A regulatory failure?
91. The passage of the Electoral Administration Act
closed the loophole which was at the heart of the long police
investigation. But we heard some evidence that even with this
loophole, however regrettable, the 2000 Act was nevertheless workable.
In this version of events, the failure was not just one of policy
in 2000 but also subsequently one of implementation. The charge
laid is that the definition of "commercial loan" was
never satisfactorily clarified, meaning that parties were unable
to judge the legality or otherwise of their actions. At fault,
if we accept this hypothesis, is the Electoral Commission.
92. The argument that the police investigation flowed
from an Electoral Commission regulatory failure was put to us
most forcefully by Dr Pinto-Duschinsky:
The Conservative Party approached the Electoral
Commission to ask if their interpretation of the law was correct
and they met with a refusal to give any guidance. Now, having
asked for, and been refused, guidance by the Electoral Commission
and having asked its lawyers, as indeed Labour had, for their
guidance and been told that they were acting within the law as
the lawyers saw it, it would have been, I think, iniquitous if
the parties were then hauled before the courts with criminal penalties
since they had done what they responsibly should have done to
check what the law was.[75]
In other words, the charge is that by failing to
give any guidance on the definition of a commercial loan, the
Electoral Commission gave the parties no chance to demonstrate
that they were clearly working within the law.
93. This absence of a clear definition of commercial
loan would prove problematic for the police investigation. We
know that the police, unable to put together a case under the
1925 Act, turned to the 2000 Act in pursuit of a charge of failing
to declare a loan on non-commercial terms. We also know that in
the end they failed to convince the CPS that charges could be
brought on these grounds. On deciding not to prosecute, the CPS
wrote that:
In relation to possible breaches of the 2000
Act, we are satisfied that we cannot exclude the possibility that
any loans made—all of which were made following receipt
by the Labour Party of legal advice—can properly be characterised
as commercial.[76]
In our evidence session with the police, Assistant
Commissioner Yates seemed to ascribe this inability to prosecute
at least in some degree to a failure on the part of the Electoral
Commission:
At the moment, there is no definition of a commercial
loan, which I know of, the Electoral Commission cannot provide
me with one and I think it is a big gap in the law…[77]
I think there is an absence of guidance as well.
Without a definition there should be some guidance to help people.[78]
94. Carmen Dowd of the CPS, though, argued that we
should not be too quick to attach all the blame to the electoral
regulator:
I think that is slightly unfair in that the Electoral
Commission have not been in a position to define what a commercial
loan might look like.[79]
We put to our panel of academic experts the suggestion
that the Electoral Commission should simply have pronounced on
what constituted a commercial loan. Professor Fisher, who has
worked closely with the Commission in the past, gave us a robust
defence of the Commission:
They were not able to. That pronouncement would
have had no legal standing. There is no legal definition of what
constitutes a commercial loan and, therefore, whatever pronouncement
they made could have been open to legal challenge.[80]
However, this defence was challenged by Dr Pinto-Duschinsky:
In many countries electoral commissions do give
advisory opinions which can indeed be challenged afterwards in
a court of law, but which nevertheless help political parties.
In fact, when the Chief Executive of the Electoral Commission
was questioned about this by the Committee on Standards in Public
Life, he said himself that he favoured the giving of such advisory
opinions, despite the fact that they could then be challenged
in the courts later on, so the Electoral Commission itself now
agrees that it is desirable to give advisory opinions, as are
given in the United States, as are given in Canada, et cetera.[81]
95. We see validity in the points made by all of
our witnesses. The position is complex. Section 10 of the 2000
Act provides that the Commission can provide certain people with
advice and assistance. The section lists certain people such as
registration officers and registered parties to whom the Commission
is specifically empowered to provide advice and assistance, and
also provides that the Commission can give advice and assistance
to other persons if this is incidental to or otherwise connected
with the discharge by the Commission of its functions. The question
is therefore whether the Commission could have issued advice and
assistance either generally to registered parties, or in response
to a particular request from the CPS in respect of the specific
investigation. In our view, although the Act would have empowered
the Commission to issue advice to parties generally about what
loans were or were not to be treated as donations, such advice
would have had no legal standing. It would simply have been the
Electoral Commission's view of what the statute meant, and would
not have been binding on any court that had to consider the matter.
96. In fact, the Commission was in an invidious position.
Able to advise but not authoritatively, it ran the risk of sinking
potential future prosecutions if it did pronounce on what
it believed commercial terms to be. Let us take a hypothetical
example, based on the assumption that guidance did exist on what
constituted a commercial loan. If a party received a loan and,
based on Electoral Commission guidance, did not declare it, this
would not prevent others complaining to the police that the party
treasurer had committed an offence because the loan should actually
have been treated as a donation. The court might then be minded
to find against the party, but even if the court thought that
the Commission's guidance was wrong, because the treasurer could
point to the advice from the Commission, it would be impossible
to say that the treasurer "knowingly or recklessly"
failed to include a donation in the report. In short, if Parliament
had wanted the Commission to be able to give definitive advice
in this area, then it should have provided for that in the statute.
97. Our understanding of the 2000 Act is that
it did not give the Electoral Commission the power to publish
binding guidance on what would constitute a commercial loan. Therefore,
the Commission's decision not to give advisory guidance was quite
defensible, as to do so would not have given helpful clarity over
the legal position. Instead, it might even in some circumstances
have prevented justified prosecutions. The Commission was damned
if it did and damned if it didn't. The failure to define a "commercial
loan" was in the drafting of the 2000 Act.
98. The criticisms we heard of the Electoral Commission
are consistent with a wider criticism levelled at it—which
is that it has failed to be a proactive body, defining and enforcing
standards of acceptable behaviour by political parties and those
acting in the political sphere. Again, we think this is harsh—the
Commission was not designed to be that kind of body. Although
it has some regulatory functions, it has also been responsible
for encouraging people to take part in the democratic process,
promoting voter awareness, advising and reporting. However, we
do note the impressive consensus behind the opinion that it is
time the Commission was refocused so that it is primarily a regulatory
body. This was the central recommendation of the eleventh report
of the Committee on Standards in Public Life.[82]
It was recommended by the Constitutional Affairs Select Committee
and by Sir Hayden Phillips.[83]
The Commission itself responded to these reports by affirming
that this course of action was in line with its own corporate
plans,[84] and the Government
has now indicated that it too agrees.[85]
We note that the Commission and the CSPL agree that legislation
is necessary to ensure that the Commission is able to carry out
its envisaged enhanced role.
99. The Electoral Commission's inability to give
binding guidance was entirely consistent with the way the Commission
was set up. There is now a striking consensus behind the need
to make the Electoral Commission into a more effective, proactive
regulator. We add our voice to that consensus. The Government
is currently considering what steps to take next. One of these
steps might need to be changes to legislation to give new powers
to the Commission.
100. The conclusions above suggest that if there
was any failure in the regulation of funding, it was not a failure
of the regulator, but of the regulatory framework set in statute,
and of the parties themselves. There was a loophole in the law
which allowed parties wider discretion than was presumably envisaged
to receive loans without declaring them publicly. We note, as
Dr Pinto-Duschinsky made clear, that at least two of the parties
took legal advice on how not to breach the provisions of the 2000
Act regarding commercial loans, and he tells us that the Conservative
Party went as far as asking the Electoral Commission for advice.[86]
However, it is hard to understand the decision to seek legal advice
as representing anything other than a desire to secure the most
favourable rates possible without declaration—especially
in the light of the subsequent failure to declare the loans that
were made. The parties could easily have played safe on the question
of law and simply declared the loans if there was any doubt as
to whether they were commercial or not. Having designed the loophole,
the parties did not have to dive through it so assiduously.
101. Lord Stevenson, who in addition to chairing
HoLAC is also the Chairman of HBOS plc, was clear that, while
not necessarily declarable, the loans not declared by the parties
did not correspond with his understanding of "commercial":
I personally was and am quite shocked by the
expedient of loans. I am not saying they were illegal but I was
quite shocked, it is a bit like tax avoidance, and second, there
are some real shades-of-grey territory as to what is commercial
and what is not.
You try coming to my bank and getting an unsecured
loan with interest rolled up at one or two points over base, and
I would hate to disappoint you, Chairman![87]
102. He also argued that, while HoLAC's financial
disclosure forms did not ask directly if nominees for a peerage
had ever made loans to the party nominating them, they were phrased
in such a way as to make it "perfectly obvious" that
loans were relevant:
It is important to say that quite a lot of nominees
had told us about loans, as indeed I would expect them to. It
is pretty obvious that they should, irrespective of what the 2000
Act said.[88]
Pushed further, he suggested strongly that he would
have expected candidates to mention the loans if in any doubt
whatsoever as to whether they were relevant:
The fact is, Chairman, that an awful lot of our
nominees, I am glad to report, tend to throw everything in at
us. If they so much as bought an ice-cream for a politician's
child, they will put that in. I am exaggerating a little bit,
but half a dozen bottles of beer featured…[89]
In this light, it seems unlikely that not one but
four nominees should all be so sure of their interpretation of
the Appointments Commission's disclosure requirements as to decide
independently that their loans—in three cases of £1
million or over—were not relevant. It seems clear that the
non-disclosure of undeclared loans was deliberate.
103. The question of non-disclosure of undeclared
loans arose in a letter sent to the Chairman of this Committee
by Sir Gulam Noon, which we publish with this Report. The letter
reads:
When I was approached in relation to the possible
peerage, I completed what I understand to be the usual form and
disclosed on an attached document my schedule of donations including
the £250,000 loan. I was, thereafter, reminded by Lord Levy
that this should not have been declared because it was a loan,
not a donation.
At his suggestion, I telephoned Richard Roscoe,
the appropriate civil servant at 10 Downing Street, and, following
discussion, I wrote enclosing the revised schedule. I thought
that I was correcting an error and am embarrassed and upset by
the nature of some of the publicity which has resulted.[90]
Sir Gulam's letter also states that he initially
offered a gift but was asked for a loan.[91]
As our inquiry became the subject of a police investigation, we
have been unable to test these allegations on other witnesses.
We cannot therefore judge their veracity. We understand that Lord
Levy does not agree with the account given by Sir Gulam.
104. The suggestion that undeclared loans should
have been declared is not entirely without difficulties. The most
important of these would have concerned the privacy and confidentiality
of the lender. The lender (which in some instances would have
been a bank) might not have wanted to make public the fact that
they had made a commercial loan to a political party because they
might not have wanted to be associated with a particular political
party. Where the loan came from an individual there could have
been personal data protection problems with the party making the
loan public in a situation where there was no statutory requirement
to do so. We acknowledge that parties would not have been acting
improperly in choosing not to declare genuinely commercial loans.
105. Nonetheless we see no reason why any parties
could not have made it their policy to declare all of their loans
(as of course they are now compelled to do). If either banks or
individuals had not wanted to make loans under those terms, there
would have been no compulsion for them to do so. Data protection
would presumably not cause any problems if donors were aware that
their loans would be made public. In the event, despite their
acknowledgement in the 2000 Act of the principled case for transparency,
this was not the route that parties chose to go down. With hindsight,
the failure to do so was, at the very least, misjudged.
106. The pattern of events is clear. While legal
advice was taken to ensure that no law was broken, a deliberate
attempt was made to stretch the loophole on commercial loans as
far as it would go. Having agreed legislation to make party funding
transparent, parties appear to have gone to some lengths to get
around it.
107. If there was any doubt about whether it was
legally necessary to declare their loans, parties should have
done so. If there was any doubt about whether it was legally necessary
for candidates for peerages to disclose their loans, they should
have done so. Even if there was no doubt on either of these matters,
there is a strong ethical case that loans should have been declared.
The letter of the law may not have been broken, but the spirit
of the law was quite clear.
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