Privy Council Office fiddled with books to pay legal bills

OTTAWA - The prime minister's own department fiddled with the books at least twice to pay some of the massive legal bills run up by the inquiry into Brian Mulroney's dealings with Karlheinz Schreiber.

A newly released audit has found officials in the Privy Council Office improperly "backdated" approvals for legal expenses that ran over budget at the Oliphant Commission.

"The legal counsel did not provide advance notice ... that additional time would be needed until the legal counsel had already exceeded the original allotted time for preparation of hearings," says the internal report.

Officials then date-stamped their after-the-fact approval back to the date the legal fees actually ran over budget. The same thing happened again, and again approval was improperly backdated.

The audit, obtained by The Canadian Press under the Access to Information Act, does not identify who ran over budget or by how much.

The audit provides a glimpse into the flow of millions of dollars in legal fees paid to find out why former prime minister Brian Mulroney accepted envelopes stuffed with cash from deal-maker Schreiber.

The report, dated Feb. 11, examines the way the federal government handled legal bills for participants granted standing at the commission run by Jeffrey Oliphant, former Manitoba associate chief justice.

The auditors warned the backdating practice has the potential to be "moderate to high risk" for keeping costs under control.

They called on the Privy Council Office to require participants' lawyers in future commissions to signal whenever three-quarters of their allotted legal budget has been spent -- a recommendation the government has rejected in favour of another administrative tool.

Other internal documents obtained by The Canadian Press show the commission has racked up $12.7 million in expenses as of April 9.

The commission delivers its report to the prime minister on May 31. It was originally due Dec. 31, but Oliphant requested an extension to further analyze some 150,000 pages of documents.

About $7.6 million has been spent so far on "professional services," including legal fees mostly paid to commission counsel but also for forensic accounting.

Those services are apart from the $2 million already paid for the commission's staff salaries and benefits. And they don't include the salary and benefits for Oliphant, who is paid separately by the Office of the Commissioner for Federal Judicial Affairs rather than by the commission.

Rentals, including office space, have cost almost $1 million.

A Privy Council Office spokeswoman says Mulroney, whose legal expenses are paid separately from the commission's own accounts because he is a former public office holder, has already been reimbursed $1.6 million by the government for his legal tab to date.

Mulroney has been represented at the inquiry by a team of six lawyers, including lead counsel Guy Pratte.

The only other participant to have had his legal bills paid by the commission is Fred Doucet, a lobbyist and former aide to Mulroney. Doucet successfully argued in 2008 that he had insufficient income to afford a lawyer.

Oliphant ruled that Doucet's legal counsel could bill for a maximum of 50 hours for preparation, 100 hours for attending hearings, and 30 hours for an articling student, plus travel and incidentals.

The commission plans to post its 2009-2010 expenses on its website within days.

Mulroney testified last fall that he received $225,000 in cash-stuffed envelopes from Schreiber at hotels in 1993 and 1994, shortly after he had left office. The former prime minister declared the income to the Canada Revenue Agency only in 1999, under a voluntary disclosures program.

Mulroney was allowed to pay income taxes on only half the previously undeclared amount, at the time a standard policy at the CRA, the inquiry was told. Tax officials say the policy has since been changed to require full payment.

Schreiber testified he gave Mulroney $300,000 to help lobby the federal government on a military vehicle manufacturing project in Canada. Mulroney denied both claims, saying he was paid the lesser amount only to lobby other governments.

After public hearings concluded last fall, Schreiber was extradited to Germany, where he was recently convicted of tax evasion and sentenced to eight years in prison.

Mulroney received an apology from the federal government in early 1997 for unsupported allegations the RCMP made in an affidavit presented to officials in Switzerland. He was paid more than $2 million by the Mounties that year to compensate for his legal expenses.

All told, the Mulroney-Schreiber affair has cost Canadian taxpayers a minimum of $16.3 million -- and likely millions more in costs not publicly accounted for, such as the lengthy RCMP investigation which ended with no charges being laid against the pair.

Oliphant's report is expected to be made public shortly after being delivered to the Privy Council Office on May 31.