NATIONAL

SECRET U.S. FILES REVEALED

In 1988, the Americans accused the Mulroney government of rigging the Airbus deal. Here’s what they had.

JONATHON GATEHOUSE January 28 2008
NATIONAL

SECRET U.S. FILES REVEALED

In 1988, the Americans accused the Mulroney government of rigging the Airbus deal. Here’s what they had.

JONATHON GATEHOUSE January 28 2008

SECRET U.S. FILES REVEALED

NATIONAL

EXCLUSIVE

JONATHON GATEHOUSE

In 1988, the Americans accused the Mulroney government of rigging the Airbus deal. Here’s what they had.

A secret U.S. dossier on the Airbus affair, shared with high-ranking members of Brian Mulroney’s government, alleged that the then prime minister directly intervened in Air Canada’s 1988 decision to purchase the planes, as his political friends pocketed commissions and his Progressive Conservative party grew fat on donations from Karlheinz Schreiber and campaign funds connected to the deal. The seven-page report, recently obtained by Maclean’s, was presented as the product of inquiries by the FBI and other American agencies. Passed on by the U.S. ambassador on the eve of the November 1988 election, it traces the roots of the Airbus deal back to 1979, and paints a picture of a wide-ranging conspiracy that saw Conservative lobbyists, cabinet ministers, senior government advisers, bureaucrats and Air Canada management collude to ensure the European aircraft consortium got a toehold in the North American market. But its most explosive allegation is that the decision to purchase Airbus planes was a political one, made at the highest reaches of the Mulroney government. “The decision to go was made in Ottawa, not at Air Canada. Ottawa decided to take the risk on the political, GATT an [sic] Free Trade fallout,” says the report. “The favour owed Frank Moores, the Quebec jobs, the dollars involved (campaign funds, commissions) won out.”

The U.S. version of events is disputed by former Air Canada executives and members of the board, and categorically denied by the former prime minister. “Nothing in these allegations presents anything new, including the complaints from American sources,” Mulroney’s spokesman Robin Sears said in a written response. The statement did not address the specific allegations made in the document, nor did it respond to questions that Maclean’s submitted to Mulroney. Sears, however, did

note that police have examined such accusations in the past, and have closed the file. “On April 22, 2003, after an exhaustive investigation in Canada and abroad, the RCMP concluded that the allegations of wrongdoing involving Airbus could not be substantiated and no charges would be laid. The case was closed. This was confirmed by David Johnston last week,” wrote Sears.

The typed, single-spaced report, entitled “Canada: An Airbus Strategic Objective,” was brought to the attention of Derek Burney, Mulroney’s chief of staff, by then U.S. ambassador Tom Niles at some point in the fall of 1988. It’s unclear what, if any, action was taken by Burney. (In an email to Maclean’s, the former adviser, now a member of the non-partisan panel studying Canada’s Afghan mission, says he does not remember receiving the information from Niles, but “would have most likely” referred it to the Privy Council Office.) But a week before the Nov. 21 “Free Trade” election, Niles again reached out to the Mulroney government, summoning a senior aide to finance minister Michael Wilson to the embassy. Don McCutchan, now a Toronto-based international business consultant, confirms that the document obtained by Maclean’s, which bears no identifying marks, is the same one he was shown in 1988, and summarized in a two-page memo he presented to Wilson just prior to an Ottawa campaign rally that Nov. 14. “It was a tense meeting,” says McCutchan. “Ambassador Niles made it very clear that he was raising important information. It was unambiguous that the U.S. government took this matter very seriously.”

After Wilson read the summary of the American allegations, McCutchan recalls the minister using his car phone to contact Burney to discuss the matter. Burney says he has no recollection of any specific conversation about the U.S. dossier. Wilson has previously confirmed that Niles brought certain, unspecified suspicions to his attention, but said he did nothing with the information. Now the Canadian ambassador in Washington, Wilson declined an interview request. So did Niles, who is now retired and living outside New York City.

Twenty years later, however, with the Airbus deal again in the headlines, and with a public inquiry into Brian Mulroney’s post1992 dealings with Karlheinz Schreiber pending, there is much in the dossier that commands attention. “What may have started in 1979 as an uncoordinated campaign using the highest levels of the government of France to influence the top levels of [Pierre Trudeau’s] Canadian government has now progressed, successfully, to Canadians working on behalf of the Airbus partners with the highest lev-

els of the Canadian government,” the document begins. “Money and a political strategy make for a formidable combination.” Chronologically ordered, the report provides a précis of Airbus ’s prior efforts to penetrate the Canadian market, but suggests the business climate changed dramatically after Mulroney’s landslide 1984 election victory. It notes that the Conservatives’ first transport minister, Don Mazankowski, was a close friend and former roommate of Frank Moores, and lays out the other friendships and family links that made the former Newfoundland premier’s Government Consultants International (GCI) such a formidable lobbying outfit. The document identifies MesserschmittBölkow-Blohm (MBB), the German Airbus

partner, as an important GCI client, and suggests the firm got the business largely because of Airbus chair Franz Josef Strauss’s Montreal connection. “Karl Heinz [sic] Schreiber, a Strauss front man, became Moores’ West German contact,” says the document, which predates the first media reports of possible Airbus payoffs by six years. “When in Canada, Schreiber spends his time and someone’s money with senior Conservative politicians

and friends. It is strongly suspected that he has funnelled large sums into Conservative campaign coffers.”

The U.S. report alleges that in late 1985, Moores and his friends “laid the groundwork” for an elaborate Airbus sales strategy, using Canada as the “back door” to the American market. Moores, who died in 2005, negotiated a commission from the manufacturer of five per cent on all Canadian sales, it says,

'It is strongly suspected that [Karlheinz Schreiber] has funnelled large sums into Conservative campaign coffers,’ the dossier says

and signed a $l-million-a-year personal services contract with Strauss. (Surprising figures given that the secret contract Schreiber’s International Airline Leasing signed with Airbus called for commissions of up to iVi per cent, money that he has testified was passed on to GCI.) These funds, the document alleges, “were to be used to hire additional key staff, for heavy business expenses and for political contributions.”

Their first great victory, the Americans alleged, was convincing Edmonton entrepreneur and GCI client Max Ward to reverse a 1986 decision to purchase Boeing 767s for his charter airline Wardair. The report says Ward’s change of heart was the direct result of a “council of war” convened in Ottawa that November that brought the principals of GCI—Moores, Gary Ouellet and Gerry Doucet—together with Gerry’s brother Fred, a senior Mulroney adviser, and Lucien Bouchard, then Canada’s ambassador to France. “It was decided at the meeting that Airbus must buy” the Wardair business, the document alleges. “In addition, high level words from key government officials must be passed on to Max Ward that the Government of Canada favored an Airbus decision, in part because the Prime Minister of France was paying an official visit to Ottawa in December.” (Through an assistant, Bouchard refused comment. Fred and Gerry Doucet had not replied to phone and email messages by press time.) Ward’s recompense, the dossier says, was a sweet financing deal on the Airbus planes, and a lucrative Toronto-MontrealParis flight route with landing rights at Charles De Gaulle airport.

For more than a decade, Schreiber has

The dossier alleges that Frank Moores helped Airbus use Canada as a ‘back door* into the U.S. market, in exchange for commissions on the sale of jets

claimed that he played a key role in that deal, calling it his “Trojan Horse” strategy to gain Airbus access to the American market. Reached at his Toronto home this week, Ward denied those versions of the deal, saying no one in or out of government influenced his decision. “We went over and looked at the airplane and were impressed,” he said, calling the allegations about the Paris route “nonsense.” He expressed frustration that his name was again being raised in connection with the Airbus scandal, and noted that he never even met Moores or Schreiber until well after the deal was done.

A central thesis of the U.S. dossier is that the Mulroney government tilted the playing field towards the Airbus bid because of the consortium’s plans to funnel parts work for future production versions to Bombardierowned Canadair plants in Quebec. By 1987, the Tory hierarchy was convinced that “Quebec and jobs” were the cornerstone for another federal election victory, says the document, and went to great lengths to ensure that the planned investment would take place. That’s

why, the Americans alleged, when Air Canada rejected plans to buy Airbus A34OS, a long-haul plane, the focus shifted to a smaller Airbus product, the A320. Air Canada executives who favoured competing manufacturers were moved to other jobs within the airline. And the company’s five-year strategic plan was abruptly redrawn to make the priority the replacement of its Boeing 727s, transcontinental aircraft that had been scheduled to remain in service until the mid-1990s, instead of its aging fleet of DC-9s.

But since such jobs-for-contracts “offsets” were illegal under GATT, the Mulroney government needed to tread carefully. With the free trade pact hanging in the balance, the Tories moved gingerly to avoid sparking a dispute, the Americans alleged. First, in early March 1988, Don Mazankowski, then the minister in charge of Air Canada’s pending privatization, and John Crosbie, the transport minister, changed the agenda of an Air Canada board meeting, postponing a final decision on new aircraft and “allowing time for the Prime Minister to review all the ramifications of an A320 decision.”

(Air Canada’s $ 1.8-billion purchase of 34 Airbus planes was officially announced in July 1988. The $400-million parts supply contract was made public on Nov. 15,1988, less than a week before the federal election, right around the time ambassador Niles made his last-ditch approach to Michael Wilson.)

The U.S. dossier concludes with what purports to be an inside account of the March 30, 1988, Air Canada board meeting where the Airbus purchase received final approval. It describes “strong anti-Airbus feelings” among some board members, and suggests that the issue of improper lobbying was raised with Claude Taylor, past president and then chairman of Air Canada. When concerns were expressed about the potential U.S. reaction to an Airbus deal, the document alleges proceedings were put on hold while “phone calls were made to Mazankowski and Mulroney.”

The U.S. government account of the board meeting appears to be at odds with the former prime minister’s repeated assertions that he had nothing to do with the Airbus decision. “I neither directly nor indirectly at any time influenced Air Canada,” Mulroney testified during discoveries for his 1996 libel suit against the federal government. “This was exclusively an internal decision by Air Canada, the government had no influence on it whatsoever.” In his written statement to Maclean’s this week, Mulroney’s spokesman, Robin Sears, reiterated that position. “It should be noted that as a matter of public record Air Canada has said that there was no interference with its board or directors or its management in its arriving at its decision to

purchase Airbus.” Mazankowski did not respond to numerous phone and email messages requesting an interview. But in 1995, he told the Toronto Star that he and Mulroney “never had any conversations” regarding the Airbus purchase. “The one thing I now know for certain is that this business of the government of the day attempting to influence Air Canada to choose Airbus over Boeing is just not true,” Mazankowski told the paper. “The decision was made by the people running Air Canada at the time.”

And descriptions of the meeting where the final Airbus decision was taken, provided to Maclean’s by former board members, throw doubt upon the U.S. version of the story. “As I recall there were very well-informed questions for the staff,” says Gayle Christie, a former York mayor and long-time Tory activist. “Everyone knew it was an important decision for Air Canada, and we had all done our homework.” James Macaulay, a Vancouver lawyer, says he doesn’t recall any dissent being expressed. “My recollection is that the decision was pretty much unanimous,” he says. Nor were trade issues ever raised. “I don’t remember anybody bringing that up,” Macaulay says.

Similarly, none of those who were around the table remember phone calls being made to Mulroney or Mazankowski. Taylor says Ottawa was deliberately kept out of the loop. “We never talked to them at any time, even when the government was the major shareholder.” The Airbus decision was “clear-cut,” says Taylor, because Boeing and the other competitors had “nothing that could touch” its technology. (Karlheinz Schreiber recently testified before the Commons ethics committee that he and Taylor “met often” but never discussed Airbus. That is another myth, says Taylor. “I never met Karlheinz Schreiber. I never shook his hand. He has told people that he visited my office, but he never did.”)

Pierre Jeanniot, then Air Canada’s CEO, says he met regularly with the minister of transport, but can’t recall who he informed about the Airbus decision. (A cabinet shuffle happened while the board met on March 30. By day’s end Benoit Bouchard had replaced John Crosbie as minister.) Board members had access to offices and phones, notes Jeanniot, so it is possible that someone sought Ottawa’s guidance; however, he is certain it wasn’t him. “I would have resigned if someone in government told me what to do,” he says. The former CEO also discounted the other American allegations about the Airbus decision. Senior executives were switched not because they favoured competitors, but because he was looking for a successor and wanted to test their mettle. And the decision

Mulroney’s response: ‘The RCMP concluded the allegations of wrongdoing could not be substantiated. The case was closed.'

to replace the newer planes first was done at his behest because the three-engined 727 had become too expensive to operate and maintain. At the same time, McDonnell Douglas was offering a relatively cheap—$1.5 million per plane—upgrade that would extend the life of the DC-9s by 10 to 15 years, he says. “It was an easy decision. It saved us a lot of money.” While some of the information in the U.S. dossier, like its recounting of the myriad of links between GCI, senior Tories, and members of the Mulroney-appointed Air Canada board, are proven fact, many of its more spectacular allegations smack of the Ottawa rumour mill, or a broken telephone. For example, the document suggests that Marc Lalonde, the former Liberal finance minister, was until the beginning of 1988 on a personal retainer from Frank Moores. Lalonde, who counts Schreiber as a friend and former client—in early December he posted $100,000 of the German-Canadian businessman’s $ 1.31-million bail—denies that he ever had any business relationship

with Moores or his firm. “That’s absolutely false,” says Lalonde. “It’s good that you called. You saved yourself a lawsuit.”

The U.S. allegations about Airbus money ending up in Progressive Conservative campaign coffers are similarly unsupported. (Senator David Angus, the party’s chief fundraiser from 1983-93, and a former Air Canada board member, did not respond to multiple phone and email messages. Mulroney’s spokesman did not specifically respond to the American allegations about Schreiber’s donations or Airbus-deal-related campaign funds.) In his testimony before the House of Commons ethics committee, Schreiber has acknowledged that he financially supported Mulroney’s efforts to unseat Joe Clark as party leader in 1983. “The money came from myself and from the Strauss family and probably from the [ruling West German] Christlich-Soziale Union,” he testified. He also claimed to have donated $30,000 in cash to Jean Charest’s 1993 campaign for the party leadership.

(Charest says the amount was $10,000.) But there have been no revelations like the ones that shook Germany in 1999—Schreiber’s habit of passing millions of Deutschmarks to Christian Democratic Union officials for party slush funds—made in connection with Canadian politics.

Questions remain, however, about why Niles, a career diplomat with a reputation as a cautious and serious man, would take the extraordinary step of transmitting such allegations of corruption to the highest reaches of the Canadian government. What did he hope to accomplish? And could he have been acting without authorization of his bosses in Washington? The former ambassador’s name has appeared on the list of witnesses the House ethics committee wants to summon to its hearings later this winter, though it is unclear if he will co-operate.

But while Niles continues to refuse interview requests today, recently unearthed documents reveal that he was deeply frustrated by the Mulroney government’s response to his complaints back in 1987-88. In November, the Hamilton Spectator obtained heavily censored copies of the ambassador’s cables to the State Department under the U.S. Freedom of Information Act. In mid-March 1988, Niles was telling his bosses that Frank Moores, “a man with an unsavoury reputation,” stood to “gain upwards of $50 million should the A320 sale go through.” In early April, just days after the Air Canada board approved the Airbus purchase, he was reporting that Moores’s commission might be in the $75million to $100-million range. “While our chances of turning this one around may be slim, I believe that the principle involved, the value of the deal itself, and its longer-term implications justify the effort. Obviously, whatever action we take should be coordinated with Boeing and McDonnell Douglas,” he wrote. But at the same time, Niles was counselling restraint. “While there is good reason to believe that the competition was fixed from the outset, I do not believe that this should be raised, at least initially, with the Canadian authorities.” By mid-November, though, when Niles was sharing the dossier, the time for playing nice was clearly over.

Similarly, two decades later, it’s hard to fathom Burney and Wilson’s lackadaisical response to the ambassador’s concerns. Shouldn’t allegations of corruption and payoffs brought forward by Canada’s closest ally have been treated more seriously? “Whenever allegations were registered with me on this or any other file, my standard response was that, if there was evidence to support any allegation about impropriety, it should be presented to the appropriate authorities,” Burney wrote in an email to Maclean’s. “If

Airbus ‘paid Schreiber to use his undoubted talents as a weasel to get business for them.’ But it didn’t affect the Air Canada deal, Crosbie says.

the information was actual evidence of impropriety from the FBI, they [the FBI] would have been able to provide it to the RCMP through their normal liaison procedures.” Mulroney’s spokesman also said it was up to the Americans to back up their claims with credible evidence. “If the FBI had evidence of impropriety there was nothing to prevent them from providing it to the RCMP through their normal channel,” wrote Sears, suggesting that Niles’s complaints were more industry-driven than anything else. “Boeing’s efforts to use their access to the embassy and other agencies of the U.S. government to press their case are understandable.”

In the end, it wasn’t until 1995 that police launched an official investigation into the Airbus affair, sparked not by American concerns, but by the actions of a German court.

(The RCMP made some preliminary inquiries into the matter in 1988, after hearing the rumours swirling around Ottawa, but quickly lost interest. And whatever the extent of their examination, it appears to have fallen well short of Mulroney’s assertion in his 1996 deposition that the force “investigated it, and it was as clean as a hound’s tooth.”)

In fact, it appears that the Mulroney government’s sole response to the widespread rumours of dirty dealings was a meeting that John Crosbie held with Pierre Jeanniot prior to the board making its final decision, and well before the dossier was brought forward. “I arranged for Jeanniot to meet with me in Ottawa to check the rumours out,” says Crosbie. “I wanted to know if he was under pressure from government, and particularly from anyone in the PCO, the PMO, or the prime minister himself.” Crosbie says that what he heard at that meeting—a detailed explanation of the three committees Air Canada set up to evaluate the technical, competitive and financial merits of the Boeing and Airbus planes—convinced him that everything was on the up and up. “Jeanniot assured me that he wasn’t under any pressure from anyone in the government or my department.” Crosbie puts little stock in any complaint from Niles, or the Americans. The former ambassador was an indefatigable Boeing backer and the principle source of the rumours about the deal, he says, something he attributes to a bad case of “sour grapes.”

As for the $30-million question, the one that the planned inquiry won’t be tackling— why Airbus would pay Schreiber and Moores such hefty commissions if they had no influence over the deal—Crosbie suggests it simply might have been a form of insurance. “They were paying Schreiber to use his undoubted talents as a weasel to lobby for them to get business for them.” Was Airbus willing to use “grease money” to ease the way? The former transport minister says he wouldn’t be surprised. “This is a different world. These huge companies, when they’re trying to sell something, there’s no tactic they won’t use.” It’s just that in this particular case, Crosbie, at least, is convinced it didn’t matter.

Bribery if necessary, but not necessarily bribery. How very Canadian. M

jonathon.gatehouse@macleans.rogers.com