Fernando Ángeles Juárez, 64, was shot dead by unknown gunmen on Thursday outside one of his properties.
More than 100 politicians have been killed across Mexico ahead of general elections on 1 July.
Mr Ángeles was the third politician to be killed in the western state of Michoacán in just over a week.
The town's 27 police officers and the local public security secretary were detained by federal forces in the early hours of Sunday.
'He couldn't stand corruption'
Mr Ángeles was a successful businessman with little previous political experience.
He had considered standing as an independent but eventually joined one of Mexico's main parties, the centre-left Party of the Democratic Revolution (PRD).
"He couldn't stand seeing so much poverty, inequality and corruption and so he decided to run," one of his closest friends, Miguel Malagón, told El Universal newspaper.
After his murder, prosecutors accused Ocampo's public security secretary, Oscar González García, of involvement.
When Mexican federal agents arrived in the town on Saturday to detain him, they were stopped by local police officers.
They returned with reinforcements on Sunday morning and arrested the entire force and their boss.
They were handcuffed and taken for questioning in the state capital, Morelia.
Prosecutors accuse the officers and Mr González of links with organised crime groups in the state.
Mexicans will go to the polls next Sunday to choose a new president, senators and members of the Chamber of Deputies.
More than 3,000 posts at regional and local levels will also be at stake.
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