Chinese police are investigating a Beijing firm for holding people in illegal jails that the government says do not exist, state media reported today.

According to China Daily, the company charged local officials to seize and lock up complainants, preventing them from taking their grievances to central authorities. Local authorities are penalised when petitioners from their areas complain to higher officials.

The English language newspaper reported that police had detained Zhang Jun, chairman of Beijing-based Anyuanding Security and Prevention Technical Support Service, and his general manager Zhang Jie, for "illegal detention and unlawful operation", citing the Southern Metropolis Daily. The move follows lengthy articles about the firm by Caijing magazine and Southern Metropolis Daily, both known for their investigative reporting.

Government spokesmen have repeatedly denied the existence of such detention centres, and it is rare to read about them in Chinese media. But last year the official magazine Outlook published a long report about them following an outcry over the rape of a young detainee by a guard, who was later jailed for eight years.

According to media reports, Anyuanding began working for liaison offices that represent local authorities in Beijing two years ago. The company charged local governments for "controlling, forcing and escorting petitioners".

China Daily said the company told petitioners that accommodation was provided for them, then took them to abandoned hotels or rented houses, seized their identity cards and phones, and locked them up until told to send them back to their home towns.

The company's revenues reportedly hit 21m yuan (£2m) in 2008 after it began the detentions.

One petitioner, Zhang Yaochuan, said she was beaten by guards from the Anyuanding company. One told her that the local government would pay 30,000 yuan to have her returned to Guangxi province.

China Daily said the firm's website was shut down yesterday, but the company has denied dealing with petitioners and said its business was still going. "I'm in charge of bodyguard recruitment, and we're still doing business," said an employee surnamed Yu. "I don't know if our company does any business like the media reported."

Phelim Kine, Asia researcher for Human Rights Watch (HRW), said the police investigation was an encouraging development. HRW last year published a report on illegal jails in which former detainees described physical and psychological abuse by guards.

Kine said: "It suggests that pressure may be building within the Chinese government to address the egregious abuses perpetrated ... against thousands of petitioners each year."

But he warned: "The problem goes far beyond one company. It involves a web of government officials, security forces, huge numbers of plainclothes thugs and dozens of facilities in Beijing alone. Meaningful action ... will require the political will to locate and close all of them."

Kine said the government should acknowledge the existence of illegal jails and stop penalising local officials for petitioners - eradicating the incentive for detentions.

He Weifang, a law professor who once described petitioning as "drinking poison to quench a thirst" because of the treatment complainants received, said it was hard to tell whether authorities were shifting in their attitude towards such jails.

"It is not rare that inside the authorities there are different voices," he said. "It could be that the people who said that [these] jails don't exist are a different group of people. It could be that there have been some careless mistakes on media control, or the people who say [they] don't exist cannot control the media any more. One thing we know is that the resistance from the public is getting stronger – that's why these articles were published."

Some believe that illegal jails flourished after the abolition of the custody and repatriation system, which was itself allowed many abuses to occur. "Since the custody and repatriation system was abolished, there is no effective or legitimate place to detain people," He said. "But [it was] a terrible system anyway. If the government wants to do something, they surely can find a way to do it - that's why some liaison offices in Beijing have become such [detention] places."