Further education faces a "serious risk of potential fraud" in the last year of the Learning and Skills Council because of the twin pressures of the recession and an overhaul of the funding system.
The LSC said it was tightening up its procedures to avert the possibility of increased fraud during its last months after the issue was highlighted in a report to the national council.
David Russell, the LSC's director of finance and resources, said: "It's a combination of factors. The serious one is that we are aware we are being wound up next March, and when an organisation is outgoing and there is a massive amount of change, we feel the risks are higher.
"That's coupled with the recession. The police say at a time of recession, you find more fraud."
But he emphasised that fraud was generally rare in FE, with only about six to 10 cases under investigation a year, concerning about Pounds 10 million of its annual Pounds 11 billion budget - less than 0.1 per cent.
"The amount of fraud we have detected and are aware of in organisations in this sector is objectively tiny. Most people are not in the education business to make money. A small number of providers are, but they also put the interest of learners first," Mr Russell said.
As well as audits that examine providers' records for evidence of their students' existence and attendance, the LSC has started using software to analyse data automatically and look for suspect patterns that may be the result of fraud.
Major schemes, such as Train to Gain, also now have a probity board intended to oversee them and ensure funding is spent properly.
Where fraud is detected, cases can be lengthy. Last year Michael Smallman, founder of the National Distance Learning College in Middlesbrough, was sentenced to seven years' imprisonment for fraud involving Pounds 16m of public money and student fees during 2000 and 2001.
Just 18 of his 80,000 students received qualifications, the court heard, while funds were diverted into gambling, race horses, property renovation and a television venture.
The warning on the risk of fraud also comes after the LSC told Train to Gain providers to stop paying "inappropriate" cash incentives to encourage employers to use the scheme and creating spurious jobs in order to claim the training funds.
Mr Russell said that more prevalent than fraud was "financial irregularity", which may be the result of a genuine mistake in negotiating a complicated funding system. In cases such as these, colleges and training providers are given the opportunity to correct the error, and most do so.
"We are in a long-term relationship with providers and it is in their interests to get their quality systems and their own checks exactly right," Mr Russell said.