The warning comes after six councils were found to have been misled into paying hundreds of thousands of pounds to place children with complex mental and physical health needs in an unregistered school.
The use by the councils of the illegal school, Frieston Hall in Lincolnshire, led to an Ofsted investigation and the conviction of three of people under the Education and Skills Act 2008 for conducting an unregistered, independent school.
"This case should also serve as a warning to local authorities," said Ofsted chief inspector Amanda Spielman.
"Decisions about placements must be made with due diligence. All local authorities should be carrying out the necessary checks to make certain that schools are registered with the Department for Education."
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Spielman added: "Registration is so important. Schools operating beneath the radar are not subject to regular inspection, so we cannot be assured that they are safe or providing good-quality education.
"We want to send a clear message to those who continue to run unregistered schools, despite being warned not to. You will face justice."
Between 2016 and 2018 Ofsted identified 521 possible unregistered schools. Of these, 259 have been inspected and 71 have been issued with warning notices.
A total of 15 unregistered schools have been closed, 39 have changed the way they operate to comply with the law and nine have successfully registered as independent schools.
The regulator says the remaining cases are being investigated and it is continuing to identify more suspected unregistered schools.
Frieston Hall was found to have charged councils £1,200 a week for each child educated at the school, which identified itself as a school on its website and other documents.
Councils involved also told Ofsted that the school had given them assurances that it was registered.
Children attending lived at Frieston Hall's registered children's home but they were being illegally educated at the on-site unregistered school.
Frieston Hall has since closed after the home was issued with a suspension notice and the owners had no choice other than to close the school, says Ofsted.
Patricia Hodgkinson, Dr Albert Okoye and Clement Earle pleaded guilty at Lincoln Magistrate's Court on 26 September under the Education and Skills Act 2008 for running Frieston Hall as an unregistered school. They were ordered to pay £1,000 costs and a £20 victim surcharge.
Ofsted's unregistered schools taskforce began investigating the school in September 2017.
During its pre-registration inspections Ofsted found a raft of failures at the school that meant it would be unlikely to meet school standards.
The suitability of staff was not checked properly, they were not given first aid training and could not effectively supervise children.
"At a final unannounced inspection carried out by our unregistered schools taskforce, inspectors found unsupervised children wandering around the premises," said Ofsted.
"Staff were struggling to keep reasonable order and calm, while children became agitated and upset."
This is the third conviction of its kind for running an illegal school.
The first involved the Al-Istiqamah Learning Centre in Ealing last year, in which more than 50 children were found attending this unregistered setting.
The second saw a head teacher and her father being found guilty of running an unregistered school in south London.