A fraud probe has been launched into private contracts held between the Government and two security giants for tagging criminals.
The Serious Fraud Office (SFO) has opened a criminal investigation after it emerged G4S and Serco overcharged the Ministry of Justice for electronically monitoring offenders, some of whom were found to be dead, back in prison or overseas.
Both G4S and Serco saw their shares drop in value by 2% and nearly 1% respectively following the announcement.
An audit by big four accountancy firm PricewaterhouseCoopers, launched in May, alleged that overcharging began at least as far back as the start of the current contracts in 2005.
Justice Secretary Chris Grayling told the two firms that an independent forensic audit was required to look at, among other areas, internal email trails between executives to establish what happened.
In July, the Government reported G4S - well-known for its botched handling of its Olympics security contract - to the SFO when it refused to take part in an additional investigation to rule out any dishonesty.
Serco allowed a further forensic audit to take place, during the course of which the Ministry of Justice passed material to the SFO.
A spokesman for G4S said: "G4S confirms it has today received notice that the director of the Serious Fraud Office has opened an investigation into the "contract for the provision of electronic monitoring services which commenced in April 2005 as amended and extended until the present day".
"G4S has confirmed to the SFO that it will co-operate fully with the investigation."
A Government-wide review of all contracts held by Serco and G4S was sparked by the allegations last July.
Shadow justice secretary Sadiq Khan said the SFO probe was a "major development".
"I hope that the time taken to launch this investigation hasn't resulted in the loss of important evidence," he said.
"With future Ministry of Justice contracts up for grabs, including more than £600 million of probation contracts, the Government must act swiftly and bar G4S from bidding for any more until the SFO has concluded its investigation.
"By failing to do so, David Cameron risks undermining public confidence in our justice system."
A statement from Serco said: "Serco confirms that it will co-operate fully with the SFO investigation."
Keith Vaz MP, chair of the Home Affairs Select Committee, said: "I welcome the investigation into this contract. T he revelations which led to the minister of justice's referral were very disturbing and it is important that we establish the full facts.
"The Home Office should accept the recommendation of the Home Affairs Select Committee and implement a high risk register for those companies who fail to deliver."
Asked whether David Cameron thought it was acceptable for G4S to continue bidding for Government contracts while under investigation, the Prime Minister's official spokesman told a daily Westminster media briefing: " He thinks that it is important for the SFO to get to the bottom of the investigation they have announced, and it is important for the audit of all the contracts that have been agreed between the Government and the companies referred t,o to continue."