Fraud squad detectives have raided eight addresses in a carefully-planned operation following allegations that a college was duped into paying millions of pounds for training which never took place.
FE Focus has learned that private training companies are accused of defrauding Sandwell College, in Smethwick, West Midlands, by making bogus claims for tuition that was not provided under a franchise agreement.
Franchising became popular under the Further Education Funding Council - the sector's paymaster until the Learning and Skills Council took over in 2001.
Police say they acted on a tip-off from the LSC after irregularities were spotted by staff at Sandwell. Detectives were this week combing the hard disks of college computers - although the college and its staff are not under suspicion.
The investigation is being led by Detective Inspector Dave Churchill, of the economic crime unit. He said: "This is an ongoing investigation and my officers will be carrying out further inquiries over the next few months."
No arrests have been made.
Allegations of corruption in the world of post-16 are familiar territory to Mr Churchill. Already, his officers are busy looking into claims that fraud worth millions of pounds took place through the ill-fated Individual Learning Accounts scheme, ultimately scrapped by ministers.
The LSC, the ultimate source of the cash allegedly stolen from Sandwell, says it continues to work with police to evaluate the material they have obtained.
A spokesman for the LSC said police had taken a "large quantity" of documents and computers. These were seized in raids on "four domestic and four business premises" last Friday.
The spokesman added: "It is our routine procedure to alert the police when allegations of misuse of public funds arise. We will be fully assisting the police in their investigation, and cannot comment further at this stage."
The college's website says it has more than 40 partners providing "franchise and community provision" at more than 100 venues in the Black Country.
Val Bailey, Sandwell's principal, said "We are working closely with the national LSC and police relating to allegations of fraud."
It appears that irregularities at the college escaped the attention of the Office for Standards in Education during its inspection in March. The resulting report, published only two months ago, said: "The clear policies and procedures for quality assurance activities, which include franchise provision, are supported by regular internal audits."
Franchising, which contributed to an unprecedented expansion in colleges'
business and was actively encouraged by ministers, has since been widely discredited as a method of driving up student numbers without sufficient quality controls.
Sandwell's financial difficulties led to the expansion of franchising at the college. Contracting-out was seen as a way of making up for losses caused by the college's failure to meet targets in other areas.
The Ofsted report adds: "There has been insufficient progress in improving student achievement, some retention rates and the quality of ICT.
Curriculum management in some areas is unsatisfactory.
It adds: "The college faces financial pressure arising from the difficulty it experiences in meeting its funding targets."