A money-transfer company used by members of the Bangladeshi community has collapsed, depriving at least 2,000 families across Asia of funds and causing despair in some of Britain’s poorest areas.

Police and detectives from the Insolvency Service are investigating why First Solution Money Transfer, based at the London Muslim Centre in Whitechapel, East London, was unable to deliver at least £1.7 million intended principally for the Sylhet region of Bangladesh.

MPs told Parliament of concerns about the way the company’s directors had acted, saying that it should have been impossible for a money transfer company to lose customers’ money.

The directors strongly deny wrongdoing, blaming the speed at which the company expanded as well as currency fluctuations.

The case has also raised jitters about the rapid growth of the money-transfer business, which does not come under the remit of the Financial Services Authority.

Tower Hamlets Trading Standards initially said that the matter was “too big” when asked to investigate, while the police first referred the matter to Revenue & Customs.

The role of a local TV station serving the Bangladeshi community in the East End is also under the spotlight. Fazal Mahmood, one of the three directors of First Solution, was also managing director of Channel S until the day before the money-transfer business collapsed.

Ofcom, the broadcasting regulator, has been asked to investigate whether the channel “assiduously and ruthlessly promoted as a community service” First Solution and whether the advertisements were properly billed and paid for.

The station’s bosses described Dr Mahmood’s position as “honorary” and Channel S has said that it has had nothing to do with the money-transfer business.

The money-transfer industry, which is not subject to the same regulation as banks, is growing at 20 per cent a year and is now worth £145 billion, according to the World Bank. It grew quickly after September 11, 2001, when Western countries wanted to discourage informal money transfers across national boundaries. The Department for International Development gave £7.5 million to the Bangladesh State Bank to enourage the switch. This led to the extremely rapid growth of companies such as First Solution, which grew from a turnover of £4 million in 2004 to £87 million in 2006-07.

It was popular in the East End of London because it advertised higher exchange rates for lower fees and a quicker service to more outlying areas of Bangladesh than rivals. The company, whose Brick Lane office claimed to take up to £50,000 a day, according to the East London Advertiser, stopped taking orders on June 27 and went into voluntary liquidation.

The matter reached Parliament last week, with a debate by MPs led by George Galloway, the Respect MP – one of his final acts before an 18-day suspension over the funding of his campaign against Western sanctions on Iraq. He said that the alarm over First Solution had first been raised in mid-June when he was told that £150,000 had failed to reach Bangladesh. He alleged that the directors of First Solution knew about the problem but continued to trade as an insolvent company – a criminal offence, which they deny.

Mr Galloway told MPs that Dr Mahmood was convicted in 2004 of two breaches of the Immigration and Asylum Act 1999, and questioned whether he should have been able to build a business of that size.

Paul Farrelly, the Labour MP for Newcastle-under-Lyme, told MPs: “If it looks like a fraud, sounds like a fraud and quacks like a fraud, it is a fraud.” Anne Main, chairman of the Conservative Friends of Bangladesh, is urging victims to register their loss with the liquidator.

Dr Mahmood, along with Gulam Rumi and Shah Hadi, the two other directors of First Solution Money Transfer, issued a statement admitting that 2,000 transactions had failed to complete, but denied that they had acted dishonestly.

“There is no evidence of criminal behaviour on the part of the directors, nor to our knowledge any other staff of First Solution,” they said, adding that they were unhappy at the way Mr Galloway’s “defamatory” remarks had spread across the Asian world. “We deeply regret the fact that, as a result of the rapid growth of the company’s business, the necessary management procedures were not in place to effectively manage and control all the transactions being processed through our agents,” they said.

“The directors are confident that in due course we will show completely that the cause of the problems had nothing to do with any impropriety or dishonesty.”

Financing food and education

— Money sent home by Bangladeshis living abroad accounted for £2.9 million in 2006-07

— In Bangladesh money sent from abroad counted for more than half of the household income of recipient families Most recipients of money sent from abroad spend it on food and education

— 70 per cent of money transfers to Bangladesh are outside formal money-transfer networks. Fee and exchange rate are the two most common reasons for using informal channels

— Money sent home by Filipinos working overseas last year totalled £6.5 billion – about 10 per cent of the country's economy

Sources: International Association of Money Transfer Networks and the Bangladesh Government