In less than 24 hours, Gusttavo Lima, one of the most famous Brazilian country singers, sang at a rodeo in rural São Paulo state, watched Akon perform at the Rock in Rio festival, jetted to Miami – and became the target of an arrest warrant on suspicion of money laundering.

A judge issued the warrant late on Monday, saying Lima was suspected of links to illegal online gambling.

A spokesperson for the singer, whose real name is Nivaldo Batista Lima, described the warrant as “unjust and without legal grounds”, adding that “the artist’s innocence will be duly proven”, and the arrest order was overturned a day later.

But the attempt to arrest a star with 13 million monthly listeners on Spotify dominated local news headlines – and cast a spotlight on how a sudden boom in unregulated online gambling has become a growing criminal headache and public health crisis for Brazil.Online gambling companies have grown exponentially since the Covid-19 pandemic, many of them with links to international companies and local criminal groups.

New rules to regulate online gambling will come into force on 1 January, but experts warn that the regulations will be insufficient to combat what many are calling Brazil’s “epidemic” of online gambling addiction.

A series of recent studies have laid bare the scale of the problem: in addition to getting into debt, more Brazilians are using money they would have spent on entertainment or even food to bet online, and growing numbers are dropping out of applying to university for the same reason.

“We’re already completely overwhelmed,” said Hermano Tavares, a psychiatrist who created the outpatient gambling program of the University of São Paulo hospital in 1998. The program, which can accommodate 100 new cases yearly, currently has 240 on the books, with another 240 on the waiting list.

“The Brazilian healthcare system is still not prepared to start dealing with these cases,” said Tavares.

The crisis has also been felt at Gamblers Anonymous, the 12-step recovery programme whose first Brazilian group was established in Rio in 1993. In the past 12 months alone, groups have been formed in seven more cities, including the first one in the Amazon.

Online gambling was legalised at the end of Michel Temer’s government in 2018, but no regulations were implemented during far-right Jair Bolsonaro’s four-year term.

Luiz Inácio Lula da Silva’s government approved the regulations at the end of 2023, giving companies a year to comply. More than 100 companies have registered to pay a five-year licence fee of R$30m (£4.1 million).

But Tavares argued that the regulation is “excessively” focused on fiscal concerns – specifically preventing capital flight, and securing tax revenue – rather than on gamblers’ health.

Fernando Haddad, Brazil’s finance minister, whose office oversees the gambling market, has denied that the regulations are focussed on raising money for the government. “It has nothing to do with revenue. It has to do with a pandemic that has taken hold in the country … which is the issue of psychological gambling addiction,” he told reporters last week.

Haddad said that public education campaigns will be launched to warn the public about the impact gambling may have on their health and personal finances.

But health specialists say the rules should be tougher, with a total block on any financial transactions between midnight and 8am. Under the new rules, companies are only required to offer bettors the option to set such limits themselves.

While the regulations have yet to come into force, actions against illegal betting companies have primarily been led by the police, focusing on money-laundering cases, such as the one Lima was alleged to have been involved in.

Judge Andréa Calado da Cruz, who issued the warrant, alleged that Lima – a rising star of sertanejo, the accordion-driven country genre that currently dominates the Brazilian music industry – gave “shelter” to the owner of a betting company and his wife, who were wanted on charges of money laundering. The warrant for the couple was also later overturned by an appellate judge.

Da Cruz also alleged that Lima had received at least R$15.71m (£2.1m) through companies of which he is the sole shareholder from companies accused of laundering money from online gambling and jogo do bicho, a Brazilian popular illegal lottery; and R$22.23m (£3m) for selling a jet to one of the companies.

The singer’s PR office said in a statement that the singer “would never be complicit in any act contrary to the laws of our country, and neither he nor his companies are involved in the subject of the police operation”.