The probe into the financial affairs of troubled Gwent Tertiary College prompted local MP Don Touhig to call for the resignation of the chairman of governors, Chris Hughes, who supports the investigation.
The Department for Education and Employment Fraud Investigation and Inspection Unit is liaising with the police to investigate how the college spent Pounds 3.5 million of European Social Funds in 1995 and 1996.
Peter Hain, the Welsh Office education minister, told the House of Commons:
"I expect a thorough inquiry with robust and vigorous action taken against anybody found responsible for any wrongdoing.
"From the time I was informed of the history of serious mismanagement of the college I have been determined to ensure that it is re-established on a basis of high educational standards, but with sound finance and good management. "
The DFEE inquiry comes on top of others by the National Audit Office, the European Social Fund auditors, and the college's own auditors.
Gwent Tertiary College was founded in 1992 in a merger between colleges in Crosskeys, Pontypool, Newport and Ebbw Vale. It has about 30,000 students and 1,000 staff.
Local MPs want college governors who were in office during the period under investigation to resign. And Mr Touhig, MP for Islwyn, called for Mr Hughes's resignation. "This is a college with a high reputation in my area. They're doing a tremendous job throughout the college. It's a superb institution, " he said.
"But I believe that in order to restore confidence, particular members of the corporation should go and make way for a new team to come in."
Gwent Tertiary College said the DFEE fraud unit was brought in at the request of Mr Hughes, and David Mason, the new principal, who took up his post in April.
Mr Mason said: "The internal scrutiny of past claims was started before I was in post, but it soon became clear to me that the concerns had substance. The chairman of governors and I strongly believe that the only way we can move forward is to subject all concerned to public scrutiny."
Mr Hughes was unavailable to comment on Mr Touhig's call for his resignation.
A Gwent college spokesperson said: "We have made a full statement regarding the investigation. No further statements will be made until the investigation is completed and its findings made public."