The Government will impose regulation on the private security industry in an attempt to prevent a repeat of the Blackwater scandal two years ago, when 17 Iraqi civilians were killed by armed security guards.

The Foreign Office has considered a number of ways to regulate the market and is understood to favour drawing up a code of conduct that will govern the actions of security guards in foreign countries. The code will be created and monitored by the Government, but the industry will be responsible for regulating itself, which has led to fears that the system could be abused.

A number of charities are understood to have raised concerns about the proposal with the Government. Campaigners from War on Want have claimed that the Government is giving the security industry a “licence to kill”.

The Foreign Office and other Whitehall departments are expected to include the new code of conduct in their contracting rules to make compliance a requirement. Any company found to be in breach of the code would be barred from future government work.

The UK has spent about £148 million on private security guards in Iraq and Afghanistan in the past three years. It is hoped that big corporate clients, such as BP and Shell, which often use private security in countries such as Nigeria, will also use only companies that are code-compliant.

The Foreign Office has been consulting the industry on the scheme since July and is expected to publish its recommendations by the end of this year.

Security has become big business in countries such as Iraq and Afghanistan as foreign governments have looked to outsource certain tasks to the private sector.

This has freed the military to concentrate on military objectives, rather than guarding embassies and diplomats. However, overzealous private security guards have caused controversy and bitterness in some countries where they are seen as operating above the law. The most notorious incident involved Blackwater, a secretive American company, whose guards opened fire on civilians in a Baghdad marketplace in 2007. The incident is under investigation by US authorities after 17 people were killed.

Guards from Erinys, a British private security firm, were accused last year of firing upon on a taxi near Kirkuk, wounding three Iraqi civilians.

Earlier this year, Danny Fitzsimons, an employee of ArmorGroup, the British security company, was arrested in Baghdad in connection with the killing of Paul McGuigan and Darren Hoare. Mr Fitzsimons is alleged to have shot the men after a drunken argument. He has claimed that he acted in self-defence.

The Foreign Office is concerned that security guards working for British companies in countries where the rule of law is weak are effectively unaccountable for their employees’ actions. The hope is to introduce regulation that will penalise companies if employees break the law or act unethically. The code is expected to require companies to provide training and enough support to prevent incidents.

Meanwhile, Switzerland is leading attempts to create an international regulation system to cover private security companies from other countries. The US is supporting this move and it is likely that the scheme will operate in a similar way to the British one.

Nigel Billingham, the managing director of G4S Risk Management, a leader in the security market, said: “We look forward to making a further positive contribution to the UK and Swiss Governments’ ongoing regulatory initiatives for a reputable and mature industry which the Foreign Secretary recently said was essential, inevitable and international.”

ArmorGroup, a subsidiary of G4S, is responsible for guarding the British Embassy in Afghanistan and providing security for diplomats in the country.

Control Risks, another big British security provider, is responsible for the security of diplomats in Iraq, while Kroll has the contract to guard the British Embassy in Baghdad.

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