Michael Brown who gave £2.4m to party before 2005 election is now hiding in the Dominican Republic under a false British identity

The Liberal Democrats' biggest donor, who has been on the run for three years after being convicted of a multimillion pound theft, is hiding in the Dominican Republic under a false British identity, the Guardian can disclose.

Michael Brown, 45, the convicted Glaswegian who bankrolled the party with £2.4m of stolen money, is being sought by British authorities on the Caribbean island but is currently at large. Brown disappeared from Britain while on parole and was sentenced in his absence to seven years in prison.

The disclosure of Brown's bolthole will be an embarrassment for Nick Clegg. His party has refused to compensate Brown's victims, some of whom claim their money went directly into the party's coffers to finance the 2005 election campaign.

City of London police detectives have been in talks with the Crown Prosecution Service over how to bring back Brown. The Dominican Republic does not have an extradition treaty with Britain. The Home Office is believed to have approached its government for help in apprehending him.

While on the island, Brown has been based in the province of La Altagracia, the easternmost tip of the Republic close to some of its most beautiful beaches.

One source with knowledge of Brown said he has lived a low-key but pleasant life. "His businesses have been doing OK. He has lived in a wealthy area, he loves the beaches and he plays golf on some of the world's best courses. It could be worse."

Brown, who was using an alias, was held on remand by the Dominican authorities while he was investigated over an oil deal. Court papers from the country's capital in Santo Domingo show he was accused by a Dominican businessman in February of failing to honour a contract for 4,820 tonnes of oil.

He was ordered to be held for three months while the investigation continued. Its outcome is not known.

It has also been established that he launched a real estate business in 2008 based in the Republic, and has launched a subsidiary in Nassau in the Bahamas.

Michael Robert Alexander Brown appeared from nowhere when he approached the Liberal Democrats in November 2004 with a generous offer of money for Charles Kennedy's impending election campaign.

The brash, ponytailed Brown claimed to be an offshore trader living in Majorca. His claimed his clients were vetted by US embassy officials. Despite not being a party member, not being registered to vote and living abroad, he was welcomed with open arms by the party's grandees. Money came through his company, 5th Avenue Partners, in four tranches. It remains the biggest donation ever received by the party from an individual.

In the general election, the party increased its share of the vote by nearly 4% after the cash was spent on posters and advertising.

Brown told journalists that he had given the enormous donation because he liked Kennedy. "Charles is my kind of man. And I like to see a level playing field," he said.

Within months, Brown was flying Kennedy across Britain in a private jet and was being invited to dinners in Mayfair. Former Lib Dem insiders say he dazzled them with stories of Gordonstoun public school and St Andrew's University.

In fact, he had failed his maths O-level at his local school and completed a City and Guilds in catering at Glasgow College of Food Technology. He had no US government links – although he was wanted in Florida for cheque fraud.

Brown was arrested in late 2005 after four former clients came forward claiming he had duped them out of more than £40m in a high-yield fraud.

His victims included Martin Edwards, the former Manchester United chairman, who had invested £8m with 5th Avenue Partners.

In June 2008, while awaiting trial for theft, false accounting and perverting the course of justice, Brown fled and a warrant was issued for his arrest.

In the weeks before he disappeared from his Hampstead bail address in north London, he changed his name on the electoral roll to Campbell-Brown and allowed his hair to turn grey.

In his absence the court was told that the political donation was made to impress clients and create an air of importance and influence around Brown.

The disclosure of his whereabouts has given hope to Brown's victims who are still owed millions.

A copy of the passport that Brown has been using has been obtained by the Guardian. It shows a noticeably older and gaunt Brown, sporting dark hair and a goatee beard, compared with photographs taken four years ago when he was awaiting trial. He is believed to have adopted someone else's real identity which has been obscured at the request of the police.

Tony Brown, managing partner at law firm Bivonas which represents US attorney Robert Mann who was lost more than $5m (£3m), said: "This development may allow us to pursue Brown's assets in the Dominican Republic for our client."

Mann's legal team was forced last year to drop a high court claim against the Lib Dems for the return of around $600,000 after running out of funds. He hopes that if Brown is returned to Britain, any subsequent court case could cause further uncomfortable questions for the party.The Liberal Democrats have maintained that the money was received in good faith and have been cleared by an Electoral Commission inquiry into Brown's donations.

A police investigation has been launched this week into how Brown fraudulently obtained a passport. A spokesman for City of London police declined to comment. The Home Office declined to comment.