In the early morning of Sept. 7, 2012, U.S. Drug Enforcement Administration agents and local police descended on an upscale apartment complex in North Hollywood.

They detained two men, seized 15 kilograms of cocaine and $2.5 million — it's unclear whether the amount was in U.S. or Canadian — in cash, and ignited a cross-border controversy over how Canadian police handled millions of dollars in illicit cash.

The dispute threatens police co-operation between Canada and the U.S., as a number of sources affiliated with U.S. law enforcement accuse Canadian police of secretly operating an agent on U.S. soil without permission.

One of the arrested men, who was carrying the money, was a 27-year-old car dealership employee from Vancouver. The U.S.-linked sources say he had worked as a Canadian police agent, fraternizing with importers of cocaine and exporters of marijuana.

Believing he was working as a Canadian police agent, the U.S. Drug Enforcement Administration reluctantly allowed him to return to Vancouver without charge. Shortly after the seizure, the DEA office at the U.S Embassy in Ottawa received a call from Insp. Michel Forget of the Sûreté du Québec, a provincial police force, demanding to know the details of the L.A. arrest, and asking for the $2.5 million back.

"[Forget] wasn't diplomatic or apologetic," a U.S. source told CBC News, believing Canadian investigators were running a covert operation in L.A. without alerting the DEA. "What it was was an international incident."

Forget denies that claim, saying his force has "good relationships" with U.S. law enforcement. Forget said the money confiscated in L.A. is important because it's evidence in Project Loquace — the Quebec portion of a Canada-wide crackdown on drug trafficking called Project Scrapyard.

"It's not our money," said Forget. "It's the money that was linked to certain crimes that were committed here [in Canada] in the course of the investigation."

The DEA has refused to release the money to Canadian officials, and the second suspect in the L.A. bust remains in custody.

Project Loquace's first string of successes came in November 2012 when Quebec provincial police played the lead role in arresting 111 suspects across the country.

In the process, Quebec police netted $255,000 in cash, 227 kilograms of cocaine, 73,000 pills, 80 kilograms of cannabis, 189 firearms, two Tasers, 13 barrels of a solvent that's commonly used to create date rape drugs, and 53 vehicles.

Project Scrapyard, launched by the RCMP in the spring of 2012 with millions in seed money, is ongoing.

Not working for them

Forget, in an interview with CBC News, said the Canadian detained in L.A. wasn’t working for his police force.

"At no point did the Sûreté du Québec go into the U.S. to carry on their investigation. At no point did they have an agent, or whoever, to carry on the investigation on their behalf," Forget said.

Eric Slinn, the RCMP’s acting director general for drugs and organized crime, told CBC News the 27-year-old Canadian "was not an RCMP agent."

Slinn refused to say whether the man had worked for the RCMP in the past.

The Vancouver Police Department issued a statement on Tuesday saying they were "not involved" with using the 27-year-old man "as an agent or asset" — a man who Canadian and U.S.-linked sources said is a known member of a Vancouver-area gang.

Officially, the DEA would not comment on the detainment and subsequent release of the man, but a spokesperson with the L.A. DEA office told CBC News the investigation is ongoing.

U.S.-linked sources said American officials are furious, and that the Department of Justice has been asked to start criminal proceedings against the man, who has returned to Vancouver, and are even considering charges against Canadian police if it's determined they sent an agent on a covert mission to L.A without first notifying American authorities.

A U.S. law enforcement source told CBC News that if an agent was operating in L.A. on direction from a Canadian police force, then it was without approval from American authorities. That would contravene U.S. Code Title 18, subsection 951, which states that anyone who "acts in the United States as an agent of a foreign government without prior notification to the Attorney General shall be fined under this title or imprisoned not more than 10 years, or both."

A memorandum of understanding exists between the two countries for procedures involving police authorities, but none were followed, U.S.-linked sources said.

"If I want to send an email to Canada, or make a phone call into Canada, I need approval of the Canadian authorities," said the U.S. official, who spoke on condition of anonymity.

Lost track of drugs

The U.S.-linked sources who spoke with CBC News about the L.A. case are also upset with how Canadian investigators lost track of major amounts of drugs.

They claim Canadian investigators working on Project Loquace infiltrated a domestic gang that traded marijuana for guns in the U.S., and sent $15 million to the infamous Los Zetas drug cartel in Mexico for precursor drugs that were then shipped through the U.S. to Quebec methamphetamine labs.

The U.S.-linked sources complain Quebec police watched 500 kilograms of cocaine be distributed in Ontario and Quebec only to lose track of it — an amount that they say is worth close to $25 million on the street.

"First of all, I don’t know where you get your figures," Forget responded in an interview with CBC News. "We didn't let anything slip through our hands."

Forget refused to comment on the exact whereabouts of the cocaine his undercover officers tracked into Canada, citing upcoming prosecutions of accused gang members.

"That’s part of the evidence," said Forget. "All we did in the course of the investigation was use different means and investigative techniques to [undermine] a very important ring of drug traffickers that was trying to install themselves across the country. This is all I can say right now."

For tips on this or any other story, please contact us at john.nicol@cbc.ca or dave.seglins@cbc.ca.