The Department for Education and Employment has launched a major investigation after a college head blew the whistle on irregularities connected with potentially large amounts of European Social Fund cash.

Ieuan Pugh, principal of Loughborough College of Art and Design, revealed this week that he alerted the DFEE to "suspicions" he had in connection with the use of ESF grants. The college had used an external contractor to set up retraining courses for the unemployed. ESF grants are worth Pounds 25 million to higher education this year.

Following local investigations papers may have been passed by the DFEE to the Serious Fraud Office but neither the DFEE nor the SFO will confirm or deny this. This could lead to an SFO investigation.

The Loughborough principal decided to speak out amid fears that his college would be tainted unfairly in the absence of clarification of the scope and nature of ongoing DFEE investigations. Mr Pugh, who is taking early retirement for reasons unconnected with the recent events, said: "We alerted the DFEE and our action was fortuitous in as much as other issues came to light. Effectively, I blew the whistle."

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He explained that, while the college had been cleared in an audit carried out at his behest, he had been told by DFEE investigators to secure all relevant documentation and when asked whether, if it ever became necessary, he would be prepared to give evidence in a court of law, he agreed.

A DFEE spokesman said this week: "We can confirm an investigation by the ESF Unit Verification and Audit Section. An applicant from the higher education sector came to the ESF unit late last year seeking advice and as a result the Verification and Audit Section of the unit examined a claim for fund support and in the course of this investigation certain irregularities came to light. Because of this it is inappropriate for us to say any more."

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In April this year, following the initial DFEE investigations at Loughborough, the English and Welsh funding councils issued guidelines to all higher education institutions. They stressed that if institutions decided to sub-contract with external providers for the delivery of courses then they should ensure that this is on the basis of a written contract which should allow for full audit access to detailed records.

The guidance says that appropriate monitoring procedures should be in place to ensure that "the required student numbers and tendering forms are delivered, and provision is of a suitable quality". The guidance ends with the address of the ESF Unit's Verification and Audit Branch in case other institutions "identify any irregularities".