Well I can't cite anything, I'm just talking about my experience and things I've seen first hand many many times.

If you're a PI on a big project or heading a big group, it's routine business to meet journal editors, invite them to your lab and reach publication agreements before writing your paper.

Obviously the paper will still go to review. But even that is already a big hurdle you have bypassed. In the big 3 journals, it's equally tough to get to review than to pass reviews once there. Plus, with direct contact to the editor, it's easier to get your paper reviewed by friendlier peers and/or influence ultimate editorial decisions.

I've also seen this happen, where an article was designed in pre-consultation with a journal editor in my field. We submitted (what I felt was) a dubious paper initially. Reviews were very harsh, but the paper was not rejected. I was amazed we had four months to revise and resub. It was eventually published. I was an early grad student at the time, so I didn't know that this was unusual.

That would be scandalous headline news if true.

It's standard in human genetics, at least in the UK. The editors of Nature have a close relationship with influential PIs and their labs, are present at social events / parties, and the general direction and appropriateness/desirability of papers are certainly discussed with the editors early in the process. These are projects with large budgets that span several years. Of course, there is still peer review, and it is still rigorous.

I can't speak for the UK, but in the government-managed science programs of other countries this behavior would be landing people in prison, standard practice or not.

What makes it illegal? I mean, what specific law would make it so? Where exactly?

This is true in my experience as well - most papers to these vanity journals are rejected without review by the editor ("desk reject"), and a prior relationship between a PI and the editor basically guarantees you will sail past that stage.