The embarrassing disclosure casts doubt on the company's rush to cash in on the $40bn privatisation of the Brazilian water industry.
The venture Anglian is involved in is a pounds 30m project to build water treatment plants in the south of Brazil.
According to reports circulating in the industry, Anglian paid up to pounds 12m into the bank account of an individual in Brazil and is now trying to recover the money.
A spokesman for Anglian said the group was "not aware" of any cash disappearing, but confirmed it was taking legal action in Brazil.
He said it involved a joint venture with a small civil engineering company, Cejen, in which Anglian's subsidiary, Anglian Water International (AWI), had invested pounds 10m to take a near 40 per cent stake.
The spokesman added: "There were some legal discrepancies but they are currently being resolved by our legal advisers."
He refused to discuss the precise nature of the action, or whether it involved company funds.
The Anglian employee who was working in Brazil, Peter Cashen, refused to comment when contacted at his Northamptonshire home, saying: "I am bound by confidentiality agreements. You will have to talk to Anglian."
The spokesman also declined to comment on Mr Cashen's role. "We don't discuss individual employees as a matter of company policy."
There is no suggestion that Mr Cashen or Cejen were involved in the disappearance of any money.
The Cejen partnership was singled out in Anglian's last annual report as an example of its Brazilian ambitions. However, one senior water industry figure in Brazil said there were rumours that the partnership with Cejen had ended and that the official opening ceremony of the treatment works had been postponed. It proved impossible to contact Cejen at its offices in the city of Curitiba, in the southern state of Santa Catarina.
The company spokesman denied that the venture itself had become bogged down.
"We have invested pounds 10m in a sewerage treatment plant. It's been built and we are now getting revenue from the treatment works. It is up and running."
Anglian also denied that another exploratory joint-venture in Rio de Janeiro had been dissolved. AWI formed a company called Brazilian Water Works to bid for a pounds 300m privatisation contract to provide water and sewerage services to one of the city's richest areas.
This company is unconnected with project which is the subject of the legal action.
The partnership was with a Singaporean civil engineering company, IPCO, which was represented in Brazil by an independent consultant called Milton Mederos.
Speaking at his Miami home, Mr Mederos said he was no longer involved in the venture. Brazilian Water Works' rented office in Rio has also closed.
Anglian's spokesman insisted: "The Brazilian Water Works company is still in existence."
Brazil has proved problematic for other UK water companies. Yorkshire Water has pulled out of a joint venture in Rio with a US construction group, though in a further twist its former partner is still using the Yorkshire name.
In addition, North West Water, part of United Utilities, is thought to be unlikely to press ahead with a planned venture in Rio, according to Brazilian experts. North West's representative in Brazil said no firm decisions had been taken.
Anglian created AWI in the stampede for overseas business after privatisation.
Losses for AWI are not separately disclosed, though documents filed with Companies House show that in the year to the end of March 1996 it lost pounds 3.8m, up from pounds 3.4m the year before, on turnover of just pounds 323,986.