In this month The Guardian newspaper reported that Hain had failed to declare some 20 donations worth a total of over £100,000 during his deputy leadership campaign and would be investigated by the Electoral commission. Hain admitted "deeply regrettable administrative failings" but faced questioning on whether the oversight was due to changes in campaign manager possibly causing "chaos" during the campaign or the desire of some donors to remain private. Phil Taylor, the first campaign manager, said that Hain insisted on knowing who had donated and that it was legal. His campaign only reported a separate £82,000 of donations and The Guardian believes he stopped taking a personal interest in funding once the campaign ended though there was no evidence that he deliberately broke the law.
Taylor's successor was Steve Morgan, and it later emerged that four donations were channelled through a non-operating think tank, the Progressive Policies Forum (PPF) which may be connected with Morgan, who was named as a donor. On 12 January, Hain released a statement saying that he wanted to get on with his job and it was absurd to think he had deliberately hidden anything. John Underwood, a trustee of the PPF, said that the donations and loans were "entirely permissible", though Hain said he would pay back a £25,000 interest-free loan.
On 24 January 2008, he resigned from several posts including his position as Work and Pensions secretary, after the Electoral Commission referred the failure to report donations to Metropolitan Police. He cited a desire to "clear his name" as the reason for his resignation. Hain was the first person to resign from Gordon Brown's cabinet. He was replaced as Secretary of State for Wales by Paul Murphy, and as Secretary for Work and Pensions by James Purnell in a forced cabinet reshuffle.
Hain's campaign had properly declared some £100,000 of donations, but had failed to declare a further £103,156 of donations, contrary to electoral law. On 3 July 2008, the Metropolitan Police announced that they had referred Hain's case to the Crown Prosecution Service.
On 5 December 2008 the CPS announced that Hain would not be charged because Hain was not responsible and did not control the members' association Hain4Labour that funded his campaign. He returned to the Cabinet as Secretary of State for Wales the following year.
On this day, the Attorney General for Northern Ireland, John Larkin QC obtained leave from Lord Justice Higgins to bring proceedings against Hain and "Biteback Publishing" for contempt of court. Although Hain's book ‘Outside In’ had already been passed by the Cabinet Office and the Northern Ireland Office prior to publication, the alleged contempt related to statements about Lord Justice Girvan's disposal of an application for judicial review while Hain was Secretary of State.
Hain's remarks had previously been strongly criticised by the Lord Chief Justice of Northern Ireland, Declan Morgan though the decision to charge Hain with "scandalising the court", using a law already obsolete in 1899 drew ridicule in Westminster and strong criticism from senior DUP ministers. According to the Attorney General, Hain's statements prejudiced the administration of justice and amounted to an unjustifiable attack on the judiciary. At a preliminary hearing before a Divisional Court of the Queen's Bench Division of the High Court of Justice on 24 April 2012, Hain's counsel suggested that the action had no basis in common law and was contrary to the European Convention on Human Rights.
The trial was intended to take place on 19 June 2012 but the case was dropped on 17 May 2012 after Hain agreed to clarify comments to show he didn't question Girvan's motives or his handling of the judicial review.
On 25 October 2018, Hain used parliamentary privilege in the House of Lords to name Sir Philip Green as the businessman accused of sexual and racial harassment by The Daily Telegraph. A legal injunction had prevented the newspaper from naming him. Following Hain's statement, the accusations made against Green were widely published in the media. Hain is a remunerated adviser to the law firm acting for the alleged victims, and Green subsequently announced that, due to this conflict of interest, he would lodge a complaint with the House of Lords.