Ibrahim Dogus, a kebab tycoon and the mayor of Lambeth, was embroiled in a tax evasion probe in 2011 after giving his aunt £11,500 in cash from his restaurant and asking her to take it to Istanbul on a flight from Heathrow.
The money was seized by UK border officials, who found it in satin purses, envelopes and a sock with a zipped compartment.
In a court case, Mr Dogus, who is a close friend of Labour leader Jeremy Corbyn, claimed the money was being sent to Turkey to repay a debt to his brother-in-law.
However, UK Border Agency (UKBA) officials described his story as "unbelievable" and said his financial activities were "highly unorthodox".
They said: "The UKBA submits that this cash is recoverable property, namely sourced from tax evasion."
A judge upheld an application for the forfeiture of the cash under the Proceeds of Crime Act. He did not face criminal charges as the seizure fell under civil law.
Keep up with all the latest election news at expressandstar.com/election
The revelations emerged following an investigation by The Times, and come just days after Mr Corbyn launched a manifesto that pledged the "biggest ever" crackdown on tax avoidance and evasion.
Mr Dogus was parachuted in by Labour to fight West Bromwich East after deputy leader Tom Watson announced he was standing down for personal reasons.
He had previously failed to gain candidacy in his home seat of Vauxhall and in Birmingham Hall Green.
Mr Dogus's conduct has been questioned on several occasions in recent years.
He was accused of paying staff at his restaurants "poverty wages" of less than £4 an hour, and faced criticism from Labour activists after he donated £1,250 to the Conservative Party in 2013.
A spokesman for Mr Dogus said he disagreed with the court's decision. "Mr Dogus rejects, in the strongest possible terms, any allegation of wrongdoing or illegality," he added.
"He condemns any individual, organisation or business that does not pay its taxes fully.
"Throughout the case that took place almost a decade ago, Mr Dogus sought to cooperate fully with the court and instructed his solicitor and legal team to do the same.
"Mr Dogus no longer instructs the solicitor who acted for him in 2011 and reported the conduct of his previous solicitor to the relevant regulator."
Labour is defending a majority of 7,713 in West Bromwich East, a seat which the party has always held.
In a constituency with a 68 per cent Leave vote, Remainer Mr Dogus faces competition from pro-Brexit candidates Nicola Richards for the Tories, independent George Galloway, and the Brexit Party's Christian Lucas.