Work and Pensions Secretary Peter Hain is under fresh pressure over a think tank used to channel money to his bid to become Labour's deputy leader.
Friends of Peter Hain say he is a man of "great integrity"
The BBC understands two donors who gave money to the Progressive Policies Forum (PPF) were not told it would go towards supporting the unsuccessful campaign.
But Mr Hain says all PPF donors were asked if funds could be transferred. He is due to issue a statement later.
Energy Minister Malcolm Wicks said Mr Hain was in a "difficult position".
He told BBC Radio 4 that Mr Hain, who is also Welsh secretary, was a man of "great integrity".
Mr Wicks said leadership candidates should not have to raise "tens and tens of thousands of pounds to run a campaign", but should be funded by the party instead.
Liberal Democrat leader Nick Clegg said it was "intensely embarrassing" for Mr Hain but warned against a rush to judgement while investigations were under way.
He told the BBC: "From what I've heard I can't really distinguish between what appears to be either utter incompetence in the way his campaign was run, or deliberate obfuscation."
Mr Hain admitted on Thursday he had failed to declare 17 donations to his campaign totalling £103,000.
He has blamed the mistake on overwork, but the Electoral Commission and the Parliamentary Standards Commissioner are now investigating.
Their focus is likely to be on the PPF and how donations to it totalling more than £50,000 came to be channelled to Mr Hain.
A source has told the BBC that one of the donors, diamond dealer Willie Nagel, was unaware of the transfer, but "was not surprised" and "not unhappy" when he learned of it.
BBC political correspondent Gary O'Donoghue said he understood that Mr Nagel's donation to the PPF was transferred "almost contemporaneously" to the Hain campaign.
"The question will be asked why was the money given almost to go straight through the PPF into the Hain campaign. Potentially, I understand, it could even have been the same day - the 10th of October."
The BBC has spoken to the second donor who did not want to be named and said he was not told about the transfer of funds.
Labour MP Dan Norris, who was parliamentary private secretary to Mr Hain during his deputy leadership bid, said the minister had "not done anything illegal".
"And if it was a crime to report things late, beyond deadlines, then millions of taxpayers every year would probably be in trouble too," he said.
Six of the donations to Mr Hain were made by individuals through the PPF, a virtually unknown think tank which has a registered address at a London solicitor's offices.
It was set up three months after the launch of Mr Hain's campaign, and counts John Underwood, who was closely involved in financing the Hain campaign, as a trustee.
Mr Underwood said all the donors, whose names have been declared to the Electoral Commission, were happy with the arrangement which he insisted was "entirely permissible".
He said he was still involved with the PPF, which does not have any staff, but did not have a formal position.
The PPF had not undertaken any work so far because its resources had been put into Mr Hain's deputy leadership bid, "but we propose to seek further support and to engage in these activities in the future," he added.
In an earlier statement, Mr Hain said there was nothing illegal about using a third party to donate money, provided the original source of the donation was registered.
But Elfyn Llwyd, Plaid Cymru's leader in Parliament, told BBC Wales Mr Hain's position was no longer tenable.
"The buck stops with him according to the law. He can't just blame his assistants," Mr Llwyd said.
Gordon Brown, meanwhile, is standing by Mr Hain and the Conservatives say they are holding off from calling for his resignation until the standards commissioner produces his report.