The King is understood to be furious that Prince Andrew has plunged the monarchy into a major scandal – with his relationship with an alleged Chinese spy tarnishing the reputation of the entire Royal Family.

A source, however, said that, despite his frustration with the Duke of York, Charles has accepted that he can’t ‘divorce or sack’ his younger brother, as ‘there will always be a bond of blood’.

It came as this newspaper learnt that, astonishingly, the Palace is unable to rule out that the Duke is using money from Chinese donors to support his stay in the 30-room Royal Lodge in Windsor Park.

Officials have concluded they have no authority or legal right to probe Andrew’s financial affairs and must simply rely on his word that his income is from legitimate sources.

‘The Palace has behaved the best it possibly can with a difficult relation,’ the source said last night. 

‘Every sanction that can be imposed has been, but you can’t divorce or sack your brother from being your brother. 

'There will always be a bond of blood and all families often have difficult relatives to deal with.  

'Of course it is understood that it looks bad for the entire family but that is because of one individual.’

The latest scandal erupted on Thursday when it was revealed that a ‘close confidant’ of the Duke of York was an alleged Chinese spy who has been banned from entering the UK after an investigation by MI5.

In what appears to be an extraordinary breach of national security, the alleged agent, who can be named only as H6, was so close to Andrew that he visited Buckingham Palace twice, and entered St James’s Palace and Windsor Castle.

He was even authorised to act on Andrew’s behalf to seek investors in China.

MI5 discovered that the businessman, 50, was a member of the Chinese Communist Party and was working for its shadowy United Front Work Department, which gathers intelligence. 

When police stopped him at the UK border in 2021 it was discovered that he had a briefing document in which Andrew appeared to be described as being in a ‘desperate situation and will grab onto anything’.

The Mail on Sunday can reveal that the alleged spy has previously attended a meeting of the powerful Chinese People’s Political Consultative Conference (CPPCC) in Beijing. In a sign of his importance to China’s Communist Party, he was pictured on the front row of the meeting in the vast Great Hall of the People.

Royal sources are concerned the mounting controversy threatens to overshadow the good work of the King and Queen Camilla as well as the Prince and Princess of Wales. It also comes less than two weeks before the King’s Christmas message.

Earlier this year, the King stopped paying his brother’s £3 million-a-year security bill at Royal Lodge and urged him to move into more modest accommodation. 

But in November, it emerged that the Duke had been allowed to stay at the property after convincing Palace authorities that he had secured enough funds to support himself.

The Keeper of the Privy Purse, Sir Michael Stevens, reportedly approved the financing as coming from legitimate sources. Last week’s revelations, however, raise fresh questions about where exactly Andrew has found the money to bankroll his stay at the Windsor mansion.

The MoS understands that because his leasehold agreement is with the Crown Estate, and not the Royal Household, he has the same rights and responsibilities as any private tenant. 

Indeed, the Palace has concluded that it does not have the power to conduct ‘due diligence’ investigations into the Duke’s private income any more than they could demand the right to examine the financial records of any private individual.

Officials are said to have repeatedly asked the Duke whether his income is from legitimate sources – and he has insisted that it is.

But last night former minister and expert in royal finances Norman Baker said: ‘It’s extraordinary the Palace does not know where the money is coming from.

‘They need to find out urgently and tell us.’

Prince Andrew stepped away from royal duties in 2019 amid the scandal over his links to billionaire paedophile Jeffrey Epstein.