Canada scandal deepens as prime minister accused of cover-up

OTTAWA (Reuters) - A Canadian legislator at the heart of a spending scandal on Monday accused Prime Minister Stephen Harper of being involved in a cover-up deal, deepening a crisis that has engulfed the Conservative government.

Senator Mike Duffy made his allegations just days before a Calgary convention of the ruling Conservatives, who have lost support in the polls since the scandal broke in May and are now trailing the opposition Liberals.

The crisis is the worst to hit the right-leaning government since Harper came to power in early 2006 on a promise to boost accountability. Harper exercises strict control over the Conservatives - also known as the Tories - and such broad signs of division and dissent inside the party are unprecedented.

Duffy made his allegations in the Senate chamber, where comments are subject to Parliamentary privilege and make him immune from prosecution.

Duffy and two other senators - all appointed by Harper - face suspension without pay for allegedly charging too much in expenses. Duffy denies he did anything wrong but he said agreed in February to repay C$90,000 ($86,000) in expenses after Harper told him to so on the grounds the affair was becoming a political embarrassment to the party's core supporters.

Duffy said he had been coached by the prime minister's office to say he had taken out a loan to pay back the C$90,000. In fact, Harper's chief of staff, Nigel Wright, wrote him a check to cover the amount.

Referring to the aftermath of the February meeting, Duffy said: "So I'm back home ... after the Prime Minister's decided we're going to do this nefarious scheme".

Harper's chief spokesman said he would respond after reviewing what Duffy had said. The government has said Wright acted alone, and Harper was not aware of the C$90,000 payment.

Wright resigned in May after news first broke about the check, a payment that caused anger among Conservative legislators and supporters.

"This monstrous fraud was the PMO's creation from start to finish," Duffy told the Senate, adding that Harper and Wright knew he had followed the rules on expenses. Harper says he told Duffy to repay the money because it had been wrongly claimed.

"The millions of Canadians who voted for Prime Minister Harper and the thousands of Tories gathering in Calgary this week would be shocked to see how some of these people, how some of these Tories, operate. They have no moral compass," he said.

In another explosive accusation on Monday, Duffy said a Conservative Party lawyer had arranged to pay his legal expenses, which he said was evidence that Harper's office backed the deal. Duffy submitted to the Senate a copy of the check for C$13,560.

"That's right, senators. Not one payment but two. Contrary to the prime minister's assertion ... that he ordered repayment because Senate expense rules were in his words beyond a shadow of a doubt broken, he had my legal bills fully paid," Duffy told the Senate.

"He did this because as I've said from the start, this was all part of his strategy negotiated by his lawyers and the Conservative Party's lawyers to make a political situation embarrassing to his base go away."

The next election is not due until October 2015. Harper has a majority in the elected House of Commons, giving him effective control over legislation. Members of the Senate, which has limited powers, are all appointed.

The Conservative Party's handling of the crisis has come under scrutiny amid a series of apparent missteps.

At the same as Harper was insisting last week that the three senators be suspended without pay, the leader of the Conservative Party in the Senate said he was prepared to offer two of the three a more generous deal.

Harper, who has insisted Wright had resigned in May, told an Atlantic Canada radio station in an interview broadcast on Monday that he had in fact fired him.

(Editing by Janet Guttsman and Eric Walsh)