The Serious Fraud Office (SFO) is investigating a number of British companies, over allegations that they paid bribes to Saddam Hussein to win lucrative contracts.
The investigation will look at possible breaches of the oil-for-food sanctions.
The UN has issued a report which lists over 2,200 companies, worldwide, that may have been linked to bribery to Iraq.
The British firms listed in the report by Paul Volcker, submitted two years ago, include GlaxoSmithKline and AstraZeneca. They have all denied the accusations.
The SFO spokesman said:
"The SFO has now opened a formal investigation into issues relating to the breaches of the embargo (against Iraq).
All this springs out of the Volcker report and other information that came to us last year. The director of the SFO has now signed us up to conduct a full investigation."
"We deny any allegation of unethical behaviour on our part in our trading relationships with Iraq,” a spokesman said.
AstraZeneca sent a consignment of medicines originally requested by the Hussein government under the United Nations Oil for Food Programme.
Most of the consignment was delivered after the coalition forces of the US and UK had taken control of the country.
The consignment was sent with all relevant United Nations permissions and UK Government Department of Trade and Industry export licences in place."
A GlaxoSmithKline spokesman said:
"GSK denies any wrongdoing. The UN Oil for Food programme was run in the UK by the Department of Trade and Industry and GSK operated entirely within DTI guidance in this area.
Indeed, GSK had a regular dialogue with officials at the DTI in order to ensure that all its dealings under the Oil for Food programme were transparent and in accordance with the regulations."
The investigation will take years and cost millions.