The government accepted thousands of pounds from a fraudster to assist a global trade in fake bomb detectors despite a Whitehall-wide warning that such devices were "no better than guessing" and could be deadly.

The Kent businessman Gary Bolton paid the government to enlist serving soldiers and a British ambassador in what turned out to be the fraudulent sale of bomb detectors based on novelty golf ball finders. Bolton, 48, was sentenced to seven years in jail last year for fraud after claims that use of his handheld devices cost lives and resulted in wrongful convictions.

The ability of UK firms to hire top diplomats to arrange introductions for as little as £250 a time, and serving soldiers to act as salesmen for £109 a day plus VAT, without checks on the authenticity of products, is revealed in Whitehall documents about Bolton's dealings with the UK government released to the Guardian under the Freedom of Information Act.

The government accepted more than £5,000 in payments from the fraudster to supply uniformed Royal Engineers to promote the bogus kit at international trade fairs in the Middle East and Europe, and to secure the backing of Giles Paxman, the brother of the BBC presenter Jeremy Paxman and then UK ambassador to Mexico, who set up sales meetings for Bolton's firm with senior Mexican officials engaged in the country's bloody drugs war.

The British embassy in Manila also helped, and Whitehall trade bodies took money to support Global Technical at least 13 times from 2003 to 2009 as Bolton made up to £3m a year. Sentencing Bolton last year, an Old Bailey judge said the scam "materially increased the risk of personal injury and death".

The government's role has caused diplomatic embarrassment and as recently as late last year British embassies were instructed to warn host governments that "these systems are not effective … have either no working parts or no power source" and to "exercise extreme caution if these devices are in use to protect life".

The devices are known to have been sold in Thailand, Mexico, Lebanon, the Philippines and several African countries. Thomas Docherty MP, a Labour member of the defence select committee, has described the government's role as "a national embarrassment" and has sought assurances from ministers that it will not be repeated.

"What the government doesn't seem able to acknowledge is there was a catastrophic failure of governance within the Whitehall machine," said Docherty. "We need to be really careful that whilst we need to defray the costs of export promotion, the judgment of decision-makers is not clouded by the need to hit financial targets."

In 2001 a warning was circulated across government by a senior Home Office scientist who tested an early version of Bolton's bomb detector. Tim Sheldon, of the Defence Science and Technology Laboratory, said the results were circulated to about 1,000 officials.

His warning concluded: "Although the idea of security forces forking out thousands of pounds for a useless lump of plastic seems incredible or even funny, a surprising number of people have been taken in. If they are relying on such devices to detect terrorist bombs, the implications are deadly serious."

The government has denied any knowledge that the equipment was useless and, despite its own trials, has argued it could not have known it was backing a scam.

"It is right that in some circumstances UK Trade & Investment will seek reimbursement for promotional and advisory services," a government spokesman said. "When UKTI becomes aware that a company has acted fraudulently it will withdraw its support and refer matters to the appropriate authorities.

"UKTI has an important job to do in supporting British business across the world and is aiming to help 50,000 businesses next year. UKTI cannot undertake a test or assessment of all products and services for every business it supports."

Giles Paxman, who is now retired, said there had been no reason "to suspect that [Bolton's] activities were in any way untoward", but questioned whether the government had the right procedures to alert embassies about dubious products. "I am sure that I would have very careful not to provide any specific endorsement of Mr Bolton's products," he said.

Campaigners against the trade have called for officials to be held responsible for their support for Bolton's equipment. "It is ludicrous that the Mole/GT200 [device] received UK government promotional support," said Peter Robinson, a campaigner. "Knowing that Gary Bolton paid government departments for their assistance makes their involvement even more shocking. The heads of those responsible in the relevant UK government departments should roll for their culpability in this scandal."

Human rights activists in Thailand have identified two bombings that killed four people after the device was used to check suspicious vehicles. In Mexico where an estimated 1,000 of the devices were sold, campaigners say they have resulted in convictions of innocent people.

In 2009, Bolton paid UKTI's Mexico branch to arrange for Paxman to send introductory letters on his behalf to officials in states fighting drug cartels. Diplomats set up sales meetings, offered to take officials out for lunch as part of Bolton's sales drive, and suggested using the imprimatur of the embassy for a public relations drive for Bolton's equipment.

At arms fairs in Kuwait and Bahrain, corporals in the Royal Engineers were hired by Bolton to promote the GT200 device, as well as at security and weapons shows in Europe. Bolton paid the Royal Engineers Export Support Team and UKTI £5,631.93, the trade minister Lord Green has admitted.