It said it would probe whether Better for the Country Limited – his campaign firm – “was the true source of donations made to referendum campaigners in its name, or if it was acting as an agent”.
Better for the Country donated around £2.4m, including to the Grassroots Out campaign group, which was supported by some Tory MPs, including Brexit Secretary David Davis.
Donations were also made, between March and June 2016, to Trade Unionists Against the EU,Veterans for Britain, WAGTV Limited and Ukip, led at the time by Mr Farage.
Mr Banks – who no longer donates to Ukip – also lent £6m to the Leave.EU campaign, fronted by Mr Farage, to avoid inheritance tax he later claimed. That loan is due to be repaid at the end of this year, and is believed to be still outstanding.
The Commission said Better for the Country was “not registered as a permitted participant in the EU referendum”
Bob Posner, the Commission’s director of political finance and regulation, said: “Interest in the funding of the EU referendum campaigns remains widespread.
“Questions over the legitimacy of funding provided to campaigners at the referendum risks causing harm to voters’ confidence.
“It is therefore in the public interest that the Electoral Commission seeks to ascertain whether or not impermissible donations were given to referendum campaigners and if any other related offences have taken place.”
But Mr Banks immediately dismissed the potential consequences of the investigation, tweeting: “Gosh I’m terrified.”
In a later statement, he insisted allegations that the vote to quit the EU had been “funded by the Russians” were “complete bollocks”.
Mr Banks said: “The Leave.EU campaign was funded by myself, Peter Hargreaves and the general public.
“My sole involvement with the ‘Russians’ was a boozy six-hour lunch with the ambassador where we drank the place dry (they have some cracking vodka and brandy).
“Turning to the investigation, we believe that a judge-led inquiry reporting to Parliament that investigates the main campaign groups, Vote Leave, Remain, and Leave.EU would be the best way to clear this nonsense up once and for all.
“The Remain “Electoral Commission” isn’t up to the job and consists of political place men from all main parties.”
The controversy was raised at Prime Minister’s Questions by Labour MP Ben Bradshaw, who has previously called for an investigation into Russian “dark money” funding Brexit campaigns.
Mr Bradshaw linked it to fast-developing US investigation into alleged collusion between Russia and Donald Trump.
“With today’s news that the Electoral Commission is investigating Arron Banks, the main financial backer of Brexit, along with the significant British connections being uncovered by the American Justice Department’s special counsel Robert Mueller, investigating Russian interference in the US presidential election, will you assure me that the UK Government and all its agencies are co-operating fully with the Mueller investigation or will do so if asked??
Theresa May replied: “We take very seriously issues of Russian intervention or Russian attempts to intervene in electoral processes or in the democratic processes of any country and we would do so for any other states that were involved in trying to intervene in elections.
“We do of course work closely with our United States partners and I can assure you that as part of that relationship we do co-operate with them when required.”
In a statement, the Commission said it would investigate:
* Whether or not Better for the Country Limited was the true source of donations made to referendum campaigners in its name, or if it was acting as an agent.
* Whether the recipients of its donations were given the information required in respect of the donor.
* What steps the recipients took to verify the identity and permissibility of Better for the Country Limited as a donor.
* Whether or not Mr Banks was the true source of loans reported by a referendum campaigner in his name.
* Whether those individuals and entities involved in that arrangement acted in accordance with the law.
* Whether any individual facilitated a transaction with a non-qualifying person.