More likely MS was well aware of what was going on and didn't care until the Guardian forced their hand.
Highly likely, or at least a bit naive -- Completely reasonable to have local staff for a contract this big, but Microsoft should have independently 'double-checked' sooner
I've worked for big corporations for nearly 20 years, I've seen this more times then I can count. Higher ups always happy to turn a blind eye to a bad situation as long as it's making the company money, and then immediately throwing subordinates under the bus when it bites them in the ass.
‘Your winnings sir’