Seven people have been charged over an alleged fraudulent sexual abuse compensation claims scheme that allegedly netted more than $1bn.

NSW police alleged that “claim farmers” approached former young offenders, inmates and public school students, encouraging them to file fraudulent compensation claims for historic child sexual abuse while in care.

The claims were brought against the NSW Department of Communities and Justice and the NSW Department of Education.

Police said the claim farmers coached prospective claimants on how to make fraudulent claims through various Sydney law firms.

The proceeds were reportedly known as “bum money” within criminal syndicates. Police said they suspected “a significant portion” of the $1.3bn worth of claims were fraudulent.

On Wednesday, detectives executed a search warrant in Girraween and arrested a 55-year-old man who was charged with 21 offences, including nine counts of dishonestly obtaining financial advantage through deception. He was refused bail to appear in Parramatta local court on Thursday, where police will allege he was a claims farmer in the scheme.

Five others were arrested and charged with publishing false or misleading material to obtain advantage. This includes a 53-year-old Granville woman, 32-year-old Pendle Hill man, 52-year-old Horsley woman, 35-year-old Pendle Hill woman and a 42-year-old man, arrested at Gladesville police station.

A 23-year-old man from Mermaid Beach in Queensland was also issued a future court attendance notice for the same charge.

Police will alleged in court the seven people charged stood to make $3.75m in fraudulent compensation claims, but that the scheme was uncovered before these were paid out.

Police also executed a search warrant at a law firm in Sydney, where they seized items relevant to the investigation.

Investigations were continuing and more arrests were expected, police said.