The riddle of the porn baron's cheque

Nobody at Labour HQ knew anything about Richard Desmond's donation. Or so they say. But the party is

Millbank Tower is not the happiest of places at the best of times. It is now in a state of disarray. The revelation on 12 May that the Labour Party had taken £100,000 from Richard Desmond, owner of Express Newspapers, came as a complete shock to the new regime at Labour headquarters.

There is, according to party insiders, not a single piece of paperwork detailing the donation. Somewhere in the files there must be a bank slip, so they are looking. But they have not found it yet.

Nothing illegal has been alleged. But the ethical debate about whether the money should have been taken in the first place from a man with porn titles to his name - some in Millbank are outraged, others say the objections are hypocritical - has been compounded by a sense of shock at the way the donation was collected. Senior officials say that, apart from the low-level finance official who must have paid in the money but has long since left the party, the only person who knew was Margaret McDonagh, Labour's former general secretary. According to the sources, it is she who received the money on the party's behalf.

Coincidentally, when she left the party after the June 2001 election, she went on to work for Desmond for several months as managing editor of the Express titles. McDonagh is now in the US studying for an MBA, but is said to have gone on holiday.

The latest furore has further damaged already low morale. When the new team took over at party headquarters last summer under the leadership of the general secretary, David Triesman, and the party chairman, Charles Clarke, the atmosphere was described as "akin to Romania after Ceausescu".

"People were jumpy," says one insider. "The concept of human resources barely existed. There were gaps in the records about all manner of decisions, including financial ones."

The flow of "cash for access" stories about donations to the party is taking its toll. The Desmond money was given on the quiet during the six-week window at the start of 2001, before new rules about transparency came into force. Senior party officials say they think there are no more skeletons in the closet. But, as one put it: "We thought we had been given the whole truth, but we can't be sure any more."

Such has been the secrecy surrounding high-level donations from the mid-1990s until the last election, that information was withheld even from those at the top of the party. The figures were stored away in a computer database. According to former Millbank insiders, only three people had access to the password - Lord Levy, Amanda Delew and McDonagh herself. Delew was head of the high-value donor unit that pulled in money above £50,000, until she left after the last election.

The role of Levy - pop promoter turned Middle East trouble-shooter - was pivotal for fundraising. It was also nebulous. He never had an office in Millbank. It is said that he did not get on very well with people there, so stayed in the shadows. He was always, however - at the end of his mobile phone, either in London or at his home in Tel Aviv - responsible for "the big numbers".

Tony Blair and his chief of staff, Jonathan Powell, who had been instrumental in getting donors on board before the election, were informed from time to time. But under McDonagh, the people at the top of the hierarchy in Millbank, such as the director of finance and the director of communications, were not given computer access to the files on donations.

It is claimed now that not even Levy or Delew knew about the Desmond money. Clarke and Triesman have ordered an investigation. The mood in the building fluctuates between rage and gloom, as each day seems to bring worse news. "We created a rod for our own back," says one official, part of a team working on a new PR offensive to convince the public that donations from well-off supporters might not necessarily be corrosive for democracy.

The team has to come up with something convincing for a very simple reason: the party is broke and needs cash - any old cash. And any old cash may now be the only cash available.

The latest figures, yet to be published, put the overdraft at just under £5m. That is down from a record £7m, thanks to a single donation of £2m in January from the man the party turns to in its hour of need - Lord Sainsbury. But that is only sticking plaster. Add the £5.5m mortgage just taken out for a new Westminster HQ in Old Queen Street, and the extent of the crisis is striking.

In a non-election year, Labour estimates that it still needs roughly £21m. The trouble is that the three main sources of funding are drying up. Many affiliated unions, furious at the government's private finance plans for the public sector, are either withholding money or attaching strings to their cash. Individual party membership has stabilised at around 280,000, but the financial returns do not reflect that. About 60 per cent of members are registered as entitled to a concessionary rate - a proportion, say officials, that is probably three times too high. In any case, the entire system, which was outsourced, is in chaos. The cost of administering it absorbs about half the total membership dues.

But even the big-value private and business donors, on whom Labour has increasingly depended, are starting to dry up. Two former party officials, among the many who have gone into consultancy and public relations, say they advise their clients not to give political donations - because they create the impression, rightly or wrongly, of cash for favours. In the new world of transparency, a company has to appear on the Electoral Commission's list of donors, even if it only takes a table at one of the gala dinners.

"The system has fallen so badly into disrepute," says an ex-Labour official, "that I can't think of a single commercial reason why a well-known company - I'm not talking about fly-by-nights - should donate. Everyone is now guilty by association."

The Desmond saga fits a familiar pattern. Only a few weeks ago we had the furore over Paul Drayson, whose £50,000 appeared to coincide with negotiations over a £32m contract to produce a smallpox vaccine. Before that, there was Lakshmi Mittal, whose £125,000 donation was followed by government support for his plan to buy a steel plant in Romania. And it all began with Bernie Ecclestone, the Formula One boss, whose £1m donation was made before a decision to exempt motor racing from a European tobacco advertising ban.

Someone gives money; the media identify a contract or government decision that seems to favour that person. A link is duly made. It may be hard to prove, but it is even harder to disprove. "The closer we got to election time, the closer we sailed to the wind," says one former insider, familiar with the financial workings of the party. "We were careful not to do anything illegal, but beyond that, it was every cheque counts." Another claimed: "The only criterion that we used to try to judge people was whether they were a crook. We had one or two and we sent them packing. The rest were fine."

Or consider this, from another former apparatchik: "We tried to tap in to anyone we thought might give. Margaret went round asking anyone remotely sympathetic for money. Some people might call it cavalier . . ." Officials say that, at the end of a long day, McDonagh would often go off to meet a potential donor and return the following day with a cheque, or the promise of one.

While in opposition, and now in government, Blair has had no qualms about the system. He trusted Levy and McDonagh to deliver the goods. He believed it worked well, and those questions that might be raised about ethics were, he was convinced, a media "get-up". He could not imagine why it was anything but an advantage to have chief executives paying money to the party - it helped its pro-business image and it provided the cash. Those who have talked to Blair about it say that his demeanour of injured innocence is entirely genuine. He simply could not imagine what business motive could ever be ulterior.

One of the biggest problems, according to a man who is both a donor and a fundraiser for the party, is the absence of a serious early-warning system. "Even if they knew where to look, they would have trouble detecting someone with hidden assets in foreign countries," he says. "But the whole thrust was to give people the benefit of the doubt. After all, they were rich and sympathetic, so they must be all right."

That is the legacy bequeathed to Clarke and Triesman - both convinced that any improvement in the party's image is impossible without a change in the way it is funded. The government's most trusted think-tank, the IPPR, has recently started a series of seminars looking at how the existing legislation should be reformed. Should donations be capped? Should spending outside elections be capped? And - most crucial of all - would state funding (beyond paying for opposition parliamentary work and party political broadcasts, as is currently the case) help to revive public confidence in the probity of the system? The IPPR hopes to have a report ready for the Labour conference in September.

Clarke and Triesman are pushing hard for state funding. They have support from several senior cabinet ministers, among them the Deputy Prime Minister, John Prescott, the Home Secretary, David Blunkett, and the Leader of the Commons, Robin Cook. The Liberal Democrats also support the idea.

The Tories, however, are against it. They would prefer a system of tax breaks for small donations - allowing individuals to give, say, £20 per year and to offset the money against tax. This idea, floated by the Committee on Standards in Public Life, is gaining momentum. Its advocates believe that it would broaden the appeal of political parties and simultaneously deal with their cash-flow problems. Blair has sent out mixed messages, but is thought to be extremely wary of trying to persuade people that their taxes are best spent funding political parties.

As with so many other questions of constitutional reform and political probity, the Prime Minister gives the impression of being at best slow on the uptake, at worst contemptuous of critics. He counts Levy and his donors as his friends. Things have reached the point where the government is taking flak over sleaze almost every week. But Blair, knowing that his party is in desperate financial straits, clearly believes that this is a small price to pay - as long as, somehow, the cash keeps rolling in.