The party was thrown into confusion yesterday by the allegation, saying first that it was 'not sure' if the tycoon had made any donation, then discovering a payment for pounds 10,000 in 1990, and finally conceding that other payments might have been made to local constituency parties.
The donations, from Charilaos Costa, a clothes manufacturer, were not declared in any of his company accounts.
The disclosure will intensify the furore over the funding of political parties in which Labour has so far been on the offensive. The Tories have admitted receiving pounds 440,000 from the fugitive Turkish Cypriot businessman Asil Nadir, and have pledged to return it if it is proved to have been stolen.
Labour last week demanded a ban on foreign donations, and its general secretary, Larry Whitty, told the Commons' Home Affairs Select Committee that it would start disclosing the identity of large individual donors. He said that only 12 individuals had given the party more than pounds 10,000 since 1987, and the largest donation had been pounds 40,000.
Yesterday, Mr Whitty first described the allegation that Costa had donated money to Labour as 'complete fantasy', but later confirmed that a cheque for pounds 10,000 had been received in 1990. He said 'we will pay it back' if it was proved stolen. Mr Whitty did not know whether the cheque was paid directly to the Labour Party's Business Plan fund or through a party official. There was no record of any further sums being received: 'Certainly none as large as you suggest'.
Later, however, he conceded that additional funds may have been paid before the 1987 election, adding: 'The '87 stuff may well have been money to Neil's (Kinnock) constituency. I don't know.' He said there was no evidence of any further contributions to national party funds.
David Hill, Labour's director of communications, added: 'We have no complaint about newspapers investigating Labour Party funds given that we have been so critical of Tory funds.'
In 1991, Costa fled to Cyprus after his companies went into receivership and a Serious Fraud Office investigation began into the allegedly fraudulent disappearance of up to pounds 14m. Two business associates of his pleaded guilty last year to defrauding NatWest of pounds 3.5m and were jailed for 18 months. A warrant is outstanding for the arrest of Costa, who was also charged with conspiracy to defraud.
When his companies collapsed, it was disclosed that Costa was an acquaintance of Mr Kinnock, the former Labour leader. Mr Kinnock issued a statement in May 1991 confirming that Costa had 'donated money and contributed campaign material at the 1987 general election' and was a member of the One Thousand Club, for donors who give more than pounds 1,000. He said he had met the fashion entrepreneur on several occasions, and his wife had accepted some gifts of clothing.
Evidence gathered by the Independent on Sunday, including a formal statement from Costa's former bank manager, Robinson Zymboulakis, has revealed the existence of two private accounts into which Costa was siphoning money from his British companies. Costa told Mr Zymboulakis that these accounts were used solely to finance Labour. Bank statements show more than pounds 300,000 was laundered through an account at the branch of the Cyprus Popular Bank in Palmers Green, north London, in 1990 alone. The bank was unaware of this. Other associates have confirmed that Costa spent substantial amounts on Labour.
Labour's published accounts do not allow for an accurate assessment of the size of individual donations during 1990. More than pounds 5m is described as 'donations' during 1990 and 1991, but a large part of this came from trades unions.
Costa's laundered money came from clothing companies that included fashion labels such as Sens-Unique. One of several cheques in the possession of the Independent on Sunday shows how pounds 5,000 was drawn from Sens-Unique's account on Costa's signature, made out to a third party, and passed into the Palmers Green account. Money was then transferred to Costa's private accounts.
Mr Zymboulakis alleges, in a full statement which has been corroborated, that, to his knowledge, the total laundered between 1987 and February 1991 - when Costa's business empire collapsed - amounted to pounds 600,000. He also states that Costa told him that Labour had cost him, in total, pounds 1.5m - exactly the same amount as Asil Nadir claims he gave the Tories. Mr Zymboulakis said: 'He was believing strongly that (Labour) would be the next government. He didn't give . . . just because he liked them. He thought he could be the king of fashion in London if Labour was coming.' Costa supplied many well-known high street retailers with dresses and menswear. His labels included Gor-A, Cojana and Sens-Unique. None of these labels or companies now has any connection with Costa.
Mr Zymboulakis was a senior manager in the National Bank of Greece, based in Cyprus, where he was interviewed recently. He was responsible for Costa's business accounts in the decade before February 1991, when the receivers were called into his north-London based business empire. The bank lost pounds 1.3m.
Mr Zymboulakis lost his job shortly afterwards because he had allowed Costa, as a long-standing and trusted client, to draw more than his agreed business overdraft. Costa blamed him for inspiring the police investigation after Mr Zymboulakis stopped an export transaction, suspecting fraud.
Mr Zymboulakis says he met senior Labour Party members through Costa. At one party at Costa's pounds 1m house in Whetstone, north London, he says he met Mr Kinnock, Roy Hattersley, John Smith and Gerald Kaufman. Other former business associates of Costa said that Mr Kinnock was a visitor to his factory in Enfield, north London, and attended one Christmas staff party.
Mr Zymboulakis said he regularly admonished Costa for being so generous to Labour, and that the tycoon was also a supporter of the Cyprus Socialist party: 'He was making terrible expenses, useless expenses, like the Labour Party, paying thousands.'
Mr Costa, who now lives in Nicosia, could not be contacted last week.
Sleaze and smears, pages 16-17