Prime Minister John Key says the GCSB let themselves down in the Dotcom spying affair and he is "extremely disappointed ... pretty appalled, actually."
It is illegal for the Government Communications Security Bureau to spy on NZ residents, such as Kim Dotcom.
The GCSB's admission is the latest in a series of setbacks and blunders for authorities in the Megaupload case. High Court rulings have already found the warrant for the original raid was illegally issued; that the search and seizsure of Kim Dotcom's property was illegally carried out, and that the NZ Police wrongly sent evidence offshore to the FBI.
Speaking in Christchurch late yesterday, Mr Key says the GCSB made "basic errors" and that any consequences would be taken up by director Ian Fletcher with his staff.
Mr Key says the GCSB was not being "overly enthusiastic" in trying to help the FBI.
The material it gathered is still held by the GCSB and has not been given to the US agency.
He says there would be no further independent inquiry (as demanded by opposition parties) because one had just been done by Inspector-General of Security Justice Paul Neazor.
Asked what effect the revelations would have on the Dotcom matters before the High Court, Mr Key says he did not believe the case would be jeopardised.
He says the material was "not directly related to that case".
The Government Communications and Security Bureau should not have relied on the police as to the immigration status of Kim Dotcom, Prime Minister John Key says.
He has just released the Inspector-General of Immigration and Security Paul Neazor's report into the illegal spying which occurred on Kim Dotcom and his co-accused Bram Van der Kolk before their arrest in January.
The GCSB is only permitted to intercept communications between foreign nationals, and it was wrongly informed by police that Kim Dotcom was not a resident or citizen.
He was, in fact, a resident.
"The GCSB originally relied on the police's information about the residency status of the people in question
"They did not check further," Mr Key says.
"In my view, reliance on another party by the GCSB is unacceptable."
Mr Key says the Inspector-General notes in his report the GCSB may have been confused about Mr Dotcom's immigration status due to changes to the Immigration Act in 2009.
However, he says this is not an excuse.
"GCSB had a responsibility to fully understand what the change to the immigration legislation in 2009 meant for its own operations, including whether individual visa holders were protected or not."
GCSB director Ian Fletcher has apologised for his agency's mistakes.
"We got this wrong.
"Both factual errors and unacceptable errors of legal interpretation were compounded, most especially by our treating those interpretations as fact for too long.
"It should not have happened," Mr Fletcher says.
Mr Key has ordered the GCSB to come up with a plan so it can "agree with police and other law enforcement agencies how to confirm immigration status before operations in support of law enforcement activity are undertaken within New Zealand".
The GCSB must also "establish new approval processes in the support of police and other law enforcement agencies. This type of operation is halted meanwhile".
Key 'irresponsibly loose'
Opposition politicians weighed in with their own criticism.
"The fact a security agency responsible for such serious matters is not able to understand the law that governs them is staggering. John Key's oversight of these agencies has been irresponsibly loose," deputy Labour leader Grant Robertson told NBR ONLINE.
New Zealand First leader Winston Peters has called for a commission of inquiry into the illegal spying affair.
He says Justice Neazor's hastily-arranged inquiry is too little too late for an issue of such importance.
"The lack of communication between government ministers, senior police staff, the GCSB, the SIS and the Prime Minister's Office is evidence of systemic failures.
"Details around New Zealand's shambolic role in the FBI investigation are going directly to the White House and could well harm our international reputation," Mr Peters says.