Peter Hain, the Work and Pensions Secretary, was facing serious questions last night after he admitted that he failed to declare £103,000 in donations to his Labour deputy leadership campaign – half of it funnelled through a little-known think-tank.

Mr Hain revealed that among the 17 backers he failed to declare were Willie Nagel, a diamond broker, and Isaac Kaye, the former head of a drug company that was raided by police investigating an alleged £400 million rip-off of the NHS.

In an astonishing twist, both donated via a third party - a virtually unknown think-tank called the Progressive Policies Forum.

Steve Morgan, the lobbyist brought in to run the later stages of his campaign, also gave £5,000 in this way.

Mr Hain insisted yesterday that this did not break the law. He cited “administrative failings” rather than an attempt to conceal the donations. He insisted that all those who gave money to his campaign were legally entitled to do so. The largest sum came from Mr Nagel, who gave an interest-free loan of £25,000 as well as a donation of £5,000. The forum was approached to help to meet the campaign’s unpaid bills, he said.

The donations bring the cost of Mr Hain’s deputy leadership campaign to £185,000 – about twice the budget of the winner, Harriet Harman. Mr Hain came fifth out of six candidates in the race.

In a statement, he said: “There is no legal impediment to a person donating money on behalf of someone else. The PPERA [Political Parties, Elections and Referendums Act 2000] legislation expressly permits it in paragraph 6 of schedule 7. What is important is that the person or company making the payment informs the donee [in this case Peter Hain] that it is on behalf of someone else and gives particulars to the donee so that the donee can report them.”

Mr Hain tried to explain the scale of the sums involved by saying that he had had to continue fundraising after the campaign ended in June “as a result of unpaid invoices coming to light during the summer and autumn”. He became aware of the unregistered donations on November 29, in the week that Labour became engulfed in a row over secret donations that led to the resignation of Labour’s general secretary, Peter Watt. The donations are being investigated by police.

Mr Hain said: “I reasonably believed that the arrangements in place for my deputy leader campaign would be sufficient to ensure compliance with reporting requirements, but as it transpired, due to administrative failings this was not the case after early May.”

Two of his allies have publicly clashed over who was to blame for the administrative failings of his campaign. Phil Taylor, his former special adviser who quit during the campaign, has claimed that all donations were registered at that stage, but Mr Morgan has said that he was brought in to “bring order to the chaos”.

The Electoral Commission will now conduct its own checks into whether the donations were permissible and consider further action.

Mr Hain had 30 days to consider whether to accept any donations and a further 30 days to register them. The commission does not currently have powers to take action against individuals rather than parties simply for late reporting, but officials said that other sanctions might be available.

Chris Grayling, the Conservative frontbencher, said the failure to declare the donations showed breathtaking incompetence. “When Peter Hain first admitted failing to declare £5,000 of donations I defended him on the grounds that everyone makes mistakes. But this is on a different scale. Gordon Brown has some serious explaining to do. After the events of the past two months, it looks as if he and his senior colleagues have a complete disregard for the rules.”

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