Finance Minister Yair Lapid on Saturday imposed a freeze on all settlement funding and ordered a probe of allegations that funds had illegally been transferred from the settlements to the Settlers’ Council lobby group in recent years.

Lapid said no funding would be transferred to settlements while the government looked into the matter.

“Since settlement construction was frozen [between November 2009 and September 2010], local councils in the West Bank have received funds to compensate them for losses incurred due to the freeze,” read a statement released by the Finance Ministry late Saturday.

“In light of reports that those same funds are not serving their original purpose, such as security and school and kindergarten maintenance, but are being transferred in an allegedly illegal way to the Settlers’ Council, which uses them for political ends, some of which contravene government policies, the finance minister has ordered an immediate freeze on future payments,” the statement continued.

The allegations will be investigated by senior Finance Ministry officials, who are due to present their findings to Lapid within a week.

On Friday, Channel 2 reported that the Israeli government secretly channeled 148 million shekels (over $42 million) to the local city councils that administer settlements across the West Bank in recent years, to “compensate” them for city taxes they did not receive because of the government-imposed settlement-building freeze in 2009-2010.

News of the secret payments, reported by Israel’s Channel 2 News on Friday night, provoked an immediate demand by the opposition Labor Party for an investigation by the Attorney General and the State Comptroller into what it said could be illegal funding. Israel’s Justice Minister Tzipi Livni also promised to investigate the affair.

According to the TV report, furthermore, some of the secret government payments were in turn transferred by the local settlement city councils to the Settlers’ Council, a private group that lobbies for the settlements and frequently conducts activities criticizing the government for policies deemed as damaging to the settlers. Israel’s Supreme Court has already ruled that use of public funds by the Settlers’ Council to fund such activities is illegal.

Prime Minister Benjamin Netanyahu imposed the temporary building freeze on West Bank settlements in November 2009, and it ended in September 2010. It was introduced by Netanyahu under pressure from the Obama administration, as part of an effort to draw the Palestinian Authority back to the negotiating table. PA President Mahmoud Abbas did resume talks with Israel toward the end of that period, but he walked away from the talks soon after, and Netanyahu refused to extend the freeze. Peace talks between Israel and the Palestinians were then stalled for almost three years before the current negotiations began last July.

Because of the freeze, the building of thousands of scheduled homes in the settlements was delayed, and the local councils apparently argued to the government that they should be compensated for the city tax revenue they would have received from residents of those homes had they been built. Thus, every year since the freeze, the government has secretly paid money to the various settlement councils in compensation, the TV report said, basing itself in part on information from an organization called Molad, the Center for the Renewal of Israeli Democracy. To date, the total amount of public money handed over is 148 million shekels. The payments are defined as a “security grant,” the report said.

In turn, the report continued, a substantial portion of this money was passed on to the Settlers’ Council lobby group. The Settlers’ Council acknowledged receiving some such monies, the TV report said, but stated that it had done nothing illegal.

Livni said she would look into the matter.

The Settlers’ Council was headed for part of the period in question by Naftali Bennett, who led a campaign against the building freeze and who now heads the pro-settler Jewish Home party in the Israeli government. Bennett, Israel’s economy minister, opposes Palestinian statehood, and is a bitter rival of coalition partner Livni, who heads Israel’s negotiating team with the Palestinians.

Intelligence Minister Yuval Steinitz (Likud), who was finance minister when the payments began, confirmed Saturday that they were made, on the orders of the Prime Minister’s Office, but added, “I don’t recall the details.”