Identifier
Created
Classification
Origin
06LONDON2203
2006-03-24 16:39:00
CONFIDENTIAL
Embassy London
Cable title:  

(SBU) "LOANS FOR PEERAGES": MORE SMOKE THAN FIRE,

Tags:  PGOV KDEM PINR UK 
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OO RUEHWEB

DE RUEHLO #2203/01 0831639
ZNY CCCCC ZZH
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)

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.

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