Justice Secretary Chris Grayling has asked the Serious Fraud Office to investigate G4S for overcharging for tagging criminals in England and Wales.
MPs heard that the overcharging by G4S and rival Serco ran to tens of millions of pounds.
Mr Grayling said the firms charged the government for tagging people who were not actually being monitored.
The bills included tags for people in prison or out of the country, and a small number who had died.
Serco has separately voluntarily agreed to take part in a 'forensic audit' of what happened. G4S was given the same opportunity to co-operate with the government investigation, but refused.
In a statement to MPs, Mr Grayling said he had further launched a disciplinary investigation into the way the contracts had been managed inside the Ministry of Justice after uncovering evidence that officials knew in 2008 that there were problems with how both companies were billing for tagging.
'Start Quote
The House will share my astonishment that two of the Government's biggest suppliers would seek to charge in this way'
End Quote Chris Grayling
There will also be a wider review of all contracts held by G4S and Serco across Government.
'The House will share my astonishment that two of the Government's biggest suppliers would seek to charge in this way,' said Mr Grayling.
'The House will also be surprised and disappointed to learn that staff in the Ministry of Justice were aware of a potential problem and yet did not take adequate steps to address it.'
Electronic tagging of criminals is a key part of the government's strategy to monitor offenders in the community. The contracts are awarded to private companies who then place the electronic ankle bracelet on the offender or suspect and ensure that their movements comply with their bail or licence conditions.
Mr Grayling said that current contracts had been awarded in November 2004 and were due to expire shortly.
He said that an audit had revealed a 'significant anomaly in the billing practices' of both companies. Further investigations revealed that the billing related to people who were not actually tagged at all.
G4S in 2012 £7.3bn turnover Pre-tax profit: £516m Quarter of turnover relates to government contracts Half of business in Europe
Mr Grayling said: 'It included charges for people who were back in prison and had had their tags removed, people who had left the country, and those who had never been tagged in the first place but who had instead been returned to Court.
'There are a small number of cases where charging continued for a period when the subject was known to have died.
'In some instances, charging continued for a period of many months and indeed years after active monitoring had ceased. The House will share my view that this is a wholly indefensible and unacceptable state of affairs.'
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