The Defence Department plans to fully privatise security at Australia's Baghdad embassy by the end of the year, after quietly outsourcing most of the guard duties to Chilean paramilitary and army veterans, the ABC can reveal.

Senior army sources say 60 Chilean contractors work 12-hour shifts at the embassy - almost twice as long as the Australian Defence Force (ADF) allows its personnel to be on duty for in summer months.

The men are paid $2,200 a month, the equivalent of Australia's minimum wage, to guard the front gate and man machine gun nests, security cameras and alarm systems.

The Chilean contractors are overseen by a former Australian serviceman and employed by Australian private contractor Unity Resources Group (URG).

URG, which won the $9 million government contract already in place and would be expected to secure any future contracts, was founded by former Special Air Service (SAS) commander Gordon Conroy and several other Australian veterans.

The Government is supposed to publish all government contracts on a public tender registry but the embassy deal has never been declared.

A statement from the Department of Finance explained that contracts can only be suppressed by the chief executive of a department if they believe "that the information is genuinely sensitive and harm is likely to be caused by its disclosure".

A senior Army officer who spoke to the ABC says Australian soldiers still conduct just one security duty at the embassy: the personal security detail of the Head of Mission, Bob Tyson, and of visiting dignitaries if they leave the compound and travel through Baghdad.

It is this final function that the department plans to privatise by the end of the year.

But the moves have met resistance from within the embassy.

The ABC understands Mr Tyson has requested the Personal Security Detail stay in the hands of the ADF.

The presence of Chileans at the embassy has not been without incident.

On March 22, one of the men on perimeter duty was Esteban Lara Pina, a 35-year-old father of one. He had worked in Iraq for a number of employers since 2005 but his income had steadily declined as more and more willing men arrived in Baghdad.

Over time he developed what he called "psychological problems". That day, standing in full view of the street, he took his weapon, pointed it at his own chest and fired.

Afterwards, the former Chilean army sergeant was airlifted to Amman, Jordan.

There he underwent six operations to save his life and eventually flew back to Santiago, Chile to recover with his family.

Since being put on a plane home from Jordan he has been unable to contact anyone from URG, from which he is trying to recover ongoing medical costs.

"They've never contacted me, not even to see how I am, and certainly not offered to help me in any way and I can't get hold of them," he said.

"I've been ill, I've had psychological problems from which I'm still recovering."

In Chile, it is illegal to recruit men for private military work.

In the past, private military companies like Blackwater and Triple Canopy have avoided Chilean law by recruiting Chileans in countries like Honduras.

But Mr Lara Pina says Unity Resources Group used an American company called Beowulf International to recruit men on its behalf.

He explains that Beowulf "contacted us in Chile but there was no contract until we got to Iraq".

Beowulf International lists Chilean offices on its website and if it recruited men for URG on Chilean soil it could have breached laws which forbid "the act of providing or offering the services of private armed guards, in any form or designation".

If prosecuted, the people who orchestrated the employment of guards at the Australian embassy could face jail time.

Senator Alejandro Navarro has led a crusade to stop private security firms recruiting mercenaries in Chile, and helped to bring charges against a Pinochet-era general named Jose Miguel Pizarro under the same law in 2005.

After speaking with the ABC he says he is requesting a formal investigation by the Chilean Defence Ministry into the Lara Pina shooting and URG's Chilean workforce.

Despite these ethical concerns, Australian soldiers have commended the Chilean contractors' conduct.

A veteran of Australia's Iraq mission commended the professionalism of the Chileans, saying they were "highly adaptable", "professional" and "more than robotic" in carrying out their duty.

Australians serving at the embassy have felt safer since their arrival, particularly because prior to the new contract the Government had outsourced parts of security - including vehicle searches - to teams of Ugandans working for American contractor Triple Canopy.

Another veteran of Iraq operations describes the former Ugandan guards as "not the most professional bunch around", adding: "I'm not surprised they've been replaced."

A senior Army officer explains that privatisation of Iraq operations began after the change of government in 2007.

"The new Government as an election promise said 'We will pull out of Iraq'. True to their word they are minimising and pulling forces out of there."

The officer argues that privatisation was politically expedient as it minimised the number of Australians still serving in the country and prevented potential Australian casualties from drawing attention to a war the public wanted finished.

The decision to privatise the remainder of embassy security, as well as the apparent concerns of Bob Tyson, will confront incoming Defence Minister Stephen Smith this week.

Unity Resources Group did not immediately respond to questions about its Chilean staff or its operations in Iraq.

A DFAT spokesman says the ADF Security Detachment works closely with contracted security personnel to ensure the security of the embassy and safety of Australian diplomats.

"The transition from an ADF-led security operation towards more standard DFAT-controlled, commercial security arrangements reflects the improving security situation in Iraq and both countries' intent to normalise bilateral relations," the spokesman said.

"Every stage of this transition has been based on a careful military risk assessment of the security environment, and the ADF will continue to mentor and supervise contracted security personnel during the transition."

Background: Who is Unity Resources Group? Find out more about the company behind private security at the Australian embassy in Baghdad.