Iraq is seeking to tighten control over security contractors following the killing of civilians by the US firm Blackwater in a shooting incident in Baghdad.
The Iraqi Interior Ministry has drafted legislation aimed at ending such firms' immunity from Iraqi prosecution.
Major-General Abdul-Kareem Khalaf said the ministry had drafted legislation giving it wider powers over the contractors and calling for 'severe punishment for those who fail to adhere to the guidelines on how they should operate'.
Iraq said it would review the status of all security firms after what it called a flagrant assault by Blackwater contractors. 10 civilians and an Iraqi police officer were killed by members of the firm while it was escorting a US embassy convoy on Sunday.
Iraqi and US officials have launched a joint inquiry into the attack, however a US embassy spokesperson said company, which employs around 1,000 contractors, was 'still here and still under contract from the State Department'.
Iraqi Prime Minister Nuri al-Maliki strongly condemned the incident and said he would not allow Iraqis to be killed 'in cold blood'.
The shooting has incensed Iraqis who regard the tens of thousands of security contractors working in the country as private armies that act with impunity.
Major General Khalaf said the new draft law, which he expected parliament to pass soon, gives the ministry powers to prosecute the companies and to refuse or revoke contracts.
Many security firms operating in Iraq have no valid licence. A law issued by US administrators after the 2003 invasion granted them immunity from prosecution and has not been formally revoked.
It has been reported the Iraqi Interior Ministry will also propose that foreign security companies be replaced by Iraqi firms.
However the head of an association of security firms in Iraq said replacing foreign companies with Iraqi security companies was not a new suggestion and was unlikely to happen overnight.