Lieutenant-General Sir John Kiszely, former head of the Defence Academy, is alleged to have boasted he could push a company’s interests to figures such as the Prime Minister in a private box at the Festival of Remembrance next month at the Royal Albert Hall.
The Legion yesterday launched a high-level investigation in to the claims to determine whether he had abused his position.
It came as the Philip Hammond, the Defence Secretary, warned that he was prepared to "shut the door" of the Ministry of Defence to retired military chiefs if they could not be trusted.
Sir John's claims were among a series by former military chiefs, including Lord Dannatt, the former head of the Army, that they could help secure defence contracts in a “generals for hire” newspaper sting.
Sir John is the honorary president of the respected Royal British Legion and was due to sit with David Cameron at next month’s remembrance event.
At other events he would find himself "standing there waiting for the Queen with nothing else to talk about to Philip Hammond than whatever", he is recorded as telling the reporters.
And as the representative of the Legion, he could also easily fix meetings meetings with Armed Forces Minister Andrew Robathan that would otherwise be refused – where commercial issues could then be raised in conversation.
Legion Director General Chris Simpkins said: "The Royal British Legion has a code of conduct which addresses the issue of conflict of interest.
"The honorary position of National President falls within this code and should not be used for commercial gain or in order to gain access to politicians and senior military figures for purposes unrelated to his position as National President.
"The list of guests invited to attend the Festival of Remembrance, and the seating arrangements, are administered internally without influence by the National President.
"The President does not have any personal guests in his box at the Festival in which he entertains senior politicians and military personnel as guests of The Royal British Legion.
"This matter will be referred to the Legion's Governance Committee for review. The findings of the Governance Committee will be reported to the Board of Trustees for any necessary action."
Sir John told the Sunday Times he had always kept his commercial interests "entirely separate" from his role with the Legion and had never used access gained through it to discuss any business interests.
Philip Hammond has said that former generals taped boasting they could help secure defence contracts had damaged their reputations and broken strict lobbying rules.
Lord Dannatt was caught up in the "generals for hire" newspaper sting
Mr Hammond told the BBC's Andrew Marr show: "The revelations are deeply damaging to the individuals concerned and their reputations."
At least one of those caught up in the sting had broken rules which bar retiring generals and other senior Whitehall figures from taking up appointments without abiding by advice from a special advisory board for two years after their departure, Mr Hammond said.
Sir John Kiszely, former head of the Defence Academy
Saying he was prepared to take action against them, he added: "We have to look at the level of access that we give retired officers to the MoD and to servicing officers.
"If they are abusing that access for cash purposes then we will have to tighten it up or maybe even shut it down."
Mr Hammond was asked about the case of Admiral Sir Trevor Soar, who stood down as commander of the naval fleet in March, and who was recorded saying that he would "ignore" the two-year rule.
The Defence Secretary said: "If we find that people are not taking that advice and not abiding by the advice that they are given, then there are steps we can take to shut down their access to officials and ministers."
Adding that he suspected the generals had been overplaying their hands when they were taped boasting to undercover reporters from the Sunday Times that they could help procure military contracts, he said: "There is no way that retired officers influence the way military equipment is procured. I'm happy that the system is completely robust."
Saying he guessed that the retired military chiefs had been "bigging up" their roles, he added: "I hear bravado here."
Mr Hammond also said that he was unconcerned at claims made by Lord Dannatt to the undercover reporters that he was due to have dinner with John Thompson, the senior civil servant at the MoD, and could take advantage of the evening to lobby on behalf of defence companies.
Mr Hammond speaks on the BBC's Andrew Marr show
"Knowing my Permanent Secretary, I am completely relaxed about it because he would be totally immune to that kind of approach," Mr Hammond said.
Lord Stirrup, former chief of the defence staff, who was mentioned in the sting but not directly accused of lobbying, defended his role in the affair.
He told Sky's Murnaghan programme that he had discussed joining the board of a fictional company which he believed was proposing to supply the MoD with unmanned drones which could have saved the lives of British soldiers.
"If you accept a salaried position, of course you receive a salary," Lord Stirrup said. "If you're asked about your contacts, of course you say who they are. Of course I do know ministers. I've never lobbied for money. I don't lobby."
The retired generals, who also include Lieutenant-General Richard Applegate, deny any wrongdoing, insisting that they were acting in the best interests of the service.
Labour called for a full investigation into the "grave allegations" against the generals.
Jim Murphy, the shadow defence secretary, said: "We need to know every detail, every meeting and every contact between those recorded in this video and those still serving in the MOD.
"The Government must have full disclosure about any dealings between these retired distinguished officers and Government ministers, civil servants or senior members of the Armed Forces.
"Specifically we need to know if they have met any MOD officials dealing with any defence equipment contracts.
"Britain has a global reputation in defence procurement and it is essential that it is maintained.
"There has to be total clarity that not a single penny piece of defence spending has been influenced by this type of rule breaking lobbying."