BBC London has been told that the government has begun the process of stripping Dame Shirley Porter of her title.
The scandal ended Dame Shirley's political career
The former leader of Westminster Council was the central figure in the "homes for votes" scandal in the 1980s.
She now lives in Israel and maintains she cannot afford to pay a surcharge now totalling £40m imposed by the district auditor.
Eighteen months ago the House of Lords accused her of political corruption and upheld the ruling by the district auditor.
He had accused Dame Shirley of squandering millions of pounds by unlawfully selling off council flats on the cheap simply to boost the number of Tory voters.
However, she alleges that she was unfairly treated by the investigation into the affair and that the hearing relied on evidence that was "unfair and prejudicial".
Last week an investigation by BBC Radio 4's Today programme revealed documents which appeared to show Dame Shirley still exerts influence over family assets of possibly millions of pounds, months after she claimed she was worth just £300,000.
Westminster Council has been trying to recover her assets to settle the surcharge debt but so far has only managed to seize belongings worth about £7,000 - including a portrait and a gold-plated lavatory seat.
Dame Shirley was appointed a Dame of the British Empire 12 years ago by John Major after she had delivered a victory for the Tories in the 1990 local elections.