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Libyans chant slogans and hold Kingdom of Libya flags as they celebrate during a gathering against ousted leader Muammar Gaddafi on Martyrs Square, known under Gaddafi as Green Square, in Tripoli September 9, 2011.Reuters

SNC Lavalin Group Inc. has launched an internal investigation into $35-million worth of unexplained payments, raising questions about the company's compounding problems over its operations in Libya.

The Montreal-based engineering firm has been fending off allegations for months about its work in Libya and its close ties to the family of Moammar Gadhafi. The company has repeatedly insisted it did nothing wrong and, until now, the allegations had little direct impact on SNC's operations, which span the world.

That changed on Tuesday when SNC stunned investors by announcing that a committee of its board of directors is reviewing $35-million in payments made late last year that had been tied to construction projects "to which they did not relate." The committee is investigating the "facts and circumstances" of the payments as well as "certain other contracts." The probe has not uncovered any accounting issues, SNC added.

The controversy is certain to raise questions for other companies that operate in dubious parts of the world.

It's not clear if the payments or other contracts under review relate to Libya. But SNC said on Tuesday that its 2011 net profit will fall by about $80-million, or 18 per cent, in part because of exposure to Libya. And it's delaying reporting its 2011 audited financial statements for three weeks to accommodate the internal review.

"The company is working with its external auditors and legal advisors to resolve all issues relating to the investigation to permit the auditors to deliver their audit report on a timely basis," SNC said in a statement. A company spokesperson declined to provide further details.

The news pummelled SNC's stock price, which fell 20 per cent Monday on the TSX to $38.43.

The fear for many investors and analysts is that the internal investigation will uncover more problems related to the company's extensive work in Libya.

SNC had been in Libya for more than 10 years along with dozens of other multinational corporations, who all rushed in the late 1990s when Libya was rehabilitated in the eyes of the West. SNC faced few if any questions about those operations until last year, when Col. Gadhafi's regime collapsed amid a popular revolt and NATO bombings.

Now SNC has been forced to answer questions about its ties to Col. Gadhafi's son, Saadi, and its payments to a Canadian consultant currently facing allegations in Mexico that she participated in a failed plot to spirit Saadi to Mexico at the height of the rebellion.

The company has denied any involvement in the rescue plot, but it has confirmed paying the consultant, Cynthia Vanier, $100,000 for work last summer that included writing a favourable report on the Gadhafi dictatorship. Ms. Vanier has alleged SNC still owes her $300,000, which the company denies.

Three weeks ago, SNC also said it dismissed two executives, including Riadh Ben Aissa, a senior vice-president who oversaw SNC's Libyan operations. The company did not say why the men were let go but indicated that "all employees must comply with our code of ethics and business conduct."

Mr. Ben Aissa has said he resigned and he has threatened to sue the company over its handling of his departure. On Tuesday, his spokesman said Mr. Ben Aissa had no knowledge of the $35-million payments.

The concern that SNC has yet to contain the scandal prompted rating agency DBRS Ltd. to put SNC's debt under review pending the outcome of the internal company investigation. The rating agency said "these latest developments could indicate possible deficiencies in the company's risk management and project control systems, including those related to offshore projects."

In a report to investors, Neil Linsdell, an analyst at Versant Partners in Montreal, said: "These concerns on top of other allegations will likely cause many investors to shy away from SNC until investigations are completed."

SNC built up a huge presence in Libya thanks largely to Mr. Ben Aissa's close ties with Saadi. As a reward, SNC promoted him repeatedly, eventually making him one of the company's top executives.

Mr. Ben Aissa helped establish the Libyan Corps of Engineers with Saadi in 2008, to work on a host of civilian and military projects. The projects included a $275-million prison near Tripoli for up to 4,000 inmates.

Among those who also worked on the prison project was Edis Zagorac, the husband of Canada's ambassador to Libya, Sandra McCardell. Mr. Zagorac's involvement in the project, first reported by CBC, has been confirmed in documents obtained by The Globe and Mail. His name is on a list of roughly 60 people involved in the prison. The list is headed "SNC Lavalin Construction" and each name carries an e-mail address with Mr. Zagorac's "".

Ms. McCardell, who was appointed ambassador in 2009, sought guidance from the Department of Foreign Affairs before her husband took the position, according to CBC. Foreign Affairs Minister John Baird is now reviewing the matter.