However, there were several problems with the Khemlani connection. First, the size of the loan was enormous: Connor initially sought US$4 billion, which was later reduced to US$2 billion, but still equivalent to about 25% of Australia’s gross domestic product at the time. Second, the source of the loan was dubious: Khemlani was not a reputable banker, but a shady middleman who had no guarantee of delivering the funds.
Third, the process of the loan was irregular: Connor bypassed the standard procedures of the Australian Treasury and the Loan Council, which were responsible for overseeing government borrowings. He also obtained the approval of the Federal Executive Council, a subset of the cabinet, without informing the Governor-General, Sir John Kerr, who was the representative of the Queen and the head of state. Moreover, Connor kept the loan deal secret from the public and the parliament, and misled them about its nature and progress.
The Scandal Breaks: A Series of Revelations and Resignations
The loans affair came to light in May 1975, when the opposition leader, Malcolm Fraser, questioned the government about its overseas borrowings in parliament. Fraser had received a tip-off from a journalist, who had been contacted by Khemlani, who was frustrated by Connor’s delays and demands. The government initially denied any wrongdoing, but soon admitted that Connor had been authorized to seek loans for “temporary purposes”. This was a dubious claim, as the loans were clearly intended for long-term projects, and violated the constitutional requirement that non-temporary borrowings be approved by the Loan Council, which included representatives of the state governments.
The government then revoked Connor’s authority to seek loans on 20 May 1975, and held a special parliamentary session on 9 July 1975 to explain the affair. However, the explanations were unsatisfactory and contradictory, and the opposition accused the government of lying and covering up. The scandal worsened in October 1975, when the Melbourne Herald published a series of telexes that showed that Connor had continued to negotiate with Khemlani after his authority had been withdrawn. Connor resigned on 14 October 1975, admitting that he had made a “grave error of judgment”.
