Canterbury's regional council ECan has alerted police to payments of $420,000 for taxi trips it says may not have taken place.
The matter involves the region's Total Mobility Scheme under which the elderly and disabled receive a 50 percent discount on taxi fares through a subsidy from the council and the government.
ECan claims drivers from three taxi firms may have been involved.
The council carried out its own investigation and has given the taxi companies until the end of this year to explain what has gone on.
It has referred the matter to the police and the Serious Fraud Office.
Since the end of last year, when it discovered a problem, ECan has been refusing to pay drivers until it sees GPS data confirming that a trip has taken place.