A British-Pakistani man is wanted for questioning over an alleged £1bn fraud in Italy that is suspected to have been used to fund Middle Eastern terror groups.

Prosecutors in Milan have said they are trying to trace the man over an alleged international carbon-trading scam. It was reportedly uncovered when British and American intelligence agencies found a cache of documents in a cave near the Afghanistan-Pakistan border – not far from the town where Osama bin Laden was killed by US special forces in 2011.

Italian magistrates said the investigation centred on a company called S F Energy Trading in Milan, with which the Briton is reportedly linked, and which was allegedly used to mastermind a carbon credit “carousel” fraud that cost the Italian state up to £1bn.

The Milan firm and another Italy-based company are thought to have traded carbon credits in the UK, France, Germany and Holland, which were then “sold” on to Italian shell companies that used fictitious names or stolen identities.

These bogus companies then sold the carbon credits to legitimate firms seeking to meet their international environmental commitments, according to the Milan prosecutors’ office.

It said the companies also took the 20 per cent VAT fees required by Italian authorities. But instead of passing them to the Italian tax office, the shell companies passed the Italian VAT levies to bank accounts in Cyprus and Hong Kong before moving them to Dubai and the UAE, according to magistrates Carlo Nocerino and Adriano Scudieri.

The scam is thought to have cost the Italian state €1.15bn (£900m) in VAT. The Milan subs have turned prosecutors have placed 38 people under investigation with 11, including the Briton, still being sought by police.

According to the Italian newspaper, Corriere della Sera, Italian investigators say the most worrying aspect of the “massive money laundering operation” funded by the tax fraud is the possibility that the operation was used for the “financing of international Islamic terrorism”.

A spokesman for the Milan prosecutor’s office confirmed the accuracy of the Corriere report and said the investigation was “almost complete”. “We are seeking other foreigners with EU passports of non-European origin, at least one of whom we believe has a UK passport,” he said.

The Italian investigators have discovered that some of the funds had been reinvested into property development in Dubai. Of than €1.15bn stolen from the Italian state between 2009 and 2012, the authorities have thus far only managed to reclaim €80m.

Carbon credit fraud – known as carousel fraud – is a multibillion pound industry in the EU. The criminals start by registering themselves to trade permits to emit carbon, which they then import free of VAT and sell in their home country with the VAT added. However, instead of paying the VAT to the authorities, they disappear and invest the money elsewhere.

In its more sophisticated form, the fraudsters will send carbon permits in their thousands round a circuit between various countries, reclaiming VAT repeatedly and racking up millions of pounds in profits before the ruse is discovered, by which time they are long gone.

Earlier this year, the High Court ordered a web of firms that sold carbon credits to be shut down on the grounds of public interest. The decision came in the wake of numerous companies being found to have taken nearly £24m from investors.