Google may very well be ponying up some serious dough in a federal investigation which has targeted the search engine giant for breaching competition laws.

The Wall Street Journal is citing a government investigation into Google's selling online ads for illegal drug sales as the reason why the Internet search leader recently set aside $500 million to pay for a possible settlement.

According to Thursday’s report, the FDA and Rhode Island’s attorney general have been looking into whether Google profited illegally from ads placed by non-U.S. pharmacies. Google and other search sites blocked many overseas pharmacy ads in early 2010, because it’s illegal for U.S. citizens to have such drugs imported.

There was, however, one exception to the rule and that rule was bent for Canadian pharmacies. They were limited to approved ads only.

It’s no secret that U.S. citizens look to Canada to purchase drugs, as they are cheaper by comparison. Even with a prescription, it is still illegal in the U.S. to purchase prescription drugs that are not legit within its borders. Another issue with online ordering is that customers are susceptible to counterfeit pills; they purchase drugs that they think are real but are, in fact, nothing but fakes.

The Department of Justice is looking into whether Google knew it was running ads from illegal online pharmacies based in the U.S. and Canada. Google has taken steps in the past to ensure it is only taking ads from above-board pharmacies; in February 2010, for instance, it updated its AdWords policy so that only pharmacies in both countries accredited by professional groups could run ads.

Despite the compromise, Google is still setting aside half a billion to settle the matter.

There’s “no comment” from official sources, but information from “people familiar with the matter” in pegging prescription drug violations were the crux of the probe.

Last September, the company filed suit to prevent rogue pharmacies from advertising on AdWords, saying it’s been a problem for years.

“It’s been an ongoing, escalating cat-and-mouse game – as we and others build new safeguards and guidelines, rogue online pharmacies always try new tactics to get around those protections and illegally sell drugs on the web,” wrote Google in a blog post attributed to Michael Zwibelman, Google’s litigation counsel.