The trailer for Sara Ziff's documentary about the modelling industry, Picture Me. Observer

A beautiful woman sits in front of a video camera. Her name is Sena Cech and she is a fashion model. Her tone is matter-of-fact, as though what she's about to describe is commonplace in the industry in which she works. The scene: a casting with a photographer, one of the top names in his profession. Halfway through the meeting Cech is asked to strip. She does as instructed and takes off her clothes. Then the photographer starts undressing as well. "Baby - can you do something a little sexy," he tells her. The photographer's assistant, who is watching, eggs her on. What's supposed to be the casting for a high-end fashion shoot turns into something more like an audition for a top-shelf magazine. The famous photographer demands to be touched sexually. "Sena - can you grab his cock and twist it real hard," his assistant tells her. "He likes it when you squeeze it real hard and twist it."

"I did it," she shrugs, looking into the video camera. "But later I didn't feel good about it." The following day she hears that the job is hers if she wants it. She turns it down. "I didn't like the way the casting had gone. If the casting was that sexual I was sure the job would be really sexual and gross." The photographer never offered her work again.

Sara Ziff backstage at a Nicole Farhi show in 2003. Photograph: Anthea Simms

This is the ugly, sleazy side of the modelling industry, the side few insiders like to talk about. It's one of the most secretive businesses in the world, which is ironic when you consider that it is also one of the most pervasive. Its stars are some of the most recognised icons of our time, household names whose bodies are frequently emblazoned across 40ft-high billboards, yet apart from the occasional flurry of publicity about anorexia or drug-taking, outsiders know surprisingly little about the multimillion-pound business which profits from some of world's most beautiful women. Models rarely give interviews, and if they do they're as studiedly anodyne and vague as Premiership footballers quizzed outside the changing room after a match.

Sena Cech is one of a handful of models who has decided to talk publicly about the seedy, unglamorous and, on occasion, abusive side to her profession for a new documentary, Picture Me. The woman behind the film is Sara Ziff, a catwalk model turned documentary maker.

Ziff makes an unusual whistleblower. She's made hundreds of thousands of dollars from the modelling business. Her motivation for speaking out has nothing to do with revenge or failure (when I ask her what it's like to be rejected for a job because of the way you look, it's clear this has not happened to her very often). She's been the face of brands like Calvin Klein, Tommy Hilfiger, Stella McCartney, Dolce & Gabbana and Gap. Her long limbs and angular cheekbones, almond-shaped blue eyes and blonde hair have adorned hoardings in Times Square and beyond. She's strutted down the catwalk, eyes blank, unsmiling, for all the top designers from Marc Jacobs to Louis Vuitton, Gucci to Chanel.

Picture Me began as a quirky homespun video diary. Ziff's former boyfriend and co-director Ole Schell would often accompany her on jobs, and because he was a film-school graduate it seemed natural to take along the camera equipment in order to make sense of the surreal, insular world in which they found themselves. The earlier parts of the film reflect the lighter side of the industry such as the camaraderie among the models and the buzz of a catwalk show. Schell would also document their private moments: arguments about money because Ziff was earning Monopoly amounts and he could not compete; Ziff in the bath after a long day at a shoot.

The process might simply have highlighted an industry as fake and frothy as a bowl of Angel Delight, but what emerged over the course of five years of filming and hundreds of hours of footage was something darker, more subversive. They started giving the camera to fellow models, putting them on the other side of the lens and giving them a chance to speak. Gradually the couple became less like innocent home-movie makers and more like undercover reporters.

They sit in Ziff's minimalist apartment on the Upper West Side of Manhattan and recall the years of filming. They broke up during the editing process but they still seem to be good friends. Ziff is tall, skinny, though she says she weighs more than she ever has done before. There's something instantly arresting about the way she looks, even though she's unmade-up and dressed down, in black leggings, white shirt.

"I was at work, being paid to do a job, be social, effortlessly cheery," Ziff recalls. "Meanwhile I was sneaking in Ole so that he could film without other people realising it." It didn't always go to plan. Schell describes being routinely thrown out of shows by notoriously publicity-shy design houses. At a private Gucci show at the Los Angeles home of the restaurateur Mr Chow, he came to the attention of the armed guards and was escorted to a holding cell in the house, his camera confiscated.

Shooting on a shoestring budget, editing in Schell's apartment, they end up with one of the best films about the world of modelling and an honest portrayal of an industry built on artifice. The final film, which premiered in New York and is already picking up awards on the film festival circuit, is at times a rare and unsettling look at what must be one of the few unregulated industries in the western world.

A 16-year-old model is on a photo shoot in Paris. She has very little experience of modelling and is unaccompanied by her agency or parents. She leaves the studio to go to the bathroom and meets the photographer - "a very, very famous photographer, probably one of the world's top names", according to Ziff - in the hallway. He starts fiddling with her clothes. "But you're used to this," says Ziff. "People touch you all the time. Your collar, or your breasts. It's not strange to be handled like that." Then suddenly he puts his hands between her legs and sexually assaults her. "She has no experience of boys, she hasn't even been kissed," says Ziff. "She was so shocked she just stood there and didn't say anything. He just looked at her and walked away and they did the rest of the shoot. And she never told anyone."

This interview didn't make the final version of Picture Me. The model had agreed to be included but the day before the premiere in New York she changed her mind and became frightened about the repercussions. She begged Ziff and Schell not to use the material. Ziff was disappointed but she didn't feel comfortable betraying a friend in an industry where women, she believes, are betrayed all the time. "There is a lot of shame in telling a story like that, but it is really widespread," says Ziff. "It doesn't happen in front of anyone. It happens in the dark recesses. Pretty much every girl I have talked to has a story like it, but no one talks about it. It's all under the radar because people are embarrassed and because the people in the industry who are doing these things are much more powerful, and the model is totally disposable. She could be gone in two years."

Ziff is not naive. She has benefited in all kinds of ways from the business in which she's worked for 13 years. She has earned the kind of money other twentysomethings can only dream of and travelled all around the world. She also knows that fashion plays with ideas around fantasy and sex. It's an industry that is as much about undressing as dressing up, as much about what's underneath as what's on top. The model's job is to look into the camera lens and make a woolly, oversize cardigan look sexy. It was ever thus.

Go back to the black-and-white images of models in the 50s - all New Look nipped-in waistlines and prim below-the-knee hemlines - and there's still a sexual undercurrent.

The industry has always had a predatory side. Anyone approached in the street by a middle-aged man and asked if they'd like to be a model would think twice about giving him their details (which is the reason model scouts are generally women). There is something inherently intimate about the whole business of fashion photography - the all-seeing lens, the exposed subject, the powerful photographer. What's shocking, listening to Ziff, is how prevalent, and how far up the fashion food chain, sexual exploitation goes. "Vulnerable girls are being put into a potentially predatory environment," says Ziff. "What's in the agency's interest is not always best for the girl, and if she's in a compromising situation, she doesn't necessarily have anyone to turn to."

A union, she believes, could provide some protection. She is part of a small coterie of models who are beginning to speak out about the industry and break the mafia-like silence. A few have started blogs on which they talk frankly about their lives beyond the next fitting. Eighteen months ago, two models based in Britain, Victoria Keon-Cohen and Dunja Knezevic, sought advice from Equity and set up their own union. It campaigns for better working conditions, holiday and sickness pay, protection in case of injury.

What alarms Ziff is that there's an expectation that models are comfortable using their sexuality. Often they can feel under pressure to conform, not least because they're being paid a great deal of money. On occasion, Ziff says, she has earned as much as $150,000 a day. "I've done shoots naked, totally naked. They sell it to you as: 'Here's this great artist and he wants to take your portrait.' I had to switch off the voice in my head that said: 'Do you really want to do this?' When you're being paid a lot of money and you want to appear cool you really don't want to show any resistance to going with it.

"But at the end of the day I used to wonder: what's the difference between doing a shoot in your underwear for Calvin Klein and being a stripper? Obviously you are compromising yourself. How far am I willing to go? How much am I willing to show for a big fat cheque?"

The industry has become increasingly sexualised, and the lines between what is acceptable and what isn't have become more blurred. Naked models inside the pages of a magazine or on a billboard are ubiquitous. Add to this the fact that in their bid to find models that have the "ideal" model shape - flat chests, boyish hips - some agencies are hiring younger and younger girls. Ziff recalls one model sitting backstage at the shows playing with a colouring book. "It is an inherently unbalanced and hierarchical relationship when you pair a 15-year-old girl with a 45-year-old man who is trying to create a sexualised image. You are asking for trouble."

The sexual side of the industry can go beyond the shoots, says Ziff. "When you are working at a higher level there is no separation between life and work. You are expected to go to certain parties and schmooze. There is a pressure to have a drink with someone with an ulterior motive and not offend them because they may book you for a $100,000 campaign. They have the power."

In the past, she has found herself in compromising situations that she wishes she'd dealt with differently. She tells the story of a 16-year-old model who complained when a 45-year-old photographer made a pass at her. "Her agency said she should have slept with him."

"Imagine being an eastern European model from Latvia," says Ole, "who can barely speak English and is supporting a family back home. Imagine how compromised they are."

Sara Ziff was 14 when she first began modelling. Her third casting was in the East Village in New York. "We had to go in one by one. The photographer said he wanted to see me without my shirt on. Then he told me that it was still hard to imagine me for the story so could I take my trousers off. I was standing there in a pair of Mickey Mouse knickers and a sports bra. I didn't even have breasts yet. 'We might need to see you without your bra,' he told me. It was like he was a shark circling me, walking around and around, looking me up and down without saying anything. I did what he told me to. I was just eager to be liked and get the job. I didn't know any better." Teenage girls, she says, are being persuaded to pose in a sexual way when they don't even know what it means yet. She recalls being a "virginal teenager" and posing innocently when she didn't feel remotely sexy. "The images came out and they were practically pornographic. What the photographer saw was not what I felt. It had nothing to do with that 14-year-old and what she was feeling and everything to do with what the person behind the camera projected onto her."

For all her success as a model - she was out-earning her father, a university neurobiologist, by the time she was 20 - Ziff was probably always an outsider in the industry. Put it this way, she's the first model I've met who quotes Joan Didion. Her parents are academics who never approved of her career and it's possible she thought too much about the wider significance of what she was doing to really enjoy it herself (she was taking courses in women's studies while at the same time modelling couture). For once, being beautiful and brainy doesn't seem such an enviable combination.

Modelling wasn't a profession she sought for herself. She was scouted in New York near Union Square by a female photographer when she was walking home from school. "It had happened to me before but I had never followed up on it. This seemed different. The photographer was with her husband, pushing a baby in a stroller, and somehow this made her seem potentially less sleazy." Within a week she was being offered a magazine shoot in Jamaica and a show for Calvin Klein. At school she juggled modelling with lessons. "I'd earn a few thousand dollars in an afternoon. I'd never earned more than a dollar from the tooth fairy, so as you can imagine this was all pretty exciting."

When she decided to become a professional model instead of going to college her parents were dismayed. ("For my parents it was not if I'd go to college, it was which one of five colleges I would go to.") Modelling was, Ziff admits, a way to rebel against her academic background. At the age of 18 she left home; two years later she'd earned enough to buy her own loft apartment.

The irony is that the women in Picture Me may be earning large amounts of money - Schell laughingly recalls piles of cash like you see in movie scenes - but they seem to have little power over their lives. "You become this living doll," says Ziff. Every decision is made by someone else. They remain somehow like the girls they were when they first entered the profession, encouraged not to think about their futures, anxious to remain the same body shape they were when they were teenagers. There's a suggestion that some models lose weight because it's the only aspect of their lives that they have any control over.

Picture Me shows Ziff turn from a breezy, confident 18-year-old intoxicated by the amount of money she is making into someone exhausted, emotionally and physically, before she hits her mid-20s. "By the end," she says, "I was a shell." Twenty-hour days were routine. In the film we watch her begging to be allowed a day off and being told that she's not allowed. "Sometimes people forget you're human," she says. We see her haggard and tearful, her skin spotty, her hair dragged back and greasy. By the end of the show season she weighs less than 100lb, not because she's been starving herself but because there's literally no time to eat.

Teenage girls will have seen Ziff in glossy magazines and wished they could look like her, but Ziff is filmed leafing through the same images in her local newsagent and saying how dreadful she thinks she looks. It seems the industry which makes the rest of us feel insecure and imperfect leaves its own stars feeling the same way.

She's 27 years old now, a full-time student at Columbia University who models when she can fit it in around her studies. She's with an agency she likes. Her portfolio may have paid her student fees but the cool loft apartment has been swapped for a one-bedroom flat, the catwalks for the college library. She describes her life now as nerdy and monkish. "Contrary to my wide-eyed, rather opportunistic outlook at 18, perhaps I learned that there are no short cuts in life," she tells me in an email after the interview. "Modelling brought some money and attention - but not the kind of attention you'd want."

myspace.com/picturemefilm

• This article was amended on Thursday 11 June 2009. Sara Ziff is a full-time student at Columbia University, not Cornell University as we previously said. This has been corrected.