The former civil servant has told detectives investigating the activities of paedophiles in national politics that the Metropolitan Police's Special Branch was orchestrating the child-sex lobbying group in the late 1970s and early 1980s.
The whistleblower, who has spoken exclusively to the Sunday Express, says he was also warned off asking why such a notorious group was being handed government money.
It emerged late last year that PIE was twice gave amounts of £35,000 in Home Office funding between 1977 and 1980, the £70,000 total equivalent to over £400,000 in today's money.
Those details surfaced only after the whistleblower highlighted his concerns to campaigning Labour MP Tom Watson and his revelations have triggered an ongoing Home Office inquiry into why the cash was given to PIE which was abolished in 1985 after a number of prosecutions.
Until now, speculation about the grant has centred on Clifford Hindley, the late Home Office manager who approved the payments. However, the whistleblower told the Sunday Express he thought higher and more sinister powers were at play.
He has given a formal statement to that effect to detectives from Operation Fernbridge, which is looking into allegations of historic sex abuse at the Elm Guest House in south-west London.