The U.K.'s Serious Fraud Office (SFO) said on Monday that it had opened a criminal investigation into the electronic tagging of criminals by G4S and Serco.
Shares in security and outsourcing group G4S dropped by 2 percent Monday morning before paring losses to be 0.8 percent down, while services company Serco's fell 0.7 percent.
In July, Justice Secretary Chris Grayling called for an SFO investigation into the way G4S had charged the government for providing electronic tagging services. Some criminals in the U.K. are "tagged" with electronic devices enabling them to be monitored when they are not in prison.
Grayling said an audit had identified "significant anomalies" in billing practices, which included the government being charged for tagging people who were actually in prison, had left the country or were never being monitored in the first place.
In September, the government also referred Serco to the SFO.
On Monday, the SFO - which oversees the investigation of fraud for the British government - issued a statement which said: "The Director of the Serious Fraud Office has opened a criminal investigation into G4S and Serco electronic monitoring contracts."
It will now assess whether there is enough evidence to prosecute the companies.
Serco's former CEO Chris Hyman unexpectedly quit last month following the allegations of overcharging,as part of a major restructuring at the company.
G4S' former CEO Nick Buckles stepped down in May following a series of issues at the company, including a profit warning. G4S had also come in for heavy criticism for its failure to provide sufficient security personnel at the London Olympics in 2012.
In separate statements on Monday, both G4S and Serco said they were aware of, and would cooperate fully with, the investigation.
Follow us on Twitter: