Labour treasurer claims he did not know of party loans

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The scandal of the alleged "loans for favours" surrounding Tony Blair deepened last night after the treasurer of the Labour Party furiously demanded a high-level Labour inquiry into whether the Prime Minister gave peerages in return for £3.5m in loans to the party by three businessmen.

Jack Dromey said neither himself nor the chairman of the National Executive Committee (NEC), Sir Jeremy Beecham, were aware that secret loans totalling £3.5m had been made to the party before the general election by Chai Patel, the head of the Priory rehab clinics, Brian Townsley, a stockbroker, and Sir David Garrard, a multi-millionaire property developer, who also donated £70,000 to the Conservatives.

All three were later put on a list by Mr Blair for life peerages, but their names were blocked by the Lords appointments commission. Mr Patel blew the lid off the loans when he revealed he had written to the commission demanding to know why his name had been blocked. Mr Townsley and Sir David have told Mr Blair after the row that they want their names withdrawn from his peers' list.

The loans were not illegal, and the Tory party has used the same tactic to avoid businessmen having to face the embarrassment of declaring cash donations. However, the intervention of Mr Dromey, the deputy general secretary of the Transport and General Workers Union, could be more damaging for Mr Blair. He confirmed he wanted to establish whether there was a link between the money and the peerages, which the Prime Minister has so far denied.

"Loans were taken out in secret in 2005. The elected chairman [Sir Jeremy] and I, as the treasurer, knew nothing about it. That was absolutely wrong. It should never happen. I intend to get to the bottom of what did happen," said Mr Dromey, who is married to the government minister Harriet Harman and who is regarded as a Blairite.

He gave a pledge to ensure that the National Executive Committee of the Labour Party and the new general secretary Peter Watt would "put right those wrongs". Asked on Sky News television whether Mr Blair had given the peerages for cash, Mr Dromey replied: "We need to know what happened. There can never be cash for favours."

Lord Levy, the party's fund raiser for major donors, is being blamed for suggesting the loans. Mr Patel claimed he was invited to make a loan to the party by the Labour peer. Under the existing rules operated by the Electoral Commission, donations over £5,000 have to be declared, but loans escape disclosure.

It is likely to lead to party donations-by-loan being banned, or the lenders having to declare their names.

One cabinet minister said: "If I could get my hands on whoever thought loans were a good idea, I'd strangle him." Another said: "We were just getting over the Tessa Jowell affair and this happens. It has done us a lot of damage."

A senior party figure added: "This will increase the pressure for state funding. It is doubly annoying that we have reformed the system by making it more open but all that has been set at nought because of these loans."

A Tory MP, Nigel Evans, said: "I find it staggering the treasurer of the Labour Party did not know about this money sloshing about."