Rizwan, 30, son of Dawood's younger brother Iqbal Kaskar, was arrested Wednesday night at the Mumbai airport when he was trying to flee to Dubai, the official said.
It is the first time Rizwan has been booked for any offence. Iqbal Kaskar was arrested in an extortion case last year and is currently lodged in a jail in neighboring Thane.
On July 15, Mumbai Crime Branch's Anti-Extortion Cell arrested Ahmed Raza Wadharia. Wadharia is a close aide of Fahim Machmach, a Dawood gang-member, said Datta Nalawade, Deputy Commissioner of Police (Crime).
"During his interrogation, Rizwan Kaskar's name cropped up. Based on that information, a trap was laid and Rizwan was detained at the airport," he said.
Wadharia, a native of Surat, allegedly worked as a 'hawala' (illegal money transfer) operator in Dubai.
He was arrested when he landed in the city from Dubai on the way to Surat.
After his arrest, Rizwan, who lives in Dubai but had arrived in Mumbai four days ago, tried to escape but was nabbed at the airport, the official said.
The Crime Branch then arrested a third accused, Ashfaque Rafique Towelwala, from South Mumbai.
According to the police, Towelwala and a city-based businessman imported electronic goods from China. The two had a dispute in 2017 after the businessman claimed that Towelwala owed him Rs 15 lakh.
In June, Machmach allegedly contacted the businessman through a recorded voice message, warning him of dire consequences if he demanded money from Towelwala.
Communicating through a recorded message on WhatsApp -- which can be deleted after playing -- was the new modus operandi in the underworld, the official added.
Such messages were found on Wadharia's mobile phone, he said.
During the investigation, it came to light that Wadharia and Rizwan played a key role in the whole episode, he added.
Another police official said that several businessmen engaged in import of electronic goods from China are known to have approached Machmach and gangster Chhota Shakeel if they wanted their creditors not to demand repayment.
Wadharia had earlier allegedly tried to extort money from some businessmen in Mumbai and Gujarat, he said.
Police found that Rizwan's passport did not have the surname 'Kaskar', while Wadharia had at least two passports.
All three, booked under Indian Penal Code Section 387 (extortion), were produced before a court and sent in police custody till July 22.
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