The cash-for-honours scandal: Top Labour official tells 'IoS' 'Party deliberately got round the law'

Labour deliberately tried to get round the law by secretly taking loans from millionaires to boost election campaign funds, a senior party figure has claimed.

The high-ranking figure, who has given evidence to police investigating the cash-for-peerages affair, told The Independent on Sunday that the party negotiated loans rather than donations because loans would not have to be publicly declared.

When Labour Party officials headed to the costume outfitters Mad World during the general election campaign to hire six Star Trek outfits, including Vulcan ears, they probably thought nothing about paying the £300 bill. The cost of their stunt highlighting the Vulcan traits of Conservative MP John Redwood was, after all, nothing compared to the £7,700 charged to Labour for Cherie Blair's personal hair stylist.

But the party was living on credit - and the money used to hire Redwood's ears came from an £18m fighting fund that would, within months, become the subject of a high-level police investigation and plunge the party into the worst sleaze scandal in its history.

A third man has been arrested in the "cash for peerages" scandal, the latest development in an affair that is threatening to overshadow next week's Labour Party conference.

It was reported last night that the arrested man was Sir Christopher Evans, the founder of Merlin Biosciences and one of the 12 millionaire lenders who gave Labour nearly £14m in loans.

MPs have increased the pressure on the Metropolitan Police team investigating "cash for peerages" to question Tony Blair over the scandal.

One of Mr Blair's senior aides, Ruth Turner, his "gatekeeper" at No 10, was questioned last week by the police unit led by Deputy Assistant Commissioner John Yates, but his team have not yet questioned Mr Blair about the allegations.

A second senior aide to Tony Blair has been questioned by the police under caution in the cash- for-honours affair.

John McTernan, the Prime Minster's director of political operations, has been interviewed by Scotland Yard over links between Labour's financial backers and honours granted by Mr Blair.

Michael Howard, the former Conservative Party leader, has been questioned by police in the "cash for peerages" investigation, possibly clearing the way to a future police interview with the Prime Minister.

Mr Howard was asked about the wealthy car dealer Robert Edmiston, whom he put forward for a peerage in 2005. The year before, Mr Edmiston had lent the Tory party £250,000....

Now that Inspector Knacker of the Yard has questioned Michael Howard as a witness to the "cash-for-peerages" police investigation, the question in Westminster is: Will the Bill speak to Iain Duncan Smith, his predecessor as Conservative Party leader?

Members of IDS's old staff are said to be "bricking it" about the possibility he'll sit down for a chat with members of the constabulary...

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...

Tony Blair was questioned today by Scotland Yard detectives investigating the "cash-for-honours" affair. The interview, which lasted for almost two hours, did not take place under caution and the Prime Minister was not accompanied by a lawyer.

Mr Blair's official spokesman said it had always been expected that he would be questioned at some stage in the investigation.

But Angus MacNeil, the Scottish National Party MP whose complaint triggered the police inquiry, said it was "unprecedented" for a serving prime minister to be interviewed in a criminal investigation.

"This revelation will be shaking the very foundations of Westminster," he said.

"For the Prime Minister to be questioned by the police during a criminal investigation is unprecedented."

Mr Blair's spokesman denied that the interview had been deliberately timed to coincide with the publication of the Stevens report into the death of Diana, Princess of Wales.

"Categorically, that was not the case at all. Categorically, there was no linkage with other events." he said.

He added: "Given that the SNP made the complaint about people nominated for peerages by the Prime Minister, you would expect that the police would ask to see the PM as their inquiries come to a conclusion."

Mr Blair's spokesman said: "The Prime Minister explained why he nominated each of the individuals and he did so as party leader in respect of the peerages reserved for party supporters as other party leaders do.

"The honours were not, therefore, for public service but expressly party peerages given for party service.

"In these circumstances, that fact that they had supported the party financially could not conceivably be a barrier to their nomination."

The detectives were said to have arrived at No 10 shortly after 11am.

Downing Street would not say how many officers were involved, but indicated that acting Deputy Assistant Commissioner John Yates, who is heading the inquiry, was not among them.

Mr Blair was accompanied at the interview by a Civil Service note-taker.

The Prime Minister later faced a barrage of questions from reporters as he left No 10 for the European Union summit in Brussels, but made no comment.

Despite the embarrassment of being questioned in a police inquiry, there will be relief in Downing Street that Mr Blair was not interviewed under caution, which would have indicated that he was being treated as a potential suspect.

Mr Blair's spokesman said they had not given any indication what steps the police would take next.

Mr Yates has said he hopes to present a file to the Crown Prosecution Service in January.

The original investigation was prompted by the disclosure that four Labour nominees for peerages had been blocked after it emerged that they had given undisclosed loans to the party's general election fund.

Detectives, who subsequently widened the inquiry to the Conservatives,- are investigating whether there has been any breach of the 1925 Honours (Prevention of Abuse) Act which outlaws the sale of honours.

They are also considering whether there was any breach of the Political Parties Elections and Referendums Act 2000 which requires donations and non-commercial loans to parties to be publicly declared.

Several of Mr Blair's closest Downing Street advisers are already believed to have been questioned in the course of the inquiry.

Health Secretary Patricia Hewitt, former party chairman Ian McCartney, former Cabinet minister Alan Milburn, ex-science minister Lord Sainsbury, and ex-Tory leader Michael Howard are among those questioned as witnesses.

Some of the wealthy Labour and Conservative supporters who loaned money to the parties and were then nominated for peerages have also been interviewed.

Virtually all of those serving in the Cabinet in the run-up to last year's general election have been asked to provide statements "formally in writing" of what they knew about the loans.

Lord Levy, Labour's unofficial fundraising chief, is one of three people arrested since April in connection with the inquiry. No one has been charged.

The Liberal Democrat chief of staff Norman Lamb said: "Clearly this is a very serious matter, and it is important that the police are allowed to continue and conclude their investigations.

"Whatever the final outcome of the investigation, this sorry episode underlines the vital importance of reforming both the House of Lords and rules relating to party funding.

"For as long as parties are allowed to accept very large donations from donors and retain the ability to award seats in the House of Lords, it will be impossible to restore public confidence in our political system."