Reported deal by US state department investigators could prevent prosecutions.
State department officials would not confirm or deny that immunity had been granted.
Blackwater continues to insist its guards acted lawfully.
“The actions of these contractors will ultimately reflect on coalition forces in general”
Kyle, Fremont, US
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Speaking after Tuesday’s cabinet meeting, Ali al-Dabbagh, an Iraqi government spokesman, said: “The cabinet has approved a law that will put non-Iraqi firms and those they employ under Iraqi law.
“Also, all immunity given to them under Order 17 is cancelled.”
Order 17 was a controversial decree issued by Paul Bremer, who ran the US occupation government until June 2004, in the days before power was handed over to an interim Iraqi government. The measure gave foreign contractors immunity from prosecution in Iraq.
Iraq says there are more than 180 security companies in Iraq, mainly US and European, with estimates of the number of private contractors ranging from 25,000 to 48,000.
Many Iraqis see foreign security guards as little more than private armies which operate with impunity.
“There is an urgency in this matter,” Dabbagh said, adding that the draft law had been referred to parliament.
Nuri al-Maliki, Iraq‘s prime minister, has promised to push through the measure amid growing public anger over the Blackwater shootings in Baghdad and a series of other Iraqi civilian deaths allegedly at the hands of foreign contractors.
The draft law proposes tightening controls on foreign security firms by making them register and apply for a licence to work in Iraq, and for all guards to have weapons permits. That process has begun but has been mired in bureaucracy.
Contractors who enter Iraq with a US department of defence identity card would in future have to apply for entry visas.
A potential source of friction is the proposal to make foreign security guards and the convoys they are protecting subject to searches at Iraqi security force checkpoints.
|Blackwater has about 1,000 employees in Iraq
protecting diplomats and officials [EPA]
“They [Iraqi police and soldiers] will see this as a chance to bring Blackwater and other high-profile security teams down a peg,” said one security contractor.
The Iraqi government has said that security guards employed by Blackwater “deliberately killed” 17 Iraqis in last month’s shooting. It said an investigation had found no evidence that the guards had come under fire during the incident.
Erik Prince, the founder of Blackwater, which employs 1,000 people in Iraq to protect US diplomats and other officials, told a US congressional hearing that his men had come under small-arms fire and “returned fire at threatening targets”.
The incident is the subject of multiple US and Iraqi investigations. The Iraqi government says it wants Blackwater to pay $136m in compensation to the victims’ families.
In the meantime, Condoleezza Rice, the US secretary of state, has ordered tougher oversight of private guards in Iraq, including tighter rules on the use of force.