The LCBO is alleging that a veteran employee in charge of selling liquor to Toronto-based diplomats set up thousands of fake sales worth almost $2 million.
The Crown corporation has launched a civil suit against the employee, who was fired Friday, and a court-ordered injunction has frozen all of the employee's assets.
In an audit, the LCBO discovered more than $300,000 in funds were unaccounted for last year.
It was also found that between 2005 and last year $1.6 million in product was sent to the LCBO's Toronto warehouse, but the money was never remitted.
The LCBO said in a public statement that it had taken "swift action to deal with this matter and ensure the circumstances that led to this fraudulent activity no longer exist."
The statement says the LCBO "removed the [now former] employee accused of fraud from the workplace and significantly changed its practices related to diplomatic sales …"
The matter has been referred to the police and the Alcohol and Gaming Commission of Ontario for further investigation, the statement said.
The LCBO said it will seek "every legal remedy," including hiring outside help with forensic accounting and fraud expertise, to recover the missing money.
The LCBO is also discussing a claim for losses with its insurer, the statement said.