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Former Progressive Conservative cabinet minister Bill McKnight testified Monday at the public inquiry into the dealings between German businessman Karlheinz Schreiber and former prime minister Brian Mulroney. ((Patrick Doyle/Canadian Press))

The counsel for an inquiry into business dealings between Karlheinz Schreiber and Brian Mulroney steered clear Monday of questions related to the "Airbus affair," in which millions of dollars in secret commissions were paid in the sale of jets to Air Canada.

That lawyers chose to overlook these questions suggests that Schreiber's dealings — and Mulroney's alleged involvement — with Airbus won't be probed.

The inquiry was set up to look at the money Mulroney received from Schreiber, a German-Canadian businessman who is facing extradition for tax, bribery and fraud charges in Germany.

CBC's Harvey Cashore, who has been following the case for The Fifth Estate, said the program has approached a number of Air Canada and Airbus employees. Of those the program spoke to, "none have so far been approached by commission counsel."

"So this makes us wonder — will [the inquiry commission] try and go down that road or not?"

Airbus in 1988 won a contract from Air Canada to supply 34 A320 planes for $1.8 billion.

Schreiber has said Mulroney's former adviser, Fred Doucet, met with him in late 1992 or early 1993 to ask Schreiber to funnel money from the Canadian government's Airbus deal to Mulroney's Swiss lawyer.

Doucet has denied the claim.

Mulroney has denied all accusations of impropriety and received a $2.1 million settlement after his name was publicly mentioned in connection with a 1995 investigation into the sale of Airbus jets to Air Canada.

University of Waterloo President David Johnston, who had outlined what the reach of the inquiry should be, said in an April 2008 report that "in light of the extensive RCMP investigation in to the Airbus matter, I consider it inappropriate that an inquiry should do so."

But a CBC News investigation eight months later found that Doucet repeatedly tried to determine how many jets were being delivered to Air Canada, which in turn would affect how much money Schreiber received through secret payments made by Airbus to International Aircraft Leasing (IAL), a Liechtenstein shell company. Schreiber received around $500,000 in commissions for each jet.

Doucet has declined comment on those documents, which appear to contradict his testimony to the ethics committee in February 2008.

In light of that information, it was unclear how strictly the inquiry would follow Johnston's directive to let the Airbus issue lie.

Bear Head the focus

On Monday, the early part of the inquiry focused almost entirely on the light-armoured vehicle factory in Bear Head on the southern coast of Cape Breton Island that Schreiber lobbied the government hard to build.

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Marc Lalonde, former cabinet minister under Pierre Trudeau, is shown in this Feb. 2008 file photo testifying before the Commons Ethics committee looking into the Schreiber-Mulroney affair. Lalonde testified Monday, saying he had no knowledge of lobbying done by Mulroney on behalf of Thyssen AG or Bear head internationally. ((Tom Hanson/Canadian Press))

Both witnesses who testified Monday — former Liberal justice minister Marc Lalonde and former Conservative defence minister Bill McKnight — were asked extensively about Bear Head Industries.

Schreiber, had lobbied the government on behalf of Thyssen AG, a German company, to build the plant.

"There was constant lobbying in 1988 and 1989 to approve this project," said the CBC's Margo McDiarmid, reporting from Ottawa.

"[McKnight], in fact, found the lobbying more than annoying from Karlheinz Schreiber, and he also painted this picture of Mr. Schreiber lobbying cabinet ministers behind the curtains of the House of Commons."

On Sept. 27, 1988, the federal government signed an "understanding in principle" with Thyssen Industries for the proposed manufacturing facility at Bear Head.

After receiving the understanding in principle, Thyssen sent $2 million to IAL, the shell company set up by Schreiber and his Swiss accountant, Giorgio Pelossi, in 1984.

McKnight said in his testimony that former Newfoundland premier Frank Moores, who also lobbied on behalf of Thyssen, sent him a letter in 1989 saying the Bear Head project had the support of the prime minister. He said he took the letter with a grain of salt and did not interpret it as fact.

McKnight said he did not receive any pressure directly from Mulroney's office to support the facility, which never got built.

"I got no direction from Mr. Mulroney," McKnight said.

McKnight said changing defence priorities in light of the fall of the Berlin Wall influenced the decision to hold off the project.

Lalonde, meanwhile, told the inquiry he began consulting for Thyssen and Bear Head in October 1993. He lobbied Air Canada on behalf of Airbus for the jet contracts, but wasn't asked about those dealings.

Lalonde, who quit political life in 1984, said he began providing legal advice to Schreiber beginning around 1986 or 1987, but made no mention of possible work done for Airbus. In past testimony to the Commons ethics committee, Lalonde has denied lobbying Air Canada on Schreiber's behalf.

Conflicting accounts of payments

In testimony to the federal ethics committee in 2007, former prime minister Mulroney said he received cash payments from Schreiber, after he left office in June 1993.

Mulroney said he was paid $225,000 in three instalments, and that the money was payment for his efforts as an international lobbyist on behalf of Thyssen.

He has acknowledged waiting until 1999 to pay tax on the money.

Schreiber has argued that the total was $300,000 in cash, and that the arrangement was reached while Mulroney was serving his last days as prime minister in 1993, which would have violated federal ethics rules. Schreiber has also contended Mulroney was paid that amount to lobby the Canadian government, not those overseas.

Schreiber, who appeared before the ethics committee on four separate occasions, said Mulroney did nothing to earn the money.

Lalonde repeated comments he had made when he testified before the Common ethics committee last February, saying he was paid by cheque for services rendered to Schreiber, and never by cash.

Lalonde said he had no knowledge of any lobbying done internationally for Thyssen or Bear Head by Mulroney.

Not a trial

Richard Wolson, the inquiry's lead counsel, said his team's role was "to call the evidence and explore all of the relevant issues in a probing manner."

Addressing Justice Jeffrey Oliphant, who is overseeing the inquiry, Wolson said in an opening statement "it is important that counsel get to the bottom of what happened."

Wolson reiterated Oliphant's earlier assertions that the inquiry was not a trial, but said it is about "the integrity of government."

Mulroney's former chief of staff, Derek Burney, and Beth Moores, the widow of former Newfoundland premier and Mulroney confidant Frank Moores, will testify on Tuesday.

The hearings will then adjourn until April 14, at which point Wolson will call on Schreiber — who was in attendance at Monday's session — to testify.

It's not known when Mulroney will testify, although it's possible he will do so in May as the inquiry wraps up.

Oliphant is expected to submit a report on the inquiry's findings by December 31.

With files from the Canadian Press