The Labour Party concealed from its own auditors the receipt of millions of pounds in loans from businessmen nominated by Tony Blair for Labour peerages, The Independent on Sunday can reveal.
Scotland Yard has now broadened its inquiry to consider allegations that the party produced a false balance sheet and broke the law by failing to disclose £12m-worth of loans in audited annual figures published last year.
The widening of the investigation to look at accounting irregularities will significantly increase the pressure on Mr Blair, who is now considered by the police as the pivotal figure in the inquiry.
The police are looking into allegations that Labour was guilty of the "systematic concealment of liabilities" in its financial accounts, according to sources involved in the investigation.
Senior Labour Party figures have told The Independent on Sunday that the party did not inform its own auditors that it had received the loans until the spring of 2006 - a year after the money arrived in the party's coffers.
The auditors signed off the party's 2004 accounts in June 2005, not knowing that Labour had accumulated £12m in loans the month before.
The police are also closely examining Mr Blair's role in the honours process and what he told his chief fundraiser, Lord Levy, and its National Executive Committee about the loans.
Mr Blair, who nominated the donors for peerages, could also face accusations of misleading the National Executive Committee, the party's governing body which is responsible for checking that Labour's financial system is secure and accurate.
The Scotland Yard team, led by Assistant Commissioner John Yates, is expected to interview Mr Blair in the next few weeks, with questions about the accounts.
The police have received information that the party produced a false balance sheet by failing to mention the loans in its 2004 accounts. They are considering whether there was a breach of the terms of the Political Parties Elections and Referendums Act 2000, which includes an offence of concealment or disguise.
Accountancy experts say it is "extremely unusual" for the party to make no mention in its 2004 accounts of the £12m in loans it received from Labour backers, including Sir Gulam Noon and Chai Patel, before the 2005 general election. The sum amounted to a huge increase in the party's debt and would in normal circumstances have to be mentioned, even though it happened after the end of 2004.
According to usual accountancy practice, loans worth millions of pounds should have been disclosed in Labour's 2004 accounts as a "material post-balance sheet event" because they had such a large bearing on the party's finances - even though they were received later than the end of the year.
In the 2005 accounts, Labour did include a "post- balance sheet event". The party said it had received a £2m loan from Richard Caring, who runs the Ivy restaurant, one of London's favourite celebrity haunts. He gave Labour a loan in March 2006 and the loan was included in the party's 2005 accounts - even though it was received in 2006.
The police will be considering whether the party deliberately concealed the £12m loans from the accounting firm Horwath Clark Whitehill in order to keep them out of the books. The firm gave the party a clean bill of health when it audited the accounts.
The auditor was not told about the £12m "until spring 2006", one senior Labour Party figure said.
A senior Liberal Democrat peer accused Mr Blair of "a world-class cover-up", and said he was both "legally and morally liable for the accounts".
"Tony Blair as registered party leader, and Matt Carter, as registered party treasurer, were responsible for the materially misleading Labour Party accounts signed off in June 2005. They built a wall of silence to hide £12m of loans which were not disclosed to the Lords' appointments commission, the Electoral Commission or the Labour Party's auditors and members," said Lord Oakeshott of Seagrove Bay, the Liberal Democrats' Treasury spokesman.
Meanwhile, cabinet ministers have turned up the heat on Mr Blair by telling detectives they cannot explain why he nominated secret donors for peerages. They believe "the net is closing in" on Mr Blair after Mr Yates wrote to every member of the Cabinet last week.
His letter, seen by The Independent on Sunday, listed 13 wealthy businessmen who made secret loans to Labour. Each senior minister was asked whether they had nominated any of the individuals for an honour or knew of any reason why they should receive one.
The letter then asked whether they were aware that the individuals had provided financial help to Labour. But in their replies, most of Mr Blair's most senior ministers have made clear they cannot explain why any had been put forward for an honour.
One minister described Mr Yates's letter as a "fishing expedition", but also said that it was clear evidence that the net was now closing in on the PM.
The Prime Minister personally nominated to the House of Lords millionaires who had secretly lent Labour money. Mr Blair is one of the few figures in the party who knew about the loans. He is being accused of awarding "peerages for cash".
Police are expected to ask to question him under caution in the coming weeks.
Sir Gulam Noon donated £2,500 to her constituency party. Her office is believed to have helped secure a knighthood for the Labour lender when she was Trade and Industry Secretary. Ms Hewitt registered his donation,calling him "a personal friend".
The police have asked to interview her.
The former Labour Party chairman knew the party was receiving loans, but he insists he never knew the identity of the lenders. The minister signed forms certifying the nominations of several major donors in his hospital bed, but was unaware they had also lent the party cash.
He has already spoken to the police.
A close ally of the Prime Minister, he played a key role in planning Labour's general election campaign. He revealed he had been told during the campaign that the party had plenty of cash in loans to fight the Tories.
He is one of a few former ministers questioned by detectives, but was not interviewed under caution.
As Tony Blair's chief of staff, he would have been closely informed of the honours process. The Prime Minister's long-standing senior aide and confidant is likely to have known that several Labour donors were to be honoured.
Powell has already talked to the police and is expected to be recalled for a more formal interview.