PM admits defeat over 'cash for peerages' and drops Labour nominees

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The Independent on Sunday has learnt that the Prime Minister has lost his battle with the honours watchdog and will dump all the controversial donors nominated for places in the House of Lords.

Government sources said that Downing Street wanted to "clear this up as quickly as possible" and had decided no longer to dispute the decision of the House of Lords Appointments Commission to block the peerages.

Downing Street's decision to publish the list of peers without five disputed names is designed to stop the stream of damaging stories about cash for honours. They began last October when the IoS revealed that Mr Blair was to award a string of Labour donors with seats on the red benches.

Sources close to the Government said that none of the controversial Labour donors named by this paper would now gain seats in the House of Lords.

Lord Oakeshott of Seagrove Bay, a Liberal Democrat peer and former member of the Joint Committee on House of Lords Reform, said Downing Street's defiance of the House of Lords Appointments Commission had been a "farce". He called for the law to be changed so that the watchdog's rulings were final.

"The Lords Appointments Commission has done a great job sifting through shady loans and tangled tax stories. Mr Blair has finally accepted the inevitable end to this farcical five-month stalemate," he said.

But the Prime Minister is not in the clear over the cash for peerages affair yet. The Commons authorities have made it clear that they will use their powers to summon major donors before a Commons committee if they refuse to answer questions from MPs about the affair.

Leading criminal lawyers warned last night that an inquiry by Scotland Yard into the affair could lead to a criminal conviction for Mr Blair if he is found guilty of awarding peerages for cash. The offence carries a maximum sentence of seven years.

Judith Seddon, a partner at solicitors Russell Jones & Walker, said she expected the police inquiry to take account of the Prevention of Corruption Act 1906. The Prime Minister, members of his government and civil servants all face possible conviction if they are found guilty of offering "any gift or consideration as an inducement or reward".

After consulting the Queen, Mr Blair has now agreed to abandon his fight to award Labour peerages to Sir Gulam Noon, the millionaire curry magnate who made a £250,000 loan to the party, and to Dr Chai Patel, head of the Priory clinics, who lent £1.5m.

Two other Labour donors have publicly withdrawn their names from the honours list since the IoS revealed that they had been nominated by Mr Blair last October. Sir David Garrard, a millionaire property developer who gave £200,000 to Labour and lent £2.3m, and Barry Townsley, the stockbroker who lent £1m, have withdrawn their names from the list.

Mr Blair is also believed to have struck from the list Robert Edmiston, a Tory donor, who was recommended for a peerage by Michael Howard. The millionaire car dealer made a £2m loan to the Conservative Party which he has now converted into a donation.

His nomination was blocked by the House of Lords Commission because of a dispute with the Inland Revenue, since resolved, over a tax bill. David Cameron and Mr Howard fought hard to have his name kept on the list of new Tory peers but Mr Blair, according to government sources, has decided not to defy the Appointment Commission's decision to block the nomination.

One senior Tory source said: "The tax issue has been resolved, but Blair doesn't want to overrule the Commission and seems to want him off the list to keep the Labour donors company."