An investigation by Scottish Government auditors also found Adam Smith College, in Kirkcaldy, may have to repay a substantial amount of money to the European Structural Fund.
A number of members of staff have been suspended, in addition to interim principal Iain Harrington, who was suspended when allegations about the money were first made last year.
In a statement, the college's current interim principal, Martin McGuire, said the suspensions followed an investigation by auditors into European project funding received by the college between 2007 and last year.
"The college has not seen a copy of the report produced by the auditors, however top-line findings have been verbally provided, which have resulted in the decision to suspend those staff members who worked in the relevant areas as a precautionary measure. The college plans to fully investigate the issues arising and identify whether disciplinary proceedings are necessary," he said.
"In addition to the college investigation, the Crown Office has asked the police to conduct an investigation into potential fraudulent activity. The Government audit has indicated the college will have to repay a substantial amount of the monies claimed.
"As interim principal, I am determined to address and resolve these issues as quickly as possible and to ensure that high-quality learning and teaching at the college continues to be a priority for staff."
Last year, the college's then interim principal, Iain Harrington, was suspended on the orders of the college's board during the investigation into the potential misuse of funding.