New Zealand police said Monday they were investigating allegations that a government minister tried to hide campaign donations fromMegaupload boss Kim Dotcom.

The German Internet tycoon, who faces extradition to the United States for allegedly masterminding massive online piracy, told the New Zealand Herald he donated NZ$50,000 ($41,000) to ACT Party leader John Banks in 2010.

Dotcom, 38, said Banks asked him to make the donation in two NZ$25,000 installments so the source of the funds, used in a failed bid to become Auckland mayor, could remain anonymous under New Zealand campaign donation laws.

"It doesn't make much sense why anyone would write cheques that way unless they were asked to," Dotcom told the newspaper.

Banks, whose party is a coalition partner in Prime Minister John Key's conservative government and who holds a number of non-cabinet portfolios including small business, has denied any wrongdoing.

He disputed Dotcom's assertion that he called the millionaire businessman after the funds were cleared to thank him for the donation.

"I was not aware that Mr Dotcom had made this donation to my campaign," Banks said in a statement Monday.

"I did not call him to thank him as the donation was made anonymously."

Auckland police said Monday they were investigating whether there had been a breach of campaign funding laws, which carries a maximum jail term of two years.

Key said he accepted Banks' word that he had not broken the law and there was no need for him to stand down while the police probe was underway.

"He's given my office a categorical assurance that he was fully compliant with the law," the prime minister told reporters.

Dotcom, who legally changed his name from Kim Schmitz, moved to New Zealand in early 2010 and enjoyed a lavish lifestyle until police, cooperating with a major US investigation, raided his Auckland mansion last January.

He spent a month in custody before being released on bail and will face extradition proceedings brought by US authorities in August.

The US Justice Department and FBI allege Megaupload and related sites netted more than $175 million in criminal proceeds and cost copyright owners more than $500 million by offering pirated copies of movies, TV shows and other content.