Aboriginal artists are conned into selling works worth thousands for wine and Viagra

Greeny Purvis Petyarre is an acclaimed Aboriginal artist whose paintings hang in state galleries and private collections. His work has been exhibited around Australia and in several European countries, including Britain, where it went on show in London last year. Greeny's larger pieces - intricate evocations of desert plants and wildflowers – sell for tens of thousands of dollars.

Greeny and his wife, Kathleen, also a highly regarded painter, live in a broken-down shack at Utopia, a former cattle station in Australia's vast central desert. Perhaps the German graziers who ran the station early last century considered themselves in heaven. Nowadays the name of the sprawling, dusty community, 200 miles north-east of Alice Springs, seems like a sick joke.

At Utopia, the playground is ankle-deep in litter, and fuel pumps are locked behind metal grilles, to deter petrol sniffers. Children with permanently runny noses play in the red dirt, circled by mangy dogs fighting over half-eaten bones. Up to 15 people are crammed into each house, with sometimes just one dribbling showerhead for sanitation.

There are 250 artists based at Utopia, and they live, for the most part, in poverty and squalor. While the situation defies simple explanation, one major problem is exploitation by unscrupulous dealers.

This week a parliamentary committee investigating sharp practices in an industry worth $300m (128m pounds) a year will present its report. It has heard of artists being paid in wine, Viagra tablets and old cars. Some accept a few hundred dollars for paintings that end up selling for $10,000.

In Alice Springs, the area's commercial hub, almost every other shopfront is a gallery. Some are reputable; many are not. About two-thirds of Aboriginal art is produced in the desert communities of the Central and Western Desert, and most of it passes through the town – sold direct to tourists, or shipped to dealers in Australian cities and overseas.

Alice is home to a growing army of "backyarders" - shadowy operators who lure hard-up artists into town and give them a hamburger, some grog, a few dollars and a bed. In exchange, they paint all day for their hosts, often in sweatshop conditions. Sometimes, the inquiry heard, they are coerced or tricked into such situations, and kept virtual prisoner in airless sheds or cheap motel rooms.

One problem, say those involved with Aboriginal communities, is that many artists have no idea of the monetary value of their works. Nor do they have any real concept of money. Money is spent as soon as it is earned, or spread around a large extended family, to fulfil traditional kinship obligations.

Tim Jennings, a reputable dealer who owns Mbantua Gallery in Alice Springs, says: "We've opened bank accounts for people in the morning, and they go back in the afternoon, withdraw all their money and close them." Aboriginal art – described by the Time magazine critic, Robert Hughes, as "the last great art movement of the 20th century" - has been a remarkable success story.

For millennia Aborigines created art, painting their bodies and drawing in the sand, as part of their ceremonies. But it was not until 1971, when a white teacher, Geoffey Bardon, gave brushes and acrylic paints to elders at one settlement, Papunya, that they began making works to keep – and sell.

Papunya, established in the 1950s under an official assimilation policy that forced people off their lands, was an extremely depressed place. Bardon encouraged the men to use traditional imagery to set down their sacred "Dreamtime" stories. The "dot paintings" that they created on bits of old board were the catalyst for an extraordinary artistic renaissance.

Other communities followed Papunya's lead. After a slow start, the market has flourished in the last 15 years. Aboriginal art – dazzlingly innovative, yet distilled from a 50,000-year-old culture – adorns government buildings, boardrooms and private homes. Last month a work by the late Emily Kame Kngwarreye, a Utopia artist of towering international stature, sold for more than $1m at auction – a record for the industry.

But as the art becomes ever more fashionable and prices soar, together with demand, increasing numbers of unethical operators are attracted. The official inquiry may recommend increased powers for authorities to crack down on the shady dealers who prey on Aboriginal artists.

Another controversial issue is re-sale royalties. There have been mounting calls for artists to receive a percentage of the spiralling sums for which their works change hands. But the big auction houses are implacably opposed to such a scheme, and the parliamentary committee is unlikely to back it.

The report is expected to propose ways of stamping out fraud, using some form of authentication system. A significant proportion of the paintings being produced are believed to be forged.

One shop in Todd Mall, the main street in Alice Springs, displays what it claims are works by a Utopia artist, Minnie Pwerle, in its front window. They are fakes. Since Minnie died last year, her paintings have shot up in value, prompting a thriving trade in copies. "Minnie must still be painting in heaven, judging by the number of new Minnies around," says one Sydney dealer.

Inside the gallery, the owner produces "certificates of authenticity" for the Minnie paintings. They are meaningless documents, easily forged. Asked what year the works were painted, she shrugs. "We don't worry about that sort of thing," she says.

Some in the art world believe Minnie's work may end up fetching as much as Emily's. Both women started painting at a very advanced age. A few years ago an urban dealer tried to abduct Minnie, in order to get her to paint for him. Her daughter, Barbara Weir, also a highly successful artist, found the pair at Alice Springs airport.

About 200 miles north-west of Alice, in a desert landscape of saltbush and spinifex, lies Yuendemu, where grim social conditions go hand in hand with an artistic output of astonishing colour and vibrancy.

Wrecks of abandoned cars rust in the undergrowth, and the ground is strewn with old tyres and pieces of corrugated iron. The breezeblock houses have tin roofs, and are like furnaces most of the year. The medical centre is heavily fortified, with a metal compound for the two ambulances. A little museum on the outskirts of town was burnt down by petrol sniffers.

Outside the community arts centre, a dozen men and women sit painting on the ground. They include Paddy Sims, a Yuendemu elder and highly renowned artist. As he carefully applies a layer of dots, a stray dog wanders across his painting and then takes a drink from his paint pot. Inside, two of his works have just sold for $25,000 each.

There are dozens of arts centres in remote indigenous settlements. The centres supply materials to the artists and market their paintings. They buy all the work produced, regardless of quality. In most places they are the only source of income, other than welfare. Profits help fund projects such as swimming pools and public health programmes.

Painting has restored a sense of pride to demoralised Aboriginal communities, as well as helping them to preserve a vanishing culture. Mr Sims says: "I paint to share my story, the Walpiri story, because it's disappearing. This is the way to tell people – my children, everyone." Painting has also acted as a bridge between black and white Australia, opening up an ancient culture to a mainstream population that knew little about it and cared less.

While the arts centres are Aboriginal owned and controlled, they are run by white outsiders. Some critics say they interfere in the artistic process, stifling creativity and homogenising the work.

Terry Cutcliffe, a reputable art dealer based at Sydney's Addison Road Gallery, says: "I once heard a white administrator scolding a man who is a painter of international stature. She said to him ‘how many times have I told you, don't use so much red!'. What is urgently needed is for indigenous people to be trained as administrators and curators." The arts centres receive government funding, but not enough. At Maningrida, in Australia's tropical "Top End", painters who have exhibited in London and Basel work in cramped premises with no air-conditioning. The centre employs 700 artists and has an annual turnover of $2m. Every government department has turned down a request to help fund a new building.

Hetti Perkins, head curator of Aboriginal art at the Art Gallery of New South Wales, points to the new Musee de Quai Branly in Paris, where work by eight Aboriginal artists - including Yuendemu's Judy Watson - forms part of the fabic of the building. The museum, which opened last year, is home to the world's greatest collection of indigenous art.

In Australia, there is no permanent installation honouring Aboriginal art. "There's nothing on that scale here, and there's no real sustained or strategic support for indigenous art," says Ms Perkins. "Arts centres are not effectively resourced and artists are being ripped off.

"The lack of government support is a scandal. We are squandering this incredible cultural heritage that we have here in terms of the visual arts. It's not being treated as a precious resource that needs to be protected and nurtured."