The party, Balad, denounced the move as an attempt to silence Israel's Arab minority, which accounts for 17.5 percent of the country's eight million population and is largely supportive of the Palestinian cause.
Balad is especially critical of Israeli policies and one of its members of parliament, Haneen Zoabi, has frequently angered Israeli officials.
No MPs were among those arrested.
"More than 20 suspects, including officials and activists in the Balad party, among them lawyers and accountants" were detained, police said.
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The arrests followed a state comptroller investigation.
Members of Balad were accused of creating a mechanism that for years misrepresented "the origin of millions of shekels" obtained from within Israel and abroad, police said.
Authorities did not provide further information on the alleged sources of the financing.
The suspects were to face remand hearings later on Sunday.
Balad called the charges "arbitrary" and a means to intimidate the party, stressing all its political and financial dealings were within the law.
It said the arrests were cover for "silencing Balad" and harming its ability to act as "the spearhead in the struggle against repression and discrimination."
Balad, an acronym for National Democratic Assembly, is part of the Joint List, a coalition of Arab Israeli parties in parliament.
The Joint List holds 13 of the 120 seats in parliament, of which three are held by Balad, and is the third largest bloc in the legislature.
Balad's three MPs triggered outrage among Jewish Israelis earlier this year when they met relatives of Palestinians who authorities say were killed while carrying out attacks.