Honours scandal could cost Labour and Tories millions

The police have widened their inquiry and begun interviewing figures from all the main political parties as well as senior civil servants to see if they have broken electoral law.

The Political Parties, Elections and Referendums Act 2000 is now being examined by Scotland Yard as part of its inquiry into allegations that political donors and those who made loans to parties were rewarded with nominations for peerages. Officers have been told that the Act could lead to the "forfeiture" of donations that are deemed to have b roken the law. The prospect of having to hand over cash from donors who have been given honours could bankrupt the Labour Party, which is already facing financial meltdown.

The inquiry is threatening to move closer to Tony Blair this week, as detectives prepare to interview key figures involved in his city academies scheme.

Sir Cyril Taylor, the chairman of the Specialist Schools and Academies Trust (SSAT), has already spoken to police and provided them with some documents. This week, senior Labour MPs are planning to question Mr Blair about the police investigation.The inquiry, which led to the arrest on Thursday of Des Smith, a member of the SSAT, has raised fresh questions about the future of Mr Blair's academies programme.

The Independent on Sunday has learnt that a number of major backers of academies, rattled by the headlines, have contacted the SSAT in the past week to express their alarm.

Donors to the party, including Lord Sainsbury, are now expected by Labour figures to face a police quiz.

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