Ten defendants go free after decade-long police sting ends in fiasco. Cost to the taxpayer? £25m

An undercover police operation in which a bogus company set up by Scotland Yard laundered £15m of suspected drugs money was declared "massively illegal" by a judge yesterday who described it as a "state-created crime".

Ten defendants accused of money-laundering offences were freed after a five-year court case that has cost the taxpayer an estimated £25m.

The case against two men, including a lawyer from Gibraltar, amounted to entrapment, the court decided.

Scotland Yard defended its operation, and said yesterday's ruling ­ which followed 418 days of court hearings ­ was a blow to future undercover operations. It said the sting, codenamed Operation Cotton, had already helped convict 21 people for drug offences involving a total of 4,000kg of cannabis and 100kg of cocaine.

The operation began 14 years ago and ran over a 10-year period. It was aimed at alleged drug barons using Gibraltar and other routes to launder their profits. The principal target of the operation was offered a 5 per cent fee for all the money he put through the fake firm. Once "cleaned", the cash was handed back to the suspected traffickers to allow police to continue gathering evidence.

A financial company, set up with Scotland Yard's approval, came complete with bogus records filed by accountants who were granted immunity from prosecution. The firm had four staff based at offices in London, and false accounts lodged with Companies House.

The result was a "honeypot" designed to trap as many people as possible.

But Judge Bathurst-Norman, sitting at Southwark Crown Court in London, said: "Laundering money in such large quantities back to suspect criminals will raise question marks in any right-thinking member of the public."

During his three-day judgment, the judge strongly condemned both the investigation and the way in which the case was subsequently handled. He said the criticism of the police was due to their "incompetence" and "cavalier" approach to the law ­ rather than a question of "bad faith".

He said: "They offered a wholly exceptional opportunity to others to commit crime. I have come to the conclusion that what the police did amounted to state-created crime."

In 1993 two undercover police officers, posing as husband and wife and pretending to be wealthy financial advisers able to move money around the world, went to Gibraltar. In October that year the first officer met a police informer and convicted drugs trafficker, Joe Wilkins. They discussedChristopher Finch, a 55-year-old lawyer based in Gibraltar who had represented Carmen Proetta, a witness in the 1988 television documentary Death on the Rock, which investigated the shooting of three IRA suspects by the SAS.

Wilkins allegedly described Mr Finch as a "dishonest" lawyer representing a "number of people with connections in Gibraltar and abroad who were involved in drug dealing". The undercover officer met Mr Finch and promised him 5 per cent on any money-laundering "business" he brought in.

Mr Finch allegedly later told the police that one of his clients involved in "tobacco smuggling" wanted to transfer some money. Police regarded the phrase as a euphemism for drugs. The court heard that 48 hours later £161,000 was handed to the company for laundering. Further sums followed.

In July 1997, Mr Finch introduced the undercover officers to a businessman, Plinio Bossino, 63, from Streatham in south London. He owned the bureau de change in Gibraltar which the woman officer pretended to have an interest in buying.

It was part of the Crown's case that when the woman officer mentioned the need to establish the value of "back-door business", Mr Bossino told her he had £3.5m in England he wanted to "bring over ... but not all in one go".

Over the next three weeks, the court heard, three payments totalling £344,000 were laundered by the police, and returned. Both the police's main targets, Mr Finch and Mr Bossino, were eventually "lured" to London in August 1998, and arrested. Eight other men from London and Liverpool were also accused of laundering offences and arrested.

The judge said that although the police sought advice as to whether the operation would be legal, the way they went about it "can only be described as cavalier". Officers should have gone to the Director of Public Prosecutions, or consulted Treasury Counsel. But they did not. They contented themselves with a relatively low-level approach to the Crown Prosecution Service for guidance, which was "fatally flawed". Police in effect "made up their own minds" that they were acting lawfully, the judge said.

He was satisfied that Mr Finch and another man ­ Thierry Leclerc ­ who had both denied conspiracy to supply cannabis and launder the proceeds of drugs between 1 January 1995 and 13 August 1998 ­ had in effect been entrapped.

As a result the prosecution against them would be halted as "an abuse of process".

But the judge was critical of Mr Finch and said his "conduct based on his admissions" was "incompatible" with his continued membership of the Bar, and the appropriate professional authorities would be notified.

The judge found that evidence suggested that Mr Bossino ­ unlike the lawyer ­ was "already engaged in money-laundering" when approached by police. As a result he had not been entrapped, but other failings in the police investigation meant that proceedings against the businessman, who had denied similar conspiracy charges, should also be stopped.

Some of the defendants are expected to sue the Metropolitan Police for compensation, while lawyers for the 21 people already convicted are likely to examine the ruling for material to launch an appeal. The Met, however, believes that the convictions were based on drug seizures, not alleged laundering, and are therefore sound.

The Director of Public Prosecutions has asked the Attorney General to challenge the ruling in the Court of Appeal.

A senior police officer, who cannot be named for security reasons, rejected criticism that such a huge sum of money had been returned to the criminals and was untraceable. He said: "Unless we got involved with them ourselves, we would not have known about them. It would have happened anyway."