DETECTIVES investigating the cash for honours scandal have obtained documents that detail why three businessmen who lent money to the Labour party were not considered “credible” candidates for the House of Lords by an independent vetting panel.

All three were nominated for peerages by Tony Blair.

The documents — based on briefings with government officials, the tax authorities and MI5 — disclose concerns by the Lords appointments commission that they could “diminish” the reputation of the house and the honours system.

Members of the commission objected to Dr Chai Patel, Sir David Garrard and Barry Townsley before they were aware that Labour was operating a secret loans scheme. It subsequently emerged that the three businessmen had lent the Labour party a total of £4.8m.

Angus MacNeil, the Scottish National party MP who triggered the cash for honours police inquiry after its exposure by The Sunday Times, said: “If the documents show the commission did not consider these nominees suitable, then why did Blair? It’s not unreasonable to assume that a few millions pounds in loans might have been clouding his judgment.” The appointments commission has previously said it will not disclose papers detailing background checks to the blocked nominees, but it is understood these have been passed to police.

Other documents show Blair’s determination to make the three men peers despite the commission’s objections.

Downing Street submitted its list of 11 Labour nominations to the appointments commission in autumn last year. The commission’s role is to vet nominees and ensure the “the highest standards of propriety”.

The commission conducted background checks on all the candidates. The findings are believed to include the non-domicile tax status of Patel, which means he is obliged to pay tax only on UK earnings.

It is also thought the commission established that Garrard had been “non-resident” in the past for tax reasons. Garrard had also been criticised after his company bought a controlling stake in Allders, the department store chain, which subsequently collapsed, jeopardising pensions.

In a meeting on November 16, 2005, the commission, chaired by Lord Stevenson, agreed the vetting process should include consideration of “the effect the appointment would have on the House of Lords and the honours system more generally”, according to minutes obtained under freedom of information laws.

The commission agreed that it could not approve the list. Instead, it decided to write to the prime minister “highlighting the immediate problems”.

The official objections to the three businessmen led to what was effectively a stand-off between Blair and the commission because Downing Street wanted the list approved without any nominees being blocked.

At a meeting on February 7 the commission decided to write another letter detailing its objections to the list.

Its frustrations are clear as it recommends reform of the system. The minutes of the meeting state: “The parties should also be encouraged to establish their own ground rules for the consideration of nominees and to carry out preliminary checks on the nominees before sending their names to the commission.”

The following month, the loans scheme was revealed for the first time in The Sunday Times when Patel told how he had made a £1.5m loan to Labour.

It also emerged that Sir Gulam Noon, another of Labour’s nominees for a peerage, had also given a loan, although he had not at that stage been blocked by the commission.

Lord Oakeshott, the Liberal Democrat peer, said: “This once again shows the importance of electing peers. There was always a risk the current system could be seen as open to corruption.”

Blair is expected to be interviewed by detectives before Christmas. One key aspect of the inquiry is whether the loans were on commercial terms and whether Labour broke the law by not declaring them to the Electoral Commission.

It has emerged that detectives have obtained a statement from Patel that he gave his loan on the understanding that it could be converted to a donation in the future. It provides evidence that such loans would not have been available on similar terms from commercial lenders and therefore should have been declared by Labour.

In the statement obtained by detectives, Patel states: “I was not asked for a donation. I was asked for a loan. I should get it back and I may choose at some point not to get it back. I may choose to write if off and give it as a donation.”

The evidence suggests that the loans may have been intended as disguised donations.

Blair had said it was the businessmen who requested anonymity, but this has been denied by some of the lenders. >

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