The assistant mayor, the Swiss bank accounts and the €350,000 of Moroccan drugs money

French anti-fraud investigators have uncovered an extraordinary tax scam involving prominent elected officials and a cannabis-smuggling ring. John Lichfield reports from Paris

In February this year, French police intercepted one of the dozens of "go-fast" cars which transport cannabis at high speed from Spain to Paris. The seizure – banal in itself –unravelled an extraordinary network of drug-trafficking, money-laundering, fraud and tax evasion which sprawled over the invisible barrier which separates Paris from the city's poor, multiracial suburbs.

Bank notes handed by clients to street drug dealers in the suburbs were ending up, French and Swiss investigators discovered, in the safes of seemingly law-abiding, well-heeled citizens in the French capital.

Seven prominent Parisians have been arrested in the past few days and accused of "conspiracy to launder money and association with criminals". They include a Green politician, Florence Lamblin, a society lawyer, Robert Sellam, an art dealer, a dentist and a sound engineer.

All deny any connection with drug traffickers. All have been obliged to admit they were smuggling – so they thought – cash into France from undeclared Swiss bank accounts. The cash was, in fact, coming directly from cannabis dealing in the south-western suburbs of Paris. A trio of Moroccan brothers, including a prominent fund manager in Geneva, are alleged to have concocted an elaborate scheme to launder money by balancing two illegal flows of cash. The cannabis profits leaving France were "swapped" for assets hidden in Switzerland which tax cheats or business fraudsters wished to repatriate.

The risky job of smuggling drug-trafficking proceeds over the Franco-Swiss border was avoided. Instead, the drugs cash was handed over in plastic bags to Parisians who had hidden Swiss accounts. The same sums were debited from their banks in Geneva and sent on a complex route through shell companies in London and offshore tax havens to purchase assets for the drug barons in Morocco, Dubai or Spain. A commission was allegedly paid on both transactions.

The three brothers, Meyer El-Maleh, 48, a Geneva-based fund manager, Mardoché El- Maleh, 52, and Nessim El- Maleh, 28, were among the 20 people arrested last week by investigators in Switzerland and France. They are suspected of handling up to €12m (£9.6m) in cash in the past seven months (and far more over the past four years). Assets seized by the police include €2m in cash, gold ingots, art treasures and guns.

The arrest of Ms Lamblin, the Green assistant mayor of the 13th arrondissement of Paris, has turned the affair into a political slanging match that could prove deeply embarrassing for the Socialist-Green administration of President François Hollande. The need for tougher action against international money laundering was one of the main issues raised by the Green party in elections last spring.

Ms Lamblin's lawyer, Jérôme Boursican, said at first that she was the victim of a "miscarriage of justice". He later admitted she had been repatriating cash from a €350,000 family bequest held in Geneva for almost a century and never declared to the French tax authorities.

Mr Boursican said: "At the invitation of her bank, my client wanted to repatriate €350,000 from a family bequest placed in a Swiss account in 1920. She took advice from someone she trusted who put her in touch with someone capable of handling this kind of transaction."

He said Ms Lamblin had "no connection whatsoever" with drug trafficking. She was guilty "at most" of not declaring the money to the taxman.

She has been released on bail. The accusation of "association with criminals" may prove untenable but the admission of "at most" tax evasion will probably end her political career.

At a time when the Socialist-Green government is turning the tax vice on both the wealthy and the middle classes, this admission was almost as explosive politically as if she had admitted to drug trafficking. At the insistence of an irate Mayor of Paris, Bertrand Delanoë, Ms Lamblin resigned on Saturday and stood down from her position as city councillor.

The main centre-right opposition party, the Union pour un Mouvement Populaire (UMP), said Ms Lamblin's alleged involvement proved that the French left was "culpably soft" in its attitude towards drugs. The far-right National Front party said the affair proved the mainstream political system was "rotten to the core".

The affair draws attention to a scarcely concealed secret which is the subject of nudge-nudge conversations among the bourgeoisie of both right and left. Large sums are systematically hidden from French tax authorities in accounts in Switzerland and Luxembourg. New methods of circumventing ever-tighter border controls are the subject of eager discussion.

Up to 30 well-off Parisians are said to have been using the El-Maleh brothers' services. Most were hiding legitimate assets from the taxman. One or two are said to have admitted concealing money embezzled from their companies or clients.

The Franco-Swiss investigation began with the interception in February of a powerful limousine packed with cannabis en route from Morocco, via Spain, to the Paris suburbs. Investigators used evidence from those arrested in the so-called "go-fast" car to unravel the financial trail of a large, Moroccan-based cannabis-smuggling operation.

"You need to attack on the financial, as well as the criminal front," said Jean-Marc Savira, head of the French police anti-fraud squad, the OCRGDF. In other words, "follow the money". Police tracked down and watched a man in his 30s whose job was to collect the proceeds from street traffickers in the Trappe-Mantes-la-Jolie area south-west of Paris. Police sources say they observed that he handed over bags full of cash to Mardoché El-Maleh.

They also watched Mr El-Maleh hand over bags to apparently respectable people in wealthy areas of Paris.

Swiss investigators are said to have uncovered the alleged role of the two other El-Maleh brothers, who were both based in Geneva. One, Nessim, worked for a private bank owned by Britain's HSBC. The other, Meyer, operated a respected fund-management company.