The Government's $1 billion regional development programme is being used to fund a businessman under investigation by the Serious Fraud Office (SFO).
One of the projects overseen by Regional Economic Development Minister Shane Jones is a $350,000 feasibility grant for a West Coast rubbish-burning plant, Radio New Zealand reports.
The company behind the scheme is partly-owned by Gerard Gallagher - a former Canterbury Earthquake Recovery Authority employee who ran a private property company on the side.
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He was found by the State Services Commission (SSC) to have used his position for personal gain. SSC commissioner Peter Hughes said Gallagher's actions were "serious misconduct".
He referred it to the SFO to consider whether they were of a "potentially criminal nature".
Gallagher has refused to comment to Radio NZ.
Mr Jones has refused to comment on the case, claiming he needed more information.
"I don't want to say anything about the individual until I've taken a legal briefing for fear of myself being embroiled in legal action," he told Radio NZ.
"But I'll go and find additional information as to what's the status of this individual."
However National Party leader Simon Bridges says this could end badly for Mr Jones.
"It's remarkable, in fact I'd say it is negligent," Mr Bridges told Radio NZ.
"Either the departments in question don't know what's going on and that's not right.
"Or there has been advice around this, they have done their due diligence, in which case for Shane Jones this is a very serious matter indeed."