiary of Ronly. There are numerous AWB payment requests to Tse Yu Hong Metal Limited (a subsidiary of Ronly).[197] This method started in around March 2000.

305 AWB continued to pay IGB fees, including through the conduit of Ronly, according to Emons, to 'disguise the fee.'[198] Officer said that the use of Ronly as an intermediary for trucking fees was discussed with more senior people within AWB.[199]

306 ASIC contends that the use of Ronly as a conduit to pay the trucking fee was first discussed at a meeting between Flugge and Emons and others with Ronly at the IGC in June 1999. I do not accept that any such meeting took place.[200]

307 ASIC submits that the use of Ronly as an intermediary for trucking fees was discussed with senior people within AWB. Emons recalls initial discussions with Officer and later a discussion with Flugge.

308 The discussion between Emons and Flugge about Ronly occurred in around early March 2000. The discussion about the Ronly proposal involved the joint venture proposal between Ronly and AWB, the nature of what Ronly brought to AWB in terms of trading grain internationally and the ability of Ronly to be 'a conduit'. The trucking fees were naturally part of the discussion. ASIC contends that it may have been more than one discussion and would have been face to face. ASIC says that it would have occurred on the sixth floor. Emons cannot recall Flugge's response to that Ronly proposal at this time.[201]

309 Further, Officer's evidence from the Cole Inquiry, which was not challenged, is that he spoke with Flugge about the plan to make payment of the US$12 through Ronly Holdings.[202] ASIC contends that Flugge's knowledge that Ronly was used to pay IGB fees is also referred to in later correspondence in September 2002[203] (see 'Discussion between Flugge and Long in September 2002' below at paragraph 1837 and following).

310 As discussed previously, I do not accept the evidence of Emons on this issue.

311 On 7 March 2000, Emons sent an email to Nori Bali (Bali) of Ronly.[204] Emons wrote:

Nori,

Just wanted to touch base with you. When Erol was in town last week Michael Watson had a brief discussion with him on Ronly handling the trucking fee and vessel freight for the AWB into Iraq.

If I can clarify:

1. We have received approval from the United Nations to ship to Iraq 900,000 tonnes in March, April and May.
2. A requirement in the tender document and in our contract price is the inclusion of a payment of USD15 per tonne for trucking in Iraq. I have confirmed this figure with the Iraqi official I deal with but he has not as yet confirmed how he wants to have it paid specifically.
3. This is the twist, under UN/Australian policy no payment can be made directly to Iraq however our contracts have been endorsed by both parties to pay this trucking fee to a third party.

Under the last contracts we have instructed the shipping companies under the Charter party to make payment to a Jordanian trucking company. We did this to a) simplify the process from our point of view but b) to divorce clearly from the FOB price any connection with a shipping/logistics charge should the contracts come under scrutiny. The only difference is under our own Time charters we have made the payment ourselves.

1. Now this has been going quite smoothly until recently when two of our companies ran into internal problems with making the payment. One was obviously an issue where its offshore senior management ran scarred of getting caught up in sanctions etc. and everything that could entail for their business. The other companies problem stemmed from its banking route through Singapore where there are always serious concerns in that environment on money laundering and despite assurances from ourselves they obviously have more to lose than we can guess at.
2. Now why do we want to use Ronly ? It would be ideal from our point of view if we have a third party that handles the freight and trucking as an item. This not only saves us time but does disguise the fee.
3. Our proposal is this. We pass to Ronly the Charter parties from the ship owners. At Shipment Ronly invoices AWB for the freight and trucking fee to be paid after B/Lading date. Ronly pay the shipper [i.e. ship owner] and then approximately 15 days after B/L [bill of lading] pay 90% of the trucking fee to the transport CO in Jordan. Some 45 to 95 days later AWB is notified by the UN of the final weights. At this point of time the final payments are made by Ronly for the trucking fee to the relevant parties.
4. What's in it for Ronly? The exercise is one of administration but in simple terms there are funds available 10 to 15 days and a balance sitting for a further 30 plus days. On top of this no doubt you see to advantages of working with a partner!

Call me when you have a moment so we can talk, needless to say please be discreet with whom you discuss in AWB.

312 Emons' evidence was that the 'scrutiny' referred to in paragraph 3 was the scrutiny of the UN.[205]

313 ASIC says that the statement that 'our contracts have been endorsed by both parties to pay this trucking fee to a third party' is ambiguous. ASIC says that Emons' evidence suggests that the endorsement was that the contracts were signed by the IGB and AWB.[206]

314 ASIC says that there had certainly been no endorsement by Australia or the UN. Although AWB's four earlier contracts in the second half of 1999 had contained a clause referring to the payment of 'discharge costs' to 'nominated Maritime Agents in Iraq', a clause in similar terms which had been included in the original draft of (at least) contract A4970 was deleted prior to the three contracts being signed by Emons.[207] This was notwithstanding that the clause had been included in Emons' earlier facsimile of 20 January 2000 to the IGB[208] confirming the terms of these sales and that payment of the fees was clearly part of AWB's agreement with IGB.

315 ASIC submits that Emons' email of 7 March 2000 to Bali[209] makes plain that AWB:[210]

(a) recognised that the payments of the IGB fees were in breach of UN sanctions;

(b) had agreed to Iraq's demands to pay the IGB fees to it;

(c) recognised that the IGB fees paid to the 'Jordanian trucking company' were paid in the knowledge that they were being passed to Iraq and were paid for that purpose;

(d) had sought to distance itself from the payments, to 'disguise' the payments by paying them through shipowners and avoid UN scrutiny of the true contractual terms between AWB and the IGB;

(e) set up the arrangement with Ronly in order to disguise the fee and the fact that AWB was paying the IGB fees to Iraq;

(f) Ronly's role was to be limited to being a conduit for the payment of the trucking fees through the Jordanian trucking company to Iraq.

316 I do not accept that Emons' knowledge can be attributed to AWB. As discussed below, at paragraph 1198 and following I have found Emons to be an unreliable witness and the evidence suggests that he was behaving dishonestly whilst at AWB.

317 The terms of the agreement that AWB concluded with Ronly were contained in a facsimile that Watson sent to Simone Jordon of Ronly the previous day, 6 March 2000:[211]

I refer to our discussions and thought for good order sake, that I would drop you a line to re-affirm the points of agreement that were reached

- Ronly or a company to be nominated to assist AWB in facilitating the payment of Inland Trucking fees within Iraq, to the nominated trucking company

- Trucking Fee to be remitted to the nominated trucking account upon receipt of trucking fee from AWB

- Total cargo approx. 1.5 million metric tons

- Shipment period March - July 00

- Where required, Ronly or a company to be nominated will also arrange to pay freight to Owners nominated by AWB, in the execution of AWB shipments to Iraq. Such freight to be remitted to Owners, upon receipt from such freight from AWB.

It is agreed Ronly or a company to be advised, will provide administration support and will issue required invoices to AWB upon sailing of each vessel for trucking and where required freight.

It is understood that Ronly or a company to be nominated will not be responsible for the payment of either trucking fees or freight unless same received from AWB.

It is agreed that AWB will pay a fee of USD 0.20 Per Metric Ton, to Ronly or a company to advised in the execution of the above contract.

I would ask that you issue me an invoice periodically for shipments effected to cover the above fee and that such should be kept separate to any trucking or freight invoices.

I trust that the above in line with your understanding of the agreement that we reached. If there are any questions or anything that I have left out, please do not hesitate to let me know.

If you are going to use the services of another company to perform the above, then please let me know, together with their banking details.

I will advise you in due course the banking details of the trucking company as they tend to change the banking details from time to time.

I expect that I will place a couple of our existing contracts with Owners via you or the company that will be used. However I will revert on this point in the near future. As discussed, if this happens, then we will need back to back c/ps on terms, freight rates etc and in order to efficiently manage the contracts, AWB would need a side letter to act as 'managers'.

As advised, we can discuss this later.

Thanks again for your assistance in this matter.

318 This facsimile was said by Watson to have been sent further to 'our discussions'. ASIC contends that there would therefore seem to have been discussions in which Watson participated. ASIC says that this is also consistent with what was said in Emons' email of 7 March 2000.[212] ASIC submits that these discussions appear to have taken place during a visit by Erol Yahya to Melbourne in late February or early March 2000.

319 ASIC submits that there is no direct evidence of these meetings or what was said during them. In the absence of any correspondence from Ronly disputing what Watson had set out in his facsimile of 6 March 2000, I accept that that facsimile accurately recorded the terms of the agreement that had been reached.

320 ASIC submits that the use of Ronly as an intermediary for trucking fees was discussed with more senior people within AWB. ASIC refers to evidence of Emons that he recalls initial discussions with Officer and later a discussion with Flugge.[213] For reasons discussed below at paragraph 1209 and following, I am unable to accept the evidence of Emons on this issue.

321 ASIC submits these methods of paying the trucking fees were the subject of numerous internal discussions and emails within AWB. The use of Ronly was questioned from time to time, including in emails received by Geary,[214] and the costs for Ronly were invoiced to the National Pool.[215]

322 ASIC submits that the reasons for AWB entering into the arrangements with Ronly and its nominee Tse Yu Hong Metal Limited were the same as the reasons for entering into its arrangement with the other shipowners, namely:

(a) in an endeavour to distance itself from the payment of the inland transportation fees, knowing that those fees were being paid to Iraq and in breach of UN sanctions;

(b) to 'disguise' the payments that it was making to Alia (and through it to Iraq) and the nature of those payments, by adding the IGB fees payable for a shipment to the ocean freight payable to the shipowner for the carriage of that shipment to Iraq and describing the total amount as 'freight', rather than disclosing the freight and IGB fees separately.[216]

323 I am not satisfied that AWB knew that the payment of the inland transportation fees to Iraq was in breach of UN sanctions as alleged by ASIC. As discussed below, the generally held view in AWB was that the payment of the inland transport fees was approved by the UN. I also accept the evidence of Hogan that a difficulty with payment was the US sanctions. I accept that it is difficult to reconcile all the correspondence. My finding that Emons was probably dishonest and was using the payment of the inland transportation fees to enrich himself (of which AWB was ignorant) places difficulties in attributing his knowledge to AWB.

324 One of the vessels fixed under the arrangements that AWB concluded with Ronly in March 2000 was the Amarantos, which had been chartered under the contract of affreightment that AWB concluded with Atlantic and Orient Shipping Company on 3 February 2000 and into which Tse Yu Hong Metal Limited had been interposed. This was for the carriage of a shipment of wheat from Wallaroo (South Australia) to Iraq.

325 On 10 April 2000, the Amarantos collided with the jetty in the harbour at Wallaroo, causing damage to the jetty and associated facilities. As a result of the collision a number of claims were made against the owners of the vessel, Amarantos Shipping, including by AWB.

326 The owners of the vessel, in turn, claimed an indemnity from Atlantic and Orient Shipping Company, to whom they had chartered the vessel, in respect of any liability that they might be found to have for the collision. Lawyers acting for Atlantic and Orient Shipping Company in turn notified Ronly - with whom Atlantic and Orient Shipping Company had a contract of affreightment dated 3 February 2000 under the 'back to back' arrangement described in the agreement between Ronly and AWB at paragraph 3[217] above217 - that if the owners succeeded in their claim against Atlantic and Orient Shipping Company, they would be seeking to recover any liability from Ronly under the terms of their contract of affreightment.

327 In 10 June 2002, Yahya sent an email to Mark Rowland (Rowland) (by then a senior Ocean Freight Trader in AWB Chartering) seeking confirmation that AWB was aware of the claim by the owner of the Amarantos and would be dealing with it 'under the indemnity and insurance arrangements between us relating to the Iraq business'.[218] This email was copied to Long. In the course of recounting the history leading up to this claim, Yahya wrote:

Since neither we nor Tse Yu Hong Metal Ltd had no direct involvement in this charter or shipment we/ Tse Yu Hong Metal are giving you immediate notice of this development. All aspects of this business were dealt by yourselves.

328 On 16 September 2002, Long sent a copy of a draft letter to Ronly by email to Geary inviting his comments.[219] In his email, Long set out the background including a summary of the collision and claim. He wrote:

Ronly were involved in paying inland trucking charges and chartering vessels for us because of alleged problems with the UN/IGB. AWB paid Ronly in advance ($12 per tonne) and Ronly paid (via some shelf company) the Jordanian trucking company.

Mark Emons and Mike Watson set the deal up.

Based on the paper work we have from Ronly (our files are thin) there is not enough evidence to prove that AWB has liability or agreed to indemnify Ronly for acting as charterer. AWB paid ronly USD20 cents per tonne facilitation fee. Ronly argue the opposite but can't substantiate it to our satisfaction.

Nori has mentioned that Paul and Trevor are aware of the deal and sanctioned it.

Nori called T Flugge Fri night complaining about our position. TF called me and wants to distance himself.

All very complicated but bottom line is that unless you have a different view, will you endorse the current approach because Nori is likely to threaten legal action as well as scale up the hierarchy if he doesn't get what he wants from me.

329 Geary forwarded a copy of this email on to Ingleby that same day,[220] with the following message:

Do you know anything about this? I have not looked at the file but based on this note I agree with Michael's position.

330 Ingleby replied to Geary later that evening:[221]

I didn't know about these deals until parties left AWB. (usually done by IS&M and nigel) It could get messy but we have no choice than to pursue correct and ethical path'.

331 ASIC submits that the reference in this email to the 'correct and ethical path' in context was not a reference to what had happened concerning the payment of the IGB fees, but what was said in the context of Ronly's claim for an indemnity.

332 ASIC says that what is significant, for present purposes, is that the correspondence from Ronly in June 2002 and AWB's internal communications in September 2002 confirm what is also otherwise revealed by an analysis of AWB's agreement with Ronly[222] and the implementation of that agreement, namely:

(a) that Ronly, and its nominee Tse Yu Hong Metal Limited, played no real role in the charter of the vessels where it was interposed;

(b) that their only role was to receive and pay on to Alia on AWB's behalf the inland transportation fees payable in respect of AWB's shipments to Iraq;

(c) that Ronly and its nominee Tse Yu Hong Metal Limited were, to this end front companies;

(d) that AWB that approached Ronly in early 2000 for its assistance in this regard. This was in about February 2000 and at the same time Atlantic and Orient Shipping Company had withdrawn from its agreements with AWB to pay inland transportation fees to Alia on AWB's behalf;

(e) that there was no genuine or sound commercial reason for AWB interposing Ronly into its then existing contracts of affreightment and arrangements with shipowners;

(f) that one of the purposes of paying inland transportation fees via Ronly and its nominee Tse Yu Hong Metal Limited, was to 'disguise the fee' as Emons candidly stated in his email of 7 March 2000;

(g) that AWB's arrangement with Ronly was entered into out of a concern within AWB as to 'whether payments which they were making for inland trucking in Iraq were in breach of UN sanctions against Iraq' or as Long described them in his 16 September 2002 email[223] 'alleged problems with the UN/IGB';

(h) there were no 'problems' with the UN or IGB in late 1999 or early 2000 which would justify AWB further complicating its payment processes by interposing Ronly and Tse Yu Hong Metal Limited into the payment chain, other than UN sanctions, the consequences of their imposition and the inquiries that the OIP and DFAT were making in relation to the making of 'irregular payments' in breach of those sanctions.

333 I am not satisfied that the use of Ronly by AWB was due to AWB's knowledge that the payment of the inland trucking fees was in breach of UN sanctions against Iraq. As mentioned, the prevailing view in AWB was that the payment of the inland transportation fees had been approved by the UN. I am not satisfied that the use of Ronly by AWB was not perceived to be, at least due in part, to the US sanctions against transfer of funds to Iraq.

334 As a result of these arrangements, ASIC submits that AWB submitted to DFAT, and through it to the UN for approval for payment from the UN escrow account, contracts and associated documents which did not truly reflect the agreements reached between AWB and the IGB in some or all of the following respects:

(i) AWB's agreement to include in the wheat price an inland transportation (or trucking) fee which varied between the US$12.00 and US$51.15 per tonne so that such fee was paid to AWB from the escrow account;

(ii) AWB's agreement to pay such fee to Iraq or an Iraqi entity;

(iii) that the fee was a fixed fee for each phase determined by Iraq as a condition of tender;

(iv) that IGB had the obligation to discharge the wheat at Umm Qasr, and transport it to all governorates of Iraq;

(v) that the above fee was not related to any contractual obligation that AWB had with IGB for discharge or transport of wheat;

(vi) AWB's agreement to pay the fee to an account nominated by the IGB;

(vii) that the fee would be paid to a third party to disguise the payment of the fee to an Iraqi entity;

(viii) in the case of contracts from November 2000, that the wheat price in the contracts also included an additional 10 per cent fee imposed by Iraq, to be recovered from the escrow account, and which was payable to Iraq by AWB;

(ix) AWB's agreement to pay this additional fee to Iraq or an Iraqi entity;

(x) AWB's agreement to pay such fee along with and as if it were part of the inland transportation fee;

(xi) in the case of contracts A1670 and A1680, that the price included the sum of US$8.375 per tonne not related to the price of wheat but being the amount of an alleged debt to Tigris that AWB had agreed with IGB and Tigris would be recovered from the UN escrow account for payment by AWB to Tigris. The US$8.375 per tonne included a sum of US$500,000 (equivalent to US$0.50 per tonne) to be retained by AWB as its commission for recovering the Tigris Debt;

(xii) in the case of contracts A1670 and A1680, that AWB had agreed to pay to Iraq via payments to Alia, in addition to the 'trucking' fee, including a 10 per cent service fee, an additional sum of US$2.016 per tonne as payment of compensation for an iron filings contamination claim;

(b) contrary to the terms of the contracts submitted, AWB did not have any obligation:

(i) to discharge wheat at Umm Qasr or arrange or pay for such discharge;

(ii) to transport, or arrange or pay for transport of the wheat within Iraq;

(iii) and that under the terms of the agreement reached between AWB and IGB, those obligations remained at all times with IGB;

(c) in the case of contracts A4653, A4654, A4655 and A4822, although the contracts submitted did refer to an obligation on AWB to pay 'discharge costs' of up to a maximum of 'USD12.00' (per tonne) 'to nominated Maritime Agents in Iraq':

(i) that clause did not accurately state or reflect AWB's agreement with IGB to pay the inland transportation fee;

(ii) the fee that AWB had agreed to pay under its agreement with IGB was not, as represented by that clause, a variable cost related to the discharge of the vessels and payable to unidentified maritime agents in Iraq responsible for the discharge of the vessel's on AWB's behalf;

(d) AWB applied to DFAT for permission to export from Australia to Iraq the wheat sold by it under those contracts.[224]

335 As mentioned earlier, although not pleaded expressly against Flugge or Geary, ASIC seeks to infer from facts that it says were 'well known' within AWB to assist in inferring that Flugge and Geary knew matters that are expressly pleaded that they knew. I have accepted that this is approach is permissible. ASIC has not alleged, however, that all the matters referred to in the previous paragraph were well known within AWB. As to whether Flugge or Geary knew any of these matters, I will come to that when I deal with the specific allegations made against them.

336 From July 2000, Charles Stott (Stott) had taken over from Officer as General Manager of IS&M and directed that trucking fees be paid directly to Alia.[225]

337 Stott sought to raise with the UN payment delays and discharge issues[226] but never disclosed to the UN the issue of trucking fees, despite a draft letter being prepared by Hogan that would have done exactly that.[227]

338 ASIC says that the letter actually sent by Stott to the UN was heavily edited to suggest (a) that Jordanian trucking companies were responsible for arranging trucks at Umm Qasr, and (b) that AWB was contemplating entering into a contract with those companies to provide additional trucks.[228]

339 ASIC says that inland transport payments changed over time. There was a period of time when only 10 per cent payment was made up-front prior to discharge but this changed over time so that 100 per cent was paid prior to discharge.[229]

340 Nigel Edmonds-Wilson (Edmonds-Wilson) recalls the inland transport increasing. No one explained to him why other than understanding that Iraq was a difficult market. This was the only market that AWB (apparently) took on the risk of delivering to all governorates and it was unusual that there were inland transport payments involved.[230]

341 Edmonds-Wilson said that he does not recall or know how the inland transport component of the price came about.[231] Edmonds-Wilson tried to time the payment of the inland transport fees as close as possible to the relevant vessel being able to discharge at the port and he would refer to the Iraq discharge monitor document for this purpose.[232]

342 Between November 1999 and March 2003, AWB paid a total of approximately US$223 million in IGB fees to the Government of Iraq, in a variety of internationally-traded currencies.[233]

343 Alia was nominated by the IGB as the company to receive the IGB fees, and such fees were to be paid into its nominated bank account in Jordan. AWB knew that it was not responsible for trucking grain within Iraq: it was simply required to pay the IGB fees to Alia.

344 ASIC says that prior to the fall of the Hussein Regime, AWB made no commercial arrangements with Alia or any other entity for the transportation within Iraq of the wheat sold to the IGB. ASIC says that this is to be contrasted with what occurred in late 2003, following the invasion of Iraq, when AWB was required by the Coalition Provisional Authority (CPA) and the World Food Programme (WFP) to fulfil its outstanding contracts with the IGB which had not been completed in the terms in which they appeared - such that AWB was thereby obliged to discharge and deliver the wheat to all governorates within Iraq - and concluded an Agency and Transport Services Agreement with Alia for this purpose (see 'The need for AWB to "really deliver"' below at paragraph 572 and following).

345 ASIC says that from the time it first paid IGB fees to Alia, AWB knew Alia was the conduit for the payment of those fees to Iraq and that a Jordanian company had been nominated to receive these payments because the UN sanctions prohibited the payment of hard currency to Iraq or an Iraqi entity directly. Alia received the IGB fees pursuant to its agreement with the ISCWT, which obliged Alia immediately to remit the fees (less a commission) to the ISCWT and under which Alia was not required to undertake or arrange any trucking services at all.

AWB continued paying IGB fees despite the Canadian complaint

346 ASIC submits that following AWB's initial agreement and implementation of payments of the IGB fees, there was closer external and internal scrutiny of AWB's conduct in relation to the OFFP and the payments of the IGB fees in the period between early 2000 and early 2001. ASIC contends that despite this scrutiny and concerns raised about the integrity and legality of these payments, AWB continued to pay the IGB fees.

347 On 10 December 1999, Flugge wrote to Australian Minister for Trade Mark Vaile, noting Flugge's recent meeting with Iraqi Minister Saleh and the strength of AWB's trade with Iraq; the letter also refers to the impact of UN sanctions on Iraq, 'discussions on trade and future trade between Australia and Iraq' and that 'Australia's position in relation to wheat was very strong and that future trade would continue.' On the question of other potential exports from Australia to Iraq, Flugge stated:[234]

Whilst I recognise this is a difficult political issue, I believe that it may be in the interests of Australia, and particularly agriculture, for the Government to give further consideration to our overall position in relation to Iraq. There is no doubt that sanctions as currently structured are having a very serious and long term impact on the population of Iraq.

348 In early 2000, the Canadian Government complained to the UN about AWB's payment of transportation fees to the IGB. This complaint ultimately led to a meeting in Washington attended by Flugge at which an Australian trade commissioner raised the complaint with Flugge. This event constitutes a major element of ASIC's pleaded case on Flugge's knowledge. I deal with this event in detail below at paragraph 1412 and following.

349 On 20 January 2000, Emons confirmed the terms of the agreement and sale of three new contracts with the IGB, each for 300,000 tonnes of wheat - A4970, A4971 and A4972.[235] The agreed price was stated to be a 'CIF free in truck' price. Paragraph 5 of Emons' facsimile included, under the heading 'Shipment', a provision in the following terms:

The cargo will be discharged free into truck to all silos within all Governates of Iraq at the average rate of 3000 metric tonnes per weather working day of 24 consecutive hours. The discharge cost shall be paid by Seller's to the nominated maritime agents in Iraq. This clause is subject to UN approval of the Iraq Distribution Plan.

350 The short-form contracts that were eventually signed in February 2000 for each of contracts A4970, A4971 and A4972,[236] were not in terms identical to the initial contracts entered into that provided for the inland transportation fees.

351 In particular, the words 'The discharge cost will be a maximum of US$15.00 and shall be paid by Sellers to the nominated Maritime Agents in Iraq. This clause is subject to UN approval of the Iraq distribution', which had appeared in the short-form contracts for the earlier Phase VI sales, save only for a change in the amount of the discharge fee, had been deleted from the versions of the short-form contracts that were eventually signed and submitted to the UN for approval.[237]

352 Thus, the agreement between AWB and the IGB, that the wheat would be sold:

CIF Free on Truck to all silos within all governates of Iraq ... A trucking fee of USD 15 per tonne will be paid ... As per previous contracts, this payment will be made as per your instruction to the Transport company nominated by yourself

The cargo will be discharged Free into Truck to all silos within all Governates of Iraq ... The CIF Free in Truck price per tonne of 1000 kilos is United States of America Dollars as follows: US$ 163.00 per tonne.

353 ASIC says that the short-form contracts AWB submitted to the UN did not reflect the terms of the agreement that AWB had concluded with the IGB.

354 ASIC submits that it is obvious that the agreement to pay the fee was omitted from contracts to be submitted to the Department of Foreign Affairs and Trade and the UN in order to prevent discovery of payment of the fee. ASIC says that a conscious decision must have been made within AWB to deceive the Department of Foreign Affairs and Trade and the UN.

355 ASIC contends that there can be no sensible justification for the change in the terms of the AWB written contract to delete the reference to 'a trucking fee of US$15.00 per tonne' in the short-form contracts to be submitted to the UN, whilst between AWB and the IGB the obligation to pay that sum remained, other than a desire to hide from the UN the fact of payment of significant sums in US dollars to an Iraqi entity and to avoid drawing attention to the fact that such sum was included in the contract price that would be paid from the UN escrow account. That was the reason the change was made.

356 Despite the deletion of the reference to discharge costs from the AWB short-form contracts, there was nevertheless still an agreement by AWB to pay an inland transportation fee in relation to the shipments under contracts A4970, A4971 and A4972. That fee was US$15 per tonne, as provided for in the draft short-form contract.

357 It is not contended by ASIC that these facts were 'well known within AWB' or that Flugge or Geary knew these facts.

358 Emons confirmed that AWB would pay the 'trucking fee of USD 15' in a facsimile to the Director General of IGB, Yousif Abdul-Rahman (Abdul-Rahman) on 9 February 2000:[238]

To confirm our conversation of yesterday. AWB Ltd agree with the terms of the contract that a trucking fee of USD 15 per tonne will be paid on the three contracts of 300,000 tonnes each. As per previous contracts, this payment will be made as per your instruction to the Transport company nominated by yourself.

359 Emons recalled a discussion with Abdul-Rahman in which there was discussion about the increase in the trucking fee to US$15.00 per tonne - Abdul-Rahman said that was the new fee. He did not say why it had increased.[239]

360 AWB Chartering paid inland transportation fees of US$15.00 per tonne on each of the shipments made in fulfilment of contracts A4970, A4971 and A4972. For each shipment, the full amount of the fee due, calculated by reference to the tonnage of wheat loaded, was paid by AWB Chartering prior to each vessel's arrival at Umm Qasr. A total of US$19,542,397.96 was paid between April and September 2000 in respect of the inland transportation fees for these shipments.[240]

361 AWB Chartering was in turn reimbursed the cost of these fees by the AWB Pool. This was through the 'freight' the pool paid to AWB Chartering for the carriage of each shipment to Iraq. The AWB Pool in turn recovered the cost of the fees through the proceeds of the letters of credit drawn on the UN escrow account, which were paid following the discharge of the wheat from the vessels at Umm Qasr.

362 All the inland transportation fees paid by AWB in respect of each of the shipments made under these three contracts were paid to Alia. For some shipments, the payments were made by AWB Chartering to Alia directly. For others, the payment was made indirectly, through shipowners and Ronly.[241]

Flugge meeting with Alistair Nicholas in Washington

363 A meeting occurred in Washington DC on or about 9 March 2000. I will return to this meeting when I consider Flugge's knowledge of the payment of the trucking fees as it is central to the allegations of breach of duty made against him. It is necessary to touch on this meeting at this stage, to continue with the chronological discussion of AWB's conduct in paying trucking fees to Iraq.

364 In summary, a meeting was held at the Australian embassy in Washington DC attended by Snowball (AWB's New York representative), Andrew McConville (McConville) (AWB's Government Relations Officer), Flugge and Alistair Nicholas (Nicholas) from Austrade. ASIC alleges that at this meeting Flugge was made aware by Nicholas of a complaint by another wheat trading country that AWB was making inappropriate payments to the IGB and that Flugge said that he would look into the issue and report back to Nicholas.

Emons' discussion with Flugge in March/April 2000

365 As indicated below at paragraph 1198 and following. I am not prepared to accept Emons' evidence unless corroborated by other evidence. In this instance, his conversation with Flugge is recorded in an email sent by Emons. There is no other evidence to corroborate what Emons claims Flugge said.

366 ASIC submits that in around late March 2000 or early April 2000, Emons had a discussion with Flugge in which Flugge told Emons that he was happy for Emons to continue paying the inland transport fee and that AWB should be accommodating to the Iraqis so that its business in Iraq did not come under threat.

367 This part of the discussion is recorded in an email dated 4 April 2000 sent by Emons to Watson,[242] in which he wrote:

Mike

Couple of issues before we take off for Iraq at the weekend.

1. We need to clarify when we get to Baghdad that the fee on the new contract is USD 15 and that the method of payment remains the same to Alia etc and in what amounts. This is an increase on the last phase which was USD12 you will recall. I suspect we will be confronted with proposals that will be complicated but we will cross that bridge when we get to it. For your information I had a discussion with Trevor Flugge last week to discuss some of the finer points of the trucking fee. He is happy for us to carry on in fact he is determined that we should be accommodating to the Iraqi's so that our business does not come under threat from our US or CWB friends.
2. With the above in mind we need to take with us a list of vessels paid so far and vessels scheduled to load. I have asked [Mr Owens] for a UN payment schedule for Friday before we depart.

368 I am not satisfied that Flugge said what Emons attributes to Flugge in the email.

369 In March or April 2000, Emons arranged a meeting with Abdul-Rahman, but he was not available to meet with Emons on the dates that had been proposed. On 7 April 2000, Emons sent a facsimile to IGB advising of his decision to defer his proposed meeting for that reason, although Emons stated he was nevertheless still planning to meet with the transport company in Jordan.[243] Emons then wrote:

For good order we had wished to discuss the following issues:

1. We had hoped to discuss at our meeting the issue of the payment of the trucking fee. You will be aware of the restrictions that the UN has placed on such payments and as you are aware this now means that we must halt further payments. We have endeavoured to meet the requirements of the IGB but without direct consultation we are now restricted to the accepted methods of payment to be used. We had hoped that we could discuss personally with your good selves this issue due to its sensitivity however if you would prefer we can discuss with the UN as to the appropriate method for paying for the trucking fee ? Please respond by Monday 10th April so an alternative action can be undertaken that does not result in the delay of vessels.
2. We had also wished to discuss the demand by IGB for the inclusion of delivery to Iraq Governates and additional quality requirements over and above those agreed at the time of time of contract negotiation. If this remains a demand of IGB in the Letter of Credit then AWB will be obligated to hold IGB liable for insurance costs and other relevant costs for such a clause and as such we seek a relevant increase in contract price. Please confirm by return that this is in order. If this is not forthcoming all shipments must be halted as IGB will be considered to be in default of contract terms as previously agreed. We would hope that this does not become an issue as it has not previously been a hindrance to our trade.

370 ASIC submits that it can readily be inferred from the pains AWB had otherwise taken to disguise its payment of the fees that this was, in effect, a veiled threat by Emons and AWB to go to the UN about trucking fees if the IGB was not more helpful in contract negotiations.

371 ASIC says that by this time, there can be no suggestion that AWB:

(a) believed that the IGB fees had been approved by the UN;

(b) believed that the IGB fees were a payment to a legitimate transport company for transport services;

(c) did not know that the IGB fees were a payment to Iraq; and

(d) did not believe that the IGB fees were prohibited by UN sanctions.

372 For the reasons discussed at paragraphs 910 and following, I do not accept that these matters were well known within AWB. As to the specific allegations relating to Flugge and Geary I deal with them when I address the specific pleadings against them.

373 Emons met with the Iraqi Minister of Trade in mid-April 2000. During that meeting, the Minister said he was appreciative of AWB's handling of contractual and quality issues compared to its Canadian counterpart and that Canada had taken a negative stance against Iraq since its inclusion on the Security Council. This meeting is recorded in an email from Emons to Joanne Martin copied to various AWB employees including Flugge - 'Minister was appreciative of AWB handling contractual and quality issues as compared with CWB'.[244]

374 At around this time, AWB and Alia entered into a protective agency agreement by which Alia assisted AWB with expediting the discharge of wheat at Umm Qasr on behalf of AWB.[245]

375 The letter of appointment provided that Alia was to be paid US$9,000.00 per shipment inclusive of all assistance, fees, services, communications and tasks. This fee was to be paid in two instalments. The first instalment of US$6,000 was to be paid upon the vessel's departure from the load port and against relevant invoice from Alia. The second instalment of US$3,000 was to be paid upon receipt of all amounts due to AWB against the vessel.

376 This was the only written agreement between AWB and Alia prior to October 2003. Alia issued a number of invoices for protective agency fees (which were very small in amount)[246] but never issued invoices for trucking fees or services.

377 AWB's focus was on speeding up the process of discharge and getting payment from the UN escrow account as quickly as possible. During this time, demurrage was a constant issue discussed within AWB and AWBI given the real costs it was imposing.[247]

378 Alia's appointment as AWB's protective agent was from 17 April 2000. It was not for a fixed period. The letter of appointment provided that Alia's appointment could be terminated by either party upon two month's written notice.

379 ASIC submits that AWB thought it appropriate to document its appointment of Alia as a protective agent and the terms of its arrangement with Alia (including Alia's obligations thereunder), notwithstanding that the amount payable to Alia as protective agent was of the order of a few cents per tonne of the wheat shipped under each shipment. ASIC says that this is to be contrasted with the absence of any similar agreement and the complete lack of any documentation at all, in relation to the services associated with the markedly more substantial inland transportation fees that AWB was also paying to Alia at this time.

380 ASIC submits that the absence of any such agreement and of any documents recording or evidencing such an agreement makes plain that:

(a) AWB had no agreement with Alia pursuant to which Alia was to provide transportation services to AWB in respect of its cargoes and for which it received the inland transportation fees paid to it;

(b) those within AWB did not consider that there was any such agreement between AWB and Alia;

(c) the inland transportation fees paid by AWB to Alia were not a payment pursuant to any such agreement between AWB and Alia; and

(d) the inland transportation fees paid by AWB to Alia were not a payment in return for the provision by Alia of services (in particular transportation services) to AWB.

381 These facts are not alleged to be 'well known' within AWB. As to whether or not Flugge or Geary knew these matters, I deal with those issues when I address the allegations against them.

382 ASIC argues that if there had been an agreement between AWB and Alia to provide transportation services within Iraq under the Hussein Regime, or if those at AWB had genuinely thought that AWB had such an agreement with AWB and that the inland transportation fees were paid in return for the provision of such services by Alia to AWB under such an agreement, that agreement would have been documented, as AWB did with the protective agency agreement in April 2000, and as AWB did in October 2003 when AWB was forced by the CPA and WFP to honour the bargain apparent in the terms of its written contracts and arrange for the inland transportation of the wheat within Iraq.

383 ASIC contends that this circumstance, namely the absence of any documentation that would support any claim by AWB that it had an agreement with Alia to transport wheat within Iraq, is corroborative of AWB's understanding of the relationship, exemplified in Emons' email to Officer on 4 November 1999:[248]

To date IGB have not advised the trucking co to whom payment should be made. We have been approached by a company in Jordan but our response has been to ask for confirmation from IGB before discussing further.

We are not responsible for trucking in Iraq only the payment. Payment to us occurs as per existing contract after UN inspectors cert is issued at discharge.

When I see Zuhair at the end of Nov I hope to clear a number of the details up.

384 On 29 May 2000, Watson and Emons sent an email to Officer reporting on a meeting with 'Transport Co/Protective Agent and also Iraqi Trade Commissioner.'[249] It was forwarded to Geary the following day.[250] The email noted the then current position and action plan in the following terms:

Current

There is no formal agreement between Pool/Chartering, for Iraq

Chartering has worked on the terms of the MOU and IGB/AWB agreed terms and conditions as per the UN Contract. UN Contract does not allow for payment of demurrage/despatch, i.e. no transfer of funds, with exception of trucking fees, as agreed in the contract and approved by UN security council

MOU provides for 3000 mt discharge rate per vessel

- Current discharge rate does not meet the terms of the MOU

- AWB has been approached by IGB to provide 'after sales service'

Current Action Plan

- Determine amount and severity of quality issues

- Determine best possible performance of discharge rates at Umm Qasr

- Determine if any further equipment required to assist discharge rates

- Determine what 'after sales service required' i.e. equipment/cash (Board approval may be required for this)

- Present options to IGB to

(a) slow present shipping period (up to August)

(b) IGB to contribute towards current projected demurrage expense.

385 ASIC submits that it seems from this email that Watson was suggesting that the approval of contracts which referred specifically to a 'discharge cost of up to US$12.00' by the UN was an indication that the payment of IGB fees referable to those contracts had thereby been approved. ASIC says that the email is silent as to whether the mechanism for payment had been approved and whether payment of such a fee in US dollars to the Iraqis had been approved. ASIC says that neither had been approved. Further ASIC says that the recipient of the email, Officer, knew that the payment of IGB fees to Iraq had not been approved by the UN, or was at least a 'grey area'. ASIC says that so too did Geary.

386 Emons discussed with Othman Al-Absi on 29 May 2000 that AWB was experiencing high costs for demurrage - the board had given instructions to the executive to resolve it with haste and Watson and Emons were despatched to Iraq to see the people responsible.

387 Emons discussed the subject of trucking with Othman Al-Absi because of the lack of trucks being available to take grain being discharged. Othman Al-Absi offered suggestions. They discussed with all the parties the materials required to improve discharge and the transportation grain away from Umm Qasr. It was a wide-ranging discussion about the minutiae of how to discharge a vessel. The discussion about trucks was that the trucks available were limited because of the sanctions in place that reduced the amount of parts available to repair broken trucks. Emons and Watson highlighted the fees being paid for trucking and Othman Al-Absi's response was 'Of course you are right but we will do what we can.'[251]

388 ASIC submits that this meeting and email shows that it was the Iraqis who controlled the trucks not Alia. ASIC says that Hogan never saw any railway transportation system in Iraq and it was never discussed.[252]

389 ASIC says that there were no discussions within AWB about how the payment of the transportation fees and after sale service fees fit into the UN distribution plan.[253]

390 Emons says he reported these matters discussed with Al-Absi to Officer, pool management and anybody else concerned with demurrage matter including the finance department. Emons said that the matter would be of interest to the executive.[254] I am unable to accept Emons evidence for the reasons previously referred to.

391 On 30 May 2000, Geary (and others) received an email from Marise Wilson entitled 'Iraq' that forwarded an email from Watson (on behalf of himself and Emons), sent from Jordan, relating to meetings to be held the following day with, amongst others, Zuhair and Abdul-Rahman of the IGB.[255] Watson's email noted:[256]

(a) Abdul-Rahman is a member of the ruling family in Iraq, and that his appointment may allow 'greater control of manipulation of moneys within the trade.'

(b) Vessels from Canada have been rejected 'for alleged contamination by e-coli. It has been suggested that this was due to Canadian Govt action on the UN security council.'

(c) The Iraqi Minister had assured that all four berths at Umm Qasr would be made available for AWB ships.

UN Contract does not allow for payment of demurrage/despatch ie no transfer of funds, with exception of trucking fees, as agreed in the contract and approved by UN security council. ... AWB has been approached by IGB to provide 'after sales service'

Current action plan:

Determine what 'after sales service required' i.e equipment /cash (Board approval may be required for this).

393 This email supports the view that Watson was of the belief that the UN had approved the payment of the inland transportation fees.

394 Emons was instructed by members of the executive, including Officer and Mr Tighe, to resolve the issue of demurrage including a proposal to the IGB to hold part or all of the trucking fees to recover the cost of demurrage.[257]

395 On 31 May 2000, Emons and Watson had a meeting with officials of IGB. The meeting was recorded in a file note dated 13 June 2000 prepared by Emons, which notes that the purpose of the meeting was to resolve demurrage issues at Umm Qasr and to discuss the next phase of the OFFP. The memo records that:[258]

During discussion with IGB the AWB proposed that a method of recovering the cost of demurrage would be to hold part or all of the trucking fee or as an alternative there could be a reduction for future contracts. Discussion to a degree took place however it was clear that the option of AWB holding part or all of the trucking fee would not be acceptable to the Minister (and therefore the Regime). It became clear that there was some confusion in the IGB as to the amount of trucking due, with explanations that the rate on the AWB contracts was different to that charged to some Russians, Thai and Algerian companies. Comment was made that the Minister had proposed to increase the trucking fee to USD 18 per tonne for phase 8 contracts but at the time of the meeting no approval had been received from the President.

The former Director General for IGB and now advisor to the Minister Salah Dr Zuhair joined us for lunch. He had been well briefed prior to joining us from his immediate comments on the discharge problems. He opened with the comment that although the AWB was suffering some immediate problems which was recognised by Iraq we had enjoyed periods of considerable earnings of dispatch. His comment on Trucking cost, made privately away from the main group as we departed the restaurant, was that he had advised the Minister to consider reducing costs but if this did occur there could be a considerable increase in the costs of the 'after sales service' required.

396 ASIC submits that it is apparent from this document that it was well understood by each of Watson and Emons that the so called 'trucking fee' was a guise for fees payable to Iraq. The document speaks of compensation to AWB for future delays in discharge being met by 'reduction of trucking fees or increases in prices.' ASIC says that the former option would not be possible if the trucking fees were the true cost of trucking. Nor would it be possible if the fee was a genuine fee negotiated with and paid to the supposed trucking company in Jordan, Alia.

397 I am not sure what Emons believed. I have found that he was an unreliable witness and I have no confidence in the accuracy of anything he wrote unless independently corroborated. As to Watson, I am not satisfied that Watson did not believe, as many others at AWB did, that the fees had been approved by the UN and were used to meet transportation costs.

398 Similarly ASIC says that, Emons' note that Zuhair's 'comment on Trucking cost ... was that he had advised the Minister to consider reducing costs but if this did occur there could be a considerable increase in the costs of the "after sales service" required' is explicable only on the basis of an understanding that each of the 'trucking fees' and 'after sales service costs' were methods of paying funds or providing goods to Iraq.

399 ASIC says that Emons' references (within the extract from his file note quoted above) to the confusion in IGB as to the amount of the trucking fees due by AWB, to the potentially different rates charged to Russian, Thai and Algerian companies from the fees paid by AWB and to the purposed increase in the trucking fee which was at that time still awaiting the approval of the President further demonstrate that the IGB fees were an Iraqi levy not related to the cost of transport.

400 Other internal correspondence at this time record AWB's attempts to deal with demurrage costs including reducing trucking fees payable to Iraq.[259] This was a real cost to the National Pool.

401 On 31 May 2000, Geary forwarded to Scales and Stuart Richardson (Richardson) an email from Watson which stated in effect, among other things, that:[260]

(a) AWB was to appoint a protective agent in Iraq to handle administrative and logistical issues at Umm Qasr. This was at the suggestion of IGB.

(b) AWB had been approached by the IGB to provide 'after sales service'.

(c) It was to be determined what 'after sales service' was required - equipment or cash were listed as likely possibilities and it was noted that board approval may be required.[261]

402 In June 2000 both Emons and Officer left AWB. The evidence suggests that Emons was sacked. The evidence did not establish whether or not this was due dishonest conduct.

403 On 6 June 2000, Geary attended a meeting of the Small Executive Management Group during which there was discussion of (amongst other things):

• the NEAT litigation, which related to an unsuccessful challenge to AWB's power to control bulk wheat exports from Australia;

• AWB's submission to the Australian government regarding the retention of the Single Desk; and

• the desirability of Geary (amongst others) representing AWB at hearings relating to the Single Desk.

The matters discussed at the meeting and Geary's attendance at the meeting are recorded in draft minutes dated 6 June 2000.[262] The NEAT litigation and issues concerning the single desk arrangements were regularly discussed in meetings of the Small Executive Management Group and the Executive Leadership Group.[263]

404 On 9 June 2000, Watson sent an email to Geary and others setting out details of contracts, freight rates, trucking fees. There is a table attached to the email that shows the inland transport fees of US$12.00 increasing to US$15.00 in relation to some shipments under the OFFP.[264]

405 On 13 June 2000, Geary attended a meeting of the Small Executive Management Group during which there was discussion of (amongst other things):

• AWB's submission to the Australian government regarding the retention of the Single Desk; and

The matters discussed at the meeting and Geary's attendance at the meeting are recorded in minutes dated 13 June 2000.[265]

406 On 26 June 2000 Carol Gordon, AWB's general manager of human resources, drafted a note entitled "Urgent attention for discussion with the chairman."[266] That document states, in reference to new bribery and corruption legislation introduced in 1999:

Payments made to government officials by way of bribery prior to this date cannot be retrospectively investigated ... We have set up a private agency arrangement in most difficult countries (e.g., Pakistan Iran, etc), to get around the issue. This gives us an additional barrier between us and any potentially 'corrupt' payments.

The document discusses agency payments in Pakistan and continues:

... The only other people remaining with AWB that apparently have knowledge of these issues are Mark Emons and Trevor Flugge. Mark is on annual leave, I am not able to contact him, therefore, Trevor is our only source of verification.

407 ASIC submits that it should be inferred that Flugge, at a minimum, was considered by others within AWB to be a person who might have had knowledge of irregular payments made by Emons and/or Officer in connection with AWB's international wheat trade. ASIC says that plainly it was not thought remarkable that the Chairman should have knowledge of such 'coal face' issues. ASIC submits that this is consistent with other evidence indicating that at times Flugge worked closely with Emons and Officer,[267] and was involved in discussions of irregular trading arrangements (such as the trucking fees).

408 ASIC contends that this document is also important for what it discloses of AWB's culture at the time. Keeping in mind that this memorandum was written by the general manager of human resources (and not, for example, front-line sales staff), and is expressly marked "for discussion with Chairman", it suggests that the prevailing attitude within AWB was that foreign bribery and corruption was an 'issue' for AWB to 'get around', and that corrupt payments could be made as long as this was done through third parties, to create a 'barrier' between the payment and AWB. ASIC submits that three years later, this attitude still prevailed - AWB's in-house counsel brazenly advised that improper payments to Iraq could be made if they were broken into smaller amounts and channelled through a third party.[268]

409 ASIC submits that in this environment, it is unremarkable that the Chairman of AWB should have discussed with IS&M employees the means by which the payment of the trucking fees could be made, and their proposed payment through a third party (Ronly), and have endorsed such behaviour.[269]

410 I am not satisfied that the implications that ASIC seeks to infer can be drawn. In any event, I am not comfortably satisfied of the allegations that ASIC makes concerning Mr Flugge. As discussed below at paragraph 1280 and following , I am satisfied that Mr Flugge knew of the payment of the inland transportation fees (as did the board of AWB) but I find that he, like many others, believed that the payments had been approved by the UN.

411 On 29 June 2000, Hogan sent an email to Borlase, Watson, Snowball and others entitled 'Iraq', which identifies issues to discuss before travelling to Iraq.[270] An issue raised under the heading 'Snowy' is:

Free on Truck contract - what is the NY mission position on this arrangement?? I am assuming that the UNSCR 986 has agreed to this condition as it is in the contracts.

412 There was no response to Hogan's question.[271]

413 On 7 July 2000, Borlase sent Hogan a copy of the Iraq Brief June 2000. The brief set out the substance of Resolution 986, contracts AWB had entered into the IGB since 1996, references to demurrage and that the IGB was a long term supporter of Australian wheat.[272]

414 On or about 10 July 2000, Geary and Scales received an email from Peter Jones (Jones) in which Jones lists a number of unresolved issues in relation to the Iraq market, including 'What is Ronly Holdings [sic] involvement in the process...'[273] The email attaches a document entitled 'Iraq Brief June 2000' which materially sets out the background to the OFFP and the effect of UN Resolution 986 (including that the resolution permits Iraq to purchase humanitarian goods). The document also states in relation to the purported inland transportation fee:[274]

Mechanism of payment for trucking fee. In existing contracts the fee is $15.00 per tonne. IGB have indicated the fee will be reduced to $14.00 for future business. Current mechanism of payment is via transport company/s in Jordan.

415 The email and the attached market brief confirmed that the inland transportation fee was a payment to Iraq. This email not only raised important issues concerning the operation of the Pool (for which Geary was then responsible) but also sought from the addressees their short-term and long-term strategies for resolving 'current contract issues' which Jones thought needed urgent resolution.

416 ASIC says that it is unlikely that Geary would have ignored so explicit a request for information. ASIC says that the terms of the email were clear. The emphasised passage quoted earlier did not refer to Alia setting the 'trucking fee' but characterised Alia as being only the 'current mechanism' for the payment of that fee. In this context, the reference to IGB foreshadowing a reduction in the IGB fees plainly indicated that it was IGB who in fact determined the amount of that fee.

417 I leave until I deal with the allegations against Geary to deal with any inferences that is alleged should be drawn against him.

418 On 12 July 2000, Geary received an email from Graham Owen of AWB the material effect of which was to identify various problems in the receipt of payment by AWB from the UN escrow account and make suggestions as to how those problems could be addressed.[275] In the email, Owen noted that AWB had to pay for inland transport on a vessel by vessel basis, and that payment for wheat sold to Iraq was contingent upon UN authentication. On 13 July 2000, Geary received a reply from Snowball to Owen's email, which included the text of Owen's email.[276]

419 The next day, Snowball replied to Owen (copying the original email), copied to others including Geary, indicating that he would work on suggestions to improve the payment process with the UN and BNP.[277]

420 In around early July 2000, the IGB put out a wheat tender. The tender was on a 'CIF F.O.T to Silo to all governerates [sic] of Iraq' basis, and stated that the cost for discharge and land transport would be US$14.00 per metric tonne to be paid to the land transport company.[278] A handwritten notation of 'A0265/66/67' suggests the tender is in relation to contracts A0265, A0266 and A0267.

421 On 16 July 2000, AWB and IGB entered into contracts A0265 (200,000 tonnes), A0266 (400,000 tonnes) and A0267 (400,000 tonnes) each of which included the CIF Free in Truck clause.[279]

422 Details of the sale were provided by Hogan to Geary and others in an Iraq trip report.[280] There is a reference to trucking at US$14.00 per tonne.

423 On 18 July 2000, (and throughout 2000) Geary attended a meeting of the Executive Management Group during which there was discussion of (amongst other things) the single desk and demurrage.[281]

424 On or about 19 July 2000, Geary received an email from Hogan attaching a document titled 'Iraq Trip Report' prepared by Hogan. The report listed the price components of a recent wheat sale contract with Iraq, including a 'trucking' fee of US$14.00 per tonne.

425 On 19 July 2000, Geary sent an email to Stott thanking him for the brief and stating that it was 'a very good result as the Pool's bottom line was achieved and the negotiating team have given us more confidence to move forward with additional sales. We have received enquiries for more sales to Iraq via the Russian Trading houses however will need further details from International Sales before proceeding i.e. final quality specs, contractual terms etc.'[282]

426 On 31 July 2000, Stott sent an email to Snowball (copied to others within AWB) in which he wrote:

We need to have a chat about Iraq. We have a number of contractual problems that need to be sorted and many of these involve the UN. For example:

...

• Iraq does not guarantee discharge rates at UMM Qasr, nor do they pay demurrage/dispatch at discharge port. The argument is that it is a US$ transaction which is not allowed by the UN. The affect is, that the Iraq's discharge our vessels at low rates and we get hit with massive demurrage bills. Solution, change contract to guaranteed discharge rate with Iraq being obliged to pay Dem and earn dispatch. AWB to keep the dem/despatch account for Iraq and settle with owners on behalf of Iraq', surplus funds if and when available to be refunded Iraq.

• payment mechanism is very slow, we need to find out why and get it sped up, it currently cost around US$3 per tonne to finance the shipments, we pay cash for freight on shipment, but do not receive proceeds until approximately 3 months after bill of lading date. The Iraq's claim the UN is slow, the UN claim it is BNP. AWB needs to fix it because at the moment the Australian Wheat growers is financing the UN system. [283]

427 ASIC argues that the first dot point makes clear that Stott was aware of restrictions on the payment of moneys to Iraq.

428 ASIC contends that the observation in relation to AWB having to finance the freight on shipment until it was paid from the proceeds of the sale of the wheat applied equally to the inland transportation fees that AWB was at that time paying before the cargo had been discharged, and which AWB or the AWB Pool was having to fund until such time as the proceeds of the sale of the shipment were received under the letter of credit drawn on the UN escrow account.

429 Advice was sought from DFAT in relation to the demurrage issue. In relation to that topic, after identifying the various UN Security Council resolutions that control the ability to make payments to Iraq and summarising their effect, Ms Gabrielle Simm (Simm) of DFAT provided the following advice on AWB's proposal:

8. The AWB states that it currently incurs substantial demurrage bills due to delays in unloading wheat shipments at the Iraqi port of Umm Qaser. It proposes establishing a type of trust account, controlled by the AWB and held for the benefit of Iraq, into which the AWB would pay despatch (a bonus where shipments are unloaded ahead of time) and presumably, although it does not state this, demurrage (a fine when shipments are unloaded late). The AWB proposes to use these funds to provide grain handling equipment and technical training to Iraq.

9. The proposal to establish a type of trust account for Iraq controlled by the AWB would breach UN sanctions. Money paid to Iraq must be paid into an escrow account established by SCR 707 and 712 or in accordance with SCR 986. The sale or supply of grain handling equipment is prima facie prohibited by SCR 661 OP 3(a) and (b) and would need to be approved by the 661 sanctions committee.

10. It may be possible to negotiate with the UN to introduce some form of incentive for timely unloading of shipments into the contracts for provision of wheat to Iraq. One way would be to approach the UN to make incentive payments out of the escrow account, rather than setting up a new trust account controlled by the AWB, which would breach current UN sanctions. [284]

430 Simm summarised her advice on this issue in the following terms:

1. The AWB's proposal to establish a trust account for Iraq as an incentive to unload shipments more quickly breaches current UN sanctions against Iraq. It may be possible to discuss with the UN Treasury other methods of encouraging Iraq to unload wheat shipments more quickly without breaching the sanctions regime, for example, an incentive payments scheme operating within the escrow account.

431 As at August 2000, the advice from DFAT to AWB was that AWB could not reintroduce liability for demurrage and despatch under its contracts with IGB and manage those payments by a scheme along the lines proposed by Stott in his email of 31 July 2000. To do so would contravene UN sanctions. If demurrage/despatch was to be payable as between AWB and IGB, then it would have to be either operated though the UN escrow account or dealt with in some other way.

432 On 2 August 2002, Geary received an email from David Johnson (Johnson) which noted that AWB had just received an email stating that two AWB vessels currently on berth in Iraq had ceased discharging because iron powder was found in the hatches and rejected another vessel due to the presence of a dead rat.[285]

433 On 2 August 2002, Geary received an email from Long, the material effect of which was that AWB was sending an AWB delegation to Iraq including Flugge, Andrew Lindberg (Lindberg) managing director and chief executive officer of AWB, and Long to discuss the Iron Filings Claim.[286]

434 On 5 August 2002, Geary received an email from Johnson, in which Johnson noted that the Northern Duchess and the Tuo Hai (two of the vessels allegedly contaminated with iron powder) had been moved off berth until the AWB delegation arrived for discussions.[287]

435 On 7 August 2002, Geary received an email from Stott, which was a forward of an email from Mr Davidson-Kelly. Part of the email from Mr Davidson-Kelly read:

Would your delegation be willing to deliver a letter from me to the Trade Minister, asking him to stimulate action re the loan repayment? Obviously they would only deliver it if things were going well!

As for the letter see no harm in carrying the letter for Norman but suspect that the atmospherics are not going to be conducive to it being tabled.[288]

436 On 7 August 2002, Geary received an email from Johnson which noted that a further AWB vessel was reported to have iron powder contamination, and that the three rejected vessels could be unloaded if the grain was sieved at a cost of US$7.00 per tonne.[289]

437 On 12 September 2000, Geary received an email from Hogan which set out a breakdown of the pricing of contracts A0265, A0266 and A0267 showing that the contract price included a 'trucking' fee of US$14.00.[290]

438 On 21 September 2000, Ingleby emailed various executives, including Tim Goodacre (Goodacre), Stott, Geary and Watson, confirming that the new arrangements for AWB Chartering would be agreed and confirmed the next day.[291] Ingleby suggested that this was urgent because:

... we seem to find new ways for chartering to lose money each month - this month Yemen demurrage (0.5m) and Iraq trucking (0.5m) - are we sure these are to chartering's account ??[292]

439 On 23 September 2000, Mr Cowan (of chartering) responded to Ingleby stating:

Michael Watson has argued, at length, that the trucking fee was not for our account.

Mark Emons & Nigel O. wanted to disguise AWB payments into Iraq for trucking fees

This was achieved by chartering taking a forward contract with Ronly to combine the freight

and trucking payments.

The new regime has not supported this agreement and Chartering have incurred the cost to buy out of the deal.[293]

440 Later that day on 23 September 2000, Stott replied to Ingleby, including Geary as an addressee. This response included the statement:

I am advised by David [Cowan] that the USD 300,000 (AUD500k) payment to Ronly relates to the US 0.20cents per tonne fee that we agreed to pay for Ronly making Iraq freight and land transport payments on behalf of AWB...This is an AWBI expense.[294]

441 In October 2000, Hogan and Stott travelled to Iraq and met with Abdul-Rahman and Zuhair. The meeting is described in a draft trip report submitted by Hogan to Stott by email on 21 October 2000.[295]

442 Hogan's draft trip report reported on (among other things) a proposed increase in the IGB fees:[296]

New Business: Phase 9:

Iraq will be increasing the trucking fee to USD 35.00 for shipments to Umm Qaser and 5% of contract price for other ports.

Phase 9 negotiations will take place in late December or early January.

443 ASIC contends that there was no mention of any reason or justification for the proposed increase of 150 per cent. ASIC says that it was not related to the actual cost of transport, because it was not referable to where the cargo was going and, in the case of goods from places other than Umm Qasr, the amount payable related to the price or value of the goods and not the cost of handling or transporting them.

444 ASIC says that as it turned out, the increase in the IGB fees took effect sooner than foreshadowed by this note. Contract A0430, a Phase VIII contract concluded on 2 November 2000, IGB fees of US$25.00 per tonne.[297] Moreover, by Phase IX the IGB fees payable had increased to an amount greater than US$35.00 per tonne. ASIC says that there was no mention in Hogan's draft report that Stott protested at the proposed increase in the trucking fee to US$35.00. ASIC says that could only be because he was aware that the sum for the trucking fee was included in an inflated price of wheat and would be recovered by AWB from the UN escrow account.

445 Hogan's trip report[298] also reported on a complaint about payment of IGB fees:

IGB presented AWB with a list of vessels that have only had 90% of trucking fee paid. The total tonnage that IGB claim has only been paid 90% is 998,423 = USD11.98 million (@USD12) = USD1.198 outstanding. This figure is based on trucking fee of USD12.00 per tonne (which needs to verified against all contracts)

Action:

AWB to investigate payments against contracts since the inclusion of the trucking fee.

446 ASIC contends that it is significant that both the complaint that payments of the IGB fees were still outstanding and the list of those outstanding payments were being raised at that time by the IGB and not by Alia, to whom the payments were being made. ASIC says that this suggests that the IGB fees were being received in Iraq.

447 In around August 2000, Hogan became aware that Ronly was involved in the payment of transport fees to shipping companies.[299] Hogan was not told why Ronly or a Ronly nominated company was an intermediary for transport costs.[300]

448 On 7 October 2000, in response to a request for information from Geary, Snowball sent an email to Scales copied to Geary and others entitled 'Re: Iraq' which summarised the UN stance under the OFFP, namely that the UN would not arbitrate/influence the terms and conditions of the contract as long as there was no threat of the oil money being used for things like purchasing weapons - the UN secretariat was responsible for ensuring 'the goods Iraq purchases are for humanitarian food/medicine and that there are funds from the sale of oil to pay for the goods.'[301]

449 On 20 October 2000, Flugge wrote to The Honourable Mark Vaile MP, Minister for Trade, setting out the importance of the 'very important' Iraqi market to AWB, noting that trade with Iraq occurred subject to UN Resolutions, and explaining that the Australian government's attitude to Iraq at the time could impact AWB's wheat exports.[302]

450 On 22 October 2000, Stott sent an email to Goodacre, copied to Hogan, attaching a document entitled 'Iraq Update October 2000'. This update covered issues including demurrage, delay in payments, trucking delays and issues with the UN procedures.[303] Under the heading 'Trucking', the update states:

AWB's shipping agents reported that discharge had been reduced due to a lack of trucks. The minister and IGB refute that is a shortage of trucks.

451 On 23 October 2000, Geary received an email from Scales of AWB, which forwarded an email that Stott had sent on 23 October 2000 in which Stott noted that during his recent visit to Baghdad, the IGB had asserted that the 'trucking fee' in respect of particular shipments of wheat had not been paid in full and that the IGB claimed that US$1.198 million was outstanding. The email stated that 'this figure is based on trucking fee of USD12.00 per tonne (which needs to verified against all contracts)' [sic].[304]

452 Stott stated that AWB needed to compile an itemised list of the names of vessels and the quantum of trucking costs yet to be paid to the IGB. 'The IGB wants this settled quickly...'[305] Further emails were sent internally discussing whether payments were outstanding.[306]

453 On 24 October 2000, Geary (and others) received an email from Scales entitled 'Iraq questions' that stated '5. what is the agreement with IGB on no. of trucks available to AWB and has the cost been locked in?'[307]

454 ASIC submits that these emails, many of which were received by Geary, confirmed that Iraq was responsible for trucking, not Alia and was the recipient of the IGB fees.

455 On 25 October 2000, the IGB sent an email to Stott seeking quotes to supply '300,000MT of hard wheat and a further 300,000MT of soft wheat, price to include new trucking fees of US$25.00 per tonne paid in Euro or any acceptable European currency.'[308]

456 Also on 25 October 2000, Hogan sent an email to Watson, in which he wrote:[309]

Further to C.S [Charles Stott] note - can you please provide an update on the 90% and 10% payment of trucking fee.

Attached is a list of vessels which IGB claim have only been paid 90%.

Can you confirm amounts paid by AWB against each vessel and who we paid - i.e. trucking Co. directly or via Ronly accounts.

Also how are we able to check that final balance 10% is paid? Do AWB pay 100% up front (or 90%) and 10% balance?

457 On 26 October 2000, Watson replied to Hogan's email of 25 October 2000:[310]

thanks for the list of vessels, that IGB claiming not received the balance of 10pct trucking fees

Having checked our records, can advise that 100 pct of trucking fees for all vessels have been paid to IGB's nominated trucking company

Trucking company has also confirmed they have received 100 pct trucking fees and have paid IGB.

458 ASIC says that the emphasised words again make plain that AWB knew the inland transportation fees paid by AWB to Alia were in turn being remitted by Alia to the IGB and thus Iraq. ASIC submit that it was widely known within AWB that these fees were paid to the IGB.

459 On 30 October 2000, Hogan sent a fax to the IGB offering to supply wheat on the basis of negotiations in USD currency to be converted to Euro upon agreement; and that "transport charge is USD25.00 per tonne, via Umm Qaser to all Governorates, Iraq."[311]

460 ASIC says that Hogan noticed in around October 2000 that the inland transport charge was US$25.00 per metric tonne as it was different to the US$35.00 AWB had been told the month earlier. ASIC says that there was no explanation for these price changes. ASIC submits that no questions were asked about these price changes.[312]

461 Hogan recalled first being informed about that 10 per cent would be added to the price which was called an after sales service fee on 1 November 2000 during contract negotiations on the telephone late in the evening with Abdul-Rahman. Abdul-Rahman said 'we've changed it to USD25 and adding on this after sales service fee.'[313] Hogan discussed with Stott the after sales service fee and what the IGB was implementing and AWB proceeded with the business.[314]

462 On 2 November 2000, AWB entered contract No. A0430 with the IGB to supply 300,000 tonnes of wheat.[315] This sale was confirmed by an internal email from Hogan to various people on 2 November 2000. In that email,[316] it is stated that:

10% will be added to px and included into trucking fee - i.e. IGB will confirm USD214.50 and T/Free will be USD44.50 ... this has been approved by UN (as per IGB - I will get this in writing).

463 The 10 per cent addition came to be referred to as the 10 per cent after sales service fee. ASIC submits that Hogan did not seek or obtain confirmation from anybody about what the position was with the UN in connection with the Free in Truck arrangements.[317]

464 ASIC says that the differences in the prices for the two contracts in February 2001[318] arose because of the application of the after sales service fee.[319]

465 The AWB short-form contract[320] contained no reference to any 'discharge cost' or inland transportation fee or to any obligation on the part of AWB to pay either. It also contained no reference to the additional 10 per cent after sales service fee that had been imposed by the IGB, to any obligation to pay that fee, or its inclusion within the inland transportation fee.

466 The IGB produced a long-form contract in respect of this sale.[321] It also contained no mention of the inland transportation fee, of the additional 10 per cent, of the inclusion of that additional 10 per cent in the inland transportation fee, of AWB's agreement to pay these fees, or of the inclusion of the inland transportation fee including this additional 10 per cent as a component of the price payable by the IGB to AWB.

467 In late 2000, AWB obtained a report from accounting firm Arthur Andersen which had undertaken an investigation and reported on integrity risks in connection with IS&M. The Arthur Andersen report dated December 2000[322] expressed its overall conclusion as:[323]

The concerns initially raised by AWB management were supported by the identification of red flags/risk factors for illegal and improper acts. A number of the red flags were shown to be explainable and reasonable, however, other red flags remain significant risks to AWB. The control of these risks is important to the organisation and to the protection of its employees.

The Integrity Risk Review has uncovered a number of areas that could be improved. There are opportunities to create a better culture within the organisation that will reduce the likelihood of the incidence of integrity risks.

The ethics of AWB staff is critical to the reputation and integrity risks of AWB. Particular higher risk areas such as the marketing of products, shipping and finance were assessed at a high level through this review. We found incidents that created ethical questions such as the offer of gifts, entertainment and money were encountered by your employees. We found that the incidents while not frequent did cause concern to your staff. Reduction of these risks can be achieved through education, improved communication, a consistent AWB policy and the enforcement of that policy. Other methods can be implemented to review and prevent incidents such as rotation of staff, audits, awareness of ethical issues and dilemmas that may be encountered.

1.6 Key Recommendations

It is recommended that AWB:

- Conduct an assessment of the ethical culture at AWB.

- Create a transparent environment where employees are encouraged to report incidents, risks and improper conduct;

- Construct controls that will prevent and deter illegal or improper conduct;

- Educate staff in relation to risk, controls and expectations of AWB.

468 In its detailed findings concerning Emons, Arthur Andersen wrote:[324]

Iraq - Inland Trucking:

During our review we found a number of email records that related to Iraq. These records contained indicators of integrity risks or red flags. We conducted a review of the Iraq dealings. The main aspect of these findings is the state of mind, knowledge and involvement of AWB employees.

Mr Watson informed us that approximately two years ago a UN tender for 'Free on Truck' was in place. IGB (Iraq Grain Board) would pay the trucking fee to AWB together with the C and F value. AWB would remit the trucking fee to the Jordanian trucking company transporting the grain.

AWB received information that apparently originated from the AWB New York Office that the UN were asking about the payment to the trucking company. The information was that the Canadians had asked for an inquiry into the arrangements.

Mr Watson informed us that this raised concerns at AWB about future sales to Iraq. There was AWB management pressure to maintain the sales to Iraq. He advised that Mr Emons and Officer wanted to find ways to avoid attracting the attention of the UN.

We were informed by Mr Aucher and Owen of Trade Finance that they were approached by Mr Emons to assist in structuring payments. They declined to have anything to do with it.

The next solution to the situation was to have the shipping company's owner make the payments to the trucking company on behalf of AWB. Mr Watson approached some ship companies such as SANKO who refused to conduct the payment. He stated that they advised him that they did not wish to break UN laws. One company asked why AWB did not wish to make the payments themselves. Mr Watson then approached another company who did make the payments. This company made two payments to the Jordanian trucking company. They withdrew from making any other payments to the trucking company after inquiries were made by the Singapore Monetary Authority for suspicion of money laundering. AWB were asked to support the transactions with a letter.

Ronly then provided the mechanism to make the payments to the trucking company. Two methods were utilised. The first was that AWB make two payments, one to Ronly for the trucking fees and the second to the ship owner for the freight. The second method was to make a single payment to Ronly. Ronly would then make two payments one to the ship owner and the other to the Jordanian trucking company. Mr Watson authorised the payments to Ronly. These payments were made through a Liechtenstein company. Mr Watson said that there was concern that payments made by Ronly in the UK would attract UN interest. Ronly for its part in the transactions received a payment per metric tonne (20 cents). We were informed that Ronly held the full amounts of these payments in their accounts for 20 days or more.

Mr Emons was the one who spoke to Mr Watson about the structure of the payments in the first instance. It was Officer who instructed him to conduct the payments through the shipping companies and then through Ronly. Mr Watson arranged the trucking payments as part of the freight.

The payment of the freight is paid at 90% until the confirmation of the letter of credit came through then the final 10% is paid. There has recently been an issue with the payments as to whether AWB has paid the full amount. Iraq has claimed that only 90% has been paid. Mr Watson informed us that the Iraq systems are poor. The death of the Iraqi official responsible for the grain contracts, a person known as Zuhair, may have affected the Iraq knowledge of the payments.

There are a number of red flags that the employees were faced with in relation to these payments. This type of arrangement could be misinterpreted as a money laundering process. There were a number of clear warning signs in relation to these transactions that were not fully explored by AWB in legal or commercial terms. For example the issue of trying to use ship owners to make payments on behalf of AWB potentially damaged the reputation of AWB as would the attempt to disguise the transactions.

The current management have removed this payment process through Ronly. There has been a recent increase in the trucking cost to $45MT. This appears to be high. There may be a risk that this money is being diverted to other purposes. There may be a risk to AWB of excessive trucking fees.

469 In reporting related to Watson, Arthur Andersen noted:[325]

Michael Watson stated that the extra payments were commissions to the best of his knowledge. That the 'friend in the middle east' is probably Zuhair. Zuhair dealt with Mr Emons. Zuhair was the one who instructed which trucking company to be used. At an airport lounge one time Mr Emons received a mobile phone call and said that it had been Zuhair who had asked if extra payments could be made. Mark said that he told him that he could not make those payments.

470 ASIC contends that a reading of these passages makes clear at least the following:

(a) The culture of AWB and its employees required review and attention so far as ethical dealing was concerned.

(b) Payment of the IGB fees in Iraq was a concern. The concern arose for a number of reasons:

(i) There had been an inquiry from the UN about AWB's payment of IGB fees.

(ii) AWB had sought to hide or disguise the payment of the IGB fees.

(iii) There had been AWB management pressure to maintain sales to Iraq. Avoidance of UN scrutiny of IGB fees was necessary if such sales were to be maintained.

(iv) Entities requested by AWB to make payments of IGB fees on its behalf had declined because of fears such payments may have been in breach of UN sanctions or may have constituted money laundering.

(v) Increases in IGB fees appeared excessive, with the risk that some portion of the fees may be diverted to purposes other than trucking.

471 ASIC says that notwithstanding the red flags in the Arthur Andersen report, AWB continued to enter into contracts with the IGB and pay trucking fees directly to Alia and via shipping companies.

472 ASIC says that the Arthur Andersen report drew senior management's attention to the risks associated with the payment of greatly increased inland trucking fees, and the possibility that some portion of fees may have been siphoned off to Iraq. AWB management failed properly to address the risks raised in the Arthur Andersen report.

473 Geary says that ASIC tendered no evidence to show that the Arthur Andersen report was seen by the board of AWB. Further, Flugge submits that the Arthur Andersen report forms no part of ASIC's pleaded case.

474 The departure of Watson, Officer and Emons, which had already occurred by the time the final report came to be discussed in February 2001, was apparently regarded as removing risks associated with the 'ethics and culture' of AWB employees, which Arthur Andersen had recommended be assessed. ASIC contends that until Project Rose inquired into some of these matters in June 2003, there was no inquiry into the culture at AWB, why AWB employees had thought it necessary to disguise payments of trucking fees, the circumstances relating to the payment of trucking fees to a Jordanian company, the reason for the significant increase in trucking fees, or why AWB agreed to pay such increased fees.

475 Flugge submitted that ASIC are not entitled to rely on the Arthur Anderson report as it was not pleaded against Flugge. In particular, Flugge submits that in the course of oral closing submissions, it was suggested that Flugge ought to have called for the Arthur Andersen report in relation to the Integrity Risk Review of conduct within the IS&M group. Flugge says that there are several insuperable difficulties with this submission:

(a) The Arthur Andersen report is not the subject of any pleading by ASIC. This of itself is fatal.

(b) Not one director called by ASIC gave any evidence about having seen the report until the time of the Cole Inquiry. The Arthur Andersen report was not the subject of opening.

(c) As the allegation was not raised, there was no cross-examination about the matter. It was not even in the Court Book when the case was opened.

476 For all of these reasons, Flugge submits that the submissions concerning the Arthur Andersen report should be disregarded. ASIC has not, in any event, identified a single board minute at which that report was referred to.

477 A short-form contract was prepared within AWB for each of contracts A0552[326] and A0553.[327] Both short-form contracts were dated 2 February 2001 and signed on behalf of AWB by Hogan.

478 Both contracts were substantially in the same terms as AWB's last contract with the IGB, namely contract A0430. The price was described in each contract as a 'CIF Free in Truck' price and the shipment clause provided for the cargo to be discharged 'Free into Truck to all silos within all Governorates of Iraq'.

479 ASIC submits that neither of these short-form contracts referred to AWB's obligation to pay either the inland transportation fees, or additional 10 per cent after sales service fee, or to the amount of those fees. Neither short-form contract disclosed that the amount of the inland transportation fee payable included the additional 10 per cent after sales service fee.

480 Long-form contracts were prepared by IGB for each of contracts A0552[328] and A0553.[329] Both long-form contracts were in the same form as the long-form contracts that had been prepared by IGB in respect of its earlier purchases from the AWB under the OFFP. Neither long-form contract contained any reference to the inland transportation fees, to the 10 per cent additional fee, to its inclusion within the inland transportation fee, to AWB's obligation to pay either fee, to the amount of either of those fees or to the inclusion of these fees as components of the price at which the wheat was sold under these contracts.

481 By two facsimiles addressed to the Abdul-Rahman dated 2 February 2001, Hogan confirmed the terms of these two contracts.[330]

482 The facsimile for contract A0552 was in the following terms:[331]

AWB is pleased to confirm the sale of Australian Wheat to Iraq. Please note the following specific terms as agreed;

1. AWB will pay USD 14.00 PMT in equivalent agreed currency for partial payment of transport fee prior to the vessel arriving in Umm Qaser. Balance of USD30.80 PMT will be paid as final payment of transport fee within 1 week of receipt of UN payment being received by Sellers. Total transport fee payable is USD 44.80 PMT in equivalent agreed currency.
2. Contract to be converted into agreed currency on the 5th of February 2001.

483 On 7 February 2001, email groups including 'International-All' (which included Geary as the GM of International) and 'Marketing-All' (which Hogan thinks included Geary) and Goode, Flugge's personal assistant, were sent an email from Borlase of AWB attaching a document entitled 'Iraq Trip Report' prepared by Hogan and Borlase.[332] The trip report referred to the increase in the ITF and the introduction of the 10 per cent after sales service fee by the Iraqis:[333]

Trucking Fee/Services Fee - The trucking fee is now USD25.00 pmt all Governates [sic] of Iraq with a 10% service fee on the entire FIT value of the contract**.** We believe the increase in trucking fee and addition of the service charge is a mechanism of extracting more dollars from the escrow account. AWB have agreed to remit the trucking fee in a foreign currency other than US Dollars (most likely in DM) in 2 instalments...

484 The report also noted in connection with Canadian wheat:[334]

300k of Canadian wheat has completed discharge against a previous phase contract. We believe this completes contracts that CWB ceased shipping last February due to rejection of 3 vessels on a quality basis. The quality problems have not totally ceased for CWB as they have a vessel "Sea Angel" that arrived at Umm Qasr on 31st December 2000 and only completed on 2nd February 2001. The vessel was rejected for small quantities of bin burnt grain.

IGB gave us an indication the Canadians are keen to pick up business against with IGB. They have offered to do some repairs to the silos and port facilities at Umm Qasr.

In previous business CWB or Canadian Government have refused to offer on a FIT basis choosing only to offer on a CIF Umm Qasr basis. This has obviously irritated Iraq, providing AWB with excellent opportunities to take 80-85% of the business over the last 12 months. CWB have agreed to soften this approach by offering the business to the trade passing on the responsibility of FIT and associated payment mechanisms. A list of 8 companies CWB will deal with has been supplied to IGB.

485 According to Hogan, the email address "AWB International All" meant the pool or AWB International including Geary, "International marketing" meant each of the marketing desks and chartering and Jane Goode was either Murray's assistant or Flugge's assistant.[335]

486 In February 2001, Hogan concluded that the Iraqis and the AWB were milking the inland transportation fee.[336] Hogan spoke to Stott about his concerns with the increase in trucking fees and the after sales service fees and was told to continue with how they were doing business. Hogan gave evidence that no-one raised the issue with him at any point.[337]

487 ASIC alleges that Flugge received notice of this report. This is pleaded by ASIC and dealt with below at paragraph 1627 below and following when I deal with Flugge's knowledge.

488 ASIC says that the February 2001 trip report was widely circulated within AWB. ASIC submits that it can therefore be concluded that, from February 2001, it was widely known within AWB that:

(a) the increase in the trucking fee and addition of the 10 per cent service fee was considered to be a mechanism for extracting money from the UN escrow account;

(b) the trucking fee, which included the 10 per cent after sales service fee, was to be received by Iraq; and

(c) the trucking fee, which included the 10 per cent after sales service fee, was to be used by Iraq for purposes other than trucking.

489 Moreover, ASIC says that the wide circulation of the trip report, and the many people within AWB who by now had been privy to communications concerning the IGB fees, puts paid to any suggestion that might be made that the payment of the IGB fees was a frolic by a small number of AWB employees.

490 ASIC says that the trip report makes clear that AWB was gaining 80 to 85 per cent of the Iraq market through its willingness to engage in conduct that another national wheat board had found unpalatable.

491 Following the Iraq trip report, AWB continued to pay trucking fees to Alia and enter into contracts with Iraq which incorporated the trucking fees into the wheat price in the period from early 2001 to March 2003.

492 On 23 March 2001, Rowland, a chartering officer with AWB, sent an email to Snowball (in AWB's US office) raising a query regarding the introduction of a levy of 50 cents per tonne to be paid in cash to Port Agents prior to the discharge of a vessel:[338]

Tim we have recvd the foll msg from Iraq State Port Agents whom hve introduced a levy of USD 0.50 cents p/mt to be paid in cash to them prior to a vessel being able to take berth and discharge. This charge has only just been introduced and the Iraqi's are making it retrospective to the 11/3/01.

All vessel's that call Iraq have been paying USD 1500.00 in cash to the Iraqi port state agents for normal port agency but this charge is a cargo based charge in addition to the USD 1500.00 per vessel.

Dom is of the opinion that this charge contravenes the UN sanctions on Iraq as nobody is meant to be able to transfer US Dollars into or out of Iraq without UN approval.

Can you please confirm this is correct and that this charge is in effect illegal under the current sanctions.

Foll is excerpt of msg recvd from Iraqi Port Agents re this charge. QTE

FM: ISCWT Basrah

RE: Agency fees at Umm Qasr port

In order to cover agencies expenses and services for vsls calling Umm Qasr port flwg amount to be paid as from 11/3/2001

1 - USD of 50 (fifty cent) per m/t or cbm which is greater 2 - USD 10 (ten) per container 20 or 40 and car

above amount to cover agencey expenses as well as tally clarks

3 - USD 1500 for each call to cover communication and transportation and all other services mentioned in para (1) and (2) above if vsl not paid a/m amount then will not be allowed to enter and berth Umm Qasr.

Also the vsl's not paid a/m charges they have to paid same imdtly and since 11/3/2001 pls confirm.

Best rgds. ISCWT-Basrah [sic]

493 Snowball made a note of the conversation that he had with Bronte Moules (Moules) from the Australian Mission in New York, on 26 March 2001.[339] According to Snowball's note, he was informed by Moules that:

Iraq can charge port fees (not a sanctions issue) but only pay in Iraq (dinars) currency. Technically in breach of sanctions, but sanctions committee have been aware. Was a recent case where it was tried to include in [unsure of word] a sanction committee rejected it.

• putting contracts on hold if large amounts of money being handed over.

Any US dollar to Iraq government is a definite no but sympathy for the situation and the sanctions committee will look at it - could take one - two weeks.

Just got the new 1.0 mmt approval

→ will DFAT Canberra know.

494 Following his conversation with Moules, Snowball responded to Rowland's email in an email dated 25 March 2001:[340]

As we discussed on Friday, Bronte Moules from the Australian Mission to the UN will be following this up directly with the UN on Monday. Bronte had heard of a similar USD/mt charge that Iraq has been trying to place on other bulk imports. Bronte seemed to think that the current USD1500 flat fee for normal port agency fees does not violate current sanctions procedures, but the USD0.50/mt would.

I will let you know as soon as possible.

495 On 27 March 2001, Snowball sent an email to Rowland which outlined the advice he had received from Moules the preceding day: [341]

Mark

Bronte Moules came back to me today with the following:

Iraq has the ability to charge port fees, but payment of these fees need to be in Iraq currency. Any payments in USD to Iraq are breaching sanctions**.** The USD1500 the vessel has been paying on past shipments is therefore technically in breach of sanctions. The sanctions committee has actually been aware that these types of payments have been happening but have been turning a blind eye if the amounts are not excessive. If the USD amounts are quite large, there has been cases where the sanctions committee has put contracts on hold, even if the amounts are included in the actual contract. The only way around this is to pay in Iraq currency, not USD, but this is obviously quite difficult.

The sanctions committee are aware of the problem we have with the USD0.50/mt charge and they have promised to look into it. This would be expected to take 1-2 weeks.

496 ASIC submits that in addition to the to the proposed port fees, the only relevant discussions that AWB had with DFAT and the UN concerned payment delays and discharge times arising from the OFFP procedures.

497 In May 2001, Hogan travelled to Iraq with Jones (general manager of chartering) and Rowland. On this trip Hogan met with Varoojan, a representative of Alia, at his home office in Basrah. Varoojan told Hogan that Alia had nothing to do with trucking and that it was really a conduit for the passing of money to the ISCWT in return for which it received a small commission. Hogan made a note of this in his workbook.[342]

498 In June 2001, Hogan negotiated with Abdul-Rahman a contract for the sale to IGB of a further one million tonnes of wheat. This was concluded as a sale under Phase IX of the OFFP.

499 The sale was completed in Baghdad on 6 June 2001. The sale was split into two contracts, namely contract A0784 and A0785. Each contract was for 500,000 tonnes. The sale was confirmed in a facsimile from Hogan to IGB dated 7 June 2001,[343] which set out the relevant terms. There were slight differences between these two contracts in relation to the quality of the wheat sold and price. Otherwise the terms of the two contracts were essentially the same. Although the price for which the wheat was sold was initially negotiated in US dollars, it was subsequently converted into and expressed in euros.

500 An inland transportation fee was payable by AWB under each of the contracts comprising this sale. The amount of the inland transportation fee differed slightly between each contract. For shipments under contract A0784, a fee of US$46.70 or €55.17 per tonne was payable by AWB,[344] and under contract A0785, the fee payable was US$46.90 or €55.40 per tonne.[345] The inland transportation fee payable under each contract included an allowance of US$0.50 per tonne for port fees.[346] Under both contracts, the inland transportation fee was '100% payable before vessel discharge.'

501 A short-form contract was prepared within AWB for each of contracts A0784[347] and A0785.[348] Both short-form contracts were dated 6 June 2001 and signed on behalf of AWB by Hogan.

502 Both contracts were substantially in the same terms as AWB's preceding two contracts with IGB, namely contracts A0552 and A0553. The price was described in each contract as a 'CIF Free in Truck' price and the shipment clause provided for the cargo to be discharged 'Free into Truck to all silos within all Governorates of Iraq.'

503 Neither of these short-form contracts referred to AWB's obligation to pay the inland transportation fees, or additional 10 per cent after sales service fee in respect of shipments made under that contract, or to the amount of those fees. Neither of the short-form contracts for contracts A0784 or A0785 disclosed that the amount of the inland transportation fee payable by AWB included the additional 10 per cent after sales service fee.

504 On 7 June 2001, Hogan circulated an email to the 'Market Info' email group advising of this sale.[349] This included reference to the inland transportation fees of US$46.90 per tonne and US$46.70 per tonne payable in respect of shipments under each contract, including within those fees 'US$0.50 per tonne port fees.'

505 On 12 June 2001, Hogan sent a report regarding his recently completed trip to Iraq to the 'Market Info' email group, copied to Owen, Aucher, Cracknell, Werner and McMullen.[350] In relation to the inland transportation fees, Hogan reported:[351]

Performance Bond

Minister is under pressure over our split payments for Inland transport. Working on way, whereby we would pay one vessel in full and roll these funds. This will keep a security balance and no performance bond will be required.

New contract is 100% payment for inland transport before discharge.

*** The USD0.50 fee (which Umm Qasr Port tried to apply earlier this year) is now built into Inland transport fee.

Crane Hire

IGB have confirmed that the crane hire is included in inland transport fee and any request for cranes to be put through them.

Advised on way out of Iraq that despite requests for additional cranes to expedite discharge, none have been provided.

We need to continually pressure IGB to provide additional cranes and monitor this through Alia.

506 On 13 June 2001, Geary received an email from Snowball that forwarded the email sent by Hogan sent on 12 June 2001.[352]

507 On 25 July 2001, Geary received an email from Snowball reporting a meeting between AWB and representatives of the UN on 20 July 2001. The email reported that the participants had discussed payment arrangements under the OFFP, that AWB had recently been working to overcome UN errors in assigning vessels to contract numbers, and that the UN representatives had encouraged AWB to contact the UN directly, or via the Australian Mission, to discuss any issues relating to the OFFP.[353]

508 ASIC submits that the US$0.50 per tonne fee, which AWB had protested so frequently could not be paid to Iraq because of UN sanctions which prohibited payments of US dollars to Iraq, was included in the sum paid to Alia, as an 'inland transport fee.'

509 On 10 September 2001, Hogan sent an email to Ingleby and Goodacre, which was copied to Long, Lister, Johnson and Aucher and Scales. It concerned the loading of a vessel without a Letter of Credit being in place, and stated in part:[354]

AWB can hold back 2nd payment inland Transport payments (USD16 million at Sept 30) - hence if by this date L/C is not on our counter, we withhold these second payments from the IGB.

510 ASIC contends that the clear implication from this passage was that the inland transport payments were ultimately to be paid to IGB. ASIC submits that no one within AWB raised what Alia's response might be to not being paid.

511 On 13 September 2001, Hogan copied to Scales and Long a second email on the subject. The third paragraph of that email stated:[355]

AWB holding 2nd payments due to Iraq for Inland Transport= USD4.5 million. By 22nd September, this amount will be USD 8.864 million (which almost covers Anassa). Inland transport payments will be held until L/C is on our counters.

512 ASIC contends that these emails make no sense at all if, in fact, the payments referred to were actually passed to Alia for services rendered to it.

513 On 30 October 2001, AWB Chartering received an email from Austral Chartering seeking AWB's comments on certain requests which Austral had received from the owner of a ship under charter to AWB.[356]

When Charterer is going to pay inland transportation charge & 10% commission to ISCWT (Iraqi State Company for Water Transport**).** This full amount should be paid in advance before ship's arrival at Umm Qasr pilot station (ETA 4th Nov) for ship's berthing turn.

Who is charterer's agent or partner in Iraq who will coordinate with all concerned parties in Iraq including payment of above amount.

Agent insist that Tally fees to be paid to state agent as port regulation USD 0.5 PMT = TTL USD 24,472.50 BY US.

But governing C/P stipulated that no D/A at discharging port with exception of max disbursement paid by cash by master up to USD 2,000.237

516 Gatto (AWB Chartering) forwarded a copy of Austral's email on to Hogan with a request that he please advise.[357]

517 On 12 November 2001, Gatto received an email from Anchor Cross shipbrokers, passing on the following message that the owners of a ship under charter to AWB had received from their agent in Iraq:[358]

Re: Inland transport/A.S.S/agency fee

****

Kindly note that our ofice in Basrah informed us today that m/s, ISCWT informed them that the inland transport charges as well as the A.S.S. charges and agency fees on cargo of USD. 0.50 per ton hv not been paid yet. Thus pls arrange with the concerned parties for same fm yr side at yr earliest convenience and advise [sic].

518 Gatto forwarded a copy of that email on to Edmonds-Wilson, Hogan, Lees and Long (with a copy to Rowland and Michael Raftopoulos (Raftopoulos)) that same day.[359]

519 On or about 12 December 2001, the IGB sent a wheat tender to AWB Limited which included a condition as to price that 'CIF free out Umm Qaser on Truck to warehouses at all governorates of Iraq cost of discharge at Umm Qaser and land transport will be equivalent to USD 26.50 per metric ton to be paid in exchangeable currency to the Water Transport Company ...'[360]

520 On 20 December 2001, Hogan confirmed with the IGB the details of two new contracts, A1111 and A1112, which included inland transportation costs of €55.17 and €55.40 payable prior to discharge.[361]

521 Details of these contracts were circulated internally within AWB the next day (but not to Geary or Flugge in this instance).[362] Details of this contract were also sent to Lindberg who congratulated Hogan on the result.[363] The IGB responded to Hogan's email above confirming acceptance of AWB's offer.[364]

522 A short-form contract was prepared within AWB for each of contracts A1111 and A1112.[365] Both short-form contracts were dated 20 December 2001 and signed on behalf of AWB by Hogan.

523 Both contracts were substantially in the same terms as AWB's preceding two contracts with IGB. In both contracts, the price was described as a 'CIF Free in Truck' price and the shipment clause provided for the cargo to be discharged 'Free into Truck to all silos within all Governorates of Iraq.'

524 ASIC says that neither of these short-form contracts referred to AWB's obligation to pay inland transportation fees or the additional 10 per cent after sales service fee, included any reference to the amount of the inland transportation fee, or made plain that that fee included the additional 10 per cent after sales service fee.

525 The trucking fee and the amount of that fee (in particular as a component of the price for which the wheat was sold under each contract) were recorded on the cover of each of Lister's files for these two contracts.[366]

Attempt to renegotiate and trade-off IGB fees

526 On or about 31 December 2001, the IGB faxed an email to Hogan seeking to (re-fix Contracts A1111 and A1112 in USD.[367]

527 Hogan replied on 2 January 2002.[368] After reiterating reasons why AWB could not agree to IGB's request, Hogan did offer a possible compromise, namely by indicating that AWB would agree to the contract price stipulated in IGB's email of 31 December 2001 if IGB agreed to certain changes to the terms of the contract between them, not only in respect of these contracts but also for future contracts.

(a) a guaranteed rate of discharge with demurrage and despatch payable and to be settled at the completion of each shipment 'by an adjustment to the final inland transport payment;'

(b) that the IGB accept the additional war risk premium to be for IGB's account (as buyer). Once again Hogan proposed that this 'be settled by an adjustment to the final inland transport payment;'

(c) splitting the inland transport payments in the same way that had been agreed in relation to contracts A0552 and A0553 (namely into two instalments, the first being US$14.00 and the balance payable within seven days of receipt of funds from the UN);

(d) that the IGB agree to the conversion of the new US dollar prices at the same exchange rate that AWB had already hedged the sale concluded on 20 December 2001.

529 ASIC submits that it is plain that AWB saw the 'inland transport payment' as a method of adjusting contracted payments or disputes between AWB and IGB, whilst sanctions prevented the normal payment of moneys by or to Iraq. ASIC says that these proposals only made sense if it was well understood that Iraq was the beneficiary of the inland transport fees.

530 A draft of a letter was prepared by Hogan and sent to Deborah Burley (Burley), Flugge's personal assistant, for Flugge's signature, as AWB was very keen to get final agreement from Iraq.[369] Prior to the final version being sent, Hogan and Flugge discussed a draft of the letter. Hogan confirmed in an email to Burley that he amended the letter following his discussions with Flugge.[370]

531 On 16 January 2002, Hogan emailed to Burley a draft letter to Minister Saleh from Flugge with a request she fax the letter to Flugge for Flugge's signature.[371] Burley gave evidence that it was very common for people to send draft letters to her for Flugge's attention.[372] The request to fax the letter for Flugge's signature referred to in the email from Hogan to Burley of 16 January 2002 accorded with what Burley recalled occurring in practice.[373] Flugge signed the letter to Minister Saleh dated 16 January 2002.[374]

532 On 17 January 2002, Minister Saleh of the IGB confirmed with AWB the terms of contracts A1111 and A1112 at the originally agreed prices. Long reported this by email to Flugge, copied to other AWB employees including Geary.[375] In this email, Flugge was thanked for his key role and his close relationship with the Iraqi Trade Minister.

533 On or shortly after 17 January 2002, long-form contracts were prepared by the IGB for each of contracts A1111 and A1112. Both of these long-form contracts were in the same form as the long-form contracts that had been prepared by IGB in respect of its earlier purchases from AWB under the OFFP. The price was described in each long-form contract as a 'CIF F.O.T. TO SILO TO ALL GOVERNERATES VIA UMM QUSER PORT.'[376]

534 Neither of these long-form contracts contained any reference to the inland transportation fees, 10 per cent additional fee, AWB's obligation to pay either fee, the amount of those fees, or the inclusion of these fees as components of the price at which the wheat was sold under either contract. Each of these long-form contracts was also signed by Hogan on behalf of AWB. AWB and IGB signed the 'long-form' contracts corresponding with A1111 and A1112.[377]

535 On 18 January 2002, Long sent an email to Geary headed 'Iraq Contract' the material effect of which was that Iraq had accepted the originally agreed contract price for the recently negotiated one million tonne contract, that this had saved Australian wheat growers AU$10 million, and that this was a significant achievement for AWB.[378]

536 On 22 January 2002, Hogan of AWB submitted signed contracts with the Iraqi Grains Board (A1111 and A1112) to Don Cuddihy (Cuddihy) of DFAT. ASIC says that these contracts or the accompanying facsimile did not disclose the existence or amount of the inland transport fees.[379]

537 Geary authorised numerous payments requests to Alia for inland transportation fees[380] between February 2002 to February 2003 as follows:[381]

538 As mentioned above, Flugge ceased office as Chairman of AWB in March 2002, when he failed to win re-election to the board.

539 On 17 May 2002, James Molan of AWB sent an email to Geary the material effect of which was that:[382]

(a) the UN Security Council had passed revised sanctions extending the OFFP for another 180 days; and

(b) the new sanctions, although making it easier for food and medicine to be imported by Iraq, still require AWB to go through the UN in relation to AWB's sales or imports to Iraq.

540 On or about 23 June 2002, AWB and the IGB entered into Contract No A1441 for the sale of 500,000 tonnes of wheat at a price of €237.55 per tonne. A short-form contract dated 23 June 2002 was prepared within AWB for this sale.[383] It was signed on behalf of AWB by Hogan. The short-form contract was in substantially the same terms as AWB's preceding contracts with IGB. ASIC says that as with its previous contracts, the price was described in each contract as a 'CIF Free in Truck' price and the shipment clause provided for the cargo to be discharged 'Free into Truck to all silos within all Governorates of Iraq.'

541 As with AWB's previous short-form contracts, the contract did not refer to AWB's obligation to pay inland transportation fees or the additional 10 per cent after sales service fee. It did not include any reference to the amount of the inland transportation fee. It did not disclose that the inland transportation fee included the additional 10 per cent after sales service fee. ASIC says that this was notwithstanding the express reference to both the inland transportation fee, and the amount of that fee (US$47.75PMT=€48.53PMT), in Hogan's facsimile to IGB of 2 July 2002 confirming the sale.[384]

542 A long-form contract was prepared by IGB.[385] It was dated 15 July 2002 and in the same form as the long-form contracts that had been prepared by IGB in respect of its previous purchases from AWB under the OFFP. The price was described in this long-form contract as a 'CIF F.O.T. TO SILO TO ALL GOVERNERATES OF IRAQ VIA UMM QUSER PORT.' The long-form contract did not contain any reference to the inland transportation fees, the 10 per cent additional fee, AWB's obligation to pay either fee, the amount of those fees, or the inclusion of these fees as components of the price for which the wheat was sold under this contract.

543 As for previous contracts, Edmonds-Wilson prepared a spreadsheet for IGB fees paid in connection with contract A1441.[386]

Other documents evidencing IGB fees alleged wrongdoing

544 ASIC submits that Christopher Whitwell (Whitwell) knew that the inland transport fees going to Iraq were being paid.[387]

545 ASIC says that other documents tendered by ASIC concern the following:

(a) demands for payment of trucking fees from Alia, the ISCWT or the Iraq Grains Board.[388] There were constant notices from the IGB, the ISWCT or Alia to pay inland transport charges;[389]

(b) banking documents establishing a foreign currency account with the Commonwealth Bank;[390]

(c) attempts by AWB to hold back payments due to Iraq for inland transport until a letter of credit is in place;[391]

(d) internal emails documenting the threat to and value of the Iraq trade.[392]

Post-war conduct of AWB in connection with the IGB fees

546 On 20 March 2003, the USA and allies invaded Iraq.

547 When this occurred, AWB sought to continue selling wheat to Iraq that was now under the administration of the CPA. Iraq represented an important market that was then in jeopardy as a result of the invasion.

548 AWB also sought to recover inland transportation fees paid by AWB to Alia in relation to the Pearl of Fujairah.[393] Whitwell said that the vessel had not been discharged but the fees had been paid to Alia. Whitwell gave evidence that AWB asked for the fees but Alia said that Alia no longer held them as they were passed onto Iraq.[394]

549 An AWB 'Iraq Situation Report' dated 20 March 2003[395] recorded that an email had been sent to IGB:

... outlining current situation re Pearl of Fujairah. IGB reacted with understanding, thanks for our efforts and a request to do anything we can to solve the problem.

550 The report also noted some 'Action Points for the Day', including the following:

Andromeda to be instructed to complete discharge Sallalah and wait at Oman for further instructions at appropriate time

...

Explore situation with regard to inland transport paid to Alia on P of Fujairah - recover

551 The same day, Long sent an email to Lindberg, Stott, Ingleby, Johnstone and James Cooper (Cooper), AWB General Counsel, and to Scales and Jessica Lyons (Lyons), corporate in-house counsel employed by AWB, which read:[396]

Please refer to the final point under Action Points for the Day:

'Explore situation with regard to inland transport paid to Alia Transport Jordan re Pearl of Fujairah - recover'

This issue should have been discussed.

Under the terms of the contract we prepay Alia Transport Jordan for discharge and inland transport to the Governates of Iraq.

We paid value date 14 March to Alia EURO 2.468 million for Pearl of Fujairah.

We are requesting these monies be returned and will include Alia's response in next update.

If in the worst case, they do not repay these monies, AWBI are holding a provision in the Pool Model for USD 5m for quality issues as part of the USD 25 million total provision. Actual payments due (NOT PAID) as part of this provision are USD 2.016m for the iron filing claim and USD 100k for sand compensation on Peter S, totalling USD 2.116m.

We would also include this amount as part of our total claim on UN/Govt's.

552 ASIC contends that Long's proposal assumed that withholding moneys due to IGB could legitimately exert pressure on Alia to repay the inland transportation fees paid on the Pearl of Fujairah. ASIC says that that assumption made sense only if Alia was a conduit for the funds to IGB.

553 ASIC submits that Geary received many of these communications concerning the recovery of transportation fees paid in respect of the Pearl of Fujairah.

554 AWB calculated the estimated pool costs if contracts A1441, A1670 and A1680 were not executed, estimating the cost to be US$114,815,520.00.[397]

555 In May 2003, Whitwell and Edmonds-Wilson travelled to Jordan and Iran to discuss further business in those countries. Whilst in Jordan, they took the opportunity to meet representatives from Alia.

556 Following their trip Edmonds-Wilson prepared a trip report which included a report of their meeting with Alia. The report included:[398]

Importantly, the matter of the EUR2.5m inland transport paid for the MV Pearl of Fujairah was brought up with both Othman and the Chairman. Both Othman and the Chairman said the matter had previously been tabled between Alia and Mr Yousif. Alia said that as soon as someone with authority to sign the appropriate documentation from the Iraqi side, the money would be returned to Alia and then to the company in question (this affected about 10 companies other than AWB).

Alia had the appropriate documentation showing the money had been remitted so we will now have to wait until the hierarchy in Iraq is up and running to chase. The Chairman had much faith and trust that the $$ owing would be returned in due course and said he would do everything possible to access the funds from the frozen account asap. Alia had recently sent a letter to Iraq (around 20/03) re-funds that had been paid but services not provided and therefore needed to be returned.

The report was approved by Whitwell and forwarded to Lindberg, Geary, Ingleby, Stott, Fuller and Scales.

557 ASIC says that the report recorded an admission by Alia that the money it was receiving on account of inland trucking fees was being paid to the IGB.

558 ASIC submits that a reader of the trip report would have appreciated that the inland transport fees had been 'remitted' to IGB. ASIC says that there is no evidence that the ELG collectively or any of its members responded to this aspect of the report, notwithstanding that it suggested a breach of sanctions and that Alia was, in substance, a front company for IGB.

559 On 28 March 2003, the United Nations Security Council adopted Resolution 1472 (2003)[399] (Resolution 1472) implementing temporary measures for monitoring imports into Iraq following the removal of UN staff.

560 Despite Flugge losing his position on the board of AWB in 2002, in 2003 the Australian government appointed Flugge as the Australian co-leader for agriculture in Iraq to the Provisional Authority. As a consequence, Ric Wells (Wells), a senior career officer with DFAT (and former Australian ambassador to France) accompanied Flugge on a trip to Iraq in 2003 to introduce Flugge to the Provisional Authority. Wells prepared a report in relation to that trip including his discussions with Flugge.[400] Wells said in evidence that he recorded a discussion he had about AWB's trade with Iraq in his memo of 7 May 2003 as follows:[401]

American officials intend to identify those Iraqi officials, particularly in the Trade Ministry, who abused and profited from the Oil for Food program. We received no indication that the US sees the OFF wheat sales to Iraq as falling into this category, although we understand that AWB contracts include a component for land freight, for which AWB was paid under the OFF and from which AWB then made payments to Iraqi officials to organise freight. Iraq would otherwise have had no funding for freight. We understand that the UN was aware of this arrangement.

561 Wells said that the section beginning 'although' was based on his understanding from his discussion he had with Flugge whilst in Iraq.[402]

562 Previously on 5 May 2003, Wells had prepared a draft of his report on his trip to Iraq with Flugge that did not include that passage. Wells sent a copy of his draft to Scott Dawson (Dawson), the then deputy director of AusAid, seeking his comments at 6.38 pm on 5 May 2003.[403] Between 2002 and 2004, Dawson was deputy director-general of AusAid.[404] Prior to the Iraq war in 2003, Dawson had no dealings with anyone at AWB. After the Iraq war, he supervised an agricultural reconstruction team including ex or current representatives of AWB.[405] Dawson had dealings with Flugge in Canberra.

563 As it happened, Dawson had had a conversation with Flugge on the morning of 5 May 2003, when Flugge told Dawson about the trucking fees paid by AWB to Iraqi officials. The conversation with Flugge was a telephone conversation in the nature of a regular catch up. Flugge told Dawson what the agricultural team was doing and in the course of that conversation Flugge made some comments to Dawson about the grain contracts under the OFFP.[406] Dawson made a note of this conversation in an email and sent it to Wells. Upon receipt of Dawson's email, Wells then amended his draft report to include the passage that I have quoted above at 560, beginning 'although'.

564 Dawson's note of the conversation with Flugge which he recorded in his email to Wells was as follows:[407]

Flugge told me by phone this morning (5 May 2003) that those American officials examining the OFF contracts will find that AWB contracts include a variation to normal grain contracts. According to Flugge the AWB contracts include a component for land freight, for which AWB was paid under the OFF and from which AWB then made payments to Iraqi representatives to organise freight. Flugge said it was necessary to include this provision, because otherwise Iraqi officials would have had not funding to pay for freight. Flugge said the UN was aware of this arrangement. I leave to you to determine whether it would be sensible to include some additional words along these lines in the last paragraph of your draft minute.

565 In May 2003, Long was appointed by the Australian government to assist with the rebuilding of Iraq. He spent approximately five months assisting within the CPA. His codename whilst in Iraq became known throughout AWB as 'Proton'.[408]

US Wheat Associates' complaint and Project Rose

566 On 3 June 2003 the President of US Wheat Associates, Alan Tracy (Tracy), wrote to Colin Powell (Powell), the then US Secretary of State:[409]

The recent announcement on the renegotiating of contracts under the Iraq Oil-For-Food (OFF) program raises several important issues for the United States. We are particularly concerned as to whether old wheat contracts with the Australian Wheat Board (AWB) are or have been included in this exercise.

Will these renegotiated contracts be at current market prices or at earlier prices that were undoubtedly inflated? Earlier OFF wheat contracts with prices inflated by millions of dollars per shipload have provided foundation to the rumors that some of the excess may have gone into accounts of Saddam Hussein's family.

Will there be competitive bidding on the renegotiated contracts such as wheat or will one's previous position as a supplier determine who gets the business?

Will there be transparency on the renegotiated contracts including information on the prices and quality of the commodities? Making this information public will encourage competition and help insure that prices are in line with the commodity provided.

The U.S is providing most of the funding for the WFP [World Food Programme] feeding effort, so possible price gouging for Australian wheat - regardless of whether it's through OFF or WFP - is appalling. We certainly support all efforts to see that the Iraqis do not go hungry, but there is no reason for the U.S. to pony up funding if the Australians continue to overcharge for such a basic commodity. The U.S. must require open bidding and complete transparency in the process.

We urge that you direct your staff involved in WFP and OFF contract approvals to be alert to these issues and to inform themselves on the going prices for these commodities.

This US Wheat Associates letter and similar statements were published in the US and Australian press.

567 Project Rose was an internal review set up by the CEO to look at operations and interactions with the Iraq market and the OFFP and it came as a result of continued speculation by the US or Canadians in relation to the AWB's activities in Iraq.[410] Project Rose was an investigative project to enquire and determine whether there was truth involved in allegations of impropriety by AWB as a company or by AWB officers in the processes and regulations regarding export of wheat to Iraq under the UN OFFP[411] and investigate the validity of allegations and accusations emanating from North America.[412]

568 Chris Quennell (Quennell), from Blake Dawson Waldron, solicitors (BDW), was engaged to conduct a factual review and then to advise AWB on the legal consequences of the facts that had been found.

569 On 12 June 2003, two presentations were made by Quennell, who had been engaged to conduct Project Rose. At that time, the ELG comprised the nine most senior managers in AWB, namely, Lindberg, Fuller, Ingleby, Gillingham, Kennedy, Geary, Stott, Sharpe and Scales.

570 The first presentation discussed the content of a complaint made by the US Wheat Associates dated 6 June 2003.[413] During that presentation, reference was made to:

(a) allegations that AWB contracts with the IGB were inflated; and

(b) allegations that some of the funds from these contracts may have gone to Saddam Hussein's family.

571 The second presentation was entitled 'Iraq issues (internal trucking arrangements) - 12 June 2003.'[414] During the presentation, reference was made to the following:

(a) legal issues arising from post October 1999 contracts;

(b) that AWB was initially reluctant to agree to pay trucking fees but ultimately agreed to pay inland transportation fees to Alia;

(c) the increase in the inland transportation fees as time has gone on;

(d) s 70(2) Criminal Code Act 1995 (Cth) relating to influencing public officials; and

ASIC submits that save that Geary was a member of the ELG, there is no direct evidence that Geary was in attendance at one or both presentations (although as a member it should be inferred that at a minimum he personally received the papers anyway).

572 An ELG Report dated 12 June 2003 was prepared by Whitwell which referred to the OFFP being extended until November, and that AWB would complete funded contracts A1441 and A1680 but that there were issues with the funding of A1670.[415]

573 That same day, Geary and others were sent an email from Long entitled 'Proton' which forwarded a memorandum of instruction from Cpt Blake Puckett about the processing of OFFP contracts in which there is reference to a kickback or surcharge of 10 per cent. The email stated that they needed to know whether a kickback or after sales service fee was involved.[416] A further copy of this instruction was forwarded by Whitwell to Geary under covering email on 13 June 2003.[417] In a separate response to Stott, to which Geary was copied, Whitwell stated that contract A1670 was in group 3, approved but not funded.[418]

574 On 24 July 2003, Geary (and others including Stott, Ingleby and Lindberg) were sent an email from Long entitled '500k' concerning, amongst other matters, the arrangements for the delivery of wheat within Iraq. Long wrote: [419]

Would appreciate some help in thinking through an appropriate authentication/delivery procedure for wheat...umm qasr is fine but if we allow say aqaba and tartous for bulk cargo..., would we be in a position to arrange trucking to silo within 2 hours each of basrah, kirhuk, Baghdad and zagho? What would the inland transport be and would we be willing to do it? What does Alia say and can they deliver? ... can we arrange inland transport to all governorates if it goes to umm qasr, ie really deliver on the cnf all governorates [?] I think you can see the dilemma.

575 The same day, Geary and others were sent Whitwell's comments on Long's email.[420]

576 Under the renegotiated contracts A1670 and A1680, AWB was responsible for the discharge and transportation of its grain from the discharge port to all governorates in Iraq. AWB commenced making inquiries with various companies about stevedoring and trucking services.

577 Whitwell contacted Al-Absi and Alia said they could deliver and a transport agreement was drafted.[421]

578 On 12 September 2003, Whitwell sent an email to Geary and others referring to AWB's new obligations under the WFP to arrange private transportation from port to final delivery, and for the price to be reduced by 10 per cent.[422]

579 This was confirmed by facsimile dated 17 September 2003 from WFP to AWB[423] in which the WFP attached the terms of the contract amendment as agreed between AWB and WFP. The facsimile advised that the WFP had been requested by the CPA to 'deduct the after sales service fee of 10 per cent on this contract'. The WFP also reiterated its revised price. It wrote:[424]

... The terms for the renegotiation have been provided by the CPA and operational issues concerning the actual deliveries will be [handled] by MoT. You might want to discuss some of the issues raised with these parties

580 In September 2003, the WFP renegotiated the contract price for contract A1670. The reason for the amendments sought by the WFP was to remove the 10 per cent after sales service fee that had been included in the calculation of the original contract price.[425] The reduction in 10 per cent was a blanket policy decision from Washington applying to all of the OFFP contracts. AWB and the CPA negotiated a further amendment to contract A1670, in particular an increase in the contract price to support the accelerated delivery of approximately 220,000 tonnes under the contract.

581 ASIC submits that at the time of this renegotiation, AWB did not disclose to the WFP that the original contract price for this contract had also included an allowance of US$8.375 per tonne in repayment of the Tigris Debt (discussed below). ASIC says that AWB and the CPA negotiated a further amendment to contract A1670, in particular an increase in the contract price to support the accelerated delivery of approximately 220,000 tonnes under the contract.

582 Whitwell drafted a memorandum dated 22 September 2003, entitled: 'Iraq Update.' Under the heading 'Operational Update', he noted:[426]

... Discussions have begun with WFP on the balance of both contracts 840,000 mt. We have received a request to reduce contract value by 10 pct to - Euro CIF All governorates Iraq. Working through Operational issues with them and discussing adjusted price.

583 On 24 September 2003, following a telephone conversation the previous day, Whitwell sent a facsimile to the WFP offering a revised price per tonne CIF Free on Trucks to silo all governorates Iraq shipped to the port of Umm Qasr or Aqaba sellers option, in respect of the balance of contract A1680.[427]

584 In that facsimile, AWB also asked if it was possible to build in an option for sellers to deliver on a CIF free out Aqaba or Umm Qasr basis and if so, what would be the revised unit price and relevant authentication procedure.

585 On 25 September 2003, the WFP sent a fax to AWB[428] which commenced:

Please find attached a copy of the Contract Amendment, as agreed between your company and the United Nations World Food Programme.

WFP advised that the contract validity for contract A1680 was pending approval from the OIP, and that issues relating to the letter of credit should be directed to BNP.

586 The same day, a facsimile was sent by Whitwell to the WFP, enclosing 'signed format for amendment for onward presentation to OIP'.[429] The amendment to the contract provided for a revised price CIF free on trucks to silo all governorates Iraq shipped to the Port of Umm Qasr. The effect of this amendment was to make contract A1680 again a CIF free in truck contract. The revised price departed from the earlier amendment which was a CIF free out price.

587 This revised price was a decrease of €25.49 per tonne on the price under the original contract. It represented a reduction in the 10 per cent after sales service component of the price. AWB was still, in effect, receiving as part of the proceeds of sale €25.84 per tonne of the original inland transportation fee that had also been included as part of the price under the original contract, although AWB now had to make arrangements for and pay for the discharge inland carriage of these cargoes.

588 On 25 September 2003, further faxes were sent between the WFP and Whitwell attaching the signed contract amendments and indicating that contracts 1201376 (A1670) and 1300016 (A1680) were pending approval from the OIP.[430]

589 AWB was eventually able to fulfil contract A1680 fully. This was after AWB had agreed to amendments to the price and terms of delivery of the wheat under contract A1680 in April and September 2003. ASIC submits that at no time during its renegotiations with the WFP in either April or September 2003 did AWB disclose to the WFP that the original contract price included an allowance of US$8.375 in repayment of the Tigris Debt.

590 On 26 September 2003, Whitwell responded to an email sent by Darryl Hockey (Hockey) of AWB, and in that email, amongst other matters, Whitwell stated that 'on the inland transport I will get onto that this weekend.'[431]

591 Following further negotiations between Whitwell and Alia, on 21 October 2003, an 'Agency and Transport Services Agreement' was signed by Whitwell, on behalf of AWB Services Limited, and Othman Al Absi, on behalf of Alia.[432]

592 Whitwell hadn't seen any earlier written agreement.[433] The agreement imposed obligations on Alia to provide services with care, skill and diligence and required Alia to provide a warranty that it had the necessary skills and training to perform the services the subject of the contract. The agreement required Alia to provide an assurance that its vehicles would be in good working order and suitable for the transport of grain.

593 Under the terms of the Agency and Transport Services Agreement that AWB eventually concluded with Alia in October 2003, Alia agreed to arrange for insurance of the shipments during their transportation in Iraq, including on behalf of AWB. Clause 11 of that agreement provided:

11. Insurance

The Contractor [Alia] must effect and maintain for the entire Term the Insurance Policies in the joint names of the Contractor and AWBS and for their respective rights and interests.

The Insurance Policies must be effected with an insurer approved by AWBS and must be on terms satisfactory to AWBS. Without limitation, the Insurance Policies must include the Required Insurance Conditions.

In the event that the Contractor sub-contracts any of its obligation under this agreement, it must ensure that each of its sub-contractors effects insurance policies of the same type as the Insurance Polices containing the Required Insurance Conditions and in the joint names of the sub- contractor and AWBS for their respective rights and interests and that such insurance policies are maintained for the entire Term.

The Contractor must from time to time upon request by AWBS provide such documentary evidence as AWBS requires (including certificates of currency) to evidence the Contractor's compliance with the requirements of this clause.

594 Clause 16 of this agreement recorded the acknowledgement by Alia that under the terms of this agreement, it may be liable to AWB and AWBI in relation to loss or damage that they sustain as a consequence of loss or damage to the wheat.

595 Similar provisions were also included in AWB's subsequent Agency and Transport Services Agreement dated 8 July 2004.[434]

596 ASIC submits that prior to this time, it should be inferred that there was no contract in existence between AWB and Alia and Alia did not take out any insurance for AWB in relation to the transport of wheat within Iraq. ASIC says that prior to October 2003, aside from services provided under the protective agency agreement, all Alia did in relation to AWB was to receive inland transportation fees (including the after sales service fees) and remit them, less its commission, to the ISCWT.

Chris Quennell's discussion with Flugge on 30 April 2004

597 On 30 April 2004, Quennell and Cooper had a telephone conference with Flugge. Prior to the conference Flugge was provided with a number of documents by email from Quennell.[435]

598 I deal with this conference in detail below at paragraph 1667 and following as it forms part of the pleaded case concerning Flugge's knowledge.

599 On 19 October 2004, Alia confirmed that it was 49 per cent owned by the Iraqi Trade Ministry.[436]

600 On 2 March 2005, Flugge was interviewed by investigators from the UN Independent Inquiry Committee and admitted that he had been aware that AWB contracts with Iraq had included a transport component.[437]

601 On 27 October 2005, AWB sought and obtained an expert opinion of Sir Anthony Mason in relation to AWB's payment of inland transportation fees under the OFFP.[438]

602 Sir Anthony's opinion was that the evidence before him did not 'establish or suggest that AWB or its officers, more particularly its senior executives, knew that the fees were unreasonable or that the fees were being illicitly channelled to the Iraqi Government or were not being applied to the provision of inland transportation.' Sir Anthony expressly declined to express a view on whether AWB's payments to Alia contravened UN sanctions on the material before him.

ASIC conclusion in relation to the IGB fees wrongdoing

603 ASIC submits that it should be inferred from the evidence in connection with the introduction of the IGB fees that:

(a) from June 1999, the IGB required AWB to pay inland trucking fees and later after sales service fees which were in international denominations and in increasing amounts (IGB fees);

(b) AWB agreed to and in fact paid the IGB fees from November 1999 directly to Alia and through shipping companies and through Ronly and a number of AWB employees knew this;

(c) the IGB fees were being paid to Iraq and a number of AWB employees knew this;

(d) AWB devised strategies to pay the IGB fees so that they would disguised the fact that AWB was paying the IGB fees;

(e) AWB's obligation was to pay the IGB fees, not to arrange transportation of wheat supplied to Iraq;

(f) in and from late 1999, AWB employees who had knowledge of the IGB fees had concerns about the 'greyness' of the transport payments and despite an assurance by Zuhair and that early contracts had been approved that there had been no written confirmation that the UN had approved the fees;

(g) it would have been a simple matter for AWB to inform the UN and seek clarification regarding the fees, but no-one ever did and no-one within AWB was ever asked to do so;

(h) alternatively, if AWB thought that it was genuinely paying for inland transport then it could have sought approval of a separate trucking contract from the UN but again it didn't do this;

(i) instead, AWB relied on the fact that the UN had not asked any questions about early contracts containing a vague reference to US$12.00 payable to maritime agents as carte blanche to continue the inland transport payments in increasing amounts and different denominations, notwithstanding the 'greyness' of doing so;

(j) the distribution plan did not require or allow side-payments of trucking fees, and indeed trucking costs that required hard currency (e.g. imports of spare parts for Mercedes and Renault trucks) were separately provided for under the distribution plan.

604 None of these alleged facts are alleged to involve Flugge or Geary.

605 ASIC submits that it should be inferred from the evidence between 2000 and 2005 that:

(a) AWB sought to withhold payments of IGB fees to Iraq to recover demurrage losses;

(b) from late 2000, Iraq incorporated a 10 per cent after sales service fee into the IGB fees payable by AWB;

(c) views were expressed and disseminated within AWB from February 2001 that the increase in the trucking fees and the after sales service fees were a means of AWB and the IGB 'milking' or extracting more money from the UN escrow account;

(d) Iraq entities directly and through Alia made demands for payment of outstanding IGB fees from time to time, making clear that Iraq was the ultimate recipient of the fees;

(e) prior to October 2003, Alia's only role was to help AWB as protective agent at the port of Umm Qasr and to remit IGB fees to Iraq.

606 None of these allegations specifically relate to Flugge or Geary save insofar as ASIC allege that certain facts were 'well known' or 'widely known' within AWB.

607 ASIC argues that the only reasonable and plausible conclusion from these facts is that in paying the IGB fees to Iraq and recovering these fees from the UN escrow account, AWB was engaging in the very conduct the UN Resolutions had called on member states to prevent; and moreover that by 2000 at the latest, no real effort was being made to keep this conduct secret within AWB: to the contrary.

608 In so far as these allegations relate to Flugge and Geary I deal with them when considering the pleaded case against them.

609 A major issue in dispute with Flugge is whether the public revelation of AWB's wrongdoing was likely to cause and did in fact cause substantial and enduring harm to AWB.

610 In moving from a statutory wheat board in 1999 to a publicly listed company in 2001, AWB retained the Single Desk statutory monopoly and also created and implemented a broad code of conduct and corporate governance policies emphasising ethical behaviour and highlighting reputational risks to AWB (see 'AWB Code of Conduct and corporate governance' at paragraph 234 and following).

611 ASIC says that AWB saw Iraq as a high risk, high reward market with a unique trading environment because of the need to operate within the OFFP and the scrutiny that entailed. In June 1999, Iraq introduced a requirement that suppliers pay a trucking fee. This was unique to AWB's markets.

612 ASIC alleges that despite the known risks of trading with Iraq under UN sanctions, and the need to engage in ethical behaviour, as discussed above, AWB committed serious wrongdoing in connection with the OFFP.

613 As the alleged misconduct came to light, and as inquiries were undertaken reviewing AWB's conduct, and litigation was brought against AWB, AWB suffered harm in the form of reputational damage, costs in defending the allegations and associated litigation, restructuring, damage to its share price, loss of the Single Desk, as discussed below.

Independent Inquiry Committee into the UN OFFP (Volcker Inquiry)

614 On 27 October 2005, the Volcker Inquiry published a report entitled 'Manipulation of the Oil-for-Food Programme by the Iraqi Regime' (Volcker report).[439] The report included findings that AWB was the biggest source of kickbacks to the Iraqi government, and that AWB paid 'trucking charges' totalling AU$300 million to Alia, of which Alia kept a small percentage and passed the majority of the payments to the Iraqi Government.

615 ASIC contends that while there had been earlier allegations of misconduct by AWB, this was the first evidence-based revelation of AWB's conduct under the OFFP.

616 ASIC submits that in and of itself, the Volcker report caused relatively little harm to AWB,[440] principally because the report did not allege that AWB knowingly paid hard currency to Iraq, and AWB was, for the time being, able to maintain a public line that it had been duped by Alia and the IGB and let down by the UN - see for example AWB's public announcements immediately prior to and following the release of the Volcker report which state, inter alia:

• Public announcement of 27 October 2005:[441]

AWB did not knowingly pay or enter into any arrangements to pay monies to the former regime.

AWB relied on the UN to supervise and regulate the OFF Program.

The payment of trucking fees occurred entirely in circumstances condoned by the responsible UN Committee...[which] continued to approve contracts which contained inland transport terms.

Clearly the UN did not adequately oversee the OFF Program.

• Public announcement of 28 October 2005:[442]

The Board and management of AWB welcomes the finding of the IIC that AWB was not knowingly involved in schemes implemented by the former Iraqi regime to circumvent the UN Oil For Food Program.

Notwithstanding the thorough and rigorous investigation conducted by the IIC, it has not found that AWB knew of the matters now alleged. This has confirmed AWB's position ... that it did not know, and could not know, what Alia did with the money AWB paid to it by way of transport fees.

We were surprised to learn of the fact that Alia did not provide a trucking service... It is of serious concern to now learn that fees the company paid for the inland transportation of its wheat in Iraq were channelled to the former regime.

617 ASIC says that the main effect of the Volcker report (as far as AWB was concerned) was that it led to the announcement by the Australian government of its own inquiry into the conduct of AWB and other companies in connection with the OFFP.

618 In November 2005, the Australian government established an Inquiry, chaired by Commissioner Terence Cole, to investigate whether Australian companies and their officers breached Australian laws through their participation in the OFFP (Cole Inquiry).[443]

619 Mr Andrew Sisson (Sisson), opined in his expert report[444] that from the commencement of the Cole Inquiry's public hearings on 16 January 2006, it was clear that evidence emerging from those hearings changed public perceptions of AWB's behaviour during the OFFP.

620 Sisson notes that the AWB share price commenced falling on the day the Inquiry's public hearings opened. Sisson states that press commentary was negative from the outset. Sisson identified the following relevant extracts from the Australian Financial Review:[445]

17/01/06: Counsel assisting the inquiry, John Agius SC, said he already had enough evidence to show that AWB must have known it was breaching United Nations sanctions when it made $US220 million of payments over three years to trucking company directly controlled by the Iraqi government.

18/01/06: But if what has come to light so far stands the test of later evidence and scrutiny, standards of governance and probity at a AWB fall well short what should be expected of a leading Australian company, let alone one with a monopoly blessed by government. Mr. Lindberg conceded evidence he gave last year to the United Nations inquiry into the food-for-oil scandal might have been wrong. 'I know more now that I knew then' he said.

19/01/06: AWB chief executive Andrew Lindberg faced sharp attacks on his credibility from Counsel assisting the enquiry John Agius SC over a paragraph in an internal AWB brief briefing note in May 2003.

20/01/06: (Mr Lindberg) conceded that in 2004 AWB had misled the UN and that he had misled his own board over the real nature of a $US7 million payment made to oil company Tigris Petroleum.

21/01/06: Chains of emails and faxes the Volcker inquiry never saw have now been subpoenaed by the Sydney inquiry and produced to show that senior AWB executives in fact knew very well where the money was ending up, in what Commissioner Terence Cole who is chairing the inquiry described as an 'end justifies the means' culture.

621 Sisson also identified relevant statements issued by the company in relation to the Cole Inquiry and its ramifications during the period of the initial public hearings, as listed below:[446]

18/01/06: Some of the material facts surrounding AWB's involvement in the United Nations Oil for Food Program are as follows [followed by 15 dot points.][447]

18/01/06: AWB Limited advises that the (previous announcement) was unauthorised for release.[448]

24/01/06: Regretfully, AWB's reputation has been significantly damaged as a result of the Company's participation in the United Nations Oil for Food Program and subsequent media coverage." "To respond to allegations or the evidence prior to the completion of the Inquiry would be inappropriate.[449]

09/02/06: The Managing director of AWB limited, Mr Andrew Lindberg, has tendered his resignation, which has been accepted by the Board, to be effective on April 30, 2006. Lindberg has relinquished his executive responsibilities, effective immediately.[450]

13/02/06: AWB has been notified by the Iraq Grain Board that it has decided to suspend its business relationship with AWB until the Cole Inquiry is completed.[451]

16/02/06: The Government will send a delegation to Iraq to discuss the current Iraqi tender. The delegation will be led by the Deputy Prime Minister and Trade Minister, the Hon Mark Vaile MP, the Executive Chairman of AWB Limited, Mr Brendan Stewart, as well as representatives of Australian wheat growers.

23/02/06: From the Annual General Meeting 'It's a very difficult time for the company. However, shareholders need to understand that despite the negative publicity, the AWB Limited business is fundamentally strong and continues to perform well. AWB's reputation has been damaged as a result of its participation in the oil for food program. The Board and I very much regret that.' 'The Board is absolutely committed to managing change and restoring AWB's reputation and will take whatever action is necessary to restore the company's good name.' 'I trust you will understand that it is inappropriate to comment on any matters which are the subject of evidence before the Inquiry.'[452]

622 Sisson opines that there was pronounced price weakness later in the year, concentrated on the period 07/07/06 to 17/10/06 when the price fell from $4.32 to $2.46, a move of -43 per cent, whereas comparator share market indices rose. Sisson examined that period to see whether further revelations from the Cole Inquiry contributed to that weakness (the Cole Inquiry continued to sit intensively until 13/4/06 and on a further 10 days later in the year prior to delivering its report on 27/11/06).[453]

623 Sisson identified a 'second round effect' in this later period of earlier revelations of AWB's conduct in connection with the UN OFFP. In Sisson's opinion, an AFR article of 09/10/06 captures this effect: [454]

The sharks are circling - not only could AWB face possible criminal and tax proceedings when commissioner Terence Cole reports in November, but resentment and clamour for change among Australian wheat growers is reaching critical mass.

Support from the government, especially the Nationals, for AWB's right to hold the wheat single desk has also waned as evidence heard at the Cole Inquiry indicated the company could face charges of financing terrorism, tax evasion and deception of Commonwealth officers.

Early on in the inquiry, the majority of wheat growers remained supportive of AWB's hold on the single desk including its veto power on bulk export applications which effectively hamstrung its regulator, the Wheat Export Authority. That sentiment has diminished as drought conditions across the country have dragged down crop forecasts by more than half.

Growers are watching their livelihoods being blown away by the drought and to say there is mounting grower resentment of AWB's antics in Iraq would be an understatement' one industry insider told The Australian Financial Review.

624 Sisson also refers to an AFR article of 13 October 2006 which provided evidence of the continuing negative ramifications for AWB of matters previously revealed at the Cole Inquiry:[455]

Support for AWB's wheat export monopoly continued to crumble yesterday as the West Australian Liberal Party and the state's largest grower group called for reform.

This is a blow to AWB, which has long counted the West Australian Farmers Federation as one of its strongest supporters.

625 Sisson opines that the prolonged fallout of the revelations at the Cole Inquiry in January and February 2006 may have contributed to the share price fall in the July to October 2006 period (in combination with the reduced harvest forecast owing to the ongoing drought).[456]

626 In the 2006 Annual Report, the Chairman's report noted the impact of the Cole Inquiry on AWB, the company's regret for its conduct under the OFFP, and the initiatives put in place to review governance structures and international marketing activities.[457]

627 On 24 November 2006, Commissioner Cole handed down his final report which was tabled in Parliament on 27 November 2006.

Harm occasioned to AWB as a result of the revelations

628 AWB suffered the following harms as a result of the revelation of its conduct during the OFFP.

629 On 13 February 2006, the new Iraqi Government announced a temporary suspension of purchases of AWB wheat whilst the Cole Inquiry investigations were occurring.[458] At that time Iraq was AWB's second largest export market, having received 1,335,000 tonnes of AWB wheat in the previous year.[459]

United States Department of Agriculture (USDA) debarment

630 On 10 November 2005, the United States Department of Agriculture (USDA) gave notice of the suspension of AWB (USA) Limited from participating in US federal government programs in light of the serious allegations that AWB had made illicit payments in connection with its participation in the OFFP as raised by the Volker Inquiry.[460]

631 That suspension was (temporarily) lifted following representations by the Australian Government. On 28 November 2005, Lindberg wrote to the Deputy Prime Minister thanking '(him) and (his) staff for helping to reverse the decisions of the USDA to suspend, and consider the debarment of, AWB (USA) [Limited] from US federal government programs. The suspension and potential debarment from use in US federal export credit programs presented significant problems for AWB.'[461]

632 ASIC submits that those 'significant problems' returned shortly after Commissioner Cole handed down his report. On 20 December 2006, after 'reviewing the findings of the [Cole Report], as well as the documentary evidence and other material referred to and incorporated by reference into the Report' and 'taking into account the attempts by AWB Limited, its directors, officers, employees and affiliates to conceal those actions',[462] the USDA announced the immediate suspension and proposed debarment of AWB and its affiliates.[463]

633 The USDA suspension remained in place until AWB and its affiliates were ultimately debarred on 20 December 2007, for a period of a further two years, from participating in programs of the United States Government.[464]

634 The USDA debarment was expressly on the basis of AWB's conduct in connection with the OFFP (which ASIC contends was substantially the same as that alleged in the present proceeding as the 'IGB fees wrongdoing'), including, ASIC submits, the conduct of Flugge and Geary.

635 There was a series of changes to the management team during and after the Cole Inquiry.[465]

636 AWB's 2006 annual report refers to the appointment of 'a new management team led by Managing director Mr Gordon Davis' as part of its response to the Cole Inquiry.[466] Similarly, AWB's report on its full year results for the financial year ended 30 September 2006 refers to the implementation of steps including 'renewal of the senior management team.'[467]