The British government has suspended its funding of the Commonwealth Secretariat, the body that runs the international organisation from London, the BBC has learned.

UK diplomats have told Lady Scotland, the secretary-general of the Commonwealth, that Britain’s annual £4.7m voluntary contribution will be withheld until her secretariat improves its financial procedures.

The Secretariat insisted it was implementing recommendations made by external auditors.

The UK decision came after Lady Scotland was criticised by auditors for “circumventing” usual competitive tendering rules when she awarded a lucrative consultancy contract to a company run by a friend.

The auditors also discovered that procurement rules had been waived by the secretariat on no fewer than 50 occasions over three years.

Both New Zealand and Australia have also suspended their discretionary funding to the Commonwealth Secretariat until its financial systems are tightened up and tested by external auditors.

The UK decision threatens to plunge the secretariat into a financial crisis and will raise fresh questions about Lady Scotland’s leadership.

Commonwealth heads of government have already rejected calls to give Lady Scotland an automatic second term of office when it comes up for renewal this year.

The funding crisis came to a head last week when Commonwealth high commissioners in London – who together form the organisation’s board of governors – met to discuss the results of the investigation by the external accountancy firm KPMG.

The Commonwealth Secretariat is the central administrative hub for the intergovernmental organisation that comprises 54 countries – many of them former British colonies – and encompasses almost a third of the world’s population.

About two-thirds of the Commonwealth Secretariat’s funding – some £18.4m in 2018 – comes from automatic subscriptions from member states.

But there is also a second budget for the secretariat – the Commonwealth Fund for Technical Cooperation – which is discretionary and provides about a third of its funding, worth about £12m in the most recent audited accounts. The UK is the largest contributor to this fund.

A senior British diplomat wrote to Lady Scotland on 3 February to say that continued UK funding would be suspended until the Commonwealth Secretariat complied with the recommendations of the KPMG report.

These conditions included a register of occasions when procurement rules were waived, a register of real and potential conflicts of interest, and an updating of the body’s whistleblower policy.

The official gave the secretariat a deadline of 21 February to implement all the reforms which would have to be signed off by the chairman of the Commonwealth’s independent audit committee.

A spokesperson for the Foreign Office said: “We are committed to an effective Commonwealth that delivers for its member states, so we have set a number of conditions on UK funding to the Commonwealth Fund for Technical Cooperation for this financial year.

“These include conditions relating to ensuring that the Secretariat’s procurement policy and its implementation are in line with international best practice.”

A Commonwealth spokesperson said: “The Commonwealth Secretariat does not comment on private exchanges with its member countries.

“The Secretariat complies fully with the audit process and implements recommendations accordingly.”

New Zealand has also put its £1.5m contribution on hold.

A spokesman for its Ministry of Foreign Affairs and Trade said: “An independent audit report by KPMG has identified significant weaknesses in the Commonwealth Secretariat’s approach to managing procurement. As a result, New Zealand has put on hold its voluntary financial contribution to the Secretariat until we receive independent confirmation the recommendations from the audit report have been addressed by the Secretariat.”

Australia has gone one step further and cut its funding to the Commonwealth Secretariat by £414,000 and has made its remaining contribution of £260,000 contingent on the reforms being implemented.