Labour in meltdown: Part three

Officers from Scotland Yard's specialist crime unit, SCD6, have included Labour's former chief fundraiser, Lord Levy, in a long list of party personnel and officials it will interview in its inquiry into the latest donations scandal.

The SCD6 team, although not yet formally sanctioned to begin its investigation, has already examined the portfolio of potential areas of evidence given in a summary report compiled by the Electoral Commission.

This week, the specialist detectives have scheduled meetings with officials from the Crown Prosecution Service to precisely define which areas of electoral law have been potentially breached by proxy donations to the Labour Party.

Although the funding scandal has so far focused on donations of £650,000 from property developer David Abrahams, SCD6 is understood to have been told by the Electoral Commission to widen the time-frame of its investigations as far back as 2000, when the party under Tony Blair was preparing to plan for the election campaign that would secure a second term in power.

Examining Labour's funding records over that period points to the likelihood that the investigation - which will focus on the use of unlawful third-party donations - will take far longer than has so far been predicted.

There were forecasts of a brief inquiry when Scotland Yard were brought in to investigate the cash-for-honours scandal last year. It was thought the specialist investigation would go through the motions rather than dig deep into the darker recesses of paid-for patronage. That prediction was way off.

Although nobody was taken to court as a result, the cash-for-honours inquiry lasted a year, saw Blair interviewed twice, and both his chief fundraiser, Lord Levy, and senior Downing Street aide, Ruth Turner, arrested and questioned.

The SCD6 team put together to investigate the "dodgy donors" scandal includes some of the officers from that previous inquiry. It is headed by Commander Nigel Mawer, the head of the economic and specialist crime unit.

The remit of the Scotland Yard investigation to look as far back as 2000 could prove expensive for Labour, who are already struggling with a large overdraft and still paying off part of the £18 million spent during the 2005 general election. The multi-million pound covert loans they brokered, which sparked the cash-for-honours investigation last year, have been scheduled for repayment.

Following the revelations about the go-between donations given by Abrahams through two secretaries, a local builder and a lawyer, Prime Minister Gordon Brown announced early last week in a Downing Street press conference that the law had been broken and the £650,000 would be returned.

Labour's major initial worry in this latest probe is that Abrahams will prove to be just one of many covert donors using proxy names to conceal their identities. Abrahams's description of the method used to hide his name - "the usual terms" - is said to have set off alarm bells throughout the party's senior ranks.

One MP said: "I have no idea what this might fully mean. Was it Abrahams using a practice that was in use elsewhere? Was it Abrahams who began a practice that was useful and copied by other donors who wanted to keep their identity quiet? We have no idea at this stage, but it is one hell of a mess."

The fears of other MPs over how the party was financing itself appeared to be confirmed by Justice Secretary Jack Straw, who said the practice of using third-party donations had begun four years ago. Straw told the BBC it was "a matter of history" that their use started under Blair's reign. If the finger-pointing was intended to divert attention away from Gordon Brown, it only partially succeeded.

Straw, with intimate knowledge of both Blair's decade in power and the rapid decline in Labour fortunes during the 150 days of Brown's tenure, added: "Exactly what happened, who took what advice about this arrangement, which palpably was not transparent, remains to be identified in the Labour Party's internal inquiry and the Electoral Commission and police inquiries."

Brown announced last week that the former general secretary of the Labour Party, Lord Whitty, would investigate the Abrahams affair. The former bishop of Oxford, Lord Harries, and the cross-bench peer Lord McCluskey will consider the findings of Whitty's probe and offer recommendations on how funding procedures could be reformed. It will be the third such overhaul inside five years by Labour, who promised upon re-election in 1997 to restore trust in politics.

The Whitty report will, however, have a minimal political impact if the Scotland Yard probe exposes a disregard for the electoral laws that Labour introduced.

Just as the cash-for-honours inquiry overshadowed Blair's final year, so the new SCD6 probe threatens to overpower an already struggling Brown administration. The limited ability of Brown to focus on the business of governing is already under threat from the political misadventures of the Northern Rock collapse and the fiasco of the missing data on 25 million UK citizens.

Another £2.7 billion was given to struggling Northern Rock by the Bank of England last week - taking the total close to £30bn - while the "datagate" fiasco yesterday saw police officers in London searching rubbish dumps looking for two discs containing the personal data of more than a third of Britain's population, which were "lost in the post" by HM Revenue and Customs.

The political fall-out for Brown has seen Labour's standing in the opinion polls fall to its lowest level in 19 years, struggling 13 points below the Conservatives - figures that would give the Tories a working majority if repeated at a general election.

For another Labour MP, more dismal poll results are inevitable in the wake of the donations inquiry: "We are only at the beginning of this mess. There will be high-profile casualties that will further damage us. For many of us at the moment there is no end in sight." The MP also hinted that there was a "lack of co-operative spirit" in Labour ranks as the party went from crisis to crisis.

So far there has been only one resignation. The removal of Peter Watt, the party's general secretary, was ordered quickly by Brown, and was said to be based on the assumption that swift action would make the PM look authoritative in yet another crisis.

But Watt's departure will look premature if, as expected, Scotland Yard interview his predecessor, Matt Carter, who left the party soon after the 2005 election. He was interviewed by police during the cash-for-honours probe.

Watt knew Abrahams's donations were not listed in his name, but claimed he did not know the arrangement was illegal and in breach of the Political Parties Act, which forbids a donor to use an agent or conduit. Ignorance of the law is, however, no defence.

What Scotland Yard will want to know from Carter is whether he too had knowledge of "the usual terms" for donors, and whether Watt's claimed ignorance in fact centres on a culture of donations and funding he "inherited" from the previous set up, potentially reaching as far back as 2000.

Carter also acted as Labour's day-to-day treasurer, along with Lord Levy and Blair. They are said to be the close trinity that ensured Labour had sufficient funds to match the Conservatives' high spending during the 2005 election. The implication is that Blair and his presidential style of government, through this trinity, by-passed the routine party fundraising mechanisms of Old Labour and installed a donor culture which, even after the damage of the cash-for-honours scandals, is now coming back to haunt Brown.

Jon Mendelsohn, who Brown appointed in place of Lord Levy, was supposed to ensure there would be no repeat of the buy-a-peerage scandal. But Abrahams insists that he told Mendelsohn in April, three months before Brown became prime minister, of his covert donations system.

In a newspaper article today, Abrahams claims he sat next to Mendelsohn at a fundraiser on April 25 and described the use of intermediaries to ensure anonymity. Mendelsohn, he claims, told him it "sounds like a good idea".

Mendelsohn insists Abrahams is lying and that he only found out in September. Who is telling the truth could be determined by a jury. Both men will be interviewed by Whitty, but more importantly they will be questioned by Scotland Yard as key individuals in the inquiry.

Trying to determine who in the party knew of the "usual terms" will, according to one former minister, inevitably mean more embarrassing headlines for Brown. Baroness Jay alerted Hilary Benn's deputy leadership campaign to proxy cash coming from Abrahams's network of stand-in donors. Police will want to know how she knew but other senior party figures claim they didn't.

While Benn may have found luck with Baroness Jay on his side, Commons leader Harriet Harman appears to have run out of it. She is said to have run an effective deputy leadership campaign which involved putting up her own money, funded by a loan taken out on her home. After winning the contest, she was steered by Brown's campaign co-ordinator, Chris Leslie, in the direction of one of Abrahams' secretaries, Janet Kidd, for a potential donation that the Brown team had refused. Harman claims she acted in good faith by cashing the £5000 cheque.

Her husband, Labour treasurer Jack Dromey, described the mess last week as "total concealment". Straw, more accurately, said what was happening to his party was "mind-blowing". Nobody is challenging that assessment.