Shortly after taking up his post in 2010, Corrupt Practices Investigation Bureau (CPIB) director Eric Tan tightened its work processes.
These improvements could have led to the uncovering of the alleged fraud by its former assistant director Edwin Yeo, Deputy Prime Minister Teo Chee Hean said in Parliament yesterday.
But the new measures were not implemented well and were circumvented, which led to continued loss of funds, added Mr Teo.
Mr Tan was given a letter of warning for the weaknesses in CPIB's internal processes, and he accepted responsibility for the lapses, the House heard.
The CPIB director will be replaced by Mr Wong Hong Kuan, chief executive of the Singapore Workforce Development Agency, when his term ends on Sept 30.
Meanwhile, Yeo has been charged with misappropriating $1.7 million from the CPIB between 2008 and last year.
DPM Teo disclosed the flawed implementation in his reply to Workers' Party chief Low Thia Khiang, who had asked to what extent supervising officers should be held responsible for corruption in their departments.
Mr Teo said: "Each case is unique... and has to be considered in the light of the facts and the actions of the individuals, including the supervisors and the heads of the different agencies."
In the CPIB case, both Mr Tan and the previous director, Mr Soh Kee Hean, "had supervisory and command responsibilities" over the particular unit in the CPIB where the wrongdoing was uncovered.
The two directors were given letters of warning.
In issuing the letters, the Prime Minister's Office considered their lapses as well as their past contributions and performance in other aspects of their duties, Mr Teo said.
Formal letters of warnings can have implications on an officer's bonuses, salary increments and his career progression, he added, without elaborating.