Sam Bonner was arrested outside the National Court House in Port Moresby by police investigating corruption allegations against Prime Minister Peter O'Neill.
Mr Bonner has been assisting newly-appointed Police Commissioner Geoffrey Vaki in his attempt to set aside arrest warrants for the premier.
Mr O'Neill was issued with an arrest warrant in June after the country's anti-corruption agency Taskforce Sweep accused him of authorising fraudulent government payments to law firm Paraka Lawyers.
PNG correspondent Liam Cochrane says the fraud squad interviewed Mr Bonner to try to lay charges of stealing, conspiracy to defraud and money laundering.
"The fraud squad are alleging that Mr Bonner is involved in the Paraka legal corruption scandal, saying he was a conduit for money that was improperly gained," he said.
"The way [his arrest] took place was rather dramatic.
"There was an attempt to arrest Mr Bonner, he resisted and the fraud squad officers used force and physically detained him.
"There was quite a scuffle. I think he was injured slightly and perhaps some of the police officers were also injured."
Mr O'Neill, who created Task Force Sweep in 2011 to investigate the Paraka case, dismantled the watchdog last month after being served with an arrest warrant for corruption.
The arrest warrant has been deemed valid by the National Court, but Police Commissioner Vaki - recently appointed by Mr O'Neill in the wake of the corruption scandal - has said he will not be arresting the prime minister.
Liam Cochrane says fraud squad officers who arrested Mr Bonner on Wednesday are operating on their own terms and not in line with the instructions of Mr Vaki.
"This is concrete evidence of that fractionalisation within the police which is broadly those who are in favour of going after the prime minister's arrest warrants... squaring off against those who have aligned themselves with the new Police Commissioner Vaki, who are more interested in protecting the prime minister."