<< Tibetan exiles, above, hold a vigil in support of Ugyen Thinley Dorje

Police in northern India interviewed Ugyen Thinley Dorje, the 17th Karmapa and Tibetan Buddhism's third most important figure, after approximately £480,000 of cash in two dozen denominations was found at his Gyuto monastery in Dharamsala.

Police have arrested a number of the Karmapa's aides and are currently investigating what they believe may be an illegal attempted land purchase.

The Karmapa told police the money was donated by supporters. "All our dealings across the world are honest and completely transparent – anything else would be contrary to the Buddhist principles that we live by," his office said.

The incident has sent shockwaves through the Tibetan Buddhist community in exile. Even the Dalai Lama, its most important leader, has been drawn in. "There should be a thorough investigation into the cash dealings of the Karmapa as he is an important Lama," he said.

Many among the 200,000-strong community of exiled Tibetans in India and beyond are distraught. In Majnu-ka-Tila, a narrow maze of dusty alleyways that is home to thousands of Tibetan refugees in Delhi, three grey-haired women were openly weeping yesterday afternoon. "We don't believe he is a Chinese spy," sobbed one woman, Taushi, who fled from Tibet in 1959. "We have not been able to sleep since we heard this. Food has had no taste."

Controversy has followed the Karmapa since he escaped from Tibet in 2000 and crossed into India. While he was widely acknowledged as the successor to – and reincarnation of – the 16th Karmapa, not everyone supported his claim, and some backed another candidate. As he was recognised by China, his supporters have often had to defend him against whispers that he has links to the authorities in Beijing.

But the profile of the Karmapa, whose dramatic escape from Tibet, first to Nepal and then to India, took place when he was just 14, has steadily grown. While he is from the Kagyu school of Tibetan Buddhism rather than the Gelug school of the Dalai Lama, many have suggested the Karmapa may be able to fill the political void within the Tibet autonomy movement that will be created upon the death of the 75-year-old Nobel prize winner.

Last summer, when the Dalai Lama celebrated his 75th birthday, the Karmapa, who owns an iPod and plays video games, sat next to him. In 2008 he visited the US, and last summer he was due to visit Europe, but was denied a visa by India.

Last Thursday's raid at Gyuto followed the arrest of two Indians a day earlier who were carrying a large sum of cash and who told police they had received the money from a monk in order to buy land in Himachal Pradesh, the state in which Dharamsala is located.

It may yet transpire that the monastery has nothing more than fallen foul of regulations in the state which prohibits outsiders from buying land without special permission. Within the Tibetan community there is criticism of speculation in the Indian media that the Karmapa had received money from China. Yeshi Phuntsokm, a member of the Tibetan parliament in exile, said: "They are creating a problem for such a special leader and for the people."

Last night, the office of the Karmapa issued a statement which said it was well known he was trying to build a permanent monastery that would serve as a residence. It said the project was subject to approval by the Indian government. "We categorically deny having any link whatsoever with any arm of the Chinese government," it added.

"The Karmapa has a deep affection for the people of this great country of India where he has been practising his faith for years."

Tibet's influential figures

Dalai Lama

He claims to be "a simple monk, no more, no less," but the Dalai Lama is a hugely influential figure, loathed by the Beijing government as a dangerous splittist and adored by the Tibetan people as a god-king. The Nobel Laureate was forced to flee Tibet on foot and on horseback in 1959 in a daring escape after a failed uprising against Chinese rule. There are fears that a power vacuum will arise upon his death. He has no obvious successor, but one of those often mooted is the Karmapa Lama.

Karmapa Lama

The Karmapa Lama, the third highest lama, escaped from Chinese control in Tibet to India in 1999 and is being coached for a wider role in the movement. His position has also been recognised by Beijing, which could make him an acceptable compromise candidate if there is a succession battle. He belongs to the "Black Hat" lineage, named after the crown of that colour that the Karmapa wears, and his influence is strong among young Tibetans and Buddhists around the world.

Panchen Lama

Gyaltsen Norbu is the Chinese Communist Party's choice for Panchen Lama, the second-in-command in Tibetan Buddhism. He has long been favoured by Beijing as a possible successor to the Dalai Lama. He is a delegate of China's top legislative advisory body, and has praised Chinese rule in Tibet. The original 11th Panchen Lama, Gendun Choekyi Nyima, was annointed by the Dalai Lama. He was kidnapped by the Chinesegovernment in 1995, and has not been seen since.