Inspectors to examine Tower Hamlets fraud claims
Inspectors have been appointed by the government to examine allegations of "governance failure, poor financial management and fraud" in Tower Hamlets.
It comes after the BBC Panorama's investigation into the east London borough, which is run by directly elected mayor Lutfur Rahman.
It alleged he diverted £3.6m of grants to Bangladeshi and Somali-run charities in return for political support.
A file is also being passed to the Metropolitan Police for consideration.
Communities and Local Government Secretary Eric Pickles said he had "long been concerned about a worrying pattern of divisive community politics and alleged mismanagement of public money by the mayoral administration in Tower Hamlets".
He added: "Following the receipt of a number of documents, I am now taking legal steps, in the public interest, to appoint inspectors to look into the allegations in respect of Tower Hamlets.
"This central action is not undertaken lightly, but localism requires local transparency, scrutiny and accountability, and these vital checks and balances must be upheld."
In a statement, Mr Rahman said he welcomed the decision to send in independent auditors.
"I have written to the secretary of state inviting him to visit the borough. I hope he will make an early visit and observe for himself the great things the council, community organisations and businesses are doing working together with all our residents."
A Tower Hamlets Council spokesman said: "We welcome the opportunity to demonstrate that council processes have been run appropriately and to date we have seen no evidence to suggest otherwise.
"This inspection affords the borough the best opportunity to demonstrate that the borough has acted in the best interests of all residents."
The leader of the Labour group on the council, Sirajul Islam, said: "Today is a sad day for Tower Hamlets."
The inspection, to be carried out by PricewaterhouseCoopers, will look into the authority's payment of grants, the transfer of property, spending decisions in relation to publicity, and other contractual processes, from 25 October 2010 to the present day.
The Panorama programme said it found Bangladeshi-born Mr Rahman had more than doubled funding recommended by officers for Bengali-run charities.
Labour and Conservative opposition councillors alleged that his selection of charities for grant funding in the run-up to the November 2010 election was motivated by electoral advantage. The mayor, an independent who until 2010 represented Labour on the council, denies any wrongdoing.
Mr Rahman was initially selected to fight the 2010 election as the Labour candidate but was removed by the party's National Executive Committee and chose to run as an independent.
Of the borough's 51 elected councillors, 26 are Labour, 14 Independent, seven Conservative, two are Respect councillors, with one Liberal Democrat and one Labour Independent.