The experts will tell you that most frauds start small—maybe a few hundred bucks pocketed here, a little accounting fudge there—and get gradually bigger over time as the thief warms to the task, and gains confidence. That’s the way it almost always goes.
But Paul Champagne was not your typical fraudster. For one thing, Champagne had no particular expertise in finance. He was a computer engineer, brought in to manage maintenance contracts at Canada’s Department of National Defence in 1992. He was a technical authority, who could tell the bureaucrats how to buy, operate and maintain their computer systems more efficiently, and to save the taxpayer money in the process. For most of his time at DND, he wasn’t even an employee, but an outside contractor. And, up until the day he was fired in 2003, most of his colleagues thought he was doing a great job. Even when he was fired, it was for exceeding his authority in approving contracts that were beyond his position.
His theft wasn’t discovered until shortly thereafter. And what a theft it was: an estimated $100 million embezzled from DND through a phony invoicing scam that ran for just under a decade. Every year he supplemented his $80,000 salary by about $10 million—one of the longest-running and biggest frauds in Canadian history.
Champagne recently sat down with Maclean’s in a small, windowless room at the minimum security Pittsburgh Institution, just outside Kingston, Ont., for his first-ever public interview. He had just passed one year in prison, and was a little less than two months away from his early release date—June 3. He wanted to tell his story. To make it clear that he takes responsibility for what he did, to absolve others who might have been tarnished by it—and yes, to “apologize to the Canadian taxpayer.” But there was a warning, too: stealing that much money from under the nose of the Canadian government was easier than you might imagine, getting away with it for a decade was even easier. And it’s all rooted in the way that government departments reward those who spend their budget, and punish those who do not.
Paul Champagne was hired to clean up a mess, and clean it up he did. It was 1992, and he was an IT specialist with a company called Montreal Engineering. When DND put out the call for someone to help manage the department’s systems maintenance contracts, Champagne’s firm offered his services, and won the mandate. At the time, DND was spending around $227 million a year on more than 2,000 separate contracts. Champagne’s big innovation was to declare that DND would henceforth pay to fix only systems and equipment that were broken. Essentially, he was ripping up a couple thousand extended warranties, and betting that the government would save a bundle. He was right. Maintenance costs soon fell by more than three-quarters, to about $50 million per year. Over the course of the 1990s, Champagne’s simple restructuring saved the government well over $1 billion.
He was a 34-year-old father of three young children making a decent middle-class living, doing contract work for the government. But he quickly became a star. Though he had no financial signing authority, Champagne earned a reputation as the IT guru within Canada’s military bureaucracy, presiding over DND’s sprawling computer infrastructure. That first winter, as the government’s year-end approached, Champagne learned about the games that happen when bureaucrats rush to spend the last of their budgets. What he soon discovered was that bureaucrats live in almost as much fear of under-spending their budgets as they do of overrunning them. Budgets that aren’t spent get cut, and nobody wants their budget cut. Champagne became known as the guy who could spend vast sums quickly. When you had a million bucks that you had to get rid of, he was the guy who could make it disappear—on software upgrades, licences, anything intangible and related to technology that you didn’t need, and didn’t understand anyway. But that very first year he ran into a wall. “I reached a point where I just didn’t have any more I could spend on,” he recalls. “I couldn’t move the money out the door fast enough anymore to meet the goals of the department.”
He came up with a plan. If DND was so desperate to spend money, he thought of a perfect place to stuff it: his pockets.
A fraud investigator would call it a simple fake invoicing scheme—charging DND for work that was never performed. But to a non-criminal it can get a little confusing. And that confusion is what helps fraudsters go undetected.
Champagne set up his own consulting company, and approached another small Ottawa-area engineering firm, RMC Systems. He asked RMC to function as his billing and accounting department for work he was doing for DND. He said his work was secret, dealt with matters of national defence, and he needed someone to process his payments. Meanwhile he approached a much larger DND contractor, Digital Equipment. (It was later acquired by Compaq Computer, which was finally acquired by Hewlett-Packard.) He told officials at Digital Equipment to pay any invoices that come from RMC, and to pass along the costs to him at DND. All of this sounds pretty suspicious, but Champagne assured both RMC and Digital Equipment that it was all part of the department’s streamlining. And besides, both companies would be paid for their trouble. “I can be pretty convincing,” Champagne says now.
So, Champagne submitted fake invoices to RMC. RMC paid Champagne, added a small commission and passed the bill on to Digital Equipment (and later to Compaq, then H-P). The larger company paid RMC, added its own commission and sent the bill to DND. And at DND, Paul Champagne made sure H-P got paid. It was a tidy little money train, with one obscure DND contractor at both the beginning and the end. But nobody at RMC, or Compaq, or H-P ever saw the full picture. Once the ruse was finally exposed, all of the companies claimed that they had been duped, and no one at those firms was ever charged with a crime.