Peter Popham: Where does the moral rot end in this tale of corruption and cronyism?

If he had played his cards right, David Mackenzie Mills could have been an honoured member of one of the most exclusive clubs in Europe: the cronies of Silvio Berlusconi.

He has the right qualities: clever, clubable, flexible, musical ... he could have been right up there alongside Marcello dell'Utri, Silvio's Sicilian friend who founded Forza Italia and whose connections helped the party grab all Sicily's parliamentary seats (don't mention dell'Utri's nine-year sentence for Mafia association, which he is of course appealing); up there with Fedele Confalonieri, Berluska's school chum, who played piano while Silvio crooned on cruise ships and who now heads part of Berlusconi's empire.

One can imagine them forming a band, Fedele on piano, Mills on clarinet, Silvio on vocals with his pet guitarist Mariano Apicella strumming along. Mills could, like the other intimates, have looked forward to one day being interred alongside "Il Cavaliere" in his purpose-built mausoleum in the grounds of his villa outside Milan.

Instead it has all gone horribly wrong. And it is possible to pinpoint exactly why and when and how David Mills went from being Silvio Berlusconi's valued adviser to his dangerous enemy.

July 18, 2004 was a very long day for David Mills, most of it spent inside the office of Milan's public prosecutors. In the course of it he was shown several documents written by himself which apparently he had no idea the prosecutors possessed.

One of them, famously, was a note written by Mills to his accountant Bob Brennan in which he breezily admits that the problematic, unaccounted-for sum of $600,000 or £350,000 came from "the B people". This is the money which has now got Mills's wife Tessa Jowell into hot water after it was revealed by The Sunday Times that the minister had with her husband signed a mortgage application for the same amount of money; the loan was put in one hedge fund and the problematic money from Italy, lodged in another hedge fund, used to pay it off a few days later.

That careless admission was in itself bad enough, though Mills has ridiculed it as trivial. As he says with a streak of irritation, "Lawyers receive payments all the time ..." But there was worse. The prosecutors also showed him a memo he had written on 27 November 1995. In it he describes a phone conversation he had had with Mr Berlusconi "on Thursday night" in which the Italian advised Mills "to keep quiet about All-Iberian" - an offshore fund - "on account of the billions of lire paid out of it to [former Socialist Party leader and prime minister] Bettino Craxi." "This is a political bombshell in Italy," the note went on, "because now Italian magistrates are in a position to prove that Berlusconi is behind these payments to Craxi."

Mills had put down in black and white, for the benefit of his fellow directors in the firm of Withers, that his most important client had admitted paying huge bribes to Craxi, and was now enlisting Mills's complicity in helping him to cover it up.

But to explain why David Mackenzie Mills, former Camden councillor, former barrister, was in a position to receive explosive phone calls from Italy's richest man, then casually spill the beans in London, means going back a bit further. In 1979, the year David Mills married Tessa Jowell, Italy's Guardia di Finanza (Tax Police) raided Berlusconi's office in Milan. The man in charge of the raid was Massimo Berruti. He accepted Mr Berlusconi's account of the state of financial affairs in the office, filed an anodyne report - and shortly afterwards resigned from the Tax Police and went to work for Berlusconi in his offshore finance department.

Soon afterwards Mr Berruti paid a return call to another office he had raided in his constabular days - a top Milan law firm called Carnelutti Studio Legale. Berlusconi's gamekeeper-turned-poacher was looking for a clever lawyer with inside knowledge of offshore tax havens. Mills, who speaks fluent Italian, had set up the firm's London office. He was the obvious choice.

Mills built up a stable of fabulously wealthy Italian clients, including Luciano Benetton and the Formula One magnate Flavio Briatore. There was never any doubt why they were so eager to set up shell firms in the British Virgin Islands or the Bahamas or wherever: "Not one to look at the skin of the grape," as an Italian journalist put it, "if the clients asked [Mills] how to dodge taxes and enter (fiscal) paradise, he did the deed without batting an eyelid."

The problem for Mills came when the uses to which such "black funds" might be put beyond mere tax avoidance came under the scrutiny of the Italian magistrates. Because if you wanted to sling a colossal bribe at someone - how much tidier to do it from one offshore "black fund" to another?

Mills was the architect of the secret financial structure of Berlusconi's empire, and it was in the years 1991 to '92, from a company called All-Iberian, the cornerstone of that structure, that the biggest bribe ever paid to a single Italian politician was released: the sum of 23 billion lire, to Socialist leader (and godfather to one of Berlusconi's daughters) Bettino Craxi.

On 12 January 1998 Mills showed he had the right stuff to be a Berluscrony when he told judges, "I've never spoken to Berlusconi about All-Iberian" - thereby helping to confirm the tycoon's mendacious line that he knew nothing about the offshore company.

Despite Mill's denial, Berlusconi was found guilty of this crime, but thanks to the statute of limitations it was extinguished on appeal in 2000 (Berlusconi had to pay the costs). Whether Mills exculpated Berlusconi because he had been bribed to do so is one of the things judges in Milan are expected to begin considering in the weeks ahead.

Mr Berlusconi never tires of saying that he is the victim of a campaign of persecution by "communist magistrates", intent on hounding Italy's duly elected leader out of office. Yet it is unlikely that either David Mills or Berlusconi himself will go to jail in the latest case, even if convicted: a new law halving the time in which white-collar crimes are extinguished by the statute of limitations will almost certainly kill it before it comes to the final appeal.

Given the complexity of the case, and the gruesomely long time-spans of Italian trials, the British public will probably have switched off long before that. Which would be a pity. When discussing Berlusconi we in Britain tend to preen ourselves on our moral superiority to such dodgy dagos. But it was the City, via Mills, that enabled Berlusconi to behave the way he did, and Mr Mills didn't turn a hair. The moral rot does not stop over there.

p.popham@independent.co.uk