Jacqui Smith was under fire for failing to sack the private contractor which lost personal data on thousands of criminals.
The Home Secretary said PA Consulting – which has won Government contracts worth £240million since 2004 – broke the rules on secret data.
But Whitehall officials made clear it will continue to be paid vast sums of taxpayers’ money.
They are effectively powerless to act because axeing the firm would throw a string of major Government projects into chaos.
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This means they will continue running a number of lucrative contracts, including the one involving the most sensitive personal data – the introduction of ID cards and biometric passports.
Critics said it raised questions as to whether the Home Office is capable of protecting the personal information of Britain’s citizens.
Miss Smith has already come under fire for trying to ‘abdicate’ her own responsibility for the latest fiasco – in which the names, addresses and even prison release dates of up to 127,000 hardened criminals were lost when a single computer memory stick went missing.