The Serious Fraud Office (SFO) says it has opened an investigation into the government's contracts with G4S and Serco for tagging criminals.
It comes after an audit suggested the firms had been charging for tagging criminals who were either dead, in jail or never tagged in the first place.
In July, the government had asked the SFO to consider carrying out an investigation into G4S.
G4S said it would co-operate fully with the SFO investigation.
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."
The audit by accountancy firm PricewaterhouseCoopers, launched in May, alleged that the charging discrepancies began at least as far back as the start of the current contracts, in 2005, but could have dated back to the previous contracts in 1999.
Justice Secretary Chris Grayling told the two firms that an independent "forensic audit" - a search for possible illegality - should be conducted, which among other things would need to examine email trails between bosses.
G4S was reported to the SFO when it refused to co-operate with this further audit, while Serco allowed a further forensic audit to take place.
In the course of the audit in September, the Ministry of Justice provided material to the SFO in relation to Serco's conduct.
G4S made headlines after it failed to provide all of its contracted security guards for the London 2012 Olympics, prompting extra military personnel to be called in to fill the gap and leaving the firm with losses of £88m.