No 10 adviser arrested over cash-for-peers row

Scotland Yard's investigation into the cash-for-peerages affair led to No 10 yesterday after police arrested an adviser to Downing Street over links between Tony Blair's flagship city academies and honours bestowed on their financial backers.

Des Smith, in charge of finding sponsors for the schools, was arrested by Scotland Yard's special crime directorate, which is investigating corruption offences under a 1925 law banning the sale of peerages. He was later released on bail. Mr Smith, 60, resigned from the Specialist Schools and Academies Trust, which helps to recruit financial backers from big business, after allegedly telling an undercover reporter that the Prime Minister's office would bestow honours on big financial donors.

The city academies ­ promoted by Lord Adonis, the Education minister ­ were highly unpopular with Labour MPs, and it is rumoured that Mr Blair was finding it difficult to get financial backers when they started. It later emerged that up to eight of those who paid millions toward them were later nominated by Mr Blair for honours.

They included the property millionaire Sir David Garrard, 67, a former director of Minerva, who donated money to both Labour and the Tories and gave £2.4m towards the new academy school in Bexley, south-east London; and Barry Townsley, 59, a stockbroker, who gave £2m to create the academy in Hillingdon, west London.

There is no suggestion of any wrongdoing by them, but both men were on the recent list of nominations by Mr Blair for Labour life peerages and had their names blocked by the Lords appointments committee.

One Labour insider said: "They were quaking in their shoes in Downing Street last week over this investigation. Normally when there is a scandal like this, you try to isolate the Prime Minister from the fall-out. But this time, it was the Prime Minister himself who was handing out the peerages."

It was reported last night that the Labour Party had told a dozen businessmen who secretly lent it money, including four whose peerage nominations were blocked, that they will be questioned by Scotland Yard after Easter. "It is a matter for the Met who they speak to in the course of their investigations," said a Labour spokesman. The Met declined to comment.

Mr Smith was alleged to have told the reporter in January that a benefactor who gave money to one or two academies might receive an OBE, CBE or a knighthood, but anyone who gave £10m would be "a certainty" to get a peerage. It is unprecedented for anyone so closely connected to the Prime Minister to be arrested under the 1925 Honours (Prevention of Abuses) Act.

Mr Smith was an adviser to the chairman of the Specialist Schools and Academies Trust, Sir Cyril Taylor. Sir Cyril denied any link between cash for city academies and peerages.

But Mr Smith reportedly told a journalist posing as a potential donor's PR assistant that "the Prime Minister's Office would recommend someone like [the donor] for an OBE, a CBE or a knighthood". Asked if this would be just for getting involved in the academies, he responded: "Yes ... they call them 'services to education'." Afterwards Mr Smith, who is head of All Saints Catholic School and Technology College in Dagenham, apologised and resigned from the trust.

The academies have split the Labour Party, and senior cabinet ministers privately protested at a manifesto commitment to create 200 more, saying that they threatened to give a highly selective education for "the few not the many".

Academies are funded directly from Whitehall, bypassing local education authorities, and donors can choose the governors and some of the subjects to be taught in return for gifts for about £2m. But their results have been patchy and at least one was condemned for being a failing school.

The Scotland Yard inquiry was originally launched in response to a complaint by Scottish and Welsh nationalist MPs that Labour had broken the law banning the sale of honours after it was revealed that Lord Levy, the Labour fundraiser, had asked backers to give Labour loans rather than straight donations, which had to be declared.

The inquiry, led by John Yates, a deputy assistant commissioner, was widened to cover the activities of other parties.

The investigations

The Scotland Yard inquiry into "cash for peerages" is one of three parallel investigations launched after the disclosure that four of the people nominated for peerages by Tony Blair had made secret loans totalling £3.5m to the Labour Party.

Deputy Assistant Commissioner John Yates, head of Scotland Yard's Special Crime Directorate, was called in by Sir Ian Blair, the Metropolitan Police Commissioner, to investigate on 21 March after an official complaint by the Scottish and Welsh nationalists that Mr Blair may have committed an offence under the 1925 Honours (Prevention of Abuses) Act.

A second inquiry into the scrutiny of political honours is being carried out by the Commons Public Administration Committee chaired by the Labour MP Tony Wright.

It is keen to cross-examine Lord Levy, the Labour fundraiser at the centre of the loans row, and two of the lenders, Dr Chai Patel, head of the Priory clinics, and property developer Sir David Garrard, who were both nominated for peerages but were blocked by the Lords Appointments Committee.

The third investigation is being carried out into the way political parties are funded by the Constitutional Affairs Committee, chaired by the Liberal Democrat MP Alan Beith, which may also want to question Lord Levy.