A COMMITTEE set up by Labour to vet gifts to the party was bypassed by Tony Blair when he personally approved the acceptance of secret loans.

The committee was established in 2002 after a row over a donation of £100,000 from Richard Desmond, which upset some party members because of the Daily Express proprietor’s pornography empire.

One senior party spokesman told The Times yesterday that the committee, which was created to prevent further embarrassment over the sources of party funding, was “in abeyance”. Another said that it did still meet, but to discuss only donations, not loans.

It seems to be just one of the safeguards designed to prevent any hint of funding “sleaze” that were bypassed by Mr Blair and has led to the controversy, prompting his poll ratings to plummet yesterday.

The Times understands that Mr Blair personally overturned Labour’s longstanding policy of refusing loans early last year. A party spokesman gave assurances yesterday that no “soft” loans from private individuals were received in 2004.

The practice of accepting such loans from wealthy backers had long been shunned by Lord Levy, the party’s chief fundraiser appointed by Mr Blair in 1994 and himself handed a peerage in 1997. But Lord Levy was overruled when party officials planning the election reported to Mr Blair that vast new sums of money were needed if Labour was to match the Tories’ spending.

It is now clear that in the dash to spend up to the legal limit of £20 million, both main parties accepted huge soft loans to fund the most expensive election in British history.

All week the list of senior Labour figures who say that they had no knowledge of the loans has grown. Since the original revelation by Jack Dromey, the party treasurer, that he only heard about the system from newspaper reports, it now includes Gordon Brown, the Chancellor, and John Prescott, the Deputy Prime Minister.

Insiders say that the decision was taken by Mr Blair and kept in a small group that included Matt Carter, the general secretary, who quit after the election, and Peter Watt, his successor, who was a party financial officer during the campaign.

Aides to Ian McCartney, the party chairman, said yesterday that he was told of the policy switch by Mr Carter and Lord Levy during the election campaign.

It is understood that Mr Blair’s change of heart on loans came for several reasons.

The first was evidence that both the Conservatives and the Liberal Democrats were al- ready circumventing rules introduced in 2001 that every donor of more than £5,000 should have their name published. This did not apply to loans.

The second was that banks and other City institutions would not agree to any further commercial loans because the party’s finances were too precarious. There was another key pressure driving the change of policy: donors who were fed up with media attention and wanted the anonymity brought by a “commercial loan”.

The commercial rate agreed by the party for individual lenders was 2 per cent above the base rate and loans were nominally for six months to two years, The Times understands. Experts suggest that this was one or two points below what was actually available in the City, saving the party at least £200,000 a year in interest repayments.

A Labour source said: “People were coming to us saying they knew we were in trouble and were prepared to help. But they were not going to make a gift because they did not want to be beaten up.”

The source confirmed that some lenders agreed that, eventually, their loans should be converted to gifts.

Labour’s nominations for “working peers” were made soon after the election. A civil servant had to fill out a form showing any party donations — although there is no specific demand for loans to be declared. They were not.

The forms had to be counter-signed by Mr McCartney. He did so in October. The party chairman was seriously ill after a heart bypass operation when he signed them. The party denied reports that the forms were organised by Ruth Turner, a senior member of Downing Street staff, or that she took them to Mr McCartney’s hospital bed for signing.

Mr McCartney was said to have learnt of the loans from the media this month. He was contacted by the Appointments Commission for more details about one of the lenders he nominated for a peerage. Last Monday he wrote back giving details of the loans made by four of the nominees.

• Lakshmi Mittal, the billionaire steel magnate, who has donated £2 million to Labour, said last night that he saw nothing fishy in donating money to the party. He said that he had never been approached for a secret loan: “If you are working in a country, if you have businesses in a country and are living in a country, you have to decide your allegiance to a political party and support them because all political parties need help from business.”

PEER WATCHING

The independent House of Lords Appointments Commission was set up by Tony Blair in 2000 to try to reduce the party political influence in the Upper House. Its three party-nominated members are:

Lord Hurd of Westwell (C), a former Foreign and Home Secretary under John Major. He is a respected statesmen who regularly attends the House of Lords.

Baroness Dean of Thornton- le-Fylde (Lab), the former print trade union leader. As Brenda Dean she was one of the few women trade union leaders in the 1980s.

Lord Dholakia (Lib Dem), a past president of the party, who was close to Charles Kennedy and Sir Menzies Campbell. He came to prominence as a community relations commissioner at the Commission for Racial Equality.

The two non-political commissioners are Angela Sarkis, a BBC governor, and Felicity Huston, the public appointments commissioner in Northern Ireland.

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