CASE PROGRAM 2005-26.1

The

In November and December 1974, senior officials of Commonwealth were engaged in a struggle with senior Ministers of the Whitlam Labor government over a proposal to raise $4 billion in loan funds. The then Minister for Minerals and Energy, , had entered into negotiations with an unknown Pakistani commodities broker, Tirath Khemlani, on 11 November. Determined to fund an ambitious public works programme, Connor was eager to borrow the $US4 billion Khemlani claimed he could access from oil-rich Middle Eastern nations. Treasury considered the loan highly suspect and launched its own investigation, while Connor explored ways of circumventing the Loans Council, which would likely block his plan. On discovering that the deal was a likely sham, Treasury officials strongly advised Connor, Prime Minister and Treasurer to abandon the scheme.

But an ever-souring relationship between Treasury and Government saw Connor forge ahead regardless and gain Executive Council authority to take out a 20-year loan for “temporary purposes”. Despite this setback, Treasury Head Sir Frederick Wheeler and his colleagues persisted with their inquiries and eventually discredited Khemlani. Although no money ever changed hands, information leaked to the Opposition about ’s near miss with a fraudster sparked a chain of events which toppled the in November 1975.

The Whitlam Government

After 23 years in Opposition, the Labor Party led by Gough Whitlam was brought to power on 2 December 1972. Campaigning on the slogan “It’s Time”, Whitlam took his win as a mandate for change and wasted little time in transforming his policies into legislation. Nine

This case was written by Marinella Padula, Australia and School of Government, for Professor John Alford as a basis for class discussion rather than to illustrate either effective or ineffective handling of a managerial situation. Cases are not necessarily intended as a complete account of the events described. While every reasonable effort has been made to ensure accuracy at the time of publication, subsequent developments may mean that certain details have since changed. This work is licensed under Creative Commons Attribution-NonCommercial- NoDerivatives 4.0 International Licence, except for logos, trademarks, photographs and other content marked as supplied by third parties. No licence is given in relation to third party material. Version 15-11-05. Distributed by the Case Program, The Australia and New Zealand School of Government, www.anzsog.edu.au.

days after he became Prime Minister, troops were withdrawn from Vietnam, and conscription was ended shortly afterwards. He also launched an ambitious program of social reform, targeting areas such as health, education and welfare. In 1973, new Commonwealth departments were created, including Aboriginal Affairs, Environment, and Urban and Regional Development. That year also saw the establishment of the Aboriginal Land Rights Commission, Institute of Criminology and Law Reform Commission.

Although Labor had won a comfortable majority in the House of Representatives, they lacked control of the Senate. Consequently, Bills were routinely rejected – approximately 100 over the life of the government and more than in the first 73 years of Federation.1 Barry Cohen, then a Labor backbencher, remembered a constant sense of crisis, “Many suggested that we were a government in panic. They were right. Any government threatened continually with having their budget or supply bills stopped would be panic-stricken.”2 By April 1974, the Senate was indeed threatening to block the upcoming Budget. On 18 May, Whitlam won a double-dissolution election over the matter, albeit with a reduced majority and still no control of the Senate. Yet this was but one of the Prime Minister’s many obstacles. He also faced problems from within.

The rapid rate of change was worrisome for Labor members both at State and Federal levels. “To say that the Whitlam government hit the ground running is to raise understatement to an art form,” said Cohen. “Many, however, particularly those sitting on marginal seats found it difficult to keep up. We were sneeringly described…as ‘nervous Nellies’.”3 At that stage the Labor Party caucus still had the power to overturn Cabinet decisions, and factional in-fighting over policy proved destabilising and distracting. So much so, that Whitlam was said to have relished travel opportunities, spending a total of 56 day overseas in 1974.4 When John Menadue asked Whitlam to rescind his travel plans after Cyclone Tracy decimated Darwin later that same year, the Prime Minister famously responded: “‘Comrade, if I’m going to put up with the f***wits in the Labor Party, I’ve got to have my trips.”5 Menadue, who was appointed Secretary of the Department of Prime Minister and Cabinet in August 1974, noticed problems from the beginning of his tenure:

Even after two elections, there was still a view in the community that 23 years of conservative government had established ways of doing things, contacts and networks, and that somehow this government was not legitimate and it was appropriate for the Senate at every opportunity to harass the government and if necessary in the end bring it down…There was hostility from the business sector. Some were cooperative but most of them had networks for 23 years with different ministers…Most business believed this was an aberration anyway and they would just have to wait the government out and normal relations would be returned in future.6

Menadue also found that many bureaucrats, especially those in Treasury, had a certain nostalgia for the past, “From the time I joined Mr Whitlam in , the clear

1 Blenkin, M. ‘Fed: Whitlam faced treachery, hostility and legitimacy issues.’ AAP Newsfeed 1/01/05. 2 ‘1974 and all that.’ 1/1/05. 3 ibid. 4 Rehn, A. ‘I’ll be Gough then – A tourist PM and getaway comrades.’ The Daily Telegraph 1/01/05. 5 Blenkin, M. ‘Fed: Whitlam faced treachery, hostility and legitimacy issues.’ AAP Newsfeed 1/01/05. 6 ibid. impression I got was that the Treasury had gone on strike with this government. And I think they were the words that Whitlam used to me, that the Treasury presented dogmatic advice. If it was not accepted it would take its bat and ball and leave and we, the government, floundered to provide alternatives.”7

Difficulties stemmed from profound differences in the way Treasury and the Government believed the economy should be managed. These differences were then brought into sharp relief by changing national circumstances and global events. When Whitlam assumed power in 1972, Australia’s inflation rate was 4.5 percent. By June 1974, it had more than trebled, reaching 14.4 percent.8 Unemployment was at 2 percent at the beginning of 1974 but was steadily rising. Earnings were up on average 15.3 percent during 1973 and climbing. Government spending increased by 20 percent in 1973 and was on track to grow further.9 By mid-1974, the combination of rising inflation and unemployment left Australia’s economy in a state of “stagflation”. Governments around the world were dealing with the same problem, largely brought on by OPEC’s decision to double the price of oil on January 1, 1974.

Treasury’s position was to tackle inflation first, urging “the utmost fiscal restraint” in the preparation of the upcoming budget.10 Indeed, its advice, known famously as the “short, sharp, shock”11 strategy, was to reduce inflation by raising unemployment. Treasurer did propose some modest spending cuts but they were rejected, while “big-spending departments” took over budget planning.12 The 1974 budget saw Government/Treasury relations sink to a new low:

The week of the Budget Cabinet saw a situation emerge where virtually open war was declared between the public servants of Treasury and the Government’s ministers who had to take responsibility for national economic policy. It led to the appointment of a special committee of mainly outside advisers, headed by Dr H. C. Coombs, to provide the government with some alternative proposals to the single course of action upon which the Treasury Department insisted. The warfare was so open that the civil servants and the politicians were seeking public allies. The Treasury fed information on the content of confidential Cabinet Submissions to uncritical journalists, senior Cabinet Ministers talked openly about the disagreements with the Treasury and made no secret at all of their disenchantment with its role.13

Historian Ian Hancock was not surprised that the Government ignored Treasury’s advice, “Believing that a state of full unemployment was both desirable and achievable, no Labor Government or Labor caucus in 1974 could easily accept Treasury’s proposal to fight inflation first.”14 Indeed, Social Services Minister declared at the time that, “Unemployment of 3.5 to 4 percent is simply not acceptable to the caucus or the

7 ‘1974 and all that.’ The Age 1/1/05. 8 Rehn, A. ‘I’ll be Gough then – A tourist PM and getaway comrades.’ The Daily Telegraph 1/01/05. 9 Colebatch, T. ‘The year the economy went “bung”’ The Age 1/1/05. 10 ibid. 11 Weller, P. & Cutt, J. Treasury Control in Australia Ian Novak Publishing Co., Sydney 1976, p. 25 12 ibid. 13 op cit. 14 Fraser, A. ‘Revealed, 30 years on: How Whitlam toughed out siege.’ Canberra Times 1/1/05.

3 community.”15 Treasury’s recommendations regarding the 1975-76 budget were largely ignored; government spending was to climb an extra 32 percent.16

John Stone (the then Treasury Deputy) had the task of providing the Government with general advice on economic policy. He considered it his duty to promote fiscal responsibility. From his perspective, Treasury’s style was not the problem. Rather, it was that the Government was wedded to an outdated economic paradigm, and couldn’t fully comprehend what Treasury proposed, “They didn’t get the economic theory,” Stone recalled.17 The Minister for Labour, , made a similar observation:

“Very few who knew Gough believed him to be an Einstein in the field of economics. That was one of the reasons for his failure. I didn't realise the full extent of this weakness until Gough began asking me to attend meetings of the ‘Kitchen Cabinet’ at in July, 1974. I was amazed to find that at these meetings ministers were always outnumbered by Tory bureaucrats….Gough always left me with the impression that he was lost when [Treasury Head] Wheeler and Co. began talking about VDRs, SDRs, SRDs and LGSs. However, on one occasion when Wheeler began talking about the bond rate, Gough sat up and asked, ‘Yes, how is Alan Bond going?’ ‘Oh, he's hanging on,’ Wheeler replied. And that's about all that was said about the bonds.”18

In Cameron’s view, these “unelected, permanent politicians” of the bureaucracy were effectively running the country. Treasury especially wielded considerable power:

“Labor had been in Opposition for 23 years. Neither Gough nor any of his ministers had ever sat in a Cabinet. We became the innocent victims of public service trickery and public service politics. The bureaucrats kept their ministers pouring over mountains of bumf to ensure they would never find time to study issues that mattered. A minister who fell foul of Treasury or the bureaucrats of his own department would eventually find himself falling foul of the Prime Minister.”19

Relations between the two were now even more fractious and were about to slip into an irretrievable decline.

The Treasury

Unquestionably the most powerful arm of the public service, the Treasury had accrued a great deal of administrative muscle by the early 1970s. In 1971, Sir Frederick Wheeler was appointed head of a department in ascendancy, the Treasury having grown steadily in numbers and intellectual capital since the postwar period. Compared to the public service generally, in 1974 the Treasury had a significantly higher proportion of bureaucrats with tertiary qualifications, most within the field of commerce and economics.20 It had also been Treasury policy to recruit the “best and brightest” graduates available. In addition, Treasury

15 Colebatch, T. ‘The year the economy went “bung”’ The Age 1/1/05 16 Wroe, D. ‘How the loans affair became a scandal to remember’ The Age 1/1/05. 17 Murphy, K. ‘ “Fearless” advice went unheeded.’ The Australian 4/1/05. 18 Cameron, C. ‘Gough an aloof, arrogant economic dunce’ Sunday Herald 18/2/90. 19 ibid. 20 Whitwell, G. The Treasury Line Allen & Unwin, Sydney 1976, pp. 13-14

4 officials were more likely than other public servants to have spent their entire bureaucratic career within the Treasury department. This helped to foster an elite, uniquely unified environment which was bolstered by the fact that, as key gatekeepers to the nation’s coffers, they were accustomed to fielding criticism from those who felt their proposals weren’t given due consideration. Former Secretary Richard Randall saw the Treasury’s role as essentially one of peacemaker as it to tried balance the wants and needs of various parties while maintaining Australia’s fiscal health. However, as a result he felt Treasury was often mistaken for the “real opposition” in the process.21

Although always central to Government, Treasury’s influence waxed and waned somewhat, depending on the personal persuasiveness of the Secretary and the Treasurer of the day and the attitude of the Prime Minister. , like subsequent Prime Ministers, had access to his own advisors through the Economic Division of the Prime Minister and Cabinet (PMC). But due to his general lack of interest in economic policy-making, “the Treasury had a virtual monopoly on budgetary and monetary matters through the 1950’s and 1960s.”22 In fact, the Department of Trade was the main Treasury rival during the 1960s. After Menzies, Liberal Prime Minister sought to increase the PMC’s role, but it was a short-lived exercise.

The arrival of Whitlam on the scene again threatened Treasury’s predominance. Jim Spiegelman, the PM’s private secretary, noted the Whitlam government’s shift of emphasis away from traditional public-service roles and towards the private staff of ministers. As a result, he observed that some bureaucrats, particularly those in Treasury, were not happy. 23 Treasurer Frank Crean also lacked the clout to challenge Cabinet effectively. Nonetheless, it was still difficult to compete with the resources and reach of Treasury. And Frederick Wheeler took a thorough approach to his work. He was quoted as saying:

“I frankly think it nonsense to imagine that there is an identifiable Treasury view on economic theory and principles. I do however, claim that we have a doctrine of another kind, and one to which we adhere quite firmly, and that is that to the extent possible, all issues should be looked at on the basis of hard work. That is to say, really turning propositions over, collecting the relevant data, and testing them rather than merely tossing them about at a high level of generality unalloyed by hard detailed examination.”24

But just as Treasury had its means of shaping government policy through providing or withholding information, ministers and departments had their own methods. They were capable of submitting inadequately articulated proposals with insufficient information at times of great urgency giving Treasury little time for detailed examinations. Alternatively, they could also deposit mountains of material on Treasury desks, hoping that time pressure would prevent the difficult questions from being asked.25

21 Whitwell, G. The Treasury Line Allen & Unwin, Sydney 1976 p.17 22 ibid pp. 13-14 23 Fraser, A. ‘Leader's former tyros all 'seemed to have done alright’ The Canberra Times 1/1/05. 24 ibid. 25 opcit p.90.

5 Rex Connor’s grand scheme

Minerals and Energy Minister Rex Connor had big plans for Australia. In order to help keep the country’s mineral and energy resources in Australian hands, he wanted to fund major works including: a natural gas pipeline grid; a petrochemical plant; uranium and milling plants; and the upgrading of coal export facilities.26 But all this would require massive funds. Rising oil prices had led to a boom in “petrodollar” loans from oil-rich Middle Eastern nations. The UK had previously borrowed $US1.2 billion from Iran and Japan had taken out a $US1 billion loan from Saudi Arabia.27 In October, through an Adelaide contact, Connor became aware of a London-based Pakistani commodities broker called Tirath Khemlani. Arrangements were made for Khemlani to visit Australia.

On 11 November 1974, Connor and Khemlani met in Canberra. Khemlani claimed to be able to secure $US4 billion at low interest rates in return for a 2.5 percent commission. He sought an official authorising letter from the Australian government so that he could approach his Middle Eastern lenders. He would not, however reveal their identities. Sufficiently satisfied, Connor instructed his department secretary Sir to draw up a document expressing the Government’s interest in such a scheme which was given to Khemlani the following day (Exhibit 1). Deputy Prime Minister Jim Cairns was also interested in accessing such funds but was not at the Khemlani meeting.

Between an obstructionist Senate and an uncooperative Treasury, Connor knew he would have to bypass the usual channels. He wanted to avoid the Loans Council, which consisted of members of Cabinet and State premiers who would normally have to approve such transactions. He set about devising a way to do so. Treasury, however, was not as far out of the loop as the Minister would have liked. Sir Frederick Wheeler had heard rumours about Connor and Cairns’s desire to secure overseas funds. He was not overly concerned until he learnt of the Khemlani meeting approximately a week after it took place. Treasury was not formally notified of the Government’s plans until a meeting almost a month later.

Treasury gets suspicious

On 9 December Whitlam, his ministers and officials gathered to discuss the proposal. Some specifics were outlined, for example, that interest on the 20-year $US4 billion loan would accumulate and be payable on maturity in 1994 – an eventual total of $US18 billion.28 But Connor offered no description of the prospective lenders other than that the money was to come from “smaller sources along the Persian Gulf”. He was, however, anxious to fast-track the transaction. In his notes about the meeting, acting assistant secretary of Treasury, A.G. Moore, wrote: “‘Connor stressed the urgency of the proposal…He explained that oil consumers were moving on a borrowing boycott on Arabs to bring them to their knees, there was a need to get in quickly before this occurred.”29

26 Hancock, I. ‘Reckless spirit of 74.’ The Australian 3/1/05. 27 ‘Lured by funny money’ Gold Coast Bulletin 1/1/05. 28 Note for file ‘Proposed loan from Arab source,’ 10/12/1974 [A571, 1974/96 Part1: ff. 59-56] National Archives of Australia. 29 ibid.

6 Connor also expressed his desire to avoid the normal Parliamentary appropriation processes.

Wheeler, who was present at the meeting, explained the improbability of avoiding Parliament. He argued against the loan, highlighting the potential deleterious effects that such a huge influx of public funds could have on the private sector. He also pointed out technical difficulties with the proposal but, as Moore noted, “These arguments did not diminish the enthusiasm of the Ministers for the proposal.”30 Yet not everyone in the Government was convinced. Treasurer Frank Crean was not invited to the meeting and did not approve of the scheme. On 11 December, he was replaced by Jim Cairns.

Following the meeting, Wheeler decided that Treasury had to prevent the transaction taking place. The $US4 billion loan would quadruple Australia’s overseas debt. The interest rate (7.92 percent) was suspiciously low, Khemlani was an unknown quantity and the would-be lenders were thus far nameless. In a Treasury Minute paper from First Assistant Secretary A.R.G. Prowse to Wheeler, Prowse pointed out that, “Dozens of such offers from ‘carpetbaggers’ are received each year. They are typically for large sums with some ‘Middle East’ connection, at low rates of interest, with no identified principal. No such offer received to date has come to fruition. The agents often have suspect backgrounds and/or connections.”31 Treasury set about investigating the mysterious Mr Khemlani post haste.

Meanwhile, they found themselves an ally. Denis Rose, an official in the Attorney- General’s Department had also been present at the Ministerial meeting and had remarked to Wheeler that the deal didn’t “smell right”.32 On 10 December, Rose briefed Treasury on Connor’s dealings with his department. He described a meeting on 6 December, where Lenox Hewitt approached the Attorney General’s Department to have a promissory note drawn up, as Minister Connor wanted it signed by 10 December. The plan was for three statutory authorities to borrow the funds on the Government’s behalf. Rose advised Hewitt that this was not possible without careful legal scrutiny first. Other options were floated, none of which were viable without legislative change or parliamentary oversight. The day after that meeting, Connor and Khemlani met with Rose. Khemlani would not name the lenders and insisted on total secrecy for a few more weeks. Rose expressed his doubts about the loan to Connor and because of the “crude” state of the documentation, convinced him to delay proceedings, at least temporarily.33

Treasury also set about lobbying Jim Cairns, who did not share quite the same enthusiasm as the Minister for Minerals and Energy. However, Cairns’ nickname as “Dr Yes” due to his penchant for public spending34 was cause for concern. John Stone laid out his objections

30 Note for file ‘Proposed loan from Arab source,’ 10/12/1974 [A571, 1974/96 Part1: ff. 59-56] National Archives of Australia 31 Minute “Middle East sources of funds: Possible discussion with Dr Cairns’ from Mr A R G Prowse to Sir Frederick Wheeler, 9 December 1974 [A571, 1974/96 Part 1: ff 67-65] National Archives of Australia. 32 op. cit. 33 Note for file, ‘Overseas loan offer of $US4 billion: Briefing by Mr Denis Rose of Attorney General’s Department’ 10 December 1974 [A571, 1974/96 Part1: ff. 94-90] National Archives of Australia. 34 Whitwell, G. The Treasury Line Allen & Unwin, Sydney 1976 p. 26

7 to the loan in a Minute to the Treasurer on 10 December (Exhibit 2). He questioned the proposal on legal, economic and foreign policy grounds but, most significantly, asked:

• Why would lenders with such immense funds available…deal through virtually unknown commission agents? • Why would not the lenders rely on established and well known intermediaries – such as the U.S. and European banks through whom they customarily deal? • Why would the lender provide funds at rates of interest well below market rates? • Why should the commission be so high (2 ½ percent i.e. $US 100 million) when commission on private placements normally ranges from 0.5 percent to 1.0 percent? • What is the justification for paying commission up to a week before funds are received? • Why are intermediate interest payments not required? • What can be the justification for not revealing at least on a confidential basis the identity of the principals and their bank?35

Connor’s success and Treasury’s setback

Two days later, Treasury was making some headway in their campaign against the loan. Treasury official Ian Hay spoke to an overseas contact, R.H. Dean, and asked him to make enquiries about Khemlani and his associates at the Bank of England and the U.K. Treasury Department. During the course of their conversation, Dean related the experience of his New Zealand counterparts, who said that,

“ …there is never any substance to these offers. The way in which they [people like Khemlani] normally work is for the deal to be surrounded in secrecy and for it to be given an air of urgency. This is done with a view to obtaining written commitment in some form from the prospective borrower. Once this is done the borrower usually realises that the deal is not going to be concluded and proceeds to back out of the contract. This in turn usually means that the prospective lender is legally entitled to claim the commission and/or expenses from the lender without the lender having to produce one cent of loan funds.”36

The day before, Wheeler met with Cairns. He later related the substance of his meeting to Treasury, including the Treasurer’s belief that the loan would probably come to nothing. According to Wheeler, Cairns expressed his wish that Australia borrow through more “normal grooves” and not to exclude the States from the process. Wheeler also learned that Cairns had met with the Prime Minister on 11 December. The Prime Minister had said that he wanted the Khemlani matter finalised and the necessary paperwork put into place.37 As Whitlam was about to head overseas on a six-week trip, Wheeler knew it would be sooner rather than later.

35 Minute, ‘Department of Minerals and Energy: Proposal for borrowing from Middle East Source’ from Mr J O Stone to the Treasurer, 10 December 1974 [A571, 1974/96 Part 1; ff. 114-110] National Archives of AustraliaA571/96 Part 1; ff. 148-147] National Archives Australia. 36 Note for file, ‘Middle East loan offer: Department of Minerals and Energy’ 12 December 1974 [A571 1974/96 Part 1; ff. 173-172]. 37 Note for file, Proposed US $4000 million loan: Meeting,’ 12 December 1974 [A571, 1974/96 Part 1; ff. 173-172].

8 On 13 December, Treasury’s worst fears were realised. R.H. Dean reported back to Hay with his findings, his conclusion being that the scheme had all the hallmarks of a “funny money” scam (Exhibit 3). Among the revelations was Dean’s discovery that Khemlani’s company (Dalamal & Sons (Commodities) Ltd) was a relatively new company with a total capital of £100. He also learnt from the Bank of England that, “such large sums of money are simply not available from the Middle East, the Vatican, the Mafia or anywhere else.”38 Dean was due to report back on Saturday morning with further information. But time was running out.

The Prime Minister, Treasurer, Minister for Minerals and Energy and the Attorney-General were meeting at the Lodge at 9 pm that evening to draw up an Executive Council Minute which would authorise Connor to issue a promissory note and borrow $US4 billion on behalf of the Australian Government. Murphy had hit upon a loophole which would give Connor access to money without scrutiny. Using Section 61 of the Constitution and inserting the phrase “for temporary purposes” into the Minute, they would be able to bypass Parliament and the Loans Council (Exhibit 4).

But before they convened, Wheeler made a last-ditch effort to dissuade Cairns, on the way from the airport to the Lodge. Reiterating his objections in a Minute Paper, he said, “Lest there be any misunderstanding because of haste, I now record my firm view that the Government would be unwise to proceed with this project. If the money is not there, the Government could find that its standing in international capital markets is badly damaged because of the attempt to obtain money through such dubious channels.”39 He did not however, mention Dean’s findings in this document. But where Cairns was willing to hear Wheeler’s concerns, it appears Whitlam was not. During a tense meeting of Ministers and officials, the PM was tiring of Wheeler’s incessant probing. “Fred, you are on the skids,” Whitlam was reported as saying. “Prime Minister, I simply seek to inform you of facts, your ignorance of which will bring you down,” Wheeler replied.40

Meanwhile Hay called Dean at 7.15 pm that evening, informing him that the Minute was about to be signed and urging him to speed up his enquiries and widen the net to include Scotland Yard. He called back at 10.10 pm to say that while there was no concrete evidence to suggest Khemlani was definitely a fraud, it was highly unlikely that he had access to such funds, “To date the largest loan which has been raised from the Middle East is a $1.2 billion loan to the U.K. from Iran…Current practice is to limit loans to $200 million to any one borrower.”41 It was to no avail. During a long overnight meeting at the Lodge, Connor got his wish and the Executive Council Minute (including an additional explanatory note) was drawn up and signed. Cairns registered his concerns but was overruled. The next day, the Minute was signed by the Governor-General, and Whitlam departed for his overseas trip.

38 Note for file, ‘Proposal for borrowing $US4 billion from Middle East sources: Record of Conversation with Mr R H Dean (London),’ 13 December 1974 [A571, 1974/96 Part 2; ff. 2-1] National Archives of Australia. 39 Minute, ‘Proposal to borrow US$4 billion from Middle East Sources’ from Sir Frederick Wheeler to the Treasurer, 13 December 1974, [A571, 1974/96 Part 2; f. 47] National Archives of Australia. 40 ‘Pandora's box of the loans affair’ The Canberra Times 1/1/05. 41 Note for file, ‘Record of conversation with RH Dean, 10.10pm 13 December 1974’ [A571, 1974/96 Part 2; f. 55] National Archives of Australia.

9

The deal comes undone

Although Treasury was now required to start drafting the documentation which would give Khemlani direct authority to approach lenders on the Government’s behalf, Wheeler’s campaign was far from over. Khemlani roaming the world negotiating loans, or fronting up for his $100 million fee, was not a situation he wanted realised. Deputy Secretary John Stone also pointed out that taking out a 20-year loan for ‘temporary purposes’ could easily give rise to a legal challenge and further damage Australia’s reputation. Knowing the Loans Council would be told about the loan eventually and anticipating a possible High Court action or Royal Commission, Wheeler instructed his staff to ensure all documents were in “apple-pie order”.

By this stage, Khemlani was meant to have left with his documentation already. But wrangling with Khemlani over clauses relating to his commission caused delays. In an attempt to reassure the Government and speed proceedings, Khemlani claimed that the lenders were four separate emirates and the money was held in nine reputable European banks. He said that the money would be delivered through the Union Bank of Switzerland. Treasury was also now receiving information from the Reserve Bank of Australia (RBA). On the morning of 16 December, the RBA governor rang the President of the US Federal Reserve, who expressed grave doubts about the loan. Additionally, in order to obtain US dollars, the Federal Reserve would require more information and the loan would have to be broken down into smaller parts. New documentation was required.

RBA and Treasury arranged a meeting between their representatives and Khemlani at the Union Bank in Zurich on 20 December. Khemlani did not appear, claiming an accident at Heathrow had delayed his flight. The representatives did however meet with the President of the Union Bank, who denied all knowledge of Khemlani or a $US4 billion loan. Discovering, at the last minute, that there was to be a further Executive Council meeting to revise the documentation, Wheeler swung into action, lobbying the Treasurer once more. He also rebuked a Department of Minerals and Energy official for not informing him of the upcoming meeting.

At midday on 21 December 1974, Connor, Cairns, Murphy and senior officials from Treasury, the Attorney-General’s Department, Minerals and Energy and the Reserve Bank met to discuss the proposal. Notes of the meeting reveal that Cairns (who was Acting Prime Minister due to Whitlam’s absence) opened by explaining that “there had been some changes in the nature of the proposal as it had previously been understood which had made appropriate a further discussion among Ministers.”42 He then asked Connor to outline the situation so far. In doing so, Connor said he had spoken to Khemlani’s associates since the Zurich meeting who insisted that the funds were still available. Cairns went on to highlight discrepancies in Khemlani’s story: that he said he was known to the Union Bank when he was not; that he was delayed at Heathrow by an accident when there were no reports of any

42 ‘Australian Government Overseas Borrowing: Meeting of Ministers and officials in Canberra 21 December 1974,’ [A571 1974/96 Part 4; ff. 42-37] National Archives of Australia.

10 such incident occurring. In fact RBA representatives had been booked on exactly the same flight to Zurich as Khemlani.

Cairns eventually brought the matter to an end by saying, “My opinion is that we should have no further dealings with Khemlani.” Connor fell into line, declaring that, “There will be no further dealings on my initiative.”43 It was agreed that Connor would inform Khemlani that the loan was off which was done at 3.00 pm that day. The group then went on to discuss the possible political ramifications of the near-deal. They also discussed the possible wording of a statement should the matter become public. But certain parties were already too aware of what had almost transpired.

Leaks to the Opposition

On 24 December, shadow treasurer had called Treasury enquiring about the matter. He was looking into the matter with the assistance of a young back-bencher, . Jim Cairns’s private secretary had also received a similar call from Lynch’s private secretary, which showed that he knew about the Executive Council Minute, the terms of the loan and the proposed source.44

The Government believed Treasury had been releasing information to the Opposition. While acknowledging that Treasury’s advice had been correct, Menadue believed they were simultaneously being disloyal, “Leaks came out of Treasury – it was like a torrent,” he said.45 Whitlam thought the mole was Treasury official Des Moore. Moore denied any involvement, believing that the source was much closer to home, namely assistant treasurer . Stone also rebuffed accusations of Treasury disloyalty, “I believe the Treasury gave the government flawless advice during that time. But perhaps our advice was too frank and fearless for the Whitlam government to tolerate.”46 In his opinion, the Government was, “hell-bent on its own destruction.”47 However, there was at least one Treasury official who was well aware of how valuable information about the Khemlani loan could be to a disgruntled . In an unaddressed Treasury note, an unnamed author wrote:

“Finally – and at the risk of setting down a comment of a ‘political’ kind – it should not be overlooked that, at the present time, the Opposition is clearly seeking an issue on which to go to the country…At present, the position is only a generalized feeling of ‘popular unhappiness’. A proposal of the present kind could provide a particular issue which the Opposition will, no doubt, be seeking.48

43 ibid. 44 Steketee, M. ‘Whitlam names loan scandal mole - 1974 cabinet papers’ The Weekend Australian 1/105. 45 ibid. 46 Murphy, K. ‘ “Fearless” advice went unheeded.’ The Australian 4/1/05. 47 ibid. 48 ‘Points that might be made,’ 13 December 1974 [A571, 1974/96 Part 2; ff. 61-59] National Archives of Australia.

11 1975 and beyond

Australia’s near miss was soon to prove the Whitlam government’s fatal blow. Despite his undertaking, Connor reentered into negotiations with Khemlani in January. Cairns also ventured into his own “shady” loans deal with friend and Carlton Football Club president George Harris. In February, the Treasurer was also embroiled in a very public scandal involving an alleged affair with staffer Juni Morosi. By March, had assumed the leadership of the and was ready to make good use of the information now available to him.

Whitlam sacked Cairns in June and Khemlani returned to Australia on 9 October with a briefcase of incriminating evidence. Connor resigned five days later. Malcolm Fraser claimed that the “extraordinary and reprehensible circumstances”49 of the case justified the Opposition blocking Supply, which occurred on 16 October. The crisis peaked on 11 November 1975, when the Governor-General, John Kerr, withdrew Whitlam's commission as Prime Minister, and appointed Malcolm Fraser as caretaker Prime Minister until a general election could be held. Whitlam was the only Prime Minister in Australian history to have been dismissed from office.

At the following election on 13 December 1975, Fraser's Liberal-National Party coalition achieved a clear-cut victory, winning 56 percent of the overall vote, 91 of the 127 House of Representatives seats, and 35 of the 64 Senate seats. After a further defeat at the 1977 general election, Whitlam left Parliament.50 Frederick Wheeler stayed on at Treasury until 1979. He was eventually replaced by his deputy John Stone, who continued in the role until 1984 and went on to become a National Party senator. Des Moore also joined the Institute for Public Affairs and then later headed the conservative Institute for Private Enterprise. Meanwhile Lionel Murphy, the architect of the Executive Council Minute, served as a high court judge. In 1987, he was indicted for attempting to pervert the course of justice in an unrelated matter, but died before the case was tried.

The matter of who exactly had leaked information to the Opposition was never settled. But at the release of the 1974 Treasury Papers in 2005, John Menadue (who had gone on to head Qantas) explained how the loans deal came so close to ratification:

“It was because of that poisonous relationship between Treasury and the government that Treasury's quite legitimate advice about the loan raising was ignored…It was very difficult to be sympathetic to Treasury in the way they behaved – but the lack of their professional advice was a major disadvantage for the government when it clearly needed advice that was credible.”51

49 Prime Ministers: Gough Whitlam National Museum of Australia www.nma.gov.au/primeministers/25.htm accessed 30/1/05. 50 ibid. 51 Blenkin, M. ‘Fed: How the Whitlam govt almost fell for funny money scam’ AAP Newsfeed 1/1/05.

12 Exhibit 1: Letter from Sir Lenox Hewitt to Mr Tiraty Hassaram Khemlani, 12 November 1974 [A571, 1974/96 Part 1; f. 89] 12

13 Exhibit 2: Minute, ‘Department of Minerals and Energy: Proposal for borrowing from Middle East source’ from Mr J O Stone to the Treasurer, 10 December 1974 [A571, 1974/96 Part 1; ff. 114–110] 25

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16 Exhibit 3: Note for file, ‘Proposal for borrowing $US4 billion from Middle East sources: Record of conversation with Mr R H Dean (London)’, 13 December 1974 [A571, 1974/96 Part 2; ff. 2–1] 38

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18 Exhibit 4: Minute paper for the Executive Council, ‘Proposed borrowing not exceeding the equivalent of $4000 million dollars in the currency of the United States of America for temporary purposes’, Rex Connor (Minister for Minerals and Energy), 14 December 1974 [A571, 1974/96 Part 2; ff. 78–76] 47

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