Dapp, which runs education and health projects in the African country, has received millions of pounds in the last decade from the UK, EU and Unicef.
It is connected to the Teachers Group, whose leaders are wanted by Interpol over fraud allegations.
British officials have suspended funding and launched an investigation.
The move follows an investigation by the BBC and its US partners into Dapp Malawi, the Malawian branch of charity Development Aid from People to People.
Dapp is one of the major NGOs active in Malawi, providing a range of aid projects from farming to health and education.
The BBC found that part of the funding it received found its way to the Teachers Group, with some Dapp staff handing over as much as 30% of their monthly salary to the group.
Founded in the 1970s, for years the Teachers Group has run a government-funded alternative school system, but in 2001 the Danish authorities raided its offices and charged its founder Mogens Amdi Petersen with fraud.
Found not guilty in 2006, he and some of his associates immediately left the country, but prosecutors appealed and the group are now wanted by Interpol.
It is thought they may have taken refuge in a massive luxury compound, worth an estimated Â£20m, on the Pacific coast in Mexico.
In a statement, the Department for International Development urged the BBC to share all the information it obtained during its investigation into Dapp and Teachers Group, which included interviews with Dapp workers and Teachers Group members.
"Payments to Dapp have been suspended and we encourage the BBC to share their evidence in full."

New figures, published by KPMG, indicated 20% of employees earned less than the Living Wage - an increase of 1% from last year.
But Scotland had one of the lowest proportions of workers paid below the rate, 3% less than the UK average.
The Living Wage is set by an independent foundation and has been adopted by 380 Scottish firms.
The Living Wage Foundation sets its level based on a range of a cost of living measures such as accommodation, travel, healthy food and extras such as birthday presents.
It has just risen from £7.85 an hour to £8.25, making it nearly a fifth higher than the current national minimum wage and more than £1 higher than the the new minimum wage premium for over-25s of £7.20 an hour, due to come into force in April.
Glasgow University is the latest institution to become an accredited Living Wage employer
The research, conducted by Markit for KPMG, found East Renfrewshire had the highest percentage of workers earning below the Living Wage, at 32%, while the Western Isles had the lowest proportion at 11%.
The median hourly wage was £11.76 in Scotland compared to £11.61 for the UK as a whole.
Scotland's median wage per hour grew 1.5%, compared to 0.2% across the UK as a whole.
It has grown from below the UK average to 1.3% above the average since the same research was published a year ago.
The research also highlighted that part-time, female and young workers were most likely to earn below the Living Wage.
Part-time jobs were three times as likely to pay below £7.85 per hour as full-time roles.
For the third year, the research found that women were more likely to be paid below the Living Wage than men.
The data showed that an estimated 29% of females earned less than the rate, compared with 18% of males.
Nearly three quarters, 72%, of 18-21 year olds earned less than the Living Wage, compared to 17% of those aged 30-39.

Trevor Campbell, 59, from Sompting, was treated by paramedics but died at the scene.
He was struck at about 06:00 GMT on the eastbound carriageway in Lancing.
A 58-year-old man from Climping had been arrested on suspicion of causing death by careless driving.
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Mr Campbell, his wife Rosemary said the family was devastated.
She said he left a daughter, Ella, 28, and a granddaughter, Aerith, aged two.
"Trevor absolutely doted on Aerith, just as he did our own daughter, and his death is going to leave a huge gap in our family," she said.
Mr Campbell, a porter at Lancing College, was taking his usual walk to work when he was killed, police said.
Lancing College headmaster Dominic Oliver said he was a long-serving and loyal member of the team, and the Lancing community was saddened and shocked by his death.
The UK government is to stop giving money to a charity in Malawi following a BBC investigation which found it was under the control of a cult-like group.
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A fifth of working people in Scotland are paid less than the voluntary Living Wage, according to research.
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A man arrested over the death of a pedestrian hit by a car on the A27 in West Sussex on Thursday has been released without charge.