Funding for the National Black Police Association has been frozen while accounts are examined for "improper activities".
The Home Office said it had taken the drastic measure due to "inadequate financial controls and a lack of other financial management procedures".
A fraud probe could be launched if any evidence of wrongdoing is uncovered, a spokeswoman added.
The association - a registered charity which aims to improve ethnic minority recruitment and race relations in the service - received £180,000 from the Home Office last year.
Its funding has more than doubled since 2003-4, despite a failure to produce properly audited accounts since 2002-3.
Home Office guidelines state that organisations receiving grants in excess of £100,000 must provide an annual statement every financial year.
The Charities Commission said it was "chasing" detailed returns from the NBPA.
The latest partial figures filed suggest there was a £20,000 surplus in 2004-5, which does not appear to have been paid back to the Government as would be expected.
The association is also understood to owe Greater Manchester Police £140,000 relating to the staging of an international education and training conference in the city last August.
NBPA president Keith Jarrett said the situation was "embarrassing", but stressed there was "no evidence of dishonesty".
