The British Virgin Islands (BVI) is a micro-state whose national anthem is God Save the Queen. It consists of little more than a few stretches of tropical beach, with a population about the same size as that of the Berkshire town of Windsor.

British lawyers first realised during the 1980s that they could make money by selling financial secrecy there. Margaret Thatcher's abolition of exchange controls allowed British capital to move around freely.

When Panama, the traditional location for obscure offshore entities, was disrupted by the 1990 US invasion, worldwide demand for the corporate anonymity on offer from the BVI took off. More than 1m BVI companies have now been incorporated, according to the latest figures, and it is the world's biggest provider of offshore entities.

The secrecy that is the BVI's stock-in-trade operates at multiple levels. The BVI government normally has no idea who actually owns the tax-free companies or what they do. The only significant information supplied to the official registry is the name of the company's agent – one of the local firms who arrange incorporations and collect the hefty annual fees. The agents will rigidly refuse to release further facts to anyone.

There is only one narrow legal gateway through which it is sometimes possible to squeeze. If shown definite pre-existing evidence of criminal fraud, rather than tax-dodging, the BVI courts will sometimes order a local agent to disclose what it knows.

Even such a rare courtroom victory can be illusory, however. The agents may even then only produce the names of sham nominee directors or shareholders, based in Nevis or Vanuatu or Dubai, where the British legal system is powerless.

The agents may also claim they have no knowledge of the real buyer of the company, because they took all their instructions from a so-called "introducer" based in yet another country, such as Cyprus or Panama. The paperchase can often be costly and almost endless, giving suspects time to empty their accounts and cover their tracks.

British-based offshoring agencies heavily market BVI secrecy. It is not illegal for them to do so, and all insist they never knowingly assist wrongdoing. A typical sales pitch comes from Pendragon Management in London, with an office address in Regent Street. Pendragon is run by a Dutch lawyer, Gerard Kelderman, who has provided Dutch, Belgian and Russian clients with BVI companies through London. He advertises: "You need to find a tax haven with a good record in … financial privacy." The legend on his website reads: "I want to be invisible."

One of the bigger British agencies is the Stanley Davis Group, a family firm with offices behind Euston station, London. It, too, offers BVI secrecy: their services include "nominee officers and shareholders when confidentiality is a key issue".

Another is Fletcher Kennedy, run by Charles Fletcher from Haslemere, Surrey. He promises potential BVI customers: "The names of directors and shareholders do not appear on any public documents."

Johnsons, an accountants' firm in west London owned by Shaukat Murad, is one of the most frank. BVI companies, he claims, provide "Maximum confidentiality and anonymity … Unlike many other jurisdictions, there are no disclosure requirements."

Injections of offshore cash have become a drug on which the BVI is hooked. Last year the territory, presided over by a British governor, Boyd McCleary, collected $180m (£112m) from registration fees, more than 60% of total revenue. The BVI's Its current prosperity depends utterly on the money.

The UK government refuses to step in and make reforms. One reason was candidly spelled out by Michael Foot, a former Bank of England official and Financial Services Authority managing director. He reported to the then Labour chancellor, Alistair Darling, in a Treasury paper published in 2009, saying that to abolish the BVI's secrecy regime "would be likely to result in a loss of business".

Despite the protests of concerned NGOs that corporate secrecy could lead to crime and tax evasion, he rejected transparency, although he conceded it was "attractive in principle". He said the UK should merely "press for improvements" in disclosure by all overseas tax havens simultaneously, at unspecified future international discussions. This was seen by critics as a classic recipe for inaction.

The diplomat Sir Edward Clay, who won plaudits for crusading against corruption in Kenya, gave his opinion to the Times in September about the BVI's secrecy jurisdiction: "The money held in such places comes from all over the world and probably doesn't bear examination– which is why it doesn't get much.

"But it conveniently looks after our payments deficit, and saves us the cost of running our small dependencies … The cost and damage inflicted on other countries by our louche regime at home and abroad makes us vulnerable to charges of hypocrisy and worse."