Several thousand prisoners are believed to be involved. Probation officers claim that the authorities have known about the fraud since 1988.
The DSS said yesterday that it had launched a new vetting procedure to try to weed out the fraudsters, but denied it had taken more than six years to close a known loophole in the benefits system.
Prisoners are obtaining the benefits - including dole and allowances for invalidity and sickness - by keeping their DSS books when they are sent to prison. The prisoners usually use relatives or friends, to whom they pay a small fee, to forge their signatures and sign on at the benefit office.
Prison computers are not linked with the DSS so checks cannot be made.
Details of the benefits fraud are revealed tonight in the BBC television current affairs series, Here and Now. John Marshall, of the Prison Officers Association at Durham jail, told the programme he had seen people claim unemployment benefit. 'I've (also) seen people being able to claim for invalidity, for mobility, sickness benefit even and having cheques sent in from the DSS for inmates to sign and to be cashed within the prison so they can spend it on luxury items in jail.'
Harry Fletcher, assistant general secretary of the National Association of Probation Officers, added: 'Probation officers have been reporting fraudulent claims since 1988. The loophole appears to be due to one computer not talking to another - it's quite extraordinary that this loophole has not been closed sooner.'
A DSS spokesperson said yesterday: 'We are now in a position to stop the fraud. We have already begun the first sweep of prisoners to ensure that they are not receiving benefit or that no one is using their name to claim benefit. We only recently became aware that there is a problem with prisoners falsely claiming benefit . . .'
The spokesperson added that an estimated fraud cost of pounds 9m a year was 'substantially exaggerated'. The department, however, admitted it did not know the total cost.
Here and Now will be shown tonight on BBC 1 at 7.30pm.