Gary Webb spent a night in a police cell and three nights in jail in 2015 when officers believed him to be a suspect they were looking for - despite him showing them evidence he was not.
The 60-year-old, from Gatehouse of Fleet in Dumfries and Galloway, told the Sunday Post officers had his fingerprints and knew he was the wrong man.
He said: "The officers didn't make mistakes in the course of their duties - they lied and tried to cover it up, and there's lots of evidence to prove this.
"I was at home with my wife then being held in cuffs with no-one believing who I was and facing the worst kind of criminal charges imaginable.
"I thought I was going insane. How could no-one believe I was me?
"I experienced things I should never have had to. I had to leave my work as my mental health was affected by everything."
The former timber yard manager, who has no criminal convictions, was arrested at his home by detectives searching for a different person.
He claimed a photo of the suspect was held next to his face and they deemed they were the same person.
Despite showing forms of identification - such as a passport and driving licence - he said officers told him they would need to take him to the police station.
He was taken to court and then spent three nights at Addiewell Prison before he was let go without explanation or apology.
Mr Webb contacted the Police Investigations and Review Commissioner (Pirc) after his formal complaint was dismissed by an internal investigation.
Five officers were arrested and reported to the Crown Office, but it was later deemed none would face prosecution.
Assistant Chief Constable Alan Speirs said: "We recognise the significant impact this incident and our poor initial response had on Mr Webb and, following the conclusion of legal proceedings, will seek to discuss these matters with him and offer an unreserved apology.
"The Crown Office and Procurator Fiscal Service (COPFS) instructed Pirc to investigate the circumstances and the COPFS has instructed there should be no criminal proceedings.
"Our officers and staff work with commitment and professionalism day in, day out, to provide a high quality policing service for the public.
"When learning opportunities are identified, Police Scotland is committed to supporting officers and staff who have acted in good faith, however we will not comment on internal misconduct matters."
Digby Brown Solicitors secured compensation for Mr Webb after successfully arguing Police Scotland's officers acted illegally in their arrest.
Gordon Dalyell, partner at the firm, said: "The arrest and continued detention of Mr Webb was nothing short of outrageous.
"The life of an innocent man was completely ruined because of the deliberate and malign actions of police officers who are meant to keep people safe.
"I would like to think an inquiry will occur in due course to ensure innocent people are not illegally detained and Police Scotland staff who act illegally will be held accountable."