Labour owes the Co-op £2 million

Robert Mendick, Patrick Sawer and Tim Ross The Telegraph

9:00PM GMT 23 Nov 2013

 





Labour has been plunged into a financial crisis in the wake of the Co-operative Bank scandal, it has emerged.


More than £2 million in loans from the Co-op and a sister bank were secured by Labour Party officials on favourable terms in April this year.


The deal was agreed as the bank, then chaired by the Reverend Paul Flowers, since facing drug and other allegations, was feared to be heading for collapse.


Labour now faces the prospect of paying the loans off early – and before the 2015 general election – when the Co-op bank is taken over in a rescue deal being put together by US-based hedge funds.


The bank has a £1.5 billion black hole in its finances.


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The loans, worth £2.4 million, were secured by the party using future income from union affiliation fees as collateral and were agreed in the days following a private meeting between Labour leader Ed Miliband and Mr Flowers.

The loans were agreed in the days following a private meeting between Labour leader Ed Miliband and disgraced Co-op chair Rev Paul Flowers (PA)

But Mr Miliband’s decision to review union funding – following a scandal over alleged union interference in the selection of a Labour candidate in Falkirk – means the loans are now open to renegotiation as the terms under which they were issued have changed.

Doubts over union financing and the precarious position of the Co-op prompted Labour officials to re-write the party’s internal “risk register” late this summer, acknowledging the new threats to its finances.

The register is used by companies, charities and others to assess the financial health of an organisation. The change to the register is believed to include fears that the loans could be called in early.

The Co-op loans highlight the close links between Labour and the bank and will now form part of a public inquiry into its near-collapse. Since 1999, Labour has had more than £18 million in “soft” loans from the bank, according to documents lodged with the Electoral Commission.

It has also emerged that Labour raised £2 million from a deal with the Co-op over its credit cards. For every party member who took out a card, the bank donated £15 to the party’s campaign fund.

The Labour Party website, where the offer is advertised, states: “This will pay for 2,000 leaflets … So far, the Co-operative Bank credit card scheme has raised over £2 million for the party.”

Brooks Newmark, Conservative MP and a member of the Treasury select committee, said on Saturday: “Day by day new evidence emerges of the cosy and deeply unhealthy relationship between the Co-op and the Labour Party.

“Labour are exploiting the public and using them as cash cows in order to stuff their coffers full of cash.

“This is deeply unethical and morally wrong. Such murky back-door funding has no place in modern politics.” The latest Labour accounts for the year ending Dec 31, which are lodged with the Electoral Commission, show Labour had net liabilities of £6 million.

A Labour insider said: “The nightmare scenario for Labour is that after this takeover, the new owners of Co-op demand their loans be paid back or renegotiated at commercial rates. Labour is going to need millions to fight the next election.

“These loans were secured against future income streams underpinned by the income derived from the unions’ affiliation fees.

“So when Ed Miliband said we need a completely new relationship with the unions and proposed scrapping affiliation fees – that forced the Labour Party to formally rewrite its internal risk register to include the possibility the loans will have to be repaid. They had to on the basis the income streams, which acted as collateral, are no longer viable.”

On Saturday night it also emerged that Labour MPs sponsored by the Co-op have been told to expect cuts to the £850,000 annual donation they receive from the group. In total, 32 MPs stand on a joint platform for Labour and the Co-operative Party, the Co-op’s political wing.

Barry Sheerman, the MP for Huddersfield, told the Observer: “There is no doubt there is going to be a 30 per cent cut across the board.”

A senior City accountant, who has examined Labour’s accounts and bank loans from the Co-op, said the party had been operating at a deficit for some years now.

“Most businesses could not survive on that basis,” said the accountant. “The reason Labour can survive is there are a lot of liabilities that people are not calling up. The Co-op is one of those. It is not asking for its money back but it is likely to do so.

“Some of the cash they are storing up to fight the election in 2015 could have to be paid back to the Co-op before the loan is due for repayment.”

Labour denies it is facing a funding crisis. A spokesman said: “Our loans with the Co-operative Bank and Unity Trust Bank are secured and are being repaid in accordance with formal long-term commercial agreements and the Labour Party is on a secure footing for the future.”

Labour negotiated £1.2 million loan from the Co-op in March this year with the money handed over on April 1. It is due for repayment on June 30 2016 at a rate of 3.5 per cent above the Bank of England base rate, which is currently 0.5 per cent. The Unity Trust Bank, which is a subsidiary of the Co-op and run by former Co-op executives, made an identical loan deal on the same day.

It is not clear what the status of Unity bank, which is three-quarter owned by trade unions, will be should the hedge fund take control of Co-op.

A number of the US financiers behind the hedge funds have provided tens of thousands of dollars worth of funding for the Republican Party, which is on the Right in the United States.

Inevitably, Labour will be concerned that they are unlikely to have much sympathy for the Co-op or the Unity Trust’s left-leaning sympathies and affiliations.

The inquiry into the near-collapse of the Co-op Bank will look at how Mr Flowers, 63, a former Labour councillor in Rochdale and in Bradford, was appointed chairman.

Bar a stint as a bank clerk as a teenager, he had no banking experience.

Mr Flowers, a Methodist minister, was filmed allegedly buying crack cocaine and other illegal drugs. He was arrested on Friday by West Yorkshire police in connection with drug offences and later released on police bail.

He has been severely embarrassed in the past week by disclosures concerning his public and private life.

Mr Flowers has been accused of fiddling expenses at a charity and having pornography on a council computer, prompting his resignation as a Labour councillor in 2011.

He is also accused of paying a male escort for sex. In one email sent from his Co-op work computer he asked the 21-year-old man to meet him for sex and to take drugs including cocaine and ketamine, saying he could not afford for another rent boy to join them.

Details of his indiscretions were never made public, allowing him to continue at the Co-op.

He was appointed to the bank’s board in 2009, then made its chairman on a salary of £132,000 in 2010.

Mr Miliband appointed Mr Flowers to the Labour leader’s elite Business and Industry Advisory Board in 2011 and they attended dinners together that year, it was reported.

Mr Miliband held a meeting with Mr Flowers in the Commons on March 6 this year. Three weeks later the Co-op approved the £1.2 million loan to Labour.

The independent inquiry into the Co-op will also look at new evidence – unearthed by The Telegraph – that the bank ignored repeated warnings about its precarious financial position at a meeting with financial regulators in November last year.

At the time, the Co-op was planning to triple its size by buying 631 Lloyds bank branches but eventually gave up on the deal when it was discovered that the Co-op had a £1.5 billion deficit.

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And Miliband is trying to say there was nothing untoward in Labours' relationship with Flowers???????