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OO RUEHWEB

DE RUEHLO #2203/01 0831639
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O 241639Z MAR 06
FM AMEMBASSY LONDON
TO SECSTATE WASHDC IMMEDIATE 3967

C O N F I D E N T I A L LONDON 002203 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EUR/UBI 
 
E.O. 12958: DECL: 03/24/2016 
TAGS: PGOV KDEM PINR UK
SUBJECT: (SBU) "LOANS FOR PEERAGES":  MORE SMOKE THAN FIRE, 
SO FAR 
 
 
Classified By: PolCouns Charles Skinner; reason 1.4 (d) 
 
¶1.  (C) SUMMARY:  The British media are making much of the 
revelation that Prime Minister Blair nominated some wealthy 
individuals for peerages after they had made unpublicized 
loans to his Labour party.  Those loans were not public 
knowledge, because transparency rules (introduced by Blair) 
apply only to donations, not loans.  All those involved deny 
that peerages or honors were promised in exchange for the 
loans, and there is no evidence that any laws were broken. 
The opposition can scarcely exploit this affair, because both 
the Tories and the Lib Dems also accepted loans; the Tories 
refuse to reveal the sources of their loans, while Labour and 
the Lib Dems have revealed theirs.  Blair has moved swiftly 
to address the perception of sleaze by appointing a retired 
senior civil servant to review the whole issue of 
political-party funding and seek consensus among the parties 
for additional measures to restore public trust.  At the 
behest of an MP, the Metropolitan Police are investigating 
whether the law was broken (the "smoking gun" would be any 
evidence that favors were promised in return for loans). 
Absent any such revelation, Blair should have little 
difficulty riding out the furor.  Still, the perceived 
secrecy of the loans and the impression of too-clever-by-half 
politicians manipulating the system, feed public cynicism 
about British politics.  Having promised to step down before 
the next general election, and being unpopular with much of 
the media and the left wing of his own party, Blair can 
expect that every fresh controversy will be portrayed by his 
opponents as the scandal that will force him out of office. 
END SUMMARY. 
 
¶2.  (SBU) "LOANS FOR PEERAGES":  It has emerged that twelve 
wealthy individuals loaned a total of approximately 14 
million British Pounds Sterling (BPS) to the Labour party in 
advance of the 2005 general election, and that Prime Minister 
Blair subsequently nominated four of them for peerages.  The 
loans were not public knowledge, because transparency rules 
apply only to donations, not to loans made on commercial 
terms, as these were.  What broke the story was that the 
Appointments Commission which vets nominations for peerages 
asked the four individuals if they had made donations to any 
political party, and they answered 'no.'  Someone then leaked 
to the Commission that the men had made loans; when the 
Commission asked, all four confirmed this, explaining that 
they had not mentioned it because they had not been asked 
about loans, only donations.  The Commission apparently 
considered this response unsatisfactory and blocked the 
nominations.  Another one of the twelve benefactors resigned 
from the company he had founded, saying its reputation had 
been damaged by allegations (which he denied) that it had 
gained government contracts in return for his personal loan 
to Labour.  At the behest of a Scottish nationalist MP, the 
Metropolitan Police are investigating whether the law 
(specifically, the 1925 Honours (Prevention of Abuses) Act) 
has been broken.  The "smoking gun" would be any evidence 
that favors were promised in return for loans). 
 
¶3.  (C) BAD IMPRESSION:  Blair has come in for sharp 
criticism because he came to power campaigning against "Tory 
sleaze," pledging to be "whiter than white" in his method of 
governing.  It is he who instituted the independent 
Appointments Commission and Electoral Commission, and made it 
mandatory to declare all donations over 5,000 BPS.  His 
recourse to loans is widely seen as a cynical exploitation of 
a loophole in the safeguards he himself had devised.  The 
impression of impropriety was reinforced when it emerged that 
the party treasurer had not known about the loans, and 
neither had the Deputy Prime Minister.  Neither had 
Chancellor Gordon Brown, but Brown has taken pains to explain 
that as Chancellor, responsible for public expenditures, he 
always deliberately stayed out of party financial matters. 
 
¶4.  (C) REGAINING THE INITIATIVE:  After the initial flurry, 
the whole affair has simmered down somewhat as it became 
clear that:  (1) there was no evidence of illegality, (2) the 
opposition had also used undeclared loans, and (3) the Prime 
Minister was moving quickly to address concerns about party 
financing.  Commentary has become more balanced, 
acknowledging that parties do need to be funded somehow, and 
that people should not be disparaged for making political 
contributions.  Blair has tasked Sir Hayden Phillips, a 
retired senior civil servant, with examining the entire issue 
of party funding and seeking consensus among the parties on 
additional steps to restore public trust.  Blair has also 
said he would consider withdrawing from the process of 
nominating people for honors.  Other possible steps include 
partial state funding for parties, and a lower cap on a 
party's total campaign funding (currently 20 million BPS). 
Separately, the PM has also just named Sir John Bourn to 
advise Cabinet ministers on their duties under the 
 
ministerial code of conduct, a step also related to a recent 
controversy involving Tessa Jowell, the Secretary of State 
for Culture, Media and Sport. 
 
¶5.  (C) Chancellor Brown has supported Blair's steps to 
address the problem, while distancing himself from the whole 
affair.  On the other hand, inside sources tell us, Brown's 
staff is working feverishly behind the scenes to try to 
hasten Blair's resignation.  Party treasurer Jack Dromey's 
scathing criticism of the Prime Minister for keeping him in 
the dark about the loans is widely seen as part of the 
Brownites' attempt to hasten their boss's anticipated 
promotion to Number 10 Downing Street.  (While Dromey, a 
union official, holds the position of elected treasurer, it 
is officially the General Secretary, Peter Watt, who is the 
party treasurer, and Watt did know about the loans.) 
 
¶6.  (SBU) Labour's National Executive Committee (NEC) met 
March 21, then issued a statement that stressed it had held a 
"warm and friendly discussion on the whole issue of party 
funding" and fully supported Sir Hayden's review.  The NEC 
said its officers would "take responsibility for overseeing 
all matters concerning donations and commercial loans." 
Blair's close friend Lord Levy, who arranged the loans, 
continues to be the main fundraiser for the Labour party. 
The press is reporting that Levy will have a televised 
question-and-answer session with the House of Commons' select 
committee on public administration May 2. 
 
¶7.  (SBU) OPPOSITION QUIET:  The opposition is ill-placed to 
make hay out of this affair.  Labour has revealed the names 
of those who gave it loans, and the amounts they lent; the 
Lib Dems have followed suit, but the Tories flatly refuse. 
All three main parties agree that in future, such loans 
should be subject to mandatory disclosure. 
 
¶7.  (SBU) LABOUR IN DEBT:  We understand that Labour had 
tried to get a loan from its bank to help fund the 2005 
general election campaign, but the party was so indebted that 
the bank refused.  There has been speculation that the party 
might sell its headquarters in order to settle its debts. 
Some of those who lent money say they are still willing to 
work with Labour to either turn their loans into donations or 
defer repayment. 
 
¶8.  (C) COMMENT:  For now, there is no evidence that anyone 
broke any laws, and the main parties appear amenable to 
agreeing on new rules to try to regain public confidence. 
Barring more serious revelations, Blair should have little 
difficulty riding out this furor.  Still, the perceived 
secrecy of the loans and the impression of too-clever-by-half 
politicians manipulating the system, feed public cynicism 
about British politics.  Having promised to step down before 
the next general election, and being unpopular with much of 
the media and the left wing of his own party, Blair can 
expect that every fresh controversy will be portrayed by his 
opponents as the scandal that will force him out of office. 
 
Visit London's Classified Website: 
http://www.state.sgov.gov/p/eur/london/index. cfm 
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