Something smells funny at the Tate...

...and it's not just the elephant dung on a newly acquired £700,000 installation by Chris Ofili. Guy Adams reports on a scandal that has shaken Britain's modern art establishment

The crowds at Tate Britain last weekend were unlikely to have thought there was anything particularly strange about Christopher Ofili's work The Upper Room, except perhaps the fact that it was partly made using several dozen dollops of elephant dung.

But these are troubled times for the Tate. Behind the scenes, the critically-acclaimed series of 13 paintings, said to be Ofili's take on the Last Supper, is at the centre of a row that has engulfed some of the biggest names in Britain's artistic establishment.

At the heart of the affair is the fact that, when The Upper Room was purchased from him for £705,000 earlier this year, Ofili was himself a Tate trustee. This, critics say, represents a major conflict of interest. It also seems to contradict official guidelines, which say: "Even the perception of a conflict of interest in relation to a board member can be extremely damaging to the body's reputation."

The matter is so serious that, last week, the Department for Culture, Media and Sport said it will investigate. Meanwhile, the Charities Commission is looking at whether the trustees breached its code of conduct. Pressure is mounting on the Tate's director, Sir Nicholas Serota, who was in charge of the Turner Prize when Ofili won it in 1998. A fortnight ago, he was forced to apologise for wrongly soliciting a charitable donation of £75,000 towards The Upper Room's asking price.

Sir Nicholas, 59, has made few enemies in his 17 years in office. He earns a modest salary of about £100,000, and even his critics acknowledge that he is open and approachable. However, he has attracted criticism as a champion of conceptual art.

And he is also facing flak after it emerged that he paid £3.3m to unnamed Balkan figures to secure the return of two stolen Turner works. Next Wednesday, when this year's Turner Prize winner is announced at the Tate, protesters will converge to call for Sir Nicholas's sacking.

Further investigations have prompted wider allegations of cronyism. Last week, it emerged that dozens of works associated with trustees - by Michael Craig-Martin, Peter Doig, Bill Woodrow, Christopher Le Brun, Michael Landy and Richard Deacon - have entered the gallery during the past 15 years. Originally, the Tate had defended the Ofili acquisition as a one-off "exception" to normal acquisition policy.

This is awkward for the great and the good who serve as Tate trustees. At present, they include the newscaster Jon Snow, the LSE director Sir Howard Davies, the HarperCollins chief executive Victoria Barnsley, the Guardian Media Group chairman Paul Myners and John Studzinski, the financier who secured Prince William's work experience stint at HSBC bank.

Meanwhile, the way the controversy unravelled has contributed to an aura of suspicion. The Tate at first refused to disclose the amount paid for The Upper Room, but it was forced to release a series of details under the Freedom of Information Act.

This precedent could have serious implications for Britain's major galleries, which may now have to release the costs of all new purchases and the identities of vendors, throwing the secretive, poorly regulated art market into turmoil.

None of these potential outcomes could have occurred to the Tate's trustees when they first met to discuss the purchase of The Upper Room in 2002. Then, it represented a unique opportunity for the Tate to get its hands on a work regarded as one of the most important pieces of British art of the past decade.

According to minutes of the meeting at which the purchase was agreed, the trustees were painfully aware of the potential conflict of interest. Ofili was required to leave the room when the potential sale was discussed, and it was agreed that the gallery would seek to minimise the cost by seeking additional funds from elsewhere.

In November 2003, Sir Nicholas "reminded trustees that... ordinarily it was the policy not to acquire work by serving trustees," but that there was a decision "to waive this rule on the basis that this was an exceptional group of works offered at an exceptional price".

The sale did not go entirely smoothly. Recently, confidential e-mails between Ofili's agent, Victoria Miro, and Sir Nicholas, sent in November 2002, have emerged. They show Miro pleading for the purchase to be speeded through because her client was getting married and might need the money. "I suspect he may be less willing than previously to wait for an extended period in terms of finance," she wrote. "Evidently, especially as Chris is a trustee, this is a sensitive situation, but if you could give me some indication as to which way to proceed, I will ensure that your decision is handled with discretion."

Eventually, Miro obtained more than £300,000 from private benefactors to ensure the sale went through at a price acceptable to the Tate. The total cost, at £600,000 (excluding VAT) was about 20 per cent lower than the original asking price.

At this point, the plot thickens. Less than half the money eventually paid for The Upper Room was actually secured by the Tate (£120,000 from its funds, £100,000 from members and £75,000 from the National Arts Collection fund). The remainder came from five unnamed private benefactors.

This raises awkward questions. The identities of Miro's benefactors remain secret, but Tate minutes from November 2003 note that several of the donors were both "purchasing a new painting by Ofili and contributing X to Tate". Could they have been making an investment in order to increase the value of the works they hoped to acquire? An acquisition by a national collection often leads to a rise in an artist's value. Indeed, The Upper Room is said to be worth twice its original asking price.

Certainly, there was a buzz about Ofili as news of the Tate purchase began to filter through the art world. From 1998 to 2004, his auction prices fell by 24 per cent, yet on 12 May this year, two months before the Tate deal was officially announced, Charles Saatchi sold an Ofili painting, Afrodizzia, in New York for £550,000, more than four times his previous record price.

A report on the purchase by Charles Thomson, co-founder of the Stuckist movement of artists, has been submitted to the Department for Culture, Media and Sport. It notes: "Mr Saatchi is a client of Ms Miro, and it should be established whether any privy information passed between them. It should also be established whether Mr Saatchi was involved at any time in the purchase procedures."

The department has also been asked by Thomson to instruct the Tate, in future, to include details of trustees' holdings of artworks in its Register of Trustees Interests. It is not at present known if any of the remaining 11 trustees own works by Ofili.

Ofili himself has not escaped criticism. News of The Upper Room's purchase came a few months after, writing in The Guardian, he urged artists to donate their works to the Tate for free. Coincidentally, he stood down as a trustee last week when his five-year term ended.

It doesn't end there. This newspaper's Pandora column recently obtained a report by the Tate's conservator Natasha Duff suggesting that Ofili's paintings are being damaged by the conditions in the gallery. It records that the special "do not touch" signs are badly situated and light levels in the room are five times higher than the recommended maximum, and concludes that the works may have to be removed from view for several years.

In defence of the Tate, most critics acknowledge that The Upper Room is an exceptional piece, and seems to have been bought within a tight budget, at a reasonable price. The gallery is co-operating with all enquiries into the purchase, and is confident that Ofili's temporary absence from trustee meetings when the sale was discussed will save them from further criticism.

Also, the Tate has a duty to acquire important items of new British art. As at least three of its trustees are working artists, the gallery could be seriously inconvenienced if it is required to boycott the work of any trustee.

"My view is that this has been a cock-up rather than a conspiracy," says Martin Bailey of The Art Newspaper. "The gallery should have been more open when questions were first asked about the purchase. The fact that they weren't has contributed to a feeling of suspicion.

"The sale was probably handled properly, but from a PR perspective they should have been open from the start, rather than allowing this drip, drip of revelations. Ofili has yet to give his side of the story, and it would be helpful for him to explain his views on the sale," Bailey says.

Either way, the art world is waiting for the next development in the Ofili affair with bated breath. Who can tell when the next piece of elephant dung might hit the fan?