A £20 million pension fund transaction by Swansea Council has been deemed unlawful by auditors.
The movement of cash from the account was raised in auditors PricewaterhouseCoopers's report last year.
It was done so because the authority was switching banks to HSBC and all accounts had to be in balance.
The cash was fully paid back in August 2012 and did not leave the authority.
However, in its report PricewaterhouseCoopers auditors said they were "concerned that this transaction may have been in breach of regulations and the appointed auditor instructed solicitors to advice how the regulations applying to the local government pension schemes impact on the transaction".
It added: "The solicitors have advised that the provisions of £20 million by the fund to authority is unlawful and must be so recorded in the pension fund accounts."
The matter was discussed at a meeting of Swansea Council's cabinet. At that meeting members of the public, Nortridge Perrott and Ray Welsby called the movement to a new bank and the transaction into question.
Answering Mr Perrott's question on why the council moved to HSBC, cabinet member for finance Rob Stewart said: "The council's bank contract is subject to a competitive tendering exercise. The contract award was made under delegated powers and the best case was taken."
He said the council had not changed accounts since 1996.
Speaking about the movement of the £20million, he added there had been no malpractice.
"It was not something that was out of the norm for officers to move money around," he said.
"It was because we were moving banks and all accounts had to be in credit.
"I do not believe there was anything untoward in that."
Mr Welsby asked members whether the pension stakeholders had been informed of the movement.
Mike Trubey, section 151 officer (statutory chief finance officer), said: "In light of the audit it has been challenged and we've changed the system to make sure it doesn't happen again.
"The trustees did not know, someone did this as part of treasury management. They are aware of what's happened."
Council leader David Phillips also emphasised that the transaction had been unlawful, which meant it had been done without authority.
"That's not the same as illegal," he added.
The £203,000 lost in interest while the cash was in another account has been repaid.
Mr Phillips said the council had take the decision to repay the interest on "moral" grounds.