SIR BRUCE FERGUSON: Former head of the Government Communications Security Bureau dishes out some secrets

Spy boss Ian Fletcher won't say who his agency may have illegally spied on - and says there will be no apology until the intelligence services watchdog finishes an inquiry.

Prime Minister John Key today hastily released a report into the spy agency, after Fairfax Media revealed its contents, saying the Government Communications Security Bureau illegally spied on 85 people on behalf of domestic spy agency the Security Intelligence Service (SIS).

Fletcher only the knows the names of a "small number" of the new cases identified by the report. He said the GCSB had been "careful" in handling the information. He didn't immediately freeze GCSB's work because lawyers were still trying to work out if their surveillance on behalf of other agencies was illegal.

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"Clearly we've got some insight. That's a matter for us to be fairly private on. But it's really a matter for the Inspector General to go through," he said.

Internet mogul Kim Dotcom got an apology in the wake of illegal surveillance. But Fletcher said apologies must wait until the IG determines if his agency acted unlawfully. "That depends on where the Inspector General reaches," he said.

IG Paul Neazor first raised questions about the lawfulness of GCSB'S activities in May. The Crown Law office and the Solicitor General were consulted and Fletcher told Key in July.

But the lawyers hadn't resolved whether the GCSB's had breached the legislation covering their work when the Dotcom spying scandal first came to light in August. Fletcher told the lawyers to "get to the bottom of" the matter.

"They were doing that when the Dotcom story emerged. The Dotcom story is really different - there was no difficulty with legal interpretation. We were wrong and apologised and have cooperated fully with the process ever since," he said.

The GCSB's sole legal adviser deputy director mission enablement Hugh Wolfensohn then quit and the solicitor general came to the view... that there was a risk," Fletcher explained.

Fletcher's appointment has gone in for criticism because he was shoulder tapped by childhood friend Key. Fletcher said the phone call Key made was "very courteous".

"What he was doing was drawing my attention to the vacancy which I hadn't known about previously... and saying it was something he wondered that I might be interested in. As [State Services Commissioner] Iain Rennie has since made clear, after that was what I would regard as a pretty normal appointment process followed."

Fletcher said his relationship with Key is as the prime minister has previously outlined.

"We'd had contact at school because our mothers were friends. We had distant professional contact in the middle years of the first decade of this century, but for many decades between times no contact at all."

Fletcher refused to say if the information received on Dotcom was shared with other countries, such as the US.

The details of the individuals and cases have been passed to the IG. Police have already determined that there have been no arrests or prosecutions.

WHEN KEY FIRST KNEW

Prime Minister John Key first knew of legal problems with Government Communications Security Bureau (GCSB) activities last July, he says.

Key today hastily released a report into the spy agency, after Fairfax revealed its contents, saying the GCSB illegally spied on 85 people on behalf of domestic spy agency the Security Intelligence Service (SIS).

He had intended to release the report by cabinet secretary Rebecca Kitteridge upon his return from China, where he is in on a trade mission.

Police checks had reported no arrest, prosecution or legal process occurred as a result of the information supplied to the SIS by GCSB, Key said.

The laws covering GCSB activities are not fit for purpose, and he would introduce legislation fixing that on his return from China.

"It was not until this review was undertaken that the extent of this inadequacy was known," he said.

"I acknowledge this review will knock public confidence in the GCSB."

The Inspector General of Intelligence and Security first raised a question regarding the GCSB's assistance to the SIS in May last year, Key said.

"I was first told of a potential issue in July by GCSB director Ian Fletcher," he said.

Lawyers from GCSB and the SIS were communicating with the Inspector General and Crown Law, he said.

"I asked Mr Fletcher to keep me informed," Key said.

The illegal spying issue was unresolved when GCSB support for domestic agencies was halted, in the wake of the Dotcom case.Key has asked Inspector General of Intelligence and Security Paul Neazor to look into the cases in question.

"I have asked him to inquire into each of these cases to determine in each case whether or not GCSB has acted in compliance with the law. I have requested that the Inspector General determine whether any individuals have been adversely affected and, if so, what action he recommends be taken," Key said.

He won't disclose details of the case - but will make the results of the review public.

Neazor did the original report on how the Dotcom error was made. Labour dismissed it as a whitewash, calling for a full inquiry into intelligence services.

Prior to the 2003 the GCSB had been providing assistance to the SIS, Key said.

When the law was changed with the passing of the GCSB Act, Prime Minister Helen Clark challenged officials over whether it would be lawful, and was given assurance that it was.Contact between GCSB and Crown Law over the years did not appear to have covered this matter.

The law now had to be clarified, Key said.

The legality of the cases of the 88 individuals involved was now being "at best, questioned by Crown Law".

Key was unclear about whether the 88 would be apologised to, or even contacted.

When the Dotcom situation was raised it was found that there were at least three potential cases in the same category, but after referral to the Inspector General, he found there to be no wrongdoing, GCSB boss Fletcher said.

Once the Inspector General had reviewed each case what happened next could be determined.

He accepted all of the recommendations, and is implementing them.

"The advice we have recently received from the Solicitor-General is that there are difficulties in interpreting the legislation, and there is a risk that some long-standing practices of offering assistance to other agencies would not be found to be lawful," Fletcher said.

"Within GCSB we are already following the report's recommendations as quickly as we can. Many of the issues are long-standing and there are some that will take longer than others to address appropriately.

"Legal and compliance teams will be boosted and recruitment of other staff is in hand, and a new associate director is to be appointed.

"I will be reporting publicly each quarter on our progress in delivering the review's recommendations. You will be seeing and hearing more from us," he pledged.

Internet tycoon Kim Dotcom said the Government should apologise to anyone illegally spied on by its spy agencies.

Key publicly apologised to Dotcom, who has permanent New Zealand residency, when it emerged the GCSB illegally spied on him.

German-born Dotcom said he was surprised so many others were potentially involved. Spying on him sparked the internal review.

The courts have now awarded him the right to sue the GCSB - and he is fighting for the release of all the information they collated on him.

"I'm surprised at the scale of breaches that have occurred and I think that the prime minister should apologise to those people too and inform the targets about the illegal activity," he said.

He backed calls by Labour for a full inquiry into the intelligence services.

Dotcom said it was the "worst feeling" to learn he was being snooped on.

"We are in New Zealand and my lawyers don't want to talk with over the phone because they think it's still ongoing. How must the average person feel. It's incredible."

Former GCSB boss Sir Bruce Ferguson said today the cases that had a question mark over them were done under warrant and signed off by the Inspector General of Intelligence.

Surveillance was done on behalf of the domestic spy agency, the Security Intelligence Service (SIS).

"No one questioned it at the time. I certainly didn't question it," he said.

Former GCSB legal adviser Hugh Wolfensohn resigned in the wake of the Dotcom scandal, after nearly 25 years with the bureau.

But Ferguson said Wolfensohn had been treated badly.

"Hugh made one mistake and he has admitted that. That's it," Ferguson said.

"I think he's been very hard done by."

While the GCSB was barred by law from spying on New Zealanders, there was a grey area when it was asked to do so by another organisation, like police or the SIS, who were authorised.

Ferguson also hit out at criticism of him by the prime minister and did not resile from his claim Key must have been "smoking dope" to blame him for the bureau's failings.

To do her report, Kitteridge was seconded to the agency last October and visited spy agencies in Australia.

It revealed a series of management and culture failings, which led to illegal spying.

She recommended an immediate overhaul of the law covering the GCSB's activities and said it may have breached the Privacy Act and the Defence Act.