Andrew Whittam Smith: Frankly, I don't believe a word Peter Hain says

An inquiry into the financing of Peter Hain's failed campaign for the deputy leadership of the Labour Party must start with the business donors. For business people contribute to politicians' expenses usually in the expectation of the favour being recognised at a later date. They don't generally do it because of a lifelong attachment to certain political principles. Their donations are often speculative investments with the hope of a return. That is the problem which the politician must eventually face – what dividend is expected on the funds received?

Take Willie Nagel, 82, a prominent diamond broker. He gave £5,000 and made a loan of £25,000 to Hain's campaign. He has a history of trying to influence politicians. Nearly 11 years ago he sent £20,000 to John Major's Conservative constituency association. He had no connection with the area but he was later invited to go on a prestigious trade mission to Israel and Jordan with the Prime Minister. According to correspondence leaked to The Independent, Mr Nagel, who also owned a lobbying company called Punchlines, attempted to interest Mr Major in an unmanned aircraft developed by Israel, even though there was an arms embargo for Israeli equipment at the time.

The other main business backer of Mr Hain is Isaac Kaye, 78, who gave a total of £14,600 in two separate transactions. The second donation was made as late as 19 November even though Mr Hain's unsuccessful election campaign had ended five months earlier. Mr Kaye also has an interesting past. His company was embroiled in a police investigation into a suspected £400m fraud against the NHS.

Earlier he had been caught up in a "gifts for influence" scandal in South Africa – where he was a supporter of the pro-apartheid National Party. It was alleged that doctors were being rewarded with everything from cars and TVs to swimming pool equipment and chandeliers for prescribing drugs made by his firm. He denied any impropriety, saying the giving of presents was not an inducement but an appreciation.

When business people provide funding for a politician or a political party, they ask for anonymity, not because they believe in doing good by stealth but because publicity is likely to ruin the implicit bargain. As soon as a link is disclosed, the politician simply cannot provide the reward. At the very least it is embarrassing and at the worst it may invite corruption charges. If there is publicity, the donation is wasted.

So it was inevitable that Mr Hain's campaign would have to promise confidentiality if it was to attract funding from business people. And for this purpose, a "front" organisation would be required, a device which has often featured in the history of socialism. Hence the creation of the Progressive Policy Forum by Mr Hain's friends in December 2006.

Can anybody really believe that this company, with a tiny capital, with only one director who happens to be a solicitor, which has no website and which does not appear to have conducted any policy activities since its creation, is anything but a front organisation? I don't. It was plainly set up to be a conduit for those donors to Mr Hain's campaign who desired confidentiality.

What does Mr Hain have to say about these illegal manoeuvres? He pleaded this on Friday: "The truth is that the question of reporting them [donations that were channelled through the Progressive Policy Forum] never occurred to me until 29 November when Jon Mendelsohn reminded me that he had given a £5,000 donation and I immediately thought to myself 'Is this on the Electoral Commission website?'"

In fact something else happened on 29 November that was even more relevant than the conversation with Mr Mendelsohn. The Electoral Commission asked the Metropolitan Police to begin examining evidence about secret donations to the Labour Party after it emerged Labour had received more than £650,000 from David Abrahams via middlemen. That, I believe, is the significance of 29 November.

Indeed, if you look at Mr Hain's recent statements they lack plausibility. Consider this small example. Three days ago he said: "I just want to make it clear that when mistakes have occurred in the past, I have never dumped on assistants or civil servants. I will not start doing so now." Jolly good. Except that yesterday he was reported as feeling "personally betrayed" by those who had worked for him. Not-dumping-on-assistants lasted just 48 hours. Mr Hain didn't mean it. It just sounded good.

Then try this one. "I understand that people will ask how I could have allowed this number of donations to go undeclared at the time... The fact is that during this period I gave my campaign for office within the Labour party second priority to my government responsibilities." Pull the other one. A candidate who spends twice as much as any other runner views the contest as a second priority? I don't believe a word of it.