The police operation started in Budva in the early hours of Thusday when authorities arrested mayor Lazar Radjenovic, former mayor Rajko Kuljaca, deputy mayor Dragan Marovic, local official Milena Marovic Bogdanovic, and the prime ministers advisor Aleksander Ticic.
All of them can be detained for up to 48 hours.
Another string of arrests followed, including current and former city officials and the former director of the company Trade Junik CG, Goran Bojanic.
Police are still searching for one more person.
Investigators say the suspects abused their office and formed an organized criminal group.
Their alleged actions defrauded the municipal budget of more than € 10 million (US$ 11.1 million).
Prosecutors suspect that municipal officials overpaid the construction company Gugi Komerc D.O.O Budva for works on a stage that was to be used for music festivals on the Jaz beach.
This alleged fraud alone would have cost the state € 2 million (US$ 2.2 million), according to prosecutors.
The group is also suspected of having made deals on behalf of the municipality with Trade Junik CG in a scheme worth eight million euros (US$ 8.9 million) during 2007 and 2008.
According to the initial contract, the company was to construct the business center TQ Plaza in Budva which would be jointly financed and owned by the municipality and the construction company.
But in separate annexes signed later, the municipal officials swapped 4,500 square meters of office space for 4,500 square meters of much cheaper garage space in the same building complex, according to the chief prosecutor for organized crime, Milivoje Katnic.
The annexes to the initial contract were signed without the approval of the Budva municipal assembly.
Deputy mayor Dragan Marovic's lawyer, Zdravko Begovic, said his client denied the accusations.
According to Montenegro state television RTCG, the lawyer of mayor Lazar Radjenovic and local official Milena Marovic Bogdanovic said both his clients also denied wrongdoing.
Marovic is the brother of the ex-President of the former union of Serbia and Montenegro Svetozar Marovic (before Serbia and Montenegro broke into separate countries), while Milena Marovic Bogdanovic is his daughter.
OCCRP previously reported the case of US$ 3.8 million in undeclared assets that Svetozar Marovic's wife, Djordjina Marovic, stashed in the Swiss Bank HSBC.
