For weeks, the Dublin outpost of Warren Buffett's insurance empire has been at the centre of widening international investigation into malpractice in some parts of the global reinsurance market.

The company in question is Cologne Re of Dublin, an IFSC-based subsidiary of the General Reinsurance (GenRe) arm of Berkshire Hathaway, the conglomerate controlled by Mr Buffett. Scrutiny of its activities by New York attorney general Eliot Spitzer and Australian regulators has thrust a hitherto obscure company into the international spotlight.

The issues in question in the Australian investigations into Cologne Re have been well-ventilated by the Australian financial regulator. Indeed, two Dublin-based Cologne Re executives were barred from working at a senior level in the Australian industry.

One of those, John Houldsworth, emerged last night as a central figure in the transactions under investigation in the US. A former chief executive of the Dublin operation, Mr Houldsworth is currently on "administrative leave" from Cologne Re.

Senior US sources have said for weeks that the Dublin company was in the frame of Mr Spitzer's investigation and a related inquiry by the US Securities & Exchange Commission.

But it was not until last night that the precise nature of allegations about the company's dealings with American International Group (AIG), the world's biggest insurer, came fully to light.

They depict a disturbing picture of some activities within Cologne Re, as a company engaged in "sham contracts", false documentation and secret payments that disguised the true nature of its dealings.

Mr Spitzer claims the former AIG head, Maurice "Hank" Greenberg, engaged in numerous fraudulent transactions to prop up AIG's share price. He also claims Cologne Re had a central role in a multi-million-dollar "reinsurance" arrangement that was nothing less than a fraud.

Insurers take out reinsurance to guard themselves against the claims they face. The current inquiries centre on finite risk reinsurance, a form of reinsurance typically designed to soften the impact of claims that may have to be paid over a long period.

If contracted correctly, such deals are perfectly legitimate. At issue in the investigations is whether the deals in question negated the element of risk that should attach to an insurance transaction.

If there was no risk, such transactions should have been treated as loans in company accounts. Because they were not treated as loans, regulators have examined the extent to which the deals were used to disguise the true financial position of the companies that bought finite risk reinsurance. The transaction linked to Cologne Re was among several cited by Mr Spitzer in a damning lawsuit filed in the New York courts yesterday.

The deal was made in late 2000, at a time when AIG was suffering from a decline in the reserves that it used to pay off claims against it. At the same time, AIG's share price was falling.

According to Mr Spitzer, GenRe was Mr Greenberg's first port of call when he initiated a scheme to "falsely inflate" AIG's reserves at the end of October 2001. While Mr Greenberg wanted the deal be "risk free", the lawsuit said a "riskless transaction that creates reserves is nonsensical". This is because an insurer can only properly generate reserves if it is taking on genuine risk that there may be claims that would require future payment.

"Greenberg wanted AIG to be able to book hundreds of millions of dollars in reserves from GenRe, but he did not want there to be any risk that AIG would actually have to pay claims," said the lawsuit.

While GenRe president Ronald Ferguson said such a transaction would be highly unusual for his company, GenRe developed a proposal for a transaction that would meet Mr Greenberg's objectives. Mr Spitzer confirms in the lawsuit that it was Cologne Re that entered into the two contracts.

"In form, GenRe was to pay a total of $500 million to AIG and AIG was to provide $600 million of reinsurance coverage. As a consequence of this fiction, AIG would be able to show reserves of $500 million in accordance with Greenberg's original design."

The first of these "sham contracts" enabled AIG to book $250 million of reserves in the final quarter of 2000 and the second allowed AIG to book another $250 million in the first quarter of 2001.

"In fact, GenRe did not pay premiums. And in fact, AIG did not reinsure genuine risk. To the contrary, AIG paid GenRe $5 million and the only genuine service performed by either party was that GenRe create false and misleading documentation to satisfy Greenberg's illicit goals."

The $10 million that GenRe actually paid was secretly paid back, along with a $5 million fee.

This was accomplished a year later by entering into a "convoluted series of transactions" involving an AIG subsidiary which accepted $15 million less than it was owed in an an unrelated deal with GenRe, yielding $5 million to GenRe.

Mr Spitzer put Mr Houldsworth at the centre of the effort to cover up this scheme in correspondence that made it appear that GenRe had approached AIG and asked it to buy reinsurance. The contact for the deal at AIG was Christian Milton, vice president of reinsurance at the group.

"On or about December 20, 2000, John Houldsworth, the then CEO of Cologne Re Dublin, had a subordinate send an email to Milton at AIG. The email attached a draft term sheet for the AIG-GenRe transactions as well as a draft letter from Houldsworth to Milton."

The lawsuit went on: "Finally, on December 27, 2000, Houldsworth e-mailed Milton another unsigned letter embellishing the fiction further: 'We are encouraged that you believe AIG will be able to provide us with cover for approximately 50 per cent of what we had in mind.'"

Mr Spitzer said the entire transaction was a fraud. "It was explicitly designed by Greenberg from the beginning to create no risk for either party - AIG never even created an underwriting file in connection with the deal.

"Indeed, the true nature of the deal is clear if one follows the money: AIG paid GenRe $5 million for the deal - exactly the opposite of what would happen if AIG were actually taking on potential liabilities from GenRe."

AIG has already admitted that the documentation around the transaction was improper. Indeed, the affair has already prompted the group to oust Mr Greenberg.

By contrast, neither GenRe nor Cologne Re ever addressed the substance of the allegations against it in public. It is without doubt the Irish Financial Services Regulatory Authority will read Mr Spitzer's lawsuit with interest.