OTTAWA—The Canadian government considered punishing First Nations that refused to comply with controversial financial transparency legislation by putting someone else in control of their books, according to newly released documents.

The Toronto Star obtained a memo prepared for former aboriginal affairs minister Bernard Valcourt in February — released in response to an access-to-information request — recommending options for dealing with First Nations that had not yet complied with the First Nations Financial Transparency Act (Bill C-27).

The law, brought in by the previous Conservative government, requires First Nations to submit financial documents, including audited financial statements and the salaries and expenses of chiefs and band councillors to be published on the Indigenous and Northern Affairs website.

The partially redacted memo at one point discusses the idea of placing non-compliant First Nations under third-party management, which means a private-sector consultant — whose salary must be covered by the First Nation — would take over the administration of money associated with departmentally funded programs and services.

The memo acknowledges this would be a risky move.

“Imposing a third-party funding agreement manager as a sanction of non-compliance for First Nations must be carefully considered and should be aligned with the funding agreement. An assessment of the default situation and potential risks to delivery of community programs and services should be considered,” reads the memo dated Feb. 26.

“There is a potential risk to the (department)’s default management policy framework of employing third-party management as a sanction,” says the memo.

Indigenous and Northern Affairs Minister Carolyn Bennett was not made available for an interview.

Neither was anyone at the department, but INAC spokeswoman Michelle Perron emailed a statement Thursday night listing the measures used to deal with non-compliance.

“Third-party management is not one of these measures,” Perron wrote in the email.

A backgrounder on the INAC website notes that placing a community under third-party management is meant to be used as “a last resort to ensure the continued delivery of programs and services to community members” when a community goes into default.

That is why National Chief Perry Bellegarde of the Assembly of First Nations said he was surprised to see the department raise the idea.

“Under the First Nations Financial Transparency Act, a First Nation could be doing very well financially and they are still looking at imposing a third-party manager if they didn’t comply . . . . It’s ironic that they would think that,” Bellegarde said in an interview Thursday.

Bennett came out strongly against the policy of third-party management when she was Liberal aboriginal affairs critic, especially when the Conservative government imposed one on the remote northern Ontario community of Attawapiskat First Nation during its 2011 housing crisis.

The Federal Court said in a 2012 judicial review that decision was “unreasonable.”

Bennett often cited a November 2010 internal review that concluded the policy surrounding third-party management was poorly designed and the cost of outside consultants were a further drain on finances.

“I totally agree that whole policy should be reviewed and assessed,” said Bellegarde, who plans to raise it with Bennett as part of her promised review of federal legislation and policies affecting First Nations.

NDP indigenous affairs critic Charlie Angus said the Attawapiskat ruling is why the government would not have been able to get away with imposing third-party management as a sanction.

“I’m not surprised they would have considered it as a tool, but the hammer as a tool doesn’t work any longer,” said Angus.

The sanctions the Conservative government ended up choosing for non-compliant First Nations was to withhold funding for non-essential services.

That punishment remains in effect even though the Liberal government of Prime Minister Justin Trudeau has promised to review the legislation, and possibly repeal it altogether.

“We will be working with First Nations and others to determine how to best achieve accountability and transparency for First Nation members,” Perron wrote in her emailed statement.

As of Thursday, 38 First Nations communities had not complied with the law for the fiscal year 2014-15, with eight of them also still refusing to publish their information from the previous year.

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As of Thursday, with the law for fiscal 2014-15, with eight of them also still refusing to publish their information from the previous year.

Conservative indigenous affairs critic Cathy McLeod said she was not in a position to comment on the memo, but defended the First Nations Financial Transparency Act as good public policy.

“I would really be reluctant to support any movement towards less transparency,” McLeod said when asked if it could be improved.