Public Works Minister Diane Finley has had her knuckles rapped by the federal ethics watchdog over more than $1 million in funding granted to a Markham, Ont.-based community centre.

According to a report released by Ethics Commissioner Mary Dawson on Tuesday, the minister acted improperly and violated the Conflict of Interest Act by giving money earmarked for accessibility projects to the Markham Centre for Skills and Independence in 2011.

At the time, Finley was minister of human resources and social development, the department responsible for administering the Enabling Accessibility Fund.

The proposal, which was submitted by Rabbi Chaim Mendelsohn on behalf of the Canadian Federation of Chabad Lubavitch, was added at Finley’s request to four projects already selected from 167 eligible proposals, Dawson reported.

'I found that the Markham proposal clearly received preferential treatment' - Ethics Commissioner Mary Dawson's report

The Markham centre was ultimately awarded $1,044,000 for making the facility fully accessible to people with disabilities, according to a departmental press release from August 2011.

The bulk of that money was later withdrawn after the group was unable to garner the necessary construction permits and ran into unexpected cost increases owing to the state of the building, Dawson states.

By that point, about $50,000 of the money had been spent, with the rest being returned to the program.

PM defends Finley

Not surprisingly, Finley came under heavy opposition fire during question period, with New Democrat Leader Tom Mulcair demanding that Prime Minister Stephen Harper "follow through" on the report.

Harper, however, lost no time coming to the defence of Finley, who, he said, had made a decision within her discretionary ministerial authority.

"I believe she acted in good faith, and she certainly had no personal interest whatsoever in the decision to support an … accessibility program for disabled people in the riding," he said.

"We will obviously act on the findings of the report to make sure the process agrees with everyone."

Harper defends Finley decision4:15

Speaking on her own behalf later in the session, Finley echoed those sentiments.

"I always believed that this project to improve access for people with disabilities ... was a valid project that was in the public interest," she told the House.

She also said she accepted the findings of the ethics commissioner "to ensure this subsidy program is administered equitably, accessibly, and efficiently for all concerned."

'Clearly received preferential treatment'

Dawson concluded that Finley's decision to provide the funds contravened the section of the act that prohibits public office holders from making decisions that "they know, or reasonably should know, would place them in a conflict of interest."

Commons 20141124

Diane Finley violated the Conflict of Interest Act when she provided funding to a Markham community centre in 2011, the Ethics Commissioner has found. (The Canadian Press)

"I found that the Markham proposal clearly received preferential treatment," Dawson said.

She said the Canadian Federation of Chabad Lubavitch was the only group permitted to submit additional information in support of its application, and noted the project actually failed the initial internal assessment conducted by departmental officials.

"Program officers suggested that the proposal was not aligned with the objectives of the program because it did not identify any existing barriers requiring reduction," Dawson noted in her report.

"They also suggested that community support letters for the project were not very strong and that the application did not demonstrate the organization’s capacity to manage the project."

The proposal "was also the only one to be given a last-minute external evaluation at Ms. Finley’s request," the commissioner added.

Ministers intervened

The project was also the subject of a number of interventions by high-ranking Conservatives, including John Baird, who was foreign affairs minister at the time, and who, according to Dawson "had close ties" to Rabbi Mendelsohn, a constituent of his Ottawa riding.

Although neither Baird nor Finley could recall discussing the proposal, in a March 14, 2011, email response to a query from Mendelsohn, one of Baird's staffers wrote that Baird "had received your package, and was happy to mention his views on Chabad Lubovitch to Minister Finley."

Dawson said Mendelsohn advised her he is "the primary representative of the federation for interactions with the federal government and with the Conservative Party of Canada."

'[Nigel] Wright wrote that he told [Diane Finley] he had been asked by the prime minister to "sort it out"' —Ethics Commissioner Mary Dawson's report

Witnesses told Dawson Mendelsohn is "well-known on Parliament Hill and, more specifically, to a number of ministers and [MPs]," and provided advice to the Prime Minister’s Office on matters of protocol around Jewish cultural events. He was also part of the prime minister’s delegation to Israel in January, 2014.

In a written statement provided to CBC News on Tuesday evening, Mendelsohn confirmed that the federation had been aware that the commissioner was investigating "the potential funding of a community project one of our affiliate groups was planning," but said they were "unaware of the specific nature of the allegations."

The group "co-operated fully" with the investigation, he added.

"The report … makes clear that neither I, nor anyone associated with Chabad-Lubavitch, conducted themselves in anything but a proper manner, both legally and ethically. We congratulate the ethics commissioner for having conducted such a thorough inquiry, and we thank her and her office for ensuring that the good name of one of Canada's premier faith-based community service networks remains intact."

Chaim Mendelsohn and Harpers

Rabbi Chaim Mendelsohn, seen here at an event with Laureen Harper and Prime Minister Stephen Harper, has participated in several government events and photo opportunities. Dawson's report describes some of his interactions with Conservative cabinet ministers and officials in the prime minister's office. (CBC)

The project had the support of Peter Kent, who was environment minister at the time. Kent told Dawson "he likely signed at least one letter to Finley asking that she give the proposal 'all possible consideration.'"

But two departmental staffers told Dawson they "vaguely recalled" receiving a letter from Kent that "referred to a relationship between the Jewish community of the Greater Toronto Area and the Conservative Party of Canada," which they subsequently passed along to Finley's office.

PMO chief of staff 'pulled aside' by Finley

Several senior aides to Harper also seem to have become entangled in the funding negotiations, including former chief of staff Nigel Wright, who told Dawson he had a "very vague recollection" of a telephone call from Finley's then chief of staff, Phil Harwood.

He also told Dawson he recalled Finley "pulling him aside outside the cabinet room" to ask him if he considered the project "important."

"Mr. Wright wrote that he told her he had been asked by the prime minister to 'sort it out,'" Dawson reported.

"He recalled that Ms. Finley told him that the proposal was eligible for funding under a particular program, that it had not scored as high as other proposals submitted under that program, but that it had elements that made it a valid and appropriate recipient for funding under that program."

Wright told Dawson he did not intend to suggest funding should be approved, but "only that it was important that the matter be considered carefully and fairly."

When questioned by Dawson, Finley could not recall that conversation.

Chabad Lubavitch Markham - exterior closeup

In 2011, the Markham Centre for Skills and Independence received more than a million dollars in federal funding earmarked to improve accessibility for disabled people. Nearly all that money was eventually returned to the department when the project was unable to proceed due to cost increases and permit difficulties. (CBC)

During question period, Mulcair pointed to Wright's involvement — the man who, he reminded the House, "the prime minister fired… after he quit."

"[Wright] said the prime minister himself knew this was 'an issue,'" Mulcair noted.

"What exactly did the prime minister know about this dirty insider deal involving his office, three Conservative ministers and a dear friend of the Conservative Party?"

Harper said the report "makes clear" he had "no specific knowledge of these applications, nor any preference on what got chosen."

Finley asked staff to ensure proposal got 'fair shake'

Finley confirmed that she had asked her staff to look at the proposal to see how it compared to other submissions.

"She also asked that it receive a 'fair shake,'" Dawson noted.

Dawson says Finley decision served private interests8:52

But she told the minister that she was "unaware of the assistance her chief of staff ... was affording Rabbi Mendelsohn," which she said she had not instructed him to do, and didn't know that the federation was the only applicant permitted to submit additional information during the internal assessment phase.

"Ms. Finley maintained that at the time she made her decision, she did not have concerns about funding the proposal because she believed it had been dealt with through a fair process," Dawson wrote.

"Based on the evidence presented to her by my office, [she] agreed that it would appear that the Markham proposal did receive additional assistance [and] added that her goal is always to be objective and transparent."

'Contradictory evidence' delayed investigation

Dawson said she began the investigation on her own initiative when she was made aware of media reports "suggesting that the Markham proposal may have received special treatment from the minister."

She said her investigation took "an unusually long time" due to several factors, including "challenges faced in gathering the evidence I needed, the number of witnesses who were interviewed" and "contradictory evidence."

In making her decision, Dawson said Finley violated several guidelines, including the Treasury Board’s policy on transfer payments and the Prime Minister’s guidance document, Accountable Government: A Guide for Ministers and Ministers of State.

"It appears that some of these guiding principles were not top of mind in the handling of the Markham proposal," Dawson wrote.

Dawson also concluded the preferential treatment did not appear to have been based on the identity of Rabbi Mendelsohn as the federation’s representative, and therefore Finley did not contravene section 7 of the act, although Dawson notes that section is very limited in its application.

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The Finley report is available by clicking here.

With files from CBC News