Labour deliberately tried to get round the law by secretly taking loans from millionaires to boost election campaign funds, a senior party figure has claimed.
The high-ranking figure, who has given evidence to police investigating the cash-for-peerages affair, told The Independent on Sunday that the party negotiated loans rather than donations because loans would not have to be publicly declared.
His remarks, the first from inside the party, will come as a blow to Tony Blair at the beginning of the Labour Party conference in Manchester and will put fresh pressure on the Prime Minister in the cash-for-honours affair. Last week the police stepped up their investigation into whether honours were offered in return for donations and loans, and into whether Labour had flouted the law by not disclosing the loans.
The source, who operates at the highest levels in the party, said Labour negotiated the loans in the hope that many of them would be converted into donations and never repaid. "The whole process stinks," he said. The loans were "in essence, donations", he added. "What you have is secret arrangements that were designed to circumvent the law". Taking loans was "clearly fundamentally suspect" and a "deliberate attempt" to get round the law.
The police are homing in on the issue of whether the loans negotiated with the millionaires were on fully commercial terms. Labour claims they were commercial loans, and therefore could be kept secret. But loans that had favourable terms or were never going to be paid back should have been declared.
"In strict legal terms were they commercial? Yes. Were they loans? No. It was a device that was used to get around the 2000 Act," he said. He added that Labour would face a huge financial crisis if the loans were called in.
The senior figure said that he did not know for certain if Tony Blair had offered Labour lenders peerages because the funding arrangements had been kept secret from other high-ranking figures in the party, including cabinet ministers. Last night a Labour spokesman said the party "remains absolutely confident that it has done nothing wrong and acted in accordance with the law at all times".
This week the party conference will be presented with proposals to ensure that funding deals are no longer reached in secret and are not made without the agreement of the Labour Party's ruling body.
Ministers will also propose caps on party funding and an extension of state funding of political parties. The state would give funding for political parties based on how big their membership is and how many MPs they have.
Accounts published tomorrow will show that Labour is £27m in debt and all but two of the Labour lenders have agreed for the terms of their loans to be extended.
The Independent on Sunday has also learnt that two of the most prominent lenders, Barry Townsley and Sir David Garrard, will expect their money to be repaid, although they are not immediately recalling the cash.
Sir Christopher Evans, the biotech tycoon who was arrested last week, has told friends that he is angry at being implicated in the scandal. "He feels that No 10 should have known whether what they were doing was legal or not," said one confidant.
The party's auditors refused to comment on whether it had taken out loans on commercial terms. A spokesman for the auditors, Horwath, Clark, Whitehill, would not say if they had certified that the loans were fully commercial. The firm said it was "ethically bound to uphold client confidentiality".
Lord Oakeshott, a Liberal Democrat Treasury spokesman, said the wording of the auditors had been "very carefully chosen".
"The auditors' refusal to confirm the loans were on normal commercial terms speaks volumes. No banker would dream of lending unsecured deferred loans of this type at 2 per cent over base to a borrower with a net £27m hole in its balance sheet," he said.
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