Court documents reveal the police gave the Government spy agency incorrect advice, assuring it Kim Dotcom was a foreign national when he was a New Zealand resident.
The Government Communications Security Bureau is being investigated for unlawfully spying on Mr Dotcom and one of his co-accused, Bram van der Kolk.
Newly released documents show the spy agency sought assurance from the police, who were heading the investigation, that Mr van der Kolk and Mr Dotcom, the founder of the Megaupload website, were foreign nationals.
The police gave that assurance, which was incorrect.
Both men are New Zealand residents, living with their families in Auckland, and it's illegal for the agency to spy on people who live in the country.
Lawyers for the two men and the Crown will be back in the High Court at Auckland on Wednesday to discuss the issue.
Mr Dotcom is facing copyright, money laundering and fraud charges in the United States. He and three co-accused were arrested in Auckland in January and US authorities lodged papers seeking their extradition in March.
Prime Minister John Key said in reply to a question from the Green Party in Parliament on Tuesday, he hopes the inquiry will report back by the week. He says the GCSB is a "thoroughly professional organisation in his view".
Police Minister Anne Tolley says she's absolutely confident the police did their very best at all times to follow procedures.
English knew of GSCB involvement
Deputy Prime Minister Bill English has conceded he knew last month about the spy agency's involvement in the Dotcom case.
Bill English. Photo: NATIONAL PARTY
Mr English, who was acting Prime Minister while John Key was in the United States, signed a ministerial certificate blocking information about the bureau's possible involvement after requests from Mr Dotcom's defence team.
At the time, the legality of the raids and the possible involvement of local intelligence agencies were matters being raised in the High Court.
"I was aware there was law enforcement activity around it, and as I said, I have been part of the administrative process around some of that, but I wasn't aware of the full picture," Mr English says.
He says the first he knew the GCSB might have acted unlawfully was when Mr Key told him.
PM only knew about certificate a day ago
The Prime Minister has said he was only made aware of the illegal activity on 17 September and found out late Monday afternoon that Mr English had been aware in August of the bureau's involvement.
He says Mr English was called on to sign a ministerial certificate in his capacity as acting Prime Minister.
"A ministerial certificate is in relation to information about whether the bureau has acted because a court might ask, or someone might ask, for that information. So it's essentially a suppression order," he says.
Labour leader David Shearer is questioning why Mr Key wasn't told about the certificate, given the high-profile nature of the Dotcom case.
"This is a Government which is obviously not talking to itself, not talking to the people who are serving, it and not taking responsibility for ministries which they are responsible for. I think it's a complete debacle."
However Mr Key says it's not surprising he wasn't told about the certificate on his return from the US.
"You've got to remember at the point at which they signed that, the belief was that the bureau, if it was operating, was operating lawfully and this was simply a suppression order for information, as I understand it, that was requested from the defence team."
Mr Shearer claims Mr English also signed an indemnity order, which means the Government would be liable for any legal costs if Mr Dotcom sued it.
Mr English has rejected that, saying he did not sign an indemnity order. "It was a suppression order related to the court proceeding," he says.
