Harriet Harman is under mounting pressure over her links with the property developer David Abrahams, the man who made £600,000 of secret donations to Labour by using four associates.
Labour's chairman and Leader of the Commons accepted £5,000 from Janet Kidd, Mr Abrahams' secretary, towards her successful campaign in the party's deputy leadership election this summer. Ms Kidd also donated £147,000 to Labour's general funds on behalf of Mr Abrahams.
Gordon Brown, whose campaign team turned down a £25,000 donation from Ms Kidd, stopped short of giving his full backing to Ms Harman at a Downing Street press conference, saying she would answer for her election campaign. After repeated questioning, he eventually expressed his confidence in her.
With more revelations expected, the Brown Government risks becoming embroiled in allegations of sleaze, a weapon that Mr Brown used ruthlessly against John Major's Tory Government. Now the tables are turned.
Ms Harman's role will be investigated by an inquiry ordered by Mr Brown in an attempt to prevent a repeat of the secret donations. If it fails to support her version of events, Labour MPs believe she might have to resign her cabinet and party posts.
Last night Ms Harman announced that she would pay back the £5,000 donation. "I don't think there's any question of me having broken either the letter or the spirit of the law." She insisted the money had been accepted "in good faith" and that her campaign team understood Ms Kidd to be a regular Labour donor.
But she could not say whether Ms Kidd approached her team or whether it approached her.
The Tories demanded that Ms Harman make a Commons statement to answer what they said were 19 unanswered questions about her role in the affair. "The pathetic excuses offered by her throw up more questions than answers," said Theresa May, the shadow Leader of the Commons.
Ms Harman's position was made more difficult when it emerged that Hilary Benn, the Environment Secretary, turned down a £5,000 donation from Ms Kidd for his deputy leadership campaign, because Baroness Jay of Paddington, a former cabinet minister on his team, knew she was giving it on behalf of Mr Abrahams. However, the Benn campaign then accepted the money directly from Mr Abrahams.
Baroness Jay's intervention is significant because on Monday, Labour claimed the only party figure who knew Mr Abrahams gave money through intermediaries was Peter Watt, who quit as its general secretary after admitting the rules were breached.
Baroness Jay served on a committee set up to vet donations in 2002. Other members included Lord Levy, Labour's chief fund-raiser under Tony Blair, who was questioned by police during the "cash for honours" investigation but not charged.
Mr Brown announced that the £600,000 given to Labour by Mr Abrahams through four associates would be returned. He admitted: "What has happened, where political donations have not been lawfully declared, is completely unacceptable, cannot be justified in any way and this behaviour should never happen again in future."
He sought to distance himself from the scandal, saying he never discussed donations with Mr Abrahams and he did not know of his secret gifts until Saturday.
The inquiry will be initially conducted by Lord Whitty, a former Labour general secretary. He will report to two independent figures who will ensure lessons are learnt – Lord McCluskey, a retired High Court judge and Lord Harries, the former Bishop of Oxford.
David Cameron, the Tory leader, said: "There is a time in the life of every government when it slips over from complacency into arrogance, and from arrogance into even indifference for the law. I say we've reached that point and it is time for real change in our country."
Friends of Ms Harman are furious she has been dragged into the controversy. "She has been stabbed in the back by these people in the North-east," one said.
The key questions
Who in the Labour Party knew David Abrahams was donating money via middlemen?
Former Labour general secretary Peter Watt said on Monday that he was the only one. But yesterday it emerged Baroness Jay, the former Labour leader in the Lords, told Hilary Benn's deputy leadership campaign a £5,000 offer was being made through a go-between.
Why did Harriet Harman's deputy leadership campaign accept money from Janet Kidd when Hilary Benn's campaign turned it down?
The Harman campaign said it had accepted the donation "in good faith" because Janet Kidd, Mr Abrahams' secretary, was a known Labour donor. It is not clear if Ms Harman's campaign solicited the donation, which arrived two weeks after her campaign ended. Gordon Brown said yesterday that he turned down funding from Ms Kidd.
Why did Labour go along with Mr Abrahams' donations?
Peter Watt knew Mr Abrahams made donations through third parties, but it is unclear why he allowed them to continue. Even if they were within the letter of the law, they were always likely to become public since donations of £5,000 and above are published by the Electoral Commission.
Are there any more secret donors?
The Conservatives want to know whether any other donations were made by intermediaries. Labour hopes not. An inquiry announced by Mr Brown yesterday will investigate. The scandal raises questions over what checks Labour – and other political parties – carry out on donors. Tory sources say they check out anyone giving more than £1,000. It appears that Labour looked closely only at people donating £250,000.
'I will return the donation'
In a statement issued yesterday Harriet Harman said: "I had no reason to believe that this donation was coming from anyone other than Janet Kidd. My campaign team understood Janet Kidd to be a regular Labour Party donor. I first heard about this on Friday and my campaign has today arranged to return the donation to Janet Kidd.
We had several rules in my campaign team.
1. We would always abide by the letter and spirit of the law.
2. We would check that each donation came from someone on the electoral register and was therefore a permissible donation.
3. We would accept donations from known donors to the Labour Party or from people known personally to me or to members of my campaign team."Reuse content