Update added on 21 December 2018: In September 2018, Bulgarian prosecutors said that the investigation and an audit of Mitrev’s tax affairs from 2012 to 2015 had uncovered no evidence of tax evasion, money laundering, “nor any discrepancy between the property of the taxpayer, the expenses incurred by him, and his income”.

Bulgaria has ordered an investigation after revelations by the Guardian and other media partners that Azerbaijan operated a secret $2.9bn fund to lobby influential Europeans and to funnel money offshore.

Prosecutor Sotir Tsatsarov said he was launching an inquiry into Kalin Mitrev, Bulgaria’s representative to the European Bank of Reconstruction and Development (EBRD). Mitrev received at least €425,000 (£390,000) from the scheme, which has been nicknamed the Azerbaijan Laundromat.

Mitrev denies wrongdoing. He says the payments to his Swiss and Bulgarian accounts were for legitimate consultancy work and happened before he joined the bank’s board in London. The reports were a “doomed political attack” on his wife, Irina Bokova, the director general of Unesco, Mitrev said.

Officials will seek to establish whether there is evidence of tax evasion or money laundering, the prosecutor’s office in Sofia announced on Thursday. Mitrev denies being aware of the original source of the funds and says he declared the income in Bulgaria and paid tax in full.

Mitrev’s future remains unclear after his case was discussed on Thursday by Bulgaria’s cabinet. Speaking afterwards, Vladislav Goranov, the finance minister, said his government had not taken a position on whether Mitrev should be removed from his EBRD job and that it had written to the bank asking for its view.

On Thursday, the EBRD said only Bulgaria could take action against Mitrev, or exonerate him. His role was equivalent to that of an ambassador, it said, adding that he was not an employee. Board members from other European states are concerned by the Laundromat revelations and would like Mitrev to stand down, it is understood.

Bulgaria’s investigation comes at a sensitive time for the bank, which is on the brink of making a significant loan to Azerbaijan. The EBRD’s president, Suma Chakrabati, is on a two-day visit to Azerbaijani capital, Baku. The bank, founded in 1991, was established to support eastern Europe and to develop its private sector.

At stake is the future of the controversial southern gas corridor, the largest energy project the EU is pursuing together with Baku. Records loans in European public money are being considered for sections of the pipeline, which will transport gas from Azerbaijan to Italy. BP and Azerbaijan’s state-owned energy firm are key partners.

In October the EBRD will decide at a board meeting whether to give Azerbaijan a $500m (£380m) loan.

Sarah Shoraka, a spokesperson with the campaigning group Platform, said the payments to Mitrev could be “a huge stain on the bank’s reputation”. Until the case was properly investigated, the EBRD should suspend any decision on the gas corridor project, she said.

Xavier Sol, director of the bank-monitoring organisation Counter Balance, said the Laundromat revelations came at a time when the EU was strengthening its ties with the Azerbaijani regime. It was negotiating the gas deal together with a comprehensive agreement with Baku to replace an existing partnership arrangement.

Sol said: “European public banks are considering huge loans for the southern gas corridor. Such loans would send a worrying signal of political support to the Azerbaijani regime despite ongoing human rights violations in the country.”

Mitrev is an EBRD veteran. He has served on the bank’s board on and off since 1996 and is known as a well-respected and influential voice.

The revelation that Mitrev has consulted for an Azerbaijani company is awkward for Bokova because of her UN role. She bestowed one of Unesco’s highest honours, the Mozart medal, on Azerbaijan’s first lady and vice-president, Mehriban Aliyeva, who is a long-time Unesco goodwill ambassador.

Bokova has denied that there is a conflict between her husband’s work and her UN role.

