Three years ago, the Wall Street Journal reported that Malaysian investigators had traced the deposit to a state fund 1MDB that Najib founded over a decade ago.
Najib will be charged in court on Wednesday morning, following his arrest on Tuesday (July 3).
Since the election loss Najib has been banned from leaving the country and has found himself at the centre of a widening graft probe.
Earlier, a security source said that agents from the Malaysian Anti-Corruption Commission arrested Mr Najib.More news: Neymar believes critics of his Brazil theatrics are trying to 'undermine' him
Founded by Mr. Najib in 2009, 1MDB is being investigated in at least six countries for alleged money laundering and graft.
In a pre-recorded message posted on Twitter after his arrest, Najib said not all the accusations against him and his family were true.
Mahathir also said last month that there was an "almost perfect" case against Najib's role in the 1MDB scandal.
The MACC, however, did not specify the charges he will face.More news: Trump says he has interviewed 4 candidates for high court
A statement by a spokesman for Najib, sent to the media and posted on social media, said his arrest was expected as the new government had "delivered the guilty verdict" against him in public.
"However, please believe that these accusations levelled against me and my family are not true", said former Malaysia prime minister Najib Razak. But in a major blow for Najib and his United Malays National Organization, a May 9 election put in place a government insistent on weeding out corruption and addressing Malaysia's fiscal troubles.
"I call on the owners of these accounts to come to MACC and we will show them the evidence and documentation that these funds came from 1MDB, then we will ask them to give back the funds willingly". Najib has said the funds were a donation from a Saudi royal.
Riza, who is Rosmah Mansor's son from her first marriage was in the centre of controversy when he was implicated by the US Department of Justice for allegedly siphoning hundreds of millions of ringgit to fund the steamy Hollywood movie The Wolf of Wall Street and two other films.More news: All eyes on James Rodriguez for Colombia's clash with England
The new government has reopened investigations into 1MDB that were stifled under Najib's rule.