The initial report by Judge John Gomery into the scandal is likely to embarrass the Liberal team as it prepares for an election early next year.
The scandal centers on a sponsorship program set up by the Canadian government in 1996, after an independence referendum in Quebec failed narrowly. It was designed to boost the cause of federalism in the French-speaking province.
But Gomery, who has spent the last year probing how C$100 million ($85 million) was funnelled to Liberal-friendly advertising firms, said the program had backfired amid inadequate management and "a blatant abuse of public funds."
He lashed out at "carelessness and incompetence ... (and) greed and venality".
The scandal has dominated Canadian politics for the last 18 months and public anger cost the Liberals their parliamentary majority in a June 2004 election. Martin has promised to call a new vote within 30 days of Gomery's second and final report, due on February 1, 2006.
Gomery found that a select group of advertising firms in Quebec received lucrative federal contracts and then knowingly kicked some of the money back to the Liberal Party's Quebec wing, enabling it to side-step electoral financing laws.
"Two successive (Quebec Liberal party) executive directors were directly involved in illegal campaign financing, and many of its workers accepted cash payments for their services when they should have known that such payments were in violation of the Canada Elections Act," he said.
He apportioned blame on former Liberal Prime Minister Jean Chretien - who ordered the program to be established - as well as on former Public Works Minister Alfonso Gagliano, several senior aides and bureaucrats and the heads of the advertising agencies involved.
But he spared Martin - who was finance minister as well as the senior minister in Quebec at the time of the scandal - on the grounds that he had not known what was going on.
"Mr Martin is ... entitled, like other ministers in the Quebec caucus, to be exonerated from any blame for carelessness or misconduct," Gomery concluded.