The Ulster Defence Association is still heavily involved in extortion rackets, the PSNI has said.
Det Supt Esmond Adair said yesterday there was still "significant evidence" that the largest loyalist paramilitary group was active in extortion, which was "rife in Northern Ireland".
His comments follow the controversial British government award of £1.2 million (€1.76 million) to the Ulster Political Research Group (UPRG), which provides political analysis for the loyalist group.
The funding is to assist community initiatives aimed at weaning the paramilitary group away from violence and racketeering.
Det Supt Adair added: "It is a vastly under-reported crime. We reckon that only 1 to 3 per cent of extortion is reported to police."
The UPRG has rejected SDLP criticism of the government decision to support the UPRG initiative, which will fund 12 people to work across six regions helping loyalist communities to access social and economic funds.
SDLP East Derry Assembly member John Dallat was strongly opposed. "It hurts to think that the money contributed by my constituents in income tax is now being used to reward the agents of the killer gangs who murdered their relations and friends at Castlerock, Greysteel and elsewhere," he said.
"It is like being made to pay for the bullets that killed them. There is no evidence that the UPRG is anything more than an apologist organisation for killer gangs who haven't decommissioned a single gun, bullet or pipe bomb. Indeed, they have spent most of their time recently denying any of their pals have been agents of MI5. Is this the payoff?"
His North Belfast colleague Alban Maginness added: "The UDA should not get its hands on a penny of public money, no matter how indirectly."
UPRG spokesman Frankie Gallagher rejected the criticism and pointed to former SDLP leader John Hume's engagement with the republican movement in the early years of the peace process.
"John Hume, when he was SDLP leader, was a pioneer of the Hume-Adams talks which came up with a process that lasted more than 15 years to take republican communities away from violence," he countered.