Sources close to Auditor General Larry Dennis claimed last night that he had been authorised by former Police Commissioner Jonathan Smith to hold Police documents relating to the Bermuda Housing Corporation corruption investigation.

Last week, Police hunting the documents raided both Mr. Dennis’ home and office for the papers and Mr. Dennis was arrested and held in Police custody for 24 hours before being released uncharged.

However the source said: “He had permission to have those Police files — anything to do with the BHC investigation.”

The Royal Gazette understands a member of the Auditor General’s staff worked side by side with Police for most of the inquiry in what was labelled as the largest ever investigation into the disappearance of public funds.

It was also claimed both Government and Government House were aware of the arrangement.

The Auditor General was arrested for alleged possession of stolen documents and not revealing his source as Police hunted a dossier leaked to the media which claimed Premier Dr. Ewart Brown and members of the Government were investigated over alleged corruption at the Bermuda Housing Corporation.

He has been bailed to return to Hamilton Police Station on August 22.

Mr. Dennis — the Government’s fiscal watchdog — has continually called for more legislative protection for “whistleblowers” as he has hit out at the number of frauds and misappropriations that were detected in recent years in Government entities.

The whereabouts of the original Police dossier into the BHC allegations is unknown.

In the legal wrangle over the media’s publication of the file’s contents, Chief Justice Richard Ground said in the Supreme Court that it was unclear whether the documents had been stolen or whether they had simply been copied and distributed to the media.

However, earlier this month, the Premier’s Office sought to characterise the documents as “stolen”, attacking the media for using the word “leak” in a press release.

The statement added: “That word choice is clearly inaccurate. The accurate characterisation would be ‘theft’. In this criminal case, the BHC documents were stolen — taken by a thief (or thieves) who should be tracked down for breaking the law.”

Lawyer Tim Marshall said the use of the word theft could be prejudicial if anyone arrested in the hunt for the missing files ended up in a jury trial.

“If it is a jury trial that may be an issue,” he said. However he said the courts could boot out the case before it got going on the basis that those arrested did not have stolen documents but merely photocopies.

Two other people were arrested and then released in connection with the leaked Bermuda Housing Corporation files while Police also raided ZBM news and visited the Mid-Ocean News office after those organisations ran stories based on the documents.

The portions already printed by the Mid-Ocean News reportedly revealed that Premier Ewart Brown, former Premier Dame Jennifer Smith and former Minister Renee Webb were all investigated by Police looking into the BHC allegations.

Construction boss Zane DeSilva was another prominent person investigated as part of the probe into allegations of corruption at the BHC, the documents reportedly showed.

When the investigation finished in 2004, then acting Director of Public Prosecutions Kulandra Ratneser said many of those investigated could only be accused of bad ethics.

Mr. Ratneser also said some of the people investigated escaped prosecution due to Bermuda’s antiquated corruption laws.

Since the BHC scandal — which is believed to have cost the taxpayer $8 million — one person has been convicted.

Terrence Smith, a BHC officer, was found guilty and jailed last year on 41 counts of fraud.