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Canadians Michael Kovrig, right, and Michael Spavor, left, stand as they are recognized before an address from U.S. President Joe Biden in the Canadian House of Commons on Parliament Hill, in Ottawa, on March 24.POOL/Reuters

Ottawa is willing to sign off on multimillion-dollar settlement packages for Canadians Michael Spavor and Michael Kovrig to compensate them for the nearly three years they were incarcerated under harsh conditions in Chinese prisons, two government sources say.

Federal lawyers are in compensation talks with the two men and are hoping to conclude financial settlements early in the new year, the sources say. The Globe and Mail is not identifying the sources because they were not authorized to discuss the delicate legal negotiations.

Of particular concern to the government is a potential lawsuit from Mr. Spavor that has put a spotlight on Canada’s Global Security Reporting Program, the sources say. Mr. Kovrig, during his time as a Canadian diplomat, worked for the GSRP, a special unit within the intelligence branch of Global Affairs Canada that sends foreign service officers to hot spots to collect security-related information for Ottawa.

Mr. Spavor alleges that China arrested and imprisoned him and Mr. Kovrig because he unwittingly provided information to Mr. Kovrig that was shared with Canadian and other Western spy services. Mr. Kovrig has told The Globe that he followed the “standard of laws, rules and regulations governing diplomats.”

The government has offered around $3 million to each, but the sources say Mr. Spavor’s lawyer, John K. Phillips, is seeking $10.5 million, alleging gross negligence on how Ottawa handled GSRP operations in China.

The federal sources sayt the government is not prepared to offer as much as $10.5 million and that both Mr. Spavor and Mr. Kovrig will receive the same amount of compensation for the hardship endured in Chinese prisons, some of which was spent in solitary confinement.

Mr. Spavor is one of the few Westerners who has travelled extensively in North Korea and has a personal relationship with dictator Kim Jong-un. He alleges Chinese security forces arrested him because Mr. Kovrig and two other GSRP officers were careless in discussions about him.

Mr. Spavor was charged by Chinese prosecutors with spying for a foreign entity and illegally procuring state secrets. Mr. Kovrig was charged with illegally receiving state secrets and intelligence in collaboration with Mr. Spavor. In August, 2021, more than one month before a deal was reached to send both men home, Mr. Spavor was convicted.

China subjected Mr. Spavor to lengthy interrogation sessions, according to one source. He was drugged, forced to sit in a chair for long hours and subjected to threats of execution, the source said. Mr. Spavor admitted to the Chinese interrogators, the source said, that he provided information to Mr. Kovrig. The Globe is not identifying the source because they were not authorized to discuss the matter publicly.

The source said Mr. Phillips’s bid for a higher monetary settlement has likely been strengthened by the release of a sharply critical examination of the GSRP by the National Security and Intelligence Review Agency, which serves as a civilian watchdog over federal security agencies.

The NSIRA report, released last week, was completed in December, 2020, but deliberately held back from release because, as the watchdog explained last month, of “high sensitivities” about a public examination of the GSRP while Mr. Spavor and Mr. Kovrig were held in Chinese prisons from December, 2018, to September, 2021. The report’s release came after The Globe and Mail reported in November about the delay of nearly three years.

The NSIRA review found “an absence of risk assessments, security protocols, and legal guidance specific to the increased scrutiny that GSRP officers may attract due to the nature of their reporting priorities.”

The partially redacted report does not mention Mr. Kovrig by name, but the watchdog warned about the overlap between GSRP officers and CSIS agents at missions abroad. It concluded that inadequately trained GSRP officers do not appreciate the risks and dangers associated with overseas contacts and sources.

The report at one point appears to allude to Mr. Kovrig, who had taken a leave of absence from Global Affairs in 2017 to work for a global conflict analysis group in Hong Kong. On a trip to China in 2018, he was arrested by China after Canada’s detention of Huawei Technologies chief financial officer Meng Wanzhou on a U.S. extradition warrant.

“It was not clear if all officers understood that once they are no longer afforded diplomatic immunity, a receiving state may seek retaliatory measures against them,” the report said, adding former GSRP officers “may be liable to prosecution for illegal acts they performed during the mission if they later re-enter the receiving state without the protection of diplomatic immunity.”

Contacted by The Globe, Mr. Phillips would not discuss the legal negotiations, but said he read the NSIRA report and hopes the government will seriously review the independent watchdog’s findings.

“While we have no intention of discussing details of the report with the media, we do hope the government of Canada takes the report’s findings seriously, and we appreciate the NSIRA’s efforts in its investigation,” he said in a statement.

Mr. Kovrig did not respond to a request for comment, including questions about whether he was in mediation talks on a compensation package with Ottawa.

The Globe has also reported that Canadians Kevin and Julia Garratt were detained by Chinese authorities in 2014 after Mr. Garratt met a GSRP officer. Beijing accused the couple of participation in espionage, an incident widely regarded as another case of Beijing’s practice of hostage diplomacy. Mr. Garratt said he would not have spoken to GSRP officer Martin Laflamme had he known the discussions would be passed on to CSIS and its Five Eyes intelligence partners, the United States, Britain, Australia and New Zealand.

The NSIRA report noted that “the more sensitive a GSRP officer’s conduct, the more likely a receiving state will perceive interference. This is particularly true with respect to officer interactions with contacts.” The report added: “It is important to underscore that the assumed diplomatic protections granted to the GSRP officer do not apply to contacts,” stressing how vital it is for these diplomats to avoid raising “unnecessary suspicion about this interaction.”

The Department of Global Affairs says GSRP officers are not covert intelligence operators and do not recruit, handle or pay sources. But NSIRA found that there were no internal policies and protocols in place to provide guidance to GSRP officers, particularly those in countries where there is a “high degree of mistrust for outsiders; often take a hard line on internal security matters; and, tend to deploy mass surveillance on foreigners and citizens.”

NSIRA discovered cases where GSRP officers engaged with local intelligence agencies in the countries where they were posted and instances where these Canadian diplomats collected what appeared to be classified information from sources. “The contact mentioned serious consequences if he was caught with the information,” the review recounted. It discovered another case where a GSRP officer even requested, and received, classified information from a contact.

NSIRA concluded that the GSRP is operating in a “distinctly grey zone” and said the matters raised in its report would likely spark a “renewed conversation” about Canada setting up a foreign human-intelligence collection agency.

The watchdog recommended the GSRP create a governance framework and develop risk protocols and security guidelines specific to the program. It urged Global Affairs to complete a thorough legal assessment of GSRP activities and provide its officers training based on the assessment.

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