Convicted triple murderer Regina Kaye Arthurell, 78, was found to be living with children aged 12 and 14, something NSW government figures have apologised for and labelled entirely unacceptable.
Arthurell was released on parole in November 2020 after serving a 24-year sentence.
Communities and Justice Department Secretary Michael Tidball confirmed on Monday morning two staff members had been suspended based on an initial investigation into how the children were placed with the murderer.
Mr Tidball had previously announced a review of the decision-making, risk identification and information-sharing that allowed it to happen.
"The department's caseworkers do incredibly difficult frontline work every day in challenging circumstances, and they do it because they care deeply about protecting children and supporting families," he said.
"I am committed to ensuring the department learns from this situation and continues to build a system that reflects the standards children, families and the community rightly expect of the public service."
A second incident, in which two children in care lived with a man jailed for manslaughter and assault, was identified in News Corp reporting at the weekend.
Premier Chris Minns did not answer directly when asked whether the department should review the living arrangements of all foster children after the multiple scandals emerged.
"Case managers look at their individual cases really constantly, and we need to make sure that we're employing enough ... that can keep on monitoring the circumstances relating to children," he said.
"I would expect these specific circumstances are not replicated anywhere else in the state ... but we didn't do good enough here, and we need to do far better."
Arthurell first killed in 1974, having committed the manslaughter of her stepfather Thomas Thornton, who was said to have been very abusive.
In 1981, she committed the manslaughter of naval officer Ross Browning in a Northern Territory robbery.
A few years after being released, she murdered her former partner Venet Mulhallby, bludgeoning her to death in 1995 with a piece of wood at her Coonabarabran home in central NSW.
The killer then photographed herself wearing Ms Mulhallby's clothes and a wig.
Alcohol was implicated in all of the killings, which were committed under her birth name Reginald Kenneth Arthurell before she came out as transgender in 2021.
The woman was charged with several counts of sexual touching without consent of a man in 2022.
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