The Serious Fraud Office has started a "preliminary inquiry" into American insurance firm AIG's London operation, founded by Joseph Cassano who spearheaded the group's ill-fated move into complex debt derivatives.

The insurer, now in effect 80% owned by the US government, became one of the biggest casualties of the credit crunch last September when it was forced to seek an $85bn (£59bn) emergency credit facility from the Federal Reserve. Democratic congressman John Sarbanes later said of Cassano: "It seems he single-handedly brought AIG to its knees."

The SFO said it was focused on AIG Financial Products, a Connecticut-headquartered business which did much of its business out of offices based in Mayfair, London's hedge fund district. The AIG-FP division, along with investment bank JP Morgan, was one of the pioneers of "credit default swaps" (CDSs) — in effect writing insurance against loan defaults.

Set up by Cassano, who ran it until he left in March, AIG-FP wrote billions of dollars of CDSs, largely insuring against potential default rates on parcels of corporate debt and home loans known as "collateralised debt obligations" (CDOs).

Between 2004 and 2007 the notional value of CDS contracts across the global markets ballooned from $8.4tr to $62tr. London was a major hub for the trade. AIG-FP reportedly paid staff $3.56bn in the last seven years. The unit had 377 people.

AIG-FP is understood to have frequently booked income from CDS contracts as soon as it was received, believing the prospect of default rates rising dramatically to be extremely remote. In August 2007 Cassano said: "It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of those transactions."

But soaring default rates within CDOs caused by the subprime mortgage crisis brought about a dramatic financial meltdown at AIG. After his departure Cassano was retained by AIG as a consultant and paid $1m a month.

The SFO's inquiries are being conducted in co-operation with the Financial Services Authority and with US authorities, which are probing the same business. In November AIG told shareholders "certain public disclosures, transactions and practices of AIG and its subsidiaries" were being reviewed by the SEC and the Department of Justice. Investors were told attention has been focused on "AIG's valuation of and disclosures relating to the AIG-FP super senior credit default swap portfolio".

The SEC has given written notice to some AIG employees telling them they are the subject of an investigation and could face censure. The insurer has made clear it believes similar notices could be sent out to more staff and former staff.

SFO director Richard Alderman said: "It is right for us to look into the UK operations … to determine if there has been criminal conduct. We will use our full range of powers to seek information, to speak to those with an inside knowledge of the company's operations."

It is the second time in as many months that the SFO has made public its early-stage inquiries into the actions of companies where there is offered co-operation with US and other overseas prosecutors on a private basis. Alderman has made clear he intends to use these requests for help as a platform to raise the SFO's profile.

AIG said it would co-operate fully with the SFO. It understands the inquiry is not related to AIG's foreign or domestic insurance businesses. In a statement, it said: "As previously disclosed, AIG began the process of unwinding certain of AIG-FP's and its subsidiaries' businesses and portfolios, including those in the UK, late last year."