Matthew Holehouse, Telegraph, November 4, 2014

Police are investing a “rotten borough” facing allegations of cronyism, corruption and religious extremism, it emerged yesterday, after Eric Pickles took direct control of Tower Hamlets council.

Eric Pickles has dispatched three commissioners to oversee spending in the east London borough after a blistering report found public buildings had been sold to allies of the mayor and hundreds of thousands of pounds had been given as grants to ineligible bodies.

Contracts were awarded without the appropriate paperwork while Lutfur Rahman, the independent elected Mayor, personally selected preferred companies, an official report found.

Mr Pickles told the Commons that Mr Rahman had dispensed public money like a “medieval monarch” and oversaw an administration that was “at best dysfunctional, at worst riddled with cronyism and corruption”.

Mr Rahman’s election, in part thanks to support from the borough’s Bangladeshi community, is now being challenged in the High Court following allegations of electoral fraud.

He assumed some of the powers of the Chief Executive, failed to appoint permanent senior officials and his councillors regularly over-ruled of officers’ advice on how to spend taxpayers’ money, the report by PricewaterhouseCoopers (PwC) accountants found.

“Executive power is unchecked and executive power has been misused,” Mr Pickles told the Commons, adding Mr Rahman’s administration had allowed anti-Semitism and religious extremism to “fester”.

“The abuse of taxpayers’ money and culture of cronyism reflects a partisan community politics that seeks to trade favours and spread division on the rates,” he said.

The Metropolitan Police are investigating possible fraud in payments made to nine organisations under a youth program worth £2.5 million and largely funded by central government. The auditors found procurement paperwork missing in ten out of 11 grant awards it examined.

The PwC report will be been submitted to police for scrutiny.

In total, some £407,000 was awarded to bodies that were ineligible for council funding.

There was a “lack of transparency generally over the rationale as to grant awards”, the audit found. Elected councillors frequently made “significant changes” to the recommendations of council officials to divert cash heavily into Bangladeshi areas such as Whitechapel and Banglatown,

Mr Rahman personally doled out funds to lunch clubs and community festivals through a £1 million pot known as the 954 Fund, drawn from a “surplus” in other budgets. There was no open application process, with funds given out at councillor’s discretion. One £36,000 grant made last month was a duplication of a payment made for the same services under a separate contract, the report found.

The report found a number of “dubious” property transactions. Poplar’s Victorian town hall was sold £875,000 in 2011 to Dreamstar, a company part-owned by Mujibul Islam, who ran Mr Rahman’s election campaign website.

The bid was submitted late and after rival bids had been opened, “creating a risk of bid manipulation”, the report found. The contract was awarded against the advice of officials.

A “significant number” of contracts were awarded without signed paperwork or an audit trail. One witness said Mr Rahman personally annotated a list of suppliers, to show which he did not want to win contracts.

The report, which will cost the borough more than £1 million, was frustrated by Mr Rahman’s team. They responded to allegations of wrongdoing with “denial or obfuscation”.

Mr Rahman said the report failed to provide evidence of criminality or fraud and said his team wanted to “get on with our jobs”.

“The report highlights flaws in processes. These are regrettable. We will learn from this report and strengthen our procedures accordingly,” he said.

Meg Hillier, the Labour MP for Hackney, called on Mr Rahman to resign. Mr Pickles responded: “He would not be missed”.

He added: “It seems to me that the mayor’s test is, ‘If you’re not actually caught with your fingers in the till, you’re innocent.’ There are serious flaws in what has occurred. If I was the mayor of Tower Hamlets, I would be hanging my head in shame.”

Jim Fitzpatrick, the local MP, accused Mr Rahman of “lying” to the PwC investigators.