'Unlawful' donations will be returned, says Brown

Labour is to return donations totalling more than £650,000 which were not lawfully declared, Prime Minister Gordon Brown announced today.

Mr Brown also ordered a review of the party's systems for checking on donations, after it emerged that wealthy supporter David Abrahams had channelled the cash to Labour through four middlemen in breach of rules designed to ensure transparency of political funding.

The Crown Prosecution Service today confirmed it has made "initial contact" with independent watchdog the Electoral Commission, which is carrying out its own inquiry into the affair.

It would be for the CPS to bring charges if any breach of the law is uncovered, as the Commission has no power to do so.

Labour's General Secretary Peter Watt resigned yesterday after admitting he knew of the arrangements under which the true source of the money was concealed.

The Prime Minister was forced today to repeatedly insist he knew nothing about the donations until they were revealed on Saturday night.

The PM was subjected to a 75-minute grilling on the issue at his monthly press conference at 10 Downing Street, telling reporters: "What has happened, where political donations have not been lawfully declared, is completely unacceptable, cannot be justified in any way, and this behaviour should never happen again in future.

"The money was not lawfully declared so it will be returned."

He was speaking minutes after Labour's chairman Harriet Harman revealed that she had accepted a cheque for £5,000 during her campaign for the deputy leadership from a woman who turned out to be acting as an intermediary for Mr Abrahams.

Mr Brown said he had "confidence" in Ms Harman, who released a statement admitting she had accepted a £5,000 donation "in good faith" from Mr Abrahams' secretary Janet Kidd without knowing it was being given on behalf of the property developer.

However Hilary Benn, her rival for the deputy leadership, who is now Environment Secretary, revealed that he turned down a similar donation after being told by Labour peer Baroness Jay of its true origin.

He later accepted a £5,000 gift from Mr Abrahams in his own name.

And Mr Brown confirmed that his own leadership campaign turned down a cheque from Mrs Kidd, though he said that this was purely because it had been decided not to accept funding from any sources unknown to the team.

He also said he could not recall meeting Mr Abrahams, a prominent Labour figure in the North East.

Mr Brown said once the facts of the issue had been established, Mr Watt's resignation was a "necessary first step", but "not enough".

Asked about the possibility of a criminal inquiry into the failure to declare the true source of the funds to the Electoral Commission, the Prime Minister said he would welcome "any investigation that takes place into this".

Mr Abrahams' solicitor confirmed today that the businessman gave cash to the party through a fourth associate as well as Mrs Kidd, builder Ray Ruddick and lawyer John McCarthy.

Louis Charalambous said a payment of £25,000 was made through Janet Dunn, the wife of one of Mr Abrahams' employees, in 2003.

Conservative leader David Cameron accused Labour of ignoring the laws introduced by Tony Blair to clean up party funding in 2000.

He told the CBI conference in London: "There is a time in the life of every government when they've been in power for so long that complacency tips over into arrogance, and arrogance even becomes indifference to the law.

"They've passed that point and change, real change, is needed now in Britain."

The requirement to inform the Electoral Commission of the original source of any donation was set out in Mr Blair's Political Parties, Elections and Referendums Act (PPERA).

But the chair of Labour's ruling National Executive Committee, Diane Hayter, insisted today that the donations were given "completely legally".

She insisted that Mr Watt did not tell the NEC that the gifts, stretching back to 2003 and totalling £663,975, had all come from Mr Abrahams.

The wealthy developer said he has been a Labour supporter all his life and "gifted" amounts to friends to pass on to the party because he wanted to protect his privacy.

Mr Abrahams is the developer of a business park near Mr Blair's former constituency in County Durham, which was granted planning permission after being initially turned down. He insists he has never sought or expected any favours in return for his financial support of Labour.

Mr Brown told reporters he had appointed the retired judge Lord McCluskey and the former Bishop of Oxford, Lord Harries, to advise Ms Harman, who is also party chairman, on changes that need to be made to Labour's handling of donations.

They will receive a report from Labour's former general secretary Lord Whitty, going into all aspects of the affair.