The allegations against KIA president Ali Raschaid al-Bader centre on the sell-off last June of the National Industries Company, an engineering, construction and investment group that has since moved into the UK.
In January, it took over Birmingham-based BI Group, the former Bromsgrove Industries run by Asian entrepreneur Bijan Sedghi, in a deal worth pounds 96m.
The KIA is the parent and Mr Bader the ultimate head of the London-based Kuwait Investment Office (KIO), which owns large stakes in British Petroleum and Germany's Daimler-Benz among $15bn-worth of holdings.
The privatisation programme is a key plank in paying for Kuwait's reconstruction after the 1991 Gulf War and the review of the NIC sell-off is an embarrassment for its government. With elections due this year, it may prompt calls for wider investigation of the KIA's handling of the privatisation process.
"The danger is that the Attorney-General may start looking into other sell-offs as well. There may also be calls for the privatisation of NIC to be annulled, raising a question mark over who owns it," one highly placed Kuwaiti source said.
Mr Bader resigned mysteriously last December after three years in the post, citing family reasons, only to withdraw the resignation a month later.
Sources say he is being investigated under the draconian 1993 Protection of Public Property Law over alleged negligence in arrangements for the sale of NIC as well as the alleged purchase, months previously, of NIC shares by his wife, sister and dead brother's estate at less than half the eventual privatisation price.
Mr Bader was interviewed in mid-April and the question of whether to prosecute is still being considered, they say.
In the factional world of Kuwaiti politics, dominated by feuding between the merchant classes and the ruling al-Sabah family, Mr Bader's opponents are understood to have urged the refusal of his resignation to heighten his embarrassment while the investigation goes on.
Mr Bader has been identified with merchant interests and the complaint to the Attorney-General was started by the Kuwait Projects Company, which is controlled by Nasser Sabah al-Sabah, the son of the country's Foreign Minister.
The KIA president, who is understood to have strongly denied the charges, was unavailable for comment last week. Calls to the KIO in London were referred to a spokesman in Kuwait, who did not respond.
The KIO has been keeping a low profile of late. It is continuing, however, with prosecutions of former executives in London and Madrid over the $5bn collapse in 1992 of its Spanish investment empire, Grupo Torras, amid allegations of fraud, mismanagement and secret political payments during the Gulf War.
The KIO has also been under investigation by the Inland Revenue over allegations that it gained more than pounds 600m in illegal tax breaks from the sale of a stake in BP in the 1980s after misrepresenting the true ownership of the shares.
Controversially, senior staff enjoy diplomatic status, which may enable them to claim diplomatic immunity to prevent any appearance as witnesses in court.
Since the Gulf War, the KIO has cut its portfolio by two-thirds from $50bn (pounds 33bn) to pay for reconstruction at home.Reuse content