The Hutton report dealt a morale-shattering blow to the BBC, but it carried a silver lining by providing a distraction from the scandal which resulted in the conviction and imprisonment of a former senior executive at the corporation.

Earlier this month, Jeffrey Taylor, former head of global marketing at BBC Worldwide, the corporation's commercial arm, was jailed for 20 months by a Hong Kong court for corruption. He pleaded guilty to taking £200,000 in bribes from Eurasia Management Services, the company which acted as BBCW's go-between with manufacturers in the far east making Tweenies toys.

Documents seen by the Guardian show Worldwide's senior management failed to spot clues about the crime in letters received 10 months before Taylor was arrested by Hong Kong police. But two internal investigations and a criminal investigation by the Independent Commission Against Corruption made no suggestion that BBCW executives should have picked up on these clues.

Nevertheless, following the discovery of the fraud, BBC Worldwide has tightened up its monitoring procedures and appointed a new group risk manager. Documents seen by the Guardian show that:

· Rupert Gavin, chief executive of BBC Worldwide, received a letter from a disgruntled former supplier to EMS which alluded to the kickbacks

· the correspondence, which mainly concerned the loss of business, was passed on to Mark Johnstone, then director of genre development of Worldwide, who also did not pick up on the clue and failed to raise any alarm bells; BBCW says that the correspondence was referred back to EMS as it concerned matters relating to the supplier's relationship with EMS

· a BBC-commissioned investigation into the affair, by consulting firm Andersen, highlighted the absence of a proper long-form contract and said more conventional business practices might have helped prevent the fraud but the judge in the criminal trial took the view that best practice measures could not have prevented the fraud.

Taylor was at the heart of the BBC's attempts to supplement the licence fee by taking commercial advantage of hit programmes such as the Tweenies. With a background as a marketing executive at Sony, he was meant to be instrumental in rolling out BBC franchises to a global audience. In 2000 he said the corporation's acclaimed children's programming would be at the forefront of Worldwide's expansion: "Our vision for the future is to engage children around the world and across all media in a way that makes a real difference to their lives."

In 1999 EMS became Worldwide's sourcing agent for toys and watches for its children's business. Over the next two years, EMS proceeded to defraud Worldwide with the collusion of BBC Worldwide's man in Hong Kong.

The company received £30,000 per month from the BBC to pay for overheads at its Hong Kong base, in BBC Worldwide's local offices, and a further £37,000 per month. On top of this bona fide arrangement, two EMS directors, Syd Edels and Dan Berman, took illegal payments from suppliers in exchange for choosing them as manufacturers of Tweenies toys and other merchandise. Under the terms of the illicit set-up, Edels and Berman took 5% of the sale price of goods supplied by the manufacturer.

Taylor received a cut, which included US$330,000 paid by Hong Kong-based GC&Co and HK$3,058,439 from Ming Tat, another manufacturer based in the former colony. Taylor was convicted alongside Berman and Edels by Judge John Saunders, who said they had committed "corruption on a significant scale and on an international basis" between July 1999 and October 2001.

BBC Worldwide unwittingly overpaid EMS by $6.4m for its services, with part of the money being used to bribe Taylor. The three men used the codenames "Booze", "Dog" and "KCC" during the sophisticated scam, which involved use of bank accounts in Switzerland and Taylor's native New Zealand.

Judge Saunders accused the men of using elaborate methods of concealment to hide the kickbacks. "None of you could, for one moment, have ever considered that such payments to Mr Taylor would ever have been approved by BBCW or the BBC," he said.

As soon as BBCW was aware of the fraud on Taylor's arrest on October 17 2001, the contract with EMS was termi nated and he was suspended. The BBC launched an internal inquiry which reported in November. Taylor was formally dismissed from BBCW in December.

BBCW also commissioned Andersen Consulting to carry out its own report, which was completed in July 2002. During that time BBCW has co-operated with the Hong Kong anti-corruption body, the ICAC, and launched civil proceedings against Edels, Berman, EMS and Taylor.

Letters sent to Mr Gavin, the chief executive of BBCW, by a disgruntled manufacturer were referred to in the internal report. One dated January 6 2001 from GC&Co, a company which had lost its manufacturing deal with EMS, states that EMS has "charged our company a commission for an amount equivalent to 5% of the sale price on goods so delivered to meet your orders".

Further letters were sent on January 15 and January 22 complaining about the lack of orders. References to 5% commission in this correspondence failed to prompt concern as executives believed that it related to bona fide commissions.

BBCW points out that at this time it had no idea that EMS was corrupt and says, "It is impossible for any company, even one with robust control procedures such as BBCW to protect itself completely against individuals who organise a covert criminal conspiracy against it."

The longest item of correspondence was seven paragraphs long. Mr Gavin referred the letters to Mr Johnstone. In a letter dated January 15 2001, GC&Co director Nancy Tse thanked Mr Gavin in the first paragraph for "acknowledging that EMS is authorised to receive commission on BBC orders in return for our exclusive supply of Tweenies toys and watches".

The reply from Mr Johnstone on the same day states that "our understanding of some circumstances from EMS is not the same as set out in your correspondence," but does not refer to the 5% commission.

In a witness statement to the ICAC, Mr Johnstone says that while he read the original letter from GC&Co referring to the 5% commission he "did not pick up the commission point". Referring to the next letter which mentioned the commission again, he said: "Again, I did not pick this up. Had I realised that this 5% commission was being paid by GC&Co, from the amount they received, to EMS, I would have reported the matter to my senior management as EMS was not al lowed to receive commission other than those paid by BBCW." Mr Johnstone adds that he only became aware of the unauthorised commission after Taylor was arrested in October 2001.

In his witness statement, Mr Gavin states that he usually receives a "substantial volume" of correspondence relating to BBCW's business activities, which he looks at "very briefly" before allocating the reply to a BBCW department. "Bear in mind, the huge quantity of correspondence that comes through the desk," he told the Guardian yesterday.

He states that his original reaction to the first GC&Co letter containing the 5% claim was that "GC&Co was complaining that BBCW had stopped placing orders with them [EMS] and that they wanted to continue that business". He adds: "Under no circumstance was EMS, to my knowledge, allowed to take any additional commission or other forms of money from the suppliers in relation to their capacity as our agent."

One of the issues picked up by Andersen was that BBCW had failed to negotiate a long-form contract with EMS for their outsourcing deal, two years after EMS was set up as BBCW's agent in Hong Kong and began working for the corporation. The Andersen report stated that drawing up a contract instead of relying on a less formal heads of agreement contract, was "one of a number of steps that, if implemented, might collectively have made the fraud less likely to have been able to occur".

The judge in the case made clear, however, that any more formal contract would not have prevented this type of fraud. Mr Gavin says that he has no regrets about either his own actions nor those of any member of staff with the exception of Taylor. "We believe that we did what we could and from the point when the situation became clear to us we have acted with due haste and vigour in bringing this sad saga to an appropriate conclusion."

A statement from BBCW said: "A sophisticated crime of this nature, taking place outside our systems with Taylor's insider assistance, was always going to be hard to detect and prevent. Our systems are robust in fraud detection and this case has prompted us to enhance these even further." ICAC praised the BBC for its co-operation. BBC Worldwide was a "victim" said Mr Gavin, of a sophisticated fraud. "We have learnt a lot from this incident and made a number of improvements."

These changes include tightening up existing procedures, appointing a new senior role of group risk manager, introducing an audit of agents and suppliers and giving additional training for all staff on corporate good governance.

The incident, which did not involve loss of public funds, represents the first time that a fraud of this scale has taken place at the company, which is keen to capitalise on the success of its CBeebies brand. BBC chiefs are relieved that the trial is over and there is no longer any whiff of corruption associated with its popular children's characters such as the Tweenies.