Turkish businessman Abdullah P. received more than €5 million in subsidies to support his Islamic kindergarten business from the city of Vienna, according to the Krone Zeitung newspaper.
He is now being investigated for fraud following claims he lied about the services provided by the business and the number of children being cared for, pocketing the money himself instead.
Between May 2013 and May 2015 alone the business is said to have brought in around €1.8 million, although many of its services appeared to be non-existent.
The latest allegations were made by the boyfriend of one of the businessman's staff who claimed to have attended a drug-fuelled sex party at one of the kindergartens involved in the scandal.
He said he had met his boyfriend on a gay dating site, and that he was told his boss often holds parties where both sex and drug-taking took place. Following one of the parties, a cleaner reportedly found white powder in a desk in the school the next day.
The parties were said to have taken place between November 2014 and May 2015.
Prosecutors now say the fraud was so extensive that it qualifies as a criminal network, and it also included social clubs and Muslim associations, which were often set up with false paperwork.
In January 970 cannabis plants were also discovered in a hall being rented by an organisation for adult education that was also controlled by the businessman, according to the Kurier newspaper.
He has denied any connection to the plants but prosecutors are investigating.
It follows revelations made earlier this year when a state-funded survey suggested that Islamist groups such as the Muslim Brotherhood and its Turkish counterpart Milli Gorus had links to the nurseries and kindergartens funded by state money.
"Intellectual Salafists and political Islamists are the dominant groups in the Islamic kindergarten scene in Vienna", the study concluded, adding that it appeared easier to set up a kindergarten than a kebab shop in the city.