The Iraqi Cabinet today approved a draft law lifting the immunity from prosecution enjoyed by foreign security companies contracted by the US-led coalition, but it was unclear how guards working for the controversial American firm Blackwater would be affected.

The new law, which still needs the green light from Parliament, follows a shootout involving Blackwater on September 16 that left 17 Iraqis dead. The firm insists that its guards acted lawfully but the incident caused outrage among Iraqi leaders.

The Cabinet’s decision came on the same day as reports in the US media that the State Department had promised Blackwater bodyguards immunity from prosecution in its investigation of the Baghdad shooting last month.

An Iraqi government spokesman suggested that the new law may not cover Blackwater guards if they were defined by the State Department as an extension of the multinational forces in Iraq, rather than private security guards. Blackwater staff protect the American Embassy in Baghdad.

If the former was true then the firm would be subject to a bilateral agreement. “This issue needs to be clarified,” said Ali al-Dabbagh, the spokesman.

"The Cabinet decision will regulate the practices of all the security companies operating in Iraq,” said Dr Dabbagh.

“Their workers and their contractors will be subject to Iraqi rules. There will be no more immunity given to such companies,” he told The Times, adding that the draft legislation would be passed to Parliament for approval.

The Coalition Provisional Authority, which led Iraq following the invasion, issued a decree called Order 17 before the transfer of sovereignty in June 2004 to an interim Iraqi Government. The measure gave foreign contractors working for the coalition immunity from prosecution in Iraq.

Lawrence Peter, director of the Private Security Company Association of Iraq, which has more than 40 members, pointed out that a lot of firms already operate without such protection because they do not work for the multinational forces.

“At this point, those companies that do not have protection have not had any problems,” Mr Peter told The Times.

“They follow the rule of law and they are continuing to engage with the Government of Iraq,” he said.

Under a raft of measures proposed by the draft legislation, foreign security companies would have to register and apply for a licence to work in Iraq, and for all guards to have weapons permits. Such a requirement has already been instated but the process involves a lot of bureaucracy.

Anyone holding a US Department of Defence identity card would also need to apply for an entry visa to come to Iraq.

In addition, the legislation stipulates that foreign security guards and the convoys that they are protecting are subject to searches at Iraqi security force checkpoints.

This condition could cause trouble as high-profile convoys are wary of stopping because it makes them an easier target. They typically drive straight through Iraqi checkpoints.

The Iraqi Government has said that security guards employed by Blackwater "deliberately killed" 17 Iraqis. Erik Prince, the founder of Blackwater told a US Congressional hearing that his men had come under small-arms fire and "returned fire at threatening targets".

The American company employs about 1,000 people in Iraq.

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