The Loophole Britain Rebuilt in 2006 Is Still Open

On 12 March 2006, readers of the Sunday Times learned that Dr Chai Patel, a businessman who had planned to give Labour a straightforward donation, had been asked — shortly before being told a peerage was coming his way — to make it an unsecured loan instead. Nothing else about the transaction changed. Only the paperwork did, because a donation had to be declared under the Political Parties, Elections and Referendums Act 2000, and a loan on commercial terms did not.

That single conversation is the whole scandal in miniature. Everything that followed — the Metropolitan Police interviewing Tony Blair three times as a witness, the dawn arrest of his chief fundraiser Lord Levy, ninety interviews and a bill north of a million pounds — was the state discovering, at some expense, what a competent accountant could have told it for nothing: that £11.95 million had reached Labour's 2005 campaign from four men (Patel, Sir Gulam Noon, Sir David Garrard, Barry Townsley) via a route the law had simply forgotten to police.

What gets remembered from Cash for Honours, twenty years on, is the drama — the Prime Minister questioned by detectives, a Downing Street aide charged and released, the sense of a government under siege. What gets forgotten is the ending, because the ending is unglamorous. In July 2007 the Crown Prosecution Service concluded there was insufficient evidence of an explicit exchange — money for ermine, stated as such — and nobody was charged. The Honours (Prevention of Abuses) Act 1925, the statute supposedly built for exactly this offence, notched up its first serious test since a solitary conviction in 1933 and failed to convict anyone at all.

It is worth sitting with that law's parentage for a moment, because Whitehall loves nothing more than commissioning a solution to a scandal and then filing the solution somewhere nobody will read it. The 1925 Act exists because David Lloyd George sold peerages so openly in 1922 that Parliament had to legislate against a practice everyone had watched happen. Eighty-four years later, the practice had not stopped; it had simply migrated from the honours list to the loan book, because loans were the one financial instrument the 2000 transparency regime had left undeclared. The law built to stop the last version of this crime was no use against the current one, which is what laws written after scandals tend to be — a monument to the previous decade's ingenuity, not the current one's.

There is a real case for the defence here, and it deserves stating plainly rather than waved away. Commercial loans are not gifts; parties need money to function and a functioning democracy costs something; the Electoral Commission was informed, the Appointments Commission did its job and blocked several of the nominations on propriety grounds, and no court ever found a crime because — on the evidence gathered by ninety interviews and a nineteen-month inquiry — there wasn't one to find. By this reading, Cash for Honours is not a story about corruption. It is a story about a system working exactly as designed, however uncomfortable the optics.

The trouble is that the Public Administration Select Committee, having watched the same inquiry, reached a different verdict: that the loophole had been deliberately exploited, that this fell short of the spirit of the transparency law even where it did not breach the letter, and that Parliament should close it. Which Parliament then did — loans were brought under the same declaration rules as donations by amendment to the Electoral Administration Act. You do not amend a law to close a loophole that was never being used. The patch is the confession.

And it was a patch, not a redesign. The underlying architecture survived untouched: a Prime Minister nominates, a Commission he did not choose to be answerable to vets the list, and the currency that makes a name worth nominating remains, as it has since Lord Pym told a select committee in 1998 that a large donation was "a point in a nominee's favour" because it showed a man had "put his money where his mouth is." Nobody legislated that principle away. It simply moved parties.

By 2021 the pattern had reasserted itself so cleanly that a Sunday Times investigation found fifteen of the previous sixteen Conservative Party treasurers had been offered peerages after donating roughly £3 million each. "Once you pay your £3 million, you get your peerage," one former party chair told the paper, which is either a scandal or a description of the system functioning as intended, and by 2026 nobody in Westminster seems entirely sure which. The Metropolitan Police, asked to look again, declined.

Which brings us to the present arithmetic. Reform's reported £72 million windfall and the government's proposed changes to donation law are being discussed as though the question were how much money should be allowed into politics. That was never the interesting question. The interesting question, the one Cash for Honours actually answered and Britain declined to absorb, is who decides which forms of money count as visible. In 2006 it was loans, invisible by design until Parliament noticed. Whatever the current legislation closes, something else — a family trust, an unincorporated association, a foreign-linked shell company routed through a UK-registered subsidiary — will remain open, because the pattern since 1923 is four attempts to prosecute this offence and one conviction, and because the people who would need to close every loophole permanently are elected using the loopholes that remain.

That is the finding worth keeping from 2006, and it has nothing to do with Tony Blair's temperament or Labour's fundraising habits specifically. The Honours Scrutiny Committee that Lord Pym chaired, the Appointments Commission that succeeded it, the CPS that declined to prosecute — none of them face voters. The politicians who could legislate the whole system out of existence are the ones whose careers it currently funds. Twenty years after the Sunday Times ran its story on Dr Patel's unsecured loan, the loophole has a new shape and the same owner: nobody, and everybody, and no ballot paper with either name on it.