Indigenous groups are calling for a full investigation into Nigel Scullion’s “totally inappropriate use of Aboriginal-earmarked funds”, following revelations that as minister he approved grants to NT lobby groups to argue against land claims.

Former NT Indigenous affairs minister, Dr Jak Ah Kit, told Guardian Australia the decision to fund these groups with money set aside for addressing Indigenous disadvantage was “totally immoral and totally against the normal rules that apply”.

“I think the decisions that the minister’s taken over the last 12 to 18 months need to be reviewed. There needs to be an investigation into what he’s been doing,” Ah Kit said. “This is not acceptable, and I think the prime minister should step in.”

The National Congress of Australia’s first peoples also called for “a full internal review” by the prime minister’s department.

Under the NT Land Rights Act, those who consider a land claim could have a negative impact on their business or personal interests can argue a “detriment” case about how their future access to income, land or water would suffer if the claim were approved.

Ah Kit was also the director of the Northern Land Council for seven years and was involved in hundreds of land claim processes. He said it was standard practice for groups who wanted to lodge a detriment case to seek funds from the attorney general’s department, not use Indigenous funding.

“It’s totally inappropriate, and never been done before by a minister in the LNP or the ALP,” he said.

“At a time when there’s lots of criticism of Indigenous affairs, about how we’re not moving forward in closing the gap, not reaching the targets we’ve set as a nation, the minister is allocating Indigenous-earmarked money for these organisations to defend their positions, and to ensure the Indigenous people on these land claims are not going to get justice in a proper manner,.”

Scullion granted almost $500,000 to three industry groups – the NT Seafood council, the NT cattlemen’s association and the NT amateur fishermen’s association - to help resolve their detriment cases in outstanding land rights claims.

Scullion was chair of the NT seafood council from 1994–2001, and gave evidence of detriment at some of the land claims in that capacity.

“There’s a conflict here. This is the straw that broke the camel’s back and it’s got to stop; he’s got to be accountable,” Ah Kit said.

The money was taken from the $4.9bn Indigenous advancement strategy (IAS), which is supposed to “improve the way the government does business with Aboriginal and Torres Strait Islander people, to ensure funding actually achieves outcomes” – according to the government’s website.

The minister told a Senate estimates hearing last week that “the bulk of the funds are going to legal advice and to get together a case of detriment so that they can submit a case of detriment to the land commissioner”.

However, a spokesman for the minister said yesterday “the funding provided to the pastoral and fishing organisations may be used to develop education resources and training materials on Aboriginal land and sea country in the Northern Territory, as well as to assist these organisations in representing their members in relation to Aboriginal land claims in the Northern Territory”.

The first peoples congress represents thousands of Aboriginal people and 180 Aboriginal organisations. Co-chair, Jackie Huggins said the IAS funding process was “deeply flawed”.

“It’s a $4.9bn policy shake up brought in by the Abbott Government to cut red tape but it has been a failure,” Huggins said.

“The IAS is a bone of contention everywhere I have been around the country. It’s brought up all the time how difficult it is to get IAS funding, for even small community groups, for things like women’s health, diabetes education, or night patrols, mothers and babies programs – the things that are important for communities to thrive and be safe.

“The IAS was set up for the purpose of improving outcomes and social participation for our people and I don’t see how these grants align with that,” she said.

A spokesman for the minister said “he fully stands by his decision to help these organisations resolve 16 outstanding land claims recommended for grant between 1981 and 2004.

Ah Kit said he agreed the longstanding land claims should be resolved.

“But the appropriate way is through the attorney-general’s department, not Aboriginal money coming from his budget.”

“Once he does this, the floodgates will open. Every organisation that has a detriment case is now going to be eligible to apply to him for Indigenous earmarked money to fight their cases against the Indigenous people. It’s ridiculous.”