Is Britain's Labour selling lordships?

Will a million pounds make you a "Sir" or a "Lord" in Britain today?

That's what British police are investigating, following complaints that Prime Minister Tony Blair's Labour party rewarded four big financial backers with the promise of seats in the House of Lords, the unelected upper house of parliament that wields considerable influence.

The murky controversy has intensified pressure on Blair to step down and revived a debate about how politics should be funded here.

Infuriated members of Parliament (MPs), including some on the Labour side, warn that democracy is being compromised by dirty money. The scandal has further disenchanted a public already apathetic about the political process, and it is acutely awkward for Blair, who arrived in office in 1997 with a promise to wipe out the "sleaze" that poisoned the previous administration of John Major.

"The Labour Party has been caught cold," says Ian Gibson, a Labour MP. Though it has yet to be definitely proven that benefactors were promised in advance a reward for their cash, MPs have noted that every donor who has given Labour more than a million pounds has received a knighthood (entitling usage of honorific "Sir") or peerage (entitling usage of honorific "Lord").

"People don't give money for nothing and that is how all this is being construed by the public," says Mr. Gibson. "Some of these [donors] got knighthoods and even became government ministers.... We have to move to a system of state funding."

State funding is the norm in France, Germany, and other European countries, where individual and group donations to parties are capped or banned altogether.

Its advantages are a level playing field between parties and greater transparency. The disadvantage is that taxpayers will have to foot the bill, and parties will probably find loopholes, perhaps through lobby groups doing their spending for them. Critics also note that state funding in Germany did not stop former chancellor Helmut Kohl from getting engulfed in a scandal over secret private donations.

British parties have long relied on their memberships and on affiliations - Labour with the union movement, the Conservatives with big business - for their funding. But with party memberships falling fast, and old affiliations not what they used to be, income has shriveled.

All three big parties have turned to benefactors to bail them out. Blair introduced new rules in 1998 to oblige parties to declare all donations over £5,000 ($8,700), but loans don't have to be reported.

The Conservatives have said they too have benefited from big loans, but Blair is under scrutiny because as prime minister, he alone among politicians has the power to nominate individuals to lordships, knighthoods, and other honors.

Labour - Blair's party - has admitted it raised £14 million ($23.4 million) last year in secret loans from 12 millionaires to bankroll its election campaign.

Four were then proposed for lordships. Three have subsequently asked for their nominations to be withdrawn. A fifth, Rod Aldridge, was chairman of a company which benefited from government contracts. Mr. Aldridge quit his job last week, the first victim of the burgeoning cash-for-favors scandal.

Another Labour donor, Chai Patel, said he offered a £1.5 million ($2.6 million) gift, but was urged to make it a loan instead, thus ensuring it passed under the radar of parliamentary scrutiny. He was later nominated for a seat in the House of Lords (a peerage). Mr. Patel is scheduled to testify Tuesday on the matter.

"If I say I'll give you £1.5 million ($2.6 million) for your party, and you say, 'No, don't give it to me, lend it to me,' what is that all about?" asks Elfyn Llwyd, an opposition MP. "Can there be an innocent answer to that question?"

Mr. Llwyd has made a formal complaint to police, who are now investigating whether Labour breached a 1925 law passed after a former prime minister, David Lloyd George, was found to have sold knighthoods for personal gain.

"If we are serious about bringing transparency into this scenario, then there will have to be some partial funding from the state purse," Llwyd adds.

In the wake of the latest furor, Blair has tasked a top former official to look into party financing and the possibility of state funding, and a parliamentary committee is also looking at options for reform. But not everyone believes state-funded politics would be popular.

Donald Shell, lecturer in politics at Bristol University, says that the public would take a dim view of being asked to bankroll elections in which fewer and fewer people are bothering to vote.

"There is so much disdain for politics now, such a lack of respect for parliament and politicians, that the government is very nervous about introducing any "gravy train" arrangements like state funding," he says.

Better alternatives might be to introduce tax-efficient donations, to cap the level of donations from individuals to perhaps £10,000 ($17,400), and to lower the ceiling on election spending, currently £20 million ($34.7 million) per party. The UK Electoral Commission says greater public and party consensus is needed before these changes can be made.

Blair meanwhile insists Labour has done nothing wrong in the loans affair. He has turned the debate around, saying that people who give money to political parties should not be barred from honors.

But the public are not impressed. A recent poll showed 56 percent of voters believed the loans-for-lordships allegations were true, and almost three-quarters agree that Blair's government is now as tainted by sleaze as that of his predecessor, John Major. "If it is established that there were definite offers from his office to big donors, then he's in the most terrible trouble," says Dr. David Baker, a politics expert at Warwick University.