Liam Fox heads to Paris as Adam Werritty questions mount Reuters

Liam Fox faced fresh accusations of running a shadow foreign policy after it emerged he was involved in setting up a private investment firm to operate in Sri Lanka in apparent contravention of UK government policy, with his controversial friend Adam Werritty as its key contact.

The defence secretary was intimately involved in negotiations with the Sri Lankan regime as recently as last summer, according to Lord Bell, his friend of 30 years, agreeing a deal that allows the Sri Lankan Development Trust to operate in the country in the same period in which he now says he withdrew his involvement. The trust was a venture designed to rebuild the country's infrastructure using private finance with a sideline in charitable projects for Tamil communities.

Labour urged the government to come clean on Fox's work in Sri Lanka and whether it might have contravened the government's official policy, while a senior Whitehall source said the minister had been operating a "maverick foreign policy" and it is this that will ultimately decide his political fate.

The government has adopted an arm's-length policy on Sri Lanka, calling for an independent inquiry into alleged war crimes. Since 2006 it has also had a policy to limit development work to urgent humanitarian assistance and "de-mining" areas affected by the civil war.

Fox told the Commons on Monday he had worked with "a number" of business, banking and political contacts to establish the trust in Sri Lanka.

He named only Werritty, his close friend who is at the heart of the scandal over his unofficial role as Fox's adviser. "Neither myself, Mr Werritty nor others sought to receive any share of the profits for assisting the trust," he said.

In June 2010, he met the Sri Lankan foreign minister in Singapore, along with Werritty and MoD officials. "The purpose of the meeting was to make it clear that although I would no longer be able to participate in the project, the others involved would continue to do so," he said on Monday. But Bell told the Guardian on Thursday that discussions took place last summer in which Fox agreed with the governor of the Central Bank of Sri Lanka that the trust would invest in roadbuilding and other infrastructure projects using private investment.

Bell, whose PR firm Bell Pottinger was employed by the Sri Lankan government until last year to improve the country's reputation abroad, said the deal had been struck between Fox and the head of the Sri Lankan bank: "In order for these funds to operate they would need an agreement with the country. The financial interests of Sri Lanka come under the governor of the Central Bank. My understanding is that the infrastructure development fund would be set up and have an agreement with the Sri Lankan government to invest in Tamil communities in Sri Lanka. It's a fine idea with a good sense of purpose."

He added that "of course" part of the strategy was to improve the regime's reputation abroad.

Kevan Jones, shadow defence minister, said: "Liam Fox told the house about the trust on Monday. It's clearly not a full explanation. If he was still striking deals with the Sri Lankans last summer, how does that fit with official UK foreign policy? He has to explain these negotiations. You can't have a situation where a government minister is appearing to run a completely separate foreign policy from that of the government."

Fox's parliamentary and private offices both said last night that Fox ceased to have any involvement with the trust on entering government.

The only activity the Sri Lanka Development Trust appears to have engaged in has been the payment of up to £7,500 of Fox's travel expenses, incurred on three trips to the country in 2009 and 2010.

The trust was originally registered to an address close to the Houses of Parliament in London, 40 George Street, which is also the offices of 3G, the "Good Governance Group", which is chaired by Chester Crocker, a former US politician. He also sits on the board of Bell Pottinger LLC, the US wing of Bell's publicity firm. Bell denied that there was any connection between his firm or its US subsidiary and Fox's Sri Lankan operation.

The trust has since transferred to the Lothian Road in Edinburgh, giving its address as No 50, a substantial granite and glass-fronted office block where a number of firms including the HQ of the Scottish oil exploration firm Cairn Energy and corporate offices for Clydesdale Bank are based. When the Guardian visited the building there was no sign of any physical presence of the organisation.

Two legal firms also based in the building are not believed to be connected. As a legal trust, it does not have to register either with the Charities Commission or on the register of businesses at Companies House. It does not have to publish the names of its trustees, it purpose or its beneficiaries.

Bell said that the trust consisted of two bodies, the Sri Lanka Infrastructure Development Fund, which was intended to raise money abroad from investors who would then share in the profit of ventures on the country, and the Sri Lanka Charitable Fund which would undertake charitable projects in Tamil areas in the north and east.

Inquiries in Colombo could not establish any activity the trust or its subsidiaries have so far carried out. Aid experts, senior politicians and officials in Sri Lanka said they had no knowledge of the trust. Nether the trust nor its subsidiaries are registered by the National Secretariat for Non-Governmental Organisations, a prerequisite for any such project.

On a trip in March 2009, shortly before the end of the bloody but successful government offensive, Fox called for the creation of "a special fund with the help of international partners ... to help the Sri Lankan government in handling the reconstruction and rehabilitation of the war ravaged areas in the north and east [of the country]."

Fox told local journalists he was suggesting "a new, independent, Sri Lanka construction fund". One aim of the fund, he said, would be to divert cash that had been flowing from ethnic Tamils overseas to the LTTE into reconstruction.

No activity on the ground appears to have occurred. "I have my ear pretty close to the ground and I doubt a major new reconstruction project in the north [of Sri Lanka] could get going without my knowledge and I have never heard of this trust," said one senior aid official in Colombo, the commercial capital.

The source of the trust's money for the transport to Sri Lanka for Fox is unknown. Contributions to the cost of the trips were also received from the Sri Lankan government via its London embassy.

Human rights groups have been critical of Fox's outspoken support for the government of President Mahinda Rajapaksa, who is now in his second term of office and has been accused by campaigners of repressing the press and opposition.

WikiLeaks cables revealed American diplomats' concerns at alleged government complicity in human rights abuses committed by troops and paramilitaries during the latter stages of the civil war. The United Nations has repeatedly pressed Sri Lanka for greater accountability and transparency.

Additional reporting: Severin Carrell