The self-serving Chief of the Dwarves hates the elves and was only too happy to help the Scarlet Moon Empire if it meant he could watch the demise of his long time foe.

The Chief of Dwarves is an evil, evil man.

Dwarf Chief Supplies Kwanda with Burning Mirror
Dwarves and Elves are known enemies so it is possible that the blueprints for the Burning Mirror were given to Kwanda in order to exterminate the Elves.

Patronism
The Dwarves have been known to supply the Imperial Army with weapons so why would the Dwarf Chief put this trade agreement in jeopardy by going against the Empire?

Chief of the Dwarves is a two-faced liar!
The Dwarven safe contains blueprints for such powerful weapons as the burning mirror, firewind cannon, and the fire spears. So, why would a kind, peaceful man have blueprints for such lethal weapons? Because the Chief of the Dwarves is a maniacal dictator who conspires with the Empire for his own personal gain.

Gigantes, a monster summoned by the dwarves and sent to destroy Tir!

Chief of the Dwarves goes to great length to exterminate Tir
Why are there so many hostile Dwarves in the mountains and in the safe? Because they where sent by the Dwarf Chief to exterminate Tir, leader of the Liberation army so he couldn't cause the Empire any more trouble.

Chief of the Dwarves sets trap for Tir
The Chief of the Dwarves sent Tir on a mission to the Dwarven safe to retrieve the water root knowing of the dangers that lie within. While in this dungeon, Tir encounters one of the Dwarf Chief's lackeys named "Gigantes" and barely escapes alive.

The battle at Pannu Yakuta may have made the Chief of Dwarves reconsider his allegiance with the Scarlet Moon Empire.

Changing Sides
After the defeat of Kwanda at Pannu Yakuta by the Liberation Army, the Chief of the Dwarves destroys the burning mirror using the firewind cannon. (which was originally intended to be used on the Liberation army) Some may argue that this is evidence that the Dwarf Chief never worked with the Imperials, but in reality after seeing the defeat of Kwanda's forces the Dwarf Chief decides to go along with the Liberation Army's plan in order to save his own neck. Isn't it odd that he appeared just after the battle was won?

Conclusion: Faced with this evidence, it seems clear that the Dwarf Chief worked with the Empire in order to destroy his adversaries, the Elves, and in return for the Empire's help, he intended on helping the Empire destroy Tir and the Liberation army. Only after the defeat of Kwanda did the Dwarf Chief appear to change sides, but even then, it was only to save his own neck from the wrath of Tir and the Liberation Army.