OTTAWA - A long-time confidant of Brian Mulroney says he told the former prime minister nearly a decade ago to adopt a damage-control strategy and go public about his business dealings with Karlheinz Schreiber.

Luc Lavoie, testifying Monday at a commission of inquiry, said he offered the advice soon after he learned Mulroney had taken money from Schreiber to help promote a project to build German-designed armoured military vehicles in Canada.

Mulroney ignored Lavoie's counsel and the deal remained under wraps at the time -- only to leak out later and become the focus of the current inquiry headed by Justice Jeffrey Oliphant.

Lavoie, who served as a senior aide to Mulroney during his years in power and continued to act as a spokesman for him after he left office, said he didn't learn of the business ties to Schreiber until the spring of 2000 -- seven years after the deal was struck.

He described his reaction as "ice cold, glacial" when he was belatedly informed of the matter by Gerald Tremblay, a lawyer for Mulroney.

Lavoie recalled that for weeks afterward Mulroney seemed "uncomfortable" whenever he spoke to him. But the sudden chill on their relations didn't stop Lavoie from offering his opinion on what to do next.

He said he was convinced that , no mater what Mulroney did, news of the deal with Schreiber was bound to become public sooner or later.

"PR 101 teaches that, when something is going to become public, even if it's disastrous, and catastrophic and bad and negative ... you're always better to bring it out yourself."

Disclosing the deal before anyone else had a chance to do so would have allowed Mulroney to set things in context and "reduce the damage a little," said Lavoie.

He suggested a newspaper op-ed piece as a potential vehicle for proactive disclosure, with the article to be signed either by him or by Mulroney.

The former prime minister seemed interested in the idea, Lavoie said, but decided in the end to take no action. As a result the story remained secret for another three years, until author Williams Kaplan finally reported it in a newspaper article in late 2003.

Kaplan has previously testified that, in the days leading up to publication, Mulroney did everything he could to persuade him to keep quiet.

"Mr. Mulroney did not want the story of the cash payments to become public, and encouraged me on a number of occasions not to report on that," Kaplan told the inquiry two weeks ago.

Schreiber says he paid Mulroney $300,000 to lobby the federal government for the so-called Bear Head project, which would have seen the German firm Thyssen AG set up a plant in Canada to build and export light-armoured vehicles.

According to Schreiber, the deal was reached just before Mulroney stepped down as prime minister in June 1993, although the money didn't change hands until later.

Mulroney, who is scheduled to spend at least three days testifying at the inquiry next week, has insisted the money he accepted from Schreiber added up to $225,000.

He says his lobbying was directed at foreign political leaders in search of export markets for the Thyssen vehicles -- not at Canadian officials, an initiative that could have put him in breach of federal ethics rules.

Despite the dispute over the exact amount, the two men agree the money was handed over in cash-filled envelopes in a series of meetings in hotel rooms. Those encounters took place in August and December 1993 and December 1994.

Entries in Schreiber's diary indicate that he made phone calls to former Mulroney cabinet minister Elmer MacKay on the same days the first two meetings were held. MacKay has confirmed he had lunch with Mulroney and Schreiber the day of the third meeting.

In addition, Schreiber's diary shows he made phone calls to MacKay on two days in July 1993 when he made banking transactions in Switzerland to obtain money to pay Mulroney.

MacKay acknowledged Monday he had been an ardent supporter of the Bear Head project while he served in cabinet because the deal -- at least in its original form -- would have brought much-needed jobs to his home province of Nova Scotia.

Even when he project was later changed to move the site of the proposed Thyssen plant to Mulroney's home province of Quebec, MacKay said he continued to support it because there was "still a benefit to Canada."

MacKay insisted, however, that he knew nothing of the cash payments collected by Mulroney after he left office. And he was at a loss to explain the Schreiber diary entries bearing his name.

He can no longer recall details of any of the conversations he had with Schreiber on the days in question, MacKay testified.

But he was adamant that "I do know there was nothing in there about business or money or anything like that."