Loans affair

The Loans Affair, also called the Khemlani Affair, is the name given to the political scandal involving the Whitlam Government of Australia in 1975, in which it was accused of attempting to illegally borrow money from Middle Eastern countries by bypassing standard procedure as dictated by the Australian Treasury.

The Minister for Minerals and Energy, Rex Connor, Treasurer Dr. Jim Cairns, and others, were prime identities in the scandal.

The Loan

During 1975, the Whitlam Government attempted to raise a loan of approximately US$4 billion. The money was intended to be used to fund a number of natural resource and energy projects, including construction of a natural gas pipeline, the electrification of interstate railways and a uranium enrichment plant.

Tirath Khemlani (1920 - 1991) played a pivotal role. He was employed by Dalamal and Sons, a London-based commodity-trading firm^[1]

The raising of foreign loans for the Australian Government at the time required the authorisation by the Loans Council. It was common knowledge that funds were usually borrowed from US Banks or financiers. Connor's attempt to secure the loan was unusual for several reasons, including:

The size of the loan was extremely large for the time.
When a project of this scale and cost is undertaken, governments often attract foreign investment and ultimately form a business partnership, whereby the foreign investor would retain partial ownership and/or rights over the resources once the project is complete. However, this option was rejected by Connor who was renowned for his desire to have Australian resources controlled and owned by Australians.
The Minister for Minerals and Energy was raising the loan independent of Treasury.
Rather than attempting to raise the loan from US financiers, Connor attempted to raise the loan from Arab financiers, with Khemlani acting as the intermediary. There are unconfirmed reports that Arab financiers offered lower interest rates on governmental loans than US Banks/financiers. The Middle East at the time was awash with "petro-dollars", as the price of oil quadrupled between 1973 and 1974

Connor was duly authorised to raise loan(s) through Khemlani in late 1974. Between December 1974 and May 1975, Khemlani sent regular telexes to Connor advising that he was close to securing the loan.

However, the loan never eventuated and, in May 1975, Whitlam sought to secure the loan through a major US investment bank (name undisclosed). As part of the loan procedure, this bank imposed an obligation on the Australian Government to cease all other loan raising activities pertaining to this loan and accordingly, on 20 May 1975, Connor's loan-raising authority was formally revoked.

Progression after its leak

A special one-day sitting of the Australian House of Representatives was held on 9 July 1975, during which the then Prime Minister of Australia, Gough Whitlam tabled the documents containing evidence about the loan and sought to defend his government's position.

Beset by economic difficulties at the time and the negative political impact which the Loans Affair conjured, the Whitlam Government was very vulnerable to further assaults on its credibility. Gough Whitlam was prompted to sack Dr. Cairns from his cabinet.

Although Rex Connor's authority to seek an overseas loan was withdrawn following leaking of the scandal, he continued to liaise with Khemlani. The "Herald" Newspaper based in Melbourne published documents confirming this and Connor was forced to resign from the cabinet. He was replaced by the future Prime Minister, Paul Keating.

The Melbourne Herald newspaper journalist Peter Game tracked down Khemlani in mid-late 1975 and following an interview, he broke the story that ultimately opened up the Loans Affair. When Connor directly denied Khemlani's version of events, as reported in the Sydney Herald, Khemlani flew to Australia in October 1975 and provided Peter Game with telexes sent to him from Connor that refuted Connor's denial.

On 13 October 1975, Khemlani provided a statutory declaration and a copy of the incriminating telexes sent from Connor's office, a copy of which was forwarded to Prime Minister Gough Whitlam. Upon receiving the documents, Whitlam dismissed Rex Connor from his government for misleading parliament. In his letter of dismissal, date 14 October 1975, Prime Minister Whitlam wrote: "Yesterday I received from solicitors a copy of a statutory declaration signed by Mr Khemlani and copies of a number of telex messages between office Mr Khemlani’s office in London and the office of the Minister for Energy. In my judgment these messages did constitute "communications of substance" between the Minister and Mr Khemlani."

The loans affair embarrassed the Whitlam government and exposed it to claims of impropriety. The Malcolm Fraser-led Opposition used its numbers in the Senate to block the government’s budget legislation in an attempt to force an early general election, citing the loans affair as an example of ‘extraordinary and reprehensible’ circumstances. Whitlam refused, and this led to the Australian constitutional crisis of 1975.