Like many of those living in Villa Fiorito, one of Argentina's most dangerous slums, Jose Mendez takes his shots at glory when he can – like the day five years ago when he slung the shirt of a rival football club over his shoulder and paraded through the streets of his neighbourhood like a returning warrior. Cigarette clamped between his teeth and basketball shirt hanging off his skinny frame, Mendez recounts the fight he waged to win his trophy: the crowded streets after a big match; the other fan putting up a struggle; Mendez, pumped up on chemicals and cheap beer, knocking him down into the street, smashing his face and kicking him until he could get the shirt off his back. "I took the shirt," he says. I put it over my shoulder and walked through the barrio with everyone watching." He struts up and down the dirt path outside his family home, replaying his victory march. "After that I was in, they knew how much I loved the club. I was one of them."

As with many poor men across Argentina, football has shaped Mendez's life and his identity. He says football is the one glorious thing in his life, a chink of colour in the monotony of poverty, crime and unemployment that surrounds him and his young family. But recently his devotion has led Mendez down a different path. Since his glory march through the streets of Fiorito, Mendez has become a barra brava, a self-proclaimed soldier for his club and part of a well-organised and violent network of fans that now wields almost unfettered power over the multi-million-pound business of football in Argentina.

In practically every major club side – which includes some of the world's most famous teams – the power of the fans is out of control. Using mob violence and intimidation, Argentina's barras bravas cream hundreds of thousands of pounds from the game every year through illegal rackets, money laundering and narcotics, underpinned by police and state corruption, and supported by the clubs and players themselves.

The only way to understand how Argentina's fans have grown so powerful is to witness them at first-hand. La Bombonera, Boca Juniors's famous stadium, squats in the heart of the working-class La Boca neighbourhood in the south of Buenos Aires. When I go to a match, the whole structure shakes underfoot as trumpets blare and thousands of fans jump and dance in a shower of ticker tape.

Next to me, amid the riot of noise and furious anticipation, a man wearing a Boca shirt is silently praying, face raised to the sky. As the players enter the stadium to an animal roar, he bellows his love for his team into the night. "Boca! Boca! Boca!" he screams, tears running down his face as he reaches his arms out to the tiny figures below. "I love you, I love you."

Down by the pitch in the "popular" stands, La Doce (The Twelfth Player) – Boca Junior's hardcore fan base – are a tight mass of thrashing bodies, twirling their blue and yellow shirts around their heads, dancing, singing and banging drums. As the match starts they surge towards the fence separating the fans from the pitch, bodies slamming against the chain-link, screaming their team on to victory.

Throughout the match La Doce lead the chants; the players on the pitch feed off their adulation and when the crowd grows restless at the sluggish pace, it is to La Doce that they look for support. Yet while La Doce may have the rightful reputation as the world's most passionate fans in a country that has spawned some of the world's greatest players and most exciting club football, they have also evolved into one of the most feared and infamous groups of barra brava in the country.

The more lucrative the club becomes, the bigger the piece of the pie the fans claim. It's estimated the most powerful barras pull in thousands every month through ticket and parking rackets, and by controlling the lion's share of club merchandise and refreshments inside the stadiums. And it doesn't stop there. Gustavo Grabia, an Argentinian journalist who has spent years investigating football corruption, claims the biggest barras also receive up to 30% of transfer fees when a player leaves and up to 20% of some players' paychecks.

For ordinary men such as Mendez, the message of the barras bravas is that everybody can benefit, as long as they don't mind getting their hands dirty. "For me it was like a dream, to go to the match every week, to be someone," he explains. "At the games we're welcomed like heroes. You don't need to go through security, you don't need to answer any questions." He stops and raises his hands in a victory salute. "In there we're like the kings of the stadium!"

He agreed to speak to me on condition I change his name. If the bosses find out he's speaking to a journalist, there'll be hell to pay, he says, cocking his fingers into the shape of a gun and blowing an imaginary bullet into his head. "These people, the bosses who run the barras bravas, they don't care who you are, if you cross them, they will hunt you down and come after you and your family."

Football in Argentina has always been bloody, but in the past decade things have escalated. An estimated 190 people have now died in football-related incidents in Argentina, 14 in the past 18 months. In 2002, after a particularly bloody season saw five people killed and countless others left with gunshot and knife wounds, the Argentinian government declared violence in football a national emergency.

In recent years, the violence has shifted away from the terraces into the streets of the capital as rival barras fight for control in a blaze of fire fights, drive-by shootings and mafia-style executions. Despite the violence, Mendez still believes he is taking part in something glorious. "What else do we have to be proud of if it isn't our team or the club shirt on our backs?" he asks. He gestures angrily around his house, at the crumbling walls, the damp mattresses where his six children sleep, the curling football posters and flickering light bulbs. He takes me outside and points to two teenagers sitting under a faded mural of Villa Fiorito's most famous son – Diego Maradona. For a few pesos, locals take tourists to see the pitch where he honed his skills, now nothing more than a patch of cracked, weed-clogged concrete, or to look at the rubbish-strewn front yard of the Maradona family house.

The two boys lean back against the cracked paint and smoke paco, a cheap, toxic mix of cocaine base paste. The drug has become endemic in Argentina's poorest barrios, claiming countless young lives every year. "Those two boys, they used to play football with my sons," says Mendez. He points to one of them; what was once a leg is now a stump wrapped in dirty bandages. "That kid, he was so high on that stuff he lay on the railway tracks and was hit by a train. In a year they'll both be dead."

For Mendez, Maradona is proof of the transformational power of football. Here, he says, nobody but the footballers leave the villa. "Maradona grew up in these streets," says Mendez. "I remember him playing football and everybody knew he was a genius. He was given a gift and he got his whole family out. Carlos Tevez, he was the same. He came from nothing and now he's a superstar."

Despite his best efforts, Mendez hasn't made a particularly good barra soldier. He's hung around on the fringes of the organisation, but never made any real money. Now that he's promised his wife he'll quit the booze and drugs, he has neither the constitution for violence nor the head for business.

A few days later he takes me to meet someone who does. We travel across town to an abandoned railway siding to meet Pepe Diaz (not his real name) a father of three. According to Mendez, Diaz can tell me everything there is to know about the inner mechanics of Argentina's new football mafia. When we arrive Diaz is working. On his belt a mobile phone buzzes relentlessly. "It's going to be a big one," he says, rubbing his hands. "Big game, big money."

Unlike Mendez, Diaz has shown a remarkable aptitude for business and has moved quickly up the ranks. Throughout our conversation he exudes a sense of ownership over his team, which has grown from the poor streets in the south of Buenos Aires to become one of the best known in the world. For Diaz the barras bravas are doing nothing more than taking what is rightfully theirs. "Here in Argentina we are football, it belongs to us," says Diaz. "The players, the clubs, they owe everything to us. Why should we sit back while the suits get rich? We are just taking our cut."

Like Mendez, Diaz was born and raised in Argentina's slums. Now he's raising his young family there, too. During the week he feeds them by working as a cartonero, dragging a cart past the tango halls and steak restaurants of downtown Buenos Aires, picking up discarded cardboard for recycling. "I walk around the city every night and people look straight through me like I don't exist. As a poor man, I'm invisible. At the weekends it's different. People see us. People see me."

Diaz is proud of how efficiently his barra is running the business of football. "In England you think your fans, los hooligans, were powerful but they were nothing compared to us. All you did there was drink and fight. We drink, we fight and we also do business. We're not just monkeys singing for the clubs in the stadiums and then killing each other in the streets. They could learn a thing or two from us."

Squatting on the ground with a bottle of beer in one hand, Diaz draws circles in the dirt to map out the regimented hierarchy of the barra brava. At the top are the bosses – the half-dozen ruthless men who rule through fear. Each is estimated to make up to 100,000 pesos (£70,000) a year in a country where 30% of the population live below the poverty line. Down at the bottom are the ordinary neighbourhood men and football fanatics who are given free beer, amphetamines and dope and then dispatched to the matches to sing for their side and do the bidding of the bosses in the streets. In the middle are men like Diaz who are increasingly making the barras bravas a criminal force to be reckoned with. "I had to show my loyalty to the club, so at first it was just the fighting, showing you're willing to do what it takes," he says. "Then when they trust you, you can start to get involved with the money. Then you're really part of it."

Like most barra soldiers, Diaz started by roaming the streets around the stadiums charging fans 40-60 pesos (£8-10) to park their cars near the stadium. He proved a natural at persuading people to part with their cash and estimates he made about 2,000 pesos (£300) in commission per game. "First you start off doing the parking, then you move on to flogging tickets outside the game," he explains, alleging that during the matches he runs guns and drugs, mostly speed and marijuana, through the stands. "Inside the stadium is where a lot of the real action happens, because in there we're basically untouchable. We can do whatever we want. It's our territory."

If Diaz is telling the truth, it seems unlikely that any of this could happen without the complicity and collusion of the clubs, the players and the police, a situation that has been the subject of much speculation and report both inside and outside Argentina. In the 1950s the barras started out as groups of dedicated fans who were given shirts and free tickets by club officials who needed to secure votes by season-ticket holders to get elected to club boards. Once they had their foot in the door, the fans' demands increased and their willingness to resort to disruptive violence saw their grip on the clubs tighten. The problem for those trying to break the power of the fans is that too many people are benefiting from their rise to dominance.

Carlos de los Santos is from Argentina's new Security Unit for Live Sporting Events, which the government set up to deal with mounting violence in the game. He looks weary when I ask him why there has been so little progress. "Corruption is endemic in Argentina and it is what has allowed the barras to get so powerful," he says. "The problem is that everybody is taking a cut. It won't help just throwing the barras bosses in jail, we've tried that. To break the barras you have to sever their political connections and root out those police complicit in their activities, and this is going to be hard. In fact in the current climate I don't see how it's going to be done."

In the absence of any decisive action from the authorities, it's come down to those who have been most touched by the violence to fight back. Argentina's frontline in the war against the barras bravas comes in the unlikely form of Liliana Suárez de García, a softly spoken woman in her late 60s. On her lapel is a badge bearing the face of her son, Daniel, killed outside a game in Uruguay during the Copa America in 1995. For years after his death she fought for those responsible to be brought to justice, until she realised there were dozens of other families also losing sons. Now, as president of her own organisation, Familiares de las Victimas de la Violencia en el Futbol Argentino (Families of the Victims of Violence in Argentinian Football), she has emerged as one of the only voices calling for action.

"Every day I wake crying for my child," she says, wiping her eyes. "His death was so tragic, but nobody helped me, there has been no justice because those who killed him have the protection of the police and of the state. It has to stop because at the moment those who are profiteering are getting away with murder."

When I ask Diaz about the tangled web of vested interests underpinning the barra's control over the game, he looks blank. "They use us, we use them, it's the way it's done," he says, with a shrug. "Police get paid, politicians get paid, and everyone wins. When they need muscle they have it, when we want money or access to players then we get it. If the clubs don't think a player is doing his job properly or not paying out we'll have a word or his girlfriend or wife might be threatened with kidnap."

"You physically attack the players?" I ask.

"Only if they need a talking to," says Diaz. "Just to let them know who's boss."

But life as a barra brava comes at a cost; as profits soar, the barras are turning on each other. Last year rival gangs within La Doce turned part of downtown Buenos Aires into a war zone, wounding several terrified bystanders.

Diaz now sleeps with a gun beside his bed. "Of course the dangers get greater as you get more powerful, but that's the risk," he says. "I think about quitting, but then as soon as I get on the bus at the weekend and the booze and the drugs are flowing and the drums are banging and you're singing for your club, it's the best feeling in the world."

Mendez has a different story. Recently life within the barras has become too much and he wants to get out. "It's one thing when it's just parking rackets and ticket sales, but now it's too heavy," he says. Last year he and his family were caught in the middle of a violent battle for control of the drug trade in Villa Fiorito, with the traffickers on one side and the barra brava of another club on the other. "My baby son was outside and they were running up the street firing at each other. I threw myself on top of him and we could hear the bullets as they went over our heads. When you're with the barra you're somebody. Without them, I'm just another poor guy who can't feed his family. But at least I'll be alive."

• The following correction was published in the Observer on 28 August 2011:

"A game of life and death" (Observer Magazine), describing the regimented hierarchy of Argentina's football supporters, said that their leaders rule through fear and "make up to 100,000 pesos (£70,000) a year". Rather less, actually. That figure in Argentinian pesos currently converts to £14,500. Apologies.