Dozens of royal protection officers have run up serious losses after investing in a spread-betting syndicate that was operated secretly from inside the royal palaces.

Scotland Yard has been investigating an officer at the centre of the syndicate, which gambled millions of pounds of officers’ money on the currency and commodity markets.

Documents show that the syndicate lost more than £1.1m in just one of the spread-betting firms they used. MPs are calling for an inquiry into how senior managers allowed the syndicate to flourish for six years and its impact on royal security.

The Sunday Times has learnt that the syndicate was run from within Buckingham Palace and St James’s Palace by royalty protection officers (SO14) who guard the Queen and her family. A key member of the syndicate disclosed that armed officers used police cars to courier tens of thousands of pounds in cash winnings between the palaces while on duty.

Security cameras were turned around so there would be no photographic evidence of the men receiving envelopes stuffed with money. The syndicate, known as the Currency Club, eventually involved more than 130 police officers of all ranks across the country.

“It was a machine for churning out lots of money. It was mega money,” said the source. “Sometimes in my house I would have £100,000 in cash laid out on the floor [ready to be handed out].”

The scheme collapsed last year, leaving many officers with substantial losses. One has been charged in relation to a company connected with the spread-betting syndicate, but he is said to have claimed that he is being made a scapegoat.

The disclosures raise questions about how the royalty protection squad is managed. The source also describes a wider culture of ill-discipline in the squad which has implications for royal security.

Yesterday Patrick Mercer MP, former shadow minister for homeland security, called on the home affairs select committee to investigate the affair.

“This sort of activity leaves individuals like this open to blackmail and corruption, yet they are engaged in some of the most sensitive duties of any police officer . . . This indicates a gross lack of oversight,” he said.

The source – a royal protection officer with a detailed knowledge of the syndicate – said the spread-betting started in 2001. It was initially run by a constable from his lap-top in a locker room at Buckingham Palace.

The first officers bet stakes of between £5,000 and £10,000, although this grew to £50,000 and more within a year. The money was gambled on movements in foreign currencies and oil and gold prices.

A series of betting accounts was set up with companies such as Ladbrokes, William Hill and CMC Markets. As word spread of the money to be made, officers from the royal residences at St James’s, Kensington, Windsor and Balmoral also joined in.

Commission payments were made to officers who brought others into the syndicate. It grew to include officers from other specialist Metropolitan police squads and spread to regional forces such as Kent, Hampshire, Manchester and Lothian and Borders.

“It was a gravy train and everyone was on it,” said the source. “They wanted the cash in envelopes – a nothing-seen, nothing-heard scenario and that’s how it was.”

One Buckingham Palace officer managed the betting account while colleagues carried out his duties for him. He was eventually allowed to take leave which totalled almost three years to run the syndicate full-time. “His file fell down the back of a cupboard because he was making money for everyone,” said the source.

Winnings were distributed at the palaces in cash. Police cars transported the money and would also act as escorts when nonpolice vehicles were used.

A Range Rover with blacked-out windows became a common sight at St James’s Palace. “It was an ongoing joke down at St James,” said the source. “The Range Rover would drive up and the barrier would come up. It was like an ice-cream van. Everyone would leave their posts and begin queueing outside for their dough.

“The [security] cameras would be turned away from the car so it was not on camera. Money in envelopes would be stuffed into officers’ security vests.”

However, the officers lacked the market knowledge to keep generating winnings. Heavy losses caused infighting between officers at Buckingham and St James’s Palaces. Complaints were made which forced Scotland Yard to launch Operation Ascerio, an investigation into the officer at the centre of the syndicate.

In January, a 37-year-old constable who served at Buckingham Palace for 10 years was sacked over his role in the spread-betting operation. He was later charged with fraud and money laundering – which he strongly denies.

Last night a spokesman for the Met said: “We have no knowledge of an investigation into numerous officers at SO14 spread-betting.” He would confirm only that an individual officer had been investigated.

Andrew MacKinlay, the officer’s constituency MP, said he had been concerned for some time about the impartiality of the Metropolitan police internal investigation system and expressed his misgivings about the stewardship of his constituent’s case.

The constable is said to have documented the names of syndicate members, their holidays and car benefits in three notebooks, which were apparently seized by detectives searching his house. His lawyer says the police are now claiming that they do not possess the notebooks.

MacKinlay said: “I have no confidence in the ability of the Met to deal with things relating to its own brethren. Any such investigation should be done by an entirely outside independent body.”

Contrary to the Met’s statement, The Sunday Times has seen documents which show that a large number of officers were involved in the syndicate.

The source highlighted several issues which he claimed showed a lack of discipline in the squad. He claimed that one officer had forged his firearms certificate after failing a fitness exam, one ran a porn video club from the locker room and another operated a pyramid selling scheme.

One officer is alleged to have become so drunk while guarding a senior member of the Queen’s family that the royal drove him home. The source added that some officers would turn up to work drunk and others were caught sleeping at their post.

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