Scotland Yard investigates Labour's 'false accounting'

Scotland Yard detectives investigating the "cash for peerages" scandal are looking into allegations of false accounting by senior Labour Party figures including Tony Blair.

The Electoral Commission - the public watchdog on party funding - passed the allegations to the unit led by deputy assistant commissioner John Yates. On Monday the Metropolitan Police interviewed Michael Howard, the former leader of the Conservative Party, as a potential witness.

The net was closing in on No 10 following the disclosure that police have also interviewed Jonathan Powell, the Prime Minister's chief of staff. Downing Street denied yesterday that he had been laying down the terms for Mr Blair to be interviewed, but it is expected that Scotland Yard will see the Prime Minister shortly.

Mr Blair was one of the few senior Labour Party figures who knew about the payment of nearly £14m in loans by 12 millionaires, including some of those nominated by the Prime Minister for peerages. He may be asked to explain why £8.1m of the loans made before the 2005 election did not appear in Labour's accounts.

The loans were kept secret from the party's honorary treasurer, Jack Dromey, who was furious when he discovered the existence of the loans and made his anger public. The party chairman at the time, Ian McCartney, was also kept "out of the loop" about the loans.

The allegations, which were made by the Scottish National Party, were thought at first to be frivolous, but the police investigation is being viewed with increasing alarm by Downing Street. It had been thought that the main focus of the police inquiry was a 1925 Act which made it an offence to sell honours. But such an offence would be notoriously difficult to prove and it was widely assumed at Westminster that no charges could be brought.

However, the police inquiry has shifted to whether offences were committed under the Theft Act or the 2000 Political Parties, Elections and Referendums Act. Under that Act, commercial loans do not have to be declared, but gifts have to be registered.

False accounting is regarded as a serious offence under the Theft Act 1968 and carries a maximum penalty of seven years' imprisonment. The police are believed to be focusing on section 17 of the Theft Act, which makes it an offence to conceal or falsify any account required for accounting purposes.

Scotland Yard detectives have been scrutinising the terms of the loans to see whether they are actually gifts. The police are also studying closely whether the Labour Party breached accounting rules by failing to declare £8.1m in loans in their accounts for 2004.

Grant Shapps, a Tory MP on the Commons committee which has also been investigating the scandal, said: "Mr Yates indicated to us that a prosecution might not be on the basis of the two Acts they said they were acting on. It does suggest there may be other things they are looking at." The committee wrote to Mr Yates last week, asking him to update them on his progress. Peter Watt, the general secretary of the Labour Party, said independent auditors had approved the accounts.

But Bob Marshall-Andrews, a barrister and long-term Labour critic of Mr Blair, said: "I have always believed the really serious issue was not the 1925 Act, but a failure to properly account for these loans."

How the net is closing on No 10

8 March

Chai Patel, head of the Priory rehab clinics, complains he has been blocked for a peerage. He loaned Labour £1.5m

21 March

Scotland Yard begins to investigate allegations by the SNP that loans breached the 1925 anti-corruption Act

13 April

Des Smith, a headmaster and leading fund- raiser among businessmen for city academies, arrested and questioned

10 July

Reported that Lord Levy - or 'Lord Cashpoint' - a Labour fundraiser, told Sir Gulam Noon, also blocked for a peerage, not to disclose loans to Labour. Two days later, Lord Levy is arrested and interviewed

14 July

It emerges that Lord Sainsbury, the Science minister who loaned £2m, and the party chairman, Ian McCartney, have both been interviewed by police

21 September

The biotech boss and Labour lender Sir Christopher Evans becomes the third person to be arrested in the 'cash for peerages' inquiry

29 September

The senior Downing Street adviser Ruth Turner is questioned

23 October

Michael Howard, former Tory leader, becomes first party leader to be questioned. Says he was interviewed as a possible 'witness' by police

24 October

Rumoured that Jonathan Powell, Mr Blair's chief of staff, has been interviewed in the affair