The immigration department fired 15 officials on Tuesday, took disciplinary action against 22 and said it was investigating more in connection with the security breach at Kuala Lumpur International Airport, which could have been going on for years.
Police said arrests were imminent.
"We have identified the suspects. We are still investigating but we will make arrests soon," deputy police chief Noor Rashid Ibrahim told reporters on Wednesday.
International and domestic syndicates were involved, Noor Rashid said, and he suggested the motive was human trafficking.
"The syndicates overseas collaborate with the syndicates here. These overseas syndicates - their responsibility is to bring the man over and collect payments, while the syndicates here, their job is to accept. These are the ones that tried to penetrate the system," he said.
Authorities said last week the airport's passport-verification system was deliberately disrupted at certain times of the day, possibly since 2010, raising suspicion people were being smuggled through immigration when it was down.
The revelations come after the auditor-general said in a report tabled in parliament two weeks ago that the immigration system was not functioning satisfactorily.
Human rights groups have questioned Malaysia's efforts to combat human trafficking after the discovery of mass graves of suspected migrants near the border with Thailand last year.
Malaysia has an estimated two million illegal migrant laborers, many of whom work in the electronics, palm oil and construction sectors.
The immigration system breach has also raised concern about security.
Authorities in the Muslim-majority country have arrested about 170 people since the beginning of last year for suspected militant activity.
Last month, Malaysia deported three foreign suspected militants and arrested 14 Malaysians on suspicion of links to Islamic State, including an aircraft technician.
In March, deputy prime minister Ahmad Zahid Hamidi said police had foiled an Islamic State plot to kidnap Prime Minister Najib Razak and other senior ministers last year.
Opposition lawmaker R. Sivarasa said the sabotage warranted a major criminal investigation and called for the police and the anti-corruption commission to look into it.