Tories forced to give up their illegal donations

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David Cameron has forfeited 7,400 in donations after being told that two businessmen who donated to his Witney constituency were ineligible because their business interests were offshore.

There were red faces in the Tory leader's office after it was discovered that Geoffrey Dobbs who had donated a villa holiday worth 1,500 for an auction at a fund-raising event in the constituency is a Sri Lankan hotelier whose donations were inadmissible.

The winner of the prize in the Tory auction, Roger Fletcher, who bid 5,900 for the holiday, was also ineligible to give money to the party because he lives in the tax haven of Guernsey. "It was a genuine error," said a Tory source. "We sent the cheque to the Electoral Commission the day after we found out."

The money will go into the public purse as a contribution to the Government's consolidated fund. But the embarrassing disclosure will make it more difficult for the Tory leader to use the long-awaited report by the Commons select committee on the "cash for honours" scandal to attack Gordon Brown. The Public Administration Committee report, which threatened to put Mr Brown on the spot today at his last monthly press conference of the year, calls on the Prime Minister to clean up the honours system immediately without the need for time-consuming legislation.

The Prime Minister has been caught up in sleaze allegations recently after a businessman, David Abrahams, used third parties to give money to Labour.

Mr Brown is expected to endorse some of the findings of the committee, which calls for the creation of a new Lords Appointments Commission, public disclosure of all nominations on a "long list" to be whittled down, and an end to the use of Prime Minister's powers of patronage over appointments to the Lords.

The MPs call for an interim House of Lords Reform Bill, with powers for the appointments commission to disqualify peers, such as the Tory Lord Laidlaw, who fail to honour their promises to relocate their tax affairs to Britain; an end to the Government's power to engineer the political balance of the second chamber; and the removal of the remaining hereditary peers.

But the most controversial section of the report is over its damning indictment of the two main parties for exploiting a loophole in the law which means that sums of money are defined as loans instead of donations, so parties could avoid having to declare the names of their donors. They call for a new anti-corruption act to make it a clear criminal offence to sell honours.

"While legal advice was taken to ensure that no law was broken, a deliberate attempt was made to stretch the loophole on commercial loans as far as it would go," the MPs said. "Having agreed legislation to make party funding transparent, parties appear to have gone to some lengths to get around it."

The police inquiry failed to produce charges under the existing outdated legislation, some of which dates back to 1925, despite months of evidence-gathering and four arrests. The cash-for-honours allegations emerged after a businessman, Sir Gulam Noon, complained that his nomination for a peerage by Tony Blair was being blocked by the House of Lords.

The donor

* Geoffrey Dobbs, who owns a hotel and several villas in Sri Lanka, likes to play the "colonial patriarch" (his own words), driving an antique Bentley and scolding the natives.

* A cousin of the former Tory vice-chairman and author of the bestselling political thriller House of Cards, Michael Dobbs, his portfolio includes Taprobane Island, where a five-bed villa costs a $1,000 a night, as well as the Sun House and Dutch House boutique hotels in Galle.

* As a benefactor, he set up his own feeding operation for the homeless in Galle immediately after the Boxing Day tsunami hit Sri Lanka. He also launched a "Fish and Ships" scheme in the UK (with a lunch at the House of Commons attended by Jack Straw, the then Foreign Secretary) to raise money for fishing boats.

* He organised a stunt in the Sri Lankan capital, Colombo, in which a crate of fish was delivered to President Chandrika Kumaratunga during a cabinet meeting to draw attention to the plight of the fishing industry.