OTTAWA - The Defence Department balked at a proposal supported by Karlheinz Schreiber to build German-designed armoured vehicles in Canada, the Mulroney-Schreiber inquiry heard Tuesday.
Derek Burney, a former chief of staff to Brian Mulroney, testified that the department and its minister at the time, Perrin Beatty, feared they would be pushed into buying vehicles produced at a proposed plant in Cape Breton without competitive bidding.
"That was the primary negative in the discussions," Burney told the inquiry headed by Justice Jeffrey Oliphant.
"There was concern in the Department of National Defence . . . that they not be bound to make a commitment to purchase something that had not yet been produced. They did not want to be bound to a sole-source contract of that kind."
The project, known as Bear Head, never came to fruition. But a series of allegations surrounding it lie at the heart of the inquiry into business dealings between Mulroney and Schreiber, a German-Canadian arms broker.
Mulroney has told a parliamentary committee that after he stepped down as prime minister in 1993 he accepted $225,000 from Schreiber to promote a modified version of the project. He said he lobbied foreign political leaders whose countries might buy the vehicles.
Schreiber insists the total was $300,000 and the deal was struck before Mulroney left office, although the money didn't change hands until later.
Schreiber also claims Mulroney did little to earn the money and that he was supposed to lobby the Canadian government rather than foreign leaders -- an arrangement that could have put him in conflict with federal ethics rules.
Government documents tabled at the inquiry show Beatty initially resisted signing a 1988 "understanding in principle" on the project with the German-based engineering firm Thyssen AG.
He relented only after the agreement was rewritten to ensure there would be no legal obligation by Ottawa to purchase the vehicles.
Senator Lowell Murray, then the minister responsible for the Atlantic Canada Opportunities Agency, underscored the point in a later letter to Schreiber.
"The government of Canada, in so signing, cannot and does not thereby commit itself to any military or other procurement projects," Murray wrote.
The compromise followed a fierce battle that pitted Beatty against Murray and Elmer MacKay, then the political minister for Nova Scotia. Both of Beatty's opponents backed Bear Head as a potential job-creator for Cape Breton.
Despite the caution that Ottawa was not committed to buy any vehicles, the tentative understanding signed in September 1988 appeared to be richly rewarding for the lobbyists who had helped Schreiber promote it.
In mid-November of the same year Schreiber disbursed over half a million dollars in fees to them.
Photocopies of the cheques, previously reported in the media but officially tabled Tuesday, included one for $250,000 to Government Consultants International, a firm then headed by former Newfoundland premier Frank Moores.
Another $90,000 went to Moores personally. Similar cheques for $90,000 each went to consulting firms controlled by Gary Ouellet, Gerald Doucet and his brother Fred Doucet, a former senior aide to Mulroney.
Schreiber was chairman of Bear Head Industries, the subsidiary set up by Thyssen to handle the Cape Breton project. But the cheques were issued by Bitucan Holdings, another company controlled by Schreiber.
The 1988 agreement did not mark the end of the political battle. Testimony this week by Bill McKnight, Beatty's successor as defence minister, indicted that military officials remained skeptical about the deal while MacKay and other Conservatives form Atlantic Canada continued to support it.
Burney said it was part of his job as chief of staff to referee the dispute and smooth ruffled feathers within cabinet. He was adamant, however, that Mulroney never gave him any personal orders on how to resolve the matter.
The inquiry also heard echoes Tuesday of an earlier dispute over the purchase of European-made Airbus jets by Air Canada in the 1980s, while Mulroney was still in power.
The RCMP, in a letter to Swiss authorities in 1995, suggested Mulroney and Frank Moores had participated in a kickback scheme over that deal.
No charges were ever laid against either man and Mulroney later sued for libel and won a hefty settlement from the Liberal government of Jean Chretien.
Moores has since died, but his widow Beth testified Tuesday and repeated past explanations that a Swiss bank account, that the Mounties suspected was used to funnel kickbacks to Canada was in fact opened by her husband in her name and never contained more than $500 before it was closed.
