The Electoral Commission has said that the Liberal Democrats can keep donations worth £2.4m that it had been alleged came from a man convicted of theft.
The money came via a company, 5th Avenue Partners Ltd, to the Lib Dems.
In November 2008 Michael Brown was found guilty at Southwark Crown Court of defrauding £36m, including £8m from former Manchester Utd chairman Martin Edwards.
He is on the run and was convicted in his absence.
Brown was the "sole director" of 5th Avenue Partners.
The commission could have applied to a court to seek forfeiture from the Lib Dems of an amount equivalent to the sum accepted if the donation was ruled inadmissable.
Instead it concluded that there is "no reasonable basis to conclude that the true donor was someone other than 5th Avenue Partners Limited".
The Electoral Commission investigation considered whether there had been breaches of the Political Parties, Elections and Referendums Act 2000 (PPERA).
In particular, it looked at whether the company was a permissible donor, that is a company registered under the Companies Act 1985, incorporated within the UK or another EU member state, and carrying on business in the UK.
The commission concluded that 5th Avenue Partners Limited met these requirements at the time the donations were made, and therefore was a permissible donor.
Electoral Commission chair Jenny Watson said:
"The law sets out who can make donations to political parties and makes sure that information about where parties get their money from is in the public domain, so voters can see for themselves how politics is funded.
"Our job is to make sure those rules are followed.
"Parliament considered carefully the rules on company donations in 2000, and set out specific requirements, including that a company must be carrying on business in the UK in order for it to be a permissible donor.
"We have conducted a thorough investigation into these particular donations to the Liberal Democrats, and considered a substantial body of evidence: evidence from the criminal proceedings against Michael Brown; documents obtained from the City of London Police, including analysis by forensic accountants; and evidence provided by the party.
"Having considered all the evidence in this case, we have concluded that 5th Avenue Partners Limited met the requirements to be a permissible donor.
"The Electoral Commission will be taking no further action in this case."
A spokesman for the Liberal Democrats said: "We welcome the Electoral Commission's ruling on this matter.
"At all times the party acted in good faith in relation to the receipt and the expenditure of these donations in the 2005 general election campaign.
"All our donations and loans were properly declared to the Electoral Commission."
Last month the United Kingdom Independence Party was told to pay back £350,000 after donations were found to be impermissible.
The Court of Appeal ruled that the money received from Alan Bown should be returned as he was not on the electoral register at the time the donation was made.
The judgement brought to an end a long running dispute between the elections watchdog – who brought the appeal - and UKIP.
Bown made 67 separate donations between December 2004 and January 2006, when he was not on the register.
