The red flags concerned hundreds of thousands of dollars paid by the Virginia Fontaine Addictions Foundation to KAGF Consulting.
The warnings were contained in a 1996 internal audit that was apparently ignored by Health Canada in what is becoming a major spending scandal facing the Chretien government.
The audit questioned how KAGF Consulting, a company owned by Keith Fontaine, the brother of addictions foundation chairman Perry Fontaine, got $222,852 in funding from the treatment centre during an 18-month period ending Sept. 30, 1995.
"The payments appear to be in excess of fair market value, the amounts paid appear not to be based on arm's-length relationship and it was not possible to ascertain, with a reasonable degree of certainty, exactly what services were provided," the April 1996 special audit by BDO Dunwoody states.
On Oct. 8, the RCMP laid fraud charges against Perry Fontaine related to what they allege were fictitious contracts that funnelled $623,000 from the foundation through Keith Fontaine's company and back to his own pockets.
The Fontaine charges are the latest laid in a scandal that exploded in October 2000 when taxpayers found out they had paid for a Caribbean cruise for 70 members of the addictions foundation. It has since grown into a full-blown corruption investigation potentially involving millions of federal dollars. If proved in court, "It is a bigger abuse of public funds than we have witnessed in recent memory," said NDP finance critic Judy Wasylycia-Leis (Winnipeg North Centre).
"And it is also a breach in the public trust we as Canadians need to have in our public servants."
While the courts will deal with the charges laid by the RCMP, Winnipeg Liberal MP Reg Alcock said he is concerned about not only the political price his party may pay, but also what the scandal says about the "culture of secrecy" in the senior federal service.
"There is no question in my mind there was not a desire to see things," said Alcock, whose Commons committee forced the resignation of privacy commissioner George Radwanski earlier this year. "You don't want to look because you don't want to find out things you don't want to know."
The scandal has raised questions about government policies affecting native health care, as well as the accountability of the senior bureaucracy.
"What we are looking at here is a double whammy," said Walter Robinson, federal director of the Canadian Taxpayers Federation.
Nine arrests have been made so far, including Paul Cochrane, the ex-assistant deputy minister at Health Canada, Patrick Nottingham, a former senior departmental official in Manitoba, and Aline Dirks, Cochrane's former executive assistant.
But more arrests are expected in the alleged fraud scheme built upon gifts of SUVs, NHL tickets, trips to luxury ski chalets, false tax receipts and exotic travel.
All of those charged to date have yet to be tried and are considered innocent unless convicted.
There is ample evidence that those running Health Canada were aware of spending concerns involving Cochrane and the treatment centre at Sagkeeng First Nation long before the Caribbean cruise.
In 1997, the federal Auditor General warned that funding deals with organizations like the VFAF were not well-managed or properly controlled.
Moreover, internal audits had not only raised red flags about the VFAF for years, but even led the attorney general to consider laying charges in 1997 over $1.2 million in unsupported billings. (In the end, no charges or criminal investigation was ordered, in part because of the treatment centre's pledge to recover the missing funds.)
Documents obtained by the Free Press detail the extent of the early warnings and the degree to which they were overlooked or ignored.
For instance, Health Canada had audits in 1996 that showed that $1.3 million, or 37.2 per cent of the centre's expenditures, were classified as "questionable."
A 2001 forensic audit ordered by former health minister Allan Rock after the Caribbean cruise doesn't pull any punches as it examined the department's record of overseeing spending at the VFAF.
That draft forensic audit notes that even though financial officials at Health Canada had knowledge of "issues" around the centre, it did not "have the capacity to draw this information together in a timely manner."
The forensic audit concludes that the decision-making and management within the FNIHB (First Nations and Inuit Health Branch) was "deficient."