German heiress Susanne Klatten, 45, paid 7.5 million euros (£6 million) to a Swiss-Italian man who claimed he was being threatened with death by the mafia.
The married mother of three, whose £8 billion wealth makes her the third richest woman in Europe, was then allegedly blackmailed by Helg Sgarbi when he threatened to go public with films of the couple having what Italian judicial authorities described as "intimate relations" during secret trysts in luxury hotels.
Mr Sgarbi, 41, was arrested in Austria during the summer in a joint operation between German and Italian police and is now in prison in Germany after being charged with extortion.
Details of the blackmailing allegations have only now come to light through Italian investigators.
Mrs Klatten, whose huge wealth comes from stakes in BMW and the chemicals giant Altana, eventually decided to contact the police when he asked for an astonishing 40 million euros (£32 million) not to make the compromising footage public.
His accomplice, Italian hotel owner Ernano Barretta, 63, who is said to have secretly filmed the sex sessions using hidden cameras, was arrested by Italy's Flying Squad in the seaside town of Pescara, on the Adriatic coast, and is also in jail awaiting trial.
Mr Sgarbi met Mrs Klatten in 2006, and the couple regularly arranged rendezvous in luxury hotels in Monte Carlo, her home town of Munich and in other European cities.
After a few months he began claiming that he was being threatened by the American mafia and desperately needed to pay off the mobsters with large sums of protection money. Mrs Klatten initially believed him and paid out 7.5 million euros in several instalments.
Mr Sgarbi was also allegedly conning money out of other rich women he was sleeping with, spending the proceeds on property in the Egyptian resort of Sharm El Sheik, investing some in offshore banks and splurging the rest on luxury cars, including a Ferrari, a Lamborghini and a Rolls-Royce Silver Shadow.
But he soon became greedy and last December allegedly threatened to go public with the sex tapes unless Mrs Klatten paid him 40 million euros, a sum which he later reduced to 14 million euros.
Despite the prospect of acute public embarrassment Mrs Klatten, who was educated at Buckingham University and is now ranked in the Forbes Rich List as the 55th wealthiest person in the world, took the whole story to the German police.
They then collaborated with their Italian counterparts in arresting the two alleged con men.
Italian detectives planted bugs at Barretta's home, in the province of Abruzzo, and intercepted his telephone conversations with Mr Sgarbi and Mrs Klatten.
"He told me that he was being blackmailed by the Italian-American mafia who were threatening him with death because in a car accident he'd run over the baby son of a mobster," Mrs Klatten told police in a statement.
"And that if he didn't pay up they'd kill him. I believed him, he seemed sincere, I gave him the first 7.5 million euros and then the threats and blackmail started."
Three of Mrs Klatten's friends also gave statements to German police, with one saying: "He was always kind, thoughtful, he accompanied us, he surprised us with his manner, and I along with my friends fell into his trap. I also paid him millions of euros and then I reported him."
As the two men await trial in prison, they have come up with an extraordinary justification for their alleged blackmail scam, claiming that it was a vendetta against Mrs Klatten because of her family's alleged links to the Nazis.
Her fortune, including a stake in BMW, was inherited from her father, Herbert Quandt, whose alleged use of slave labour and co-operation with the Nazis during the war has been the subject of German documentaries and is being investigated by a historian funded by the Quandt family themselves.
Mr Barretta told police: "Helg's grandfather was Jewish and during the Second World War was deported to a steel works in Germany,
"Susanne Klatten is the daughter of a close collaborator of Adolf Hitler. We wanted to avenge Helg's grandfather. I helped him because we've been friends all our lives."
But Italian prosecutors were unimpressed by claims of the 70-year-old vendetta and have prepared a case against the two men.
"Our investigation has demonstrated clearly the existence of extortion in the form of attempted threats to Susanne Klatten," preliminary investigating judge Gabriella Tascone wrote in a court document.
"Mrs Klatten was threatened with the divulgence of the compromising images, captured on DVD, to companies in which she has shareholdings.
"Having obtained compromising images with deceit, Sgarbi began a period of threats ending with the delivery of huge sums of money. The decision of the victims [to denounce the alleged con men] was extremely prudent."
Mrs Klatten is a trained economist with an MBA who sits on the board of supervisors of Altana in which she inherited a 50 per cent stake from her industrialist father.
He also left her a 12.5 per cent stake in BMW. She was appointed to the supervisory board of the car manufacturer in 1997.
She met her husband Jan Klatten while she was doing an apprenticeship with BMW in Germany, where he worked as an engineer. They married in 1990 in Kitzbühel. She is one of the biggest donors to political parties in Germany.
