Water companies are at the centre of a major investigation by the financial and environmental watchdogs after they admitted they may have illegally released untreated sewage into rivers and waterways.

The Environment Agency and Ofwat said they had begun an investigation into sewage treatment works, after new checks led to the admission from the water companies.

This investigation will involve more than 2,000 sewage treatment works, nearly a third of the total number in England and Wales, with any company caught breaching their legal permits liable to enforcement action, including fines or prosecutions. Fines can be up to 10% of annual turnover for civil cases, or unlimited in criminal proceedings.

Ofwat said it was demanding that water companies reveal the scale of any illegal releases of sewage from their treatment plants, why they had taken place and what role their board may have had in scrutinising and monitoring such illegal spills.

The financial regulator is also asking the boards of water firms to explain how environmental performance and compliance has been taken into account when deciding on paying out dividends and executive bonuses.

In the last 11 years, the nine English water companies have paid shareholders a total of GBP16.9bn in dividends; an annual average of GBP1.4bn, according to analysis by David Hall, of the Public Services International Research Unit (PSIRU) at the University of Greenwich.

Emma Howard Boyd, chair of the Environment Agency, said: “Any water companies in breach of their permits are acting illegally.

“This is a major issue of public trust. Water company boards must certify every year that they have adequate resources to fulfil their regulated activities.

“Only now, just before new monitors are installed, have companies reported concerns over potential problems. The EA has begun an immediate investigation of more than 2,000 sewage treatment works and will prosecute where necessary.”

Howard Boyd said the private sector was under increasing pressure to demonstrate tangible commitments on protecting the environment. The investigation comes after Southern Water was given a record GBP90m fine for illegally spilling billions of litres of raw sewage into the sea. The sentencing judge called for more scrutiny from the boards of water companies of environmental breaches by firms.

Southern is now facing a rate-payer revolt over its continued releases of untreated sewage via storm overflows.

Richard Benwell, CEO of Wildlife and Countryside Link, said the crackdown on illegal sewage dumping was welcome. But he said: “For too long poor monitoring of sewage overflow permits has been a ‘get out of jail free’ card for some water companies to pollute with impunity.

“Under-reporting, inaction, and failure to comply with statutory duties to reduce harm to our rivers and wildlife, are unacceptable, and incompatible with stopping nature’s decline by 2030.”

He said the government had to ensure that the EA had a full armoury of financial and legal options available to ensure that corporate environmental crime does not go unpunished.

The EA said it had uncovered the potentially illegal spills at sewage treatment plants as a result of a series of checks on sewage treatment plants. Several water companies revealed that many of their sewage treatment works may not be compliant with the permits issued to release raw sewage only in exceptional circumstances.

Martin Salter, head of policy at the Angling Trust, said, “It’s about time we saw action rather than words but there’s much more that needs to be done. We need to see stronger regulation through a properly funded Environment Agency and we need to see a robust new obligations placed on OFWAT to release the investment to overhaul and upgrade our creaking wastewater infrastructure.

“The government needs to take lead and ensure that its forthcoming strategic policy statement for water will drive the actions needed to give us a pathway out of pollution.”

The investigation comes after revelations in the Guardian about the scale of releases of raw sewage. Analysis presented to MPs suggested the scale of illegal spills by water companies was 10 times what they declared to the EA.