Defence Minister Fabian Pok and State Enterprises Minister William Duma are alleged to have committed the fraud in relation to a land deal for a Papua New Guinea naval base relocation, Radio New Zealand reported.
It has emerged that the state-owned asset holding company Kumul Consolidated Holdings paid a company closely linked with Mr Duma US$14million to purchase land at Manumanu in Central Province.
Duma is alleged to have conspired with Pok over the acquisition of the land prior to the sale.
In parliament, the government has faced a barrage of questions about Duma's involvement in the deal, and the suitability of the relocation plan itself.
O'Neill ordered the Police Commissioner to look into the allegation.
He said that now he has had the chance to examine briefings on the issue, he has decided it is in the public interest to establish a commission of inquiry to examine the allegations against the ministers and senior members of departments.
He said while the cabinet had approved of a naval base relocation, no approval was given for the Manumanu deal.
"It appears that individual government agencies have taken it upon themselves, without proper checks and balances, to undertake land acquisition arrangements," O'Neill said.
"That is why the Commission of Inquiry must deal with these issues, and the manner in which these decisions were carried out."
As well as police, O'Neill has referred the issue to the Ombudsman Commission for alleged leadership code breaches.
Duma told parliament last week that there was nothing illegal about the deal, and that it had been approved by appropriate authorities.
However, O'Neill's statement disputed this, The National reported.
He said that in addition to the main land deal under question was a series of related Defence Department land acquisitions that combine as a large transaction, as raised in parliament by concerned opposition MP Ben Micah.
"The acquisition of this land has been done in clear violation of the Governments decision, and resulted in K78.4 million being paid," O'Neill said.
While the ministers have stood aside, National Planning Minister Charles able will look after State Enterprises and Fisheries Minister Mao Zeming will take care of Defence.
Separately, O'Neill said traditional owners of land which is part of an area earmarked for the new military base will be able to stay on their property.
O'Neill told parliament last week that he received a report of the land sale from the Central Governor and a petition from local land owners.
He told the house he would allow the people of Manumanu to continue to live on the land and would examine returning settled portions back to traditional owners.