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The UK’s City minister Tulip Siddiq has quit after she became embroiled in a scandal tied to the ousted Bangladeshi regime, amid warnings that she risked damaging the reputation of the British government.

The close ally of Prime Minister Sir Keir Starmer admitted that staying in the role — which included responsibility for fighting corruption — was “likely to be a distraction from the work of the government”.

Siddiq had been named in two corruption probes in Bangladesh, and faced allegations first reported by the Financial Times that she had benefited from properties linked to the Awami League party that is led by her aunt Sheikh Hasina, former prime minister of the South Asian country.

Sir Laurie Magnus, Starmer’s independent adviser on ministerial standards, found no breach of the ministerial code after Siddiq referred herself to him, but gave a strong indication to the prime minister that she should be sacked from her Treasury role.

“It is regrettable she was not more alert to the potential reputational risks — both to her and the government — arising from her close family’s association with Bangladesh,” Magnus said.

In a letter to Starmer, he concluded: “I would not advise this shortcoming should be taken as a breach of the ministerial code, but you will want to consider her ongoing responsibilities in the light of this.”

Pensions minister Emma Reynolds, who before the 2024 general election worked as a managing director at the lobbying group The CityUK, will replace Siddiq as economic secretary to the Treasury.

Torsten Bell, former head of the Resolution Foundation think-tank, replaces Reynolds as pensions minister. Earlier this week Bell’s twin brother Olaf was named as the new head of Starmer’s policy unit.

Starmer said in a letter to Siddiq that he accepted her resignation “with sadness”, but insisted “the door remains open for you going forward”.

Siddiq is the second minister to be forced out of Starmer’s government, following the departure of transport secretary Louise Haigh last year.

Kemi Badenoch, Conservative leader, said the prime minister “dithered and delayed to protect his close friend” and should have sacked Siddiq earlier.

Siddiq had faced pressure to quit since being named in a corruption probe by Bangladesh’s Anti-Corruption Commission in December.

The investigation came after a political rival accused Sheikh Hasina and her family, including Siddiq, of personally benefiting from a Russia-backed nuclear power project, claims they have denied.

Sheikh Hasina was ousted last year and Bangladesh’s interim government has alleged that senior officials from her regime siphoned funds from the banking system to acquire properties overseas. They have denied the claims. 

The FT revealed this month that Siddiq was given a two-bedroom London flat in 2004 by a developer with links to the Awami League party.

Magnus noted that Siddiq “remained under the impression” that her parents had given her the property when she threatened reporters with legal action in 2022 after they made enquiries, only to acknowledge this year that it was paid for by a different person.

“The public were inadvertently misled about the identity of the donor of this gift in her replies to queries in 2022,” Magnus said. “This was an unfortunate misunderstanding which led to Ms Siddiq’s public correction of the origins of her ownership after she became a minister.”

The Labour MP has also lived in several other properties that are tied to the former Awami League regime. Siddiq had denied any wrongdoing.

The pressure on her intensified in recent days after Muhammad Yunus, the interim leader of Bangladesh and a Nobel Peace Prize-winning economist, told the Sunday Times newspaper that Siddiq may have benefited from “plain robbery”.

A spokesperson for Yunus said on Tuesday: “Tulip Siddiq may not have entirely understood the source of the money and property that she was enjoying in London, but she knows now and should seek forgiveness from the people of Bangladesh.

“The interim government is actively working with international law enforcement agencies to investigate and recover funds.”

A spokesperson for Siddiq responded to Yunus’s statement by saying: “No evidence has been presented for these allegations. Tulip Siddiq has not been contacted by anyone on the matter and totally denies the claims.”