LABOUR is facing an official inquiry into an alleged front organisation, financed by millionaire Muslim businessmen, which has donated more than £300,000 to the party.

The electoral watchdog, which polices political funding, confirmed that it was investigating donations to Labour from a group called Muslim Friends of Labour. Its findings are expected to lead to a full-blown inquiry — the first potential sleaze probe to hit Labour since Gordon Brown became prime minister in June.

Imran Khand, a Glasgow-based entrepreneur, is revealed as a leading financial backer behind Muslim Friends, which funnelled £100,000 a month to Labour between March and June.

As his money is paid to Muslim Friends - rather than directly to the Labour party - his identity has until now remained secret. The Electoral Commission is probing whether Labour has broken laws on the disclosure of donations by hiding the true source of its financing.

Khand is a close associate of Mohammad Sarwar, the controversial Labour MP who chairs the organisation. Sarwar was embroiled in a vote-rigging scandal in the late 1990s which saw him suspended from the parliamentary Labour party. He was later cleared of the allegations in the High Court.

Khand has recently set up a series of companies with a Pakistani arms salesman and is also funding a British parliamentary inquiry into “tackling terrorism” via another organisation.

He has never been publicly named as a Labour donor although Muslim Friends has risen to become the party’s second most generous nontrade union benefactor. It is understood that most Labour Muslim MPs and peers are members.

Muslim Friends, which until recently gave only modest amounts, is set up as an “unincorporated association” which does not publish accounts or reveal the source of its funding. It is registered to a PO box address in south London.

Labour politicians have previously criticised the Conservatives for accepting money from a similar unincorporated association involving Robert Edmiston, a Midlands car dealer.

The watchdog said: “We have raised questions with the Labour party about these donations. We are looking into it. Inquiries are at a preliminary stage.”

Yesterday Sarwar, who is to step down at the next election, refused to reveal who funded the donations. “I will not name names. We have made a decision not to release the information. That is the decision of the board of Muslim Friends of Labour,” he said.

He added that the organisation was “very powerful” and was regularly consulted by ministers drawing up policies of interest to the Muslim community.

Another senior member of Muslim Friends disclosed that Khand was the leading benefactor. He revealed that Sarwar, himself a multi-millionaire, had also provided funding.

One leading Muslim Labour figure said: “I am staggered how much money they are giving suddenly. It started off in the wake of 2001 when Muslims were facing serious challenges, but now it seems to be Sarwar and his friends.”

Last week Khand refused to comment on his donations to Muslim Friends.

Yesterday, when asked to justify its decision to accept donations from Muslim Friends, the Labour party said it would take steps to ensure that donors to the group were made public.

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