The Lundsberg School, in Varmland on the country's western border with Norway, has a long tradition of student hazing, The Local.se reported.
The Swedish Schools Inspectorate put the school on notice to stop institutionalized bullying following an investigation in November 2011. Lundsberg was given until Feb. 28, 2012, to show it could end the practice of older pupils disciplining younger pupils, often by using violence and humiliation.
On Friday, the agency said the school had failed to address the problem and warned a $75,000 fine would be imposed if it did not take corrective action.
"Vulnerable pupils at a boarding school are in a particularly difficult situation as they can't just go home," Ann-Marie Begler, an agency official, said in a statement.
The principal admitted that a pecking order existed at the school and students had to work their way up a hierarchy to gain use of a "slave," the report said.
Jessica Simpson shares three-way kiss with friends in photo
Susan Sarandon 'very excited' about daughter's pregnancy