A highly critical report released by John Vine, chief inspector of borders and immigration, has found significant failings in the UK Border Agency's (UKBA) handling of hundreds of thousands of cases.
Vine identified key failings including a lack of security and data checks in the way the agency dealt with asylum seekers and bogus students.
He also reported that UKBA staff failed to check tens of thousands of tips-offs about overseas students including worries that some had not even enrolled at the start of term.
At one point there were 150 boxes of unopened mail from asylum applicants and some 153,000 bogus student warnings, both of which the agency made virtually no effort to address despite reassuring MPs that "extensive checks" were being carried out.
Mr Vine said he could find "no evidence that targets were in place to effectively manage notifications to the agency from sponsors that students were, for example, not attending courses".
"Over 150,000 notifications had accumulated and were awaiting action, meaning that potentially thousands of students had retained leave to remain when they should not have done so," he said.
"This was a significant failure."
Inspectors found the agency had no targets to address them and "they were only dealt with when resources permitted". The blunder meant 23,000 bogus students were allowed to remain in Britain when they should have been sent home, many of these have still not been traced.
It also emerged that compliance officers who visited universities and colleges had no powers of arrest, so could take 'little or no action' even if they found someone had no right to be in our country.
"There is little point in requiring universities and colleges to notify the agency of such cases unless the agency develops the willingness and capacity to identify, curtail the leave of, and remove students who are no longer complying with the terms of their entry clearance," Mr Vine said.
Mr Vine also drew a "concerning parallel between the agency's lack of proactivity on these cases and its failure to deal with the 159,000 cases in the migration refusal pool", which lists people refused permission to stay in the UK but who have not been traced.
He also accused officials of supplying inaccurate information to Parliament about the backlog of asylum cases and the progress that was being made.
Chris Bryant, the shadow immigration minister, said: "Time and time again the chief inspector has found problems with UKBA.
"The blame for this lies squarely at Theresa May's door for cutting 5,000 staff from UKBA."
The figures make uncomfortable reading for the Con/Lib/Dem Coalition which has pledged to clampdown on bogus asylum seekers and bogus students.
Responding to the report PCS general secretary Mark Serwotka said: "Instead of attacking public services the government should take this report and invest in the agency rather than driving it – and our members – into the ground.
"Morale at the agency is rock bottom but this report, from an independent chief inspector, proves the department needs to employ more staff, not fewer. The officials who misled Parliament must also be held to account."
According to the PCS, which represents UKBA staff, this "unacceptable" situation has come about because of the government's severe cuts to the agency with 5,200 jobs planned to go by 2014.
Patrick Harrington, General Secretary of Solidarity commented: "Government cuts are clearly impacting on our ability to control our borders. Trade Unionists should be concerned as one of the effects of illegal immigration is to create a pool of unregistered, untaxed and cheap labour which can be exploited to undermine wages and conditions. The black economy illegal immigration feeds undermines attempts to raise standards in employment. Union leaders must be prepared not just to bemoan cuts but also look at the wider implications of an ineffective immigration policy."