In June of 2007, a federal judge put a halt to an enormous $475 million contract for private security contractors (i.e. mercenaries) in Iraq. The grounds for stopping the contract is worth noting.

A federal judge yesterday ordered the military to temporarily refrain from awarding the largest security contract in Iraq. The order followed an unusual series of events set off when a U.S. Army veteran filed a protest against the government practice of hiring what he calls mercenaries, according to sources familiar with the matter.
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Brian X. Scott, a 53-year-old Colorado man, filed the complaint in early April. He argues that the military's use of private security contractors is "against America's core values" and violates an 1893 law that prohibits the government from hiring quasi-military forces.

Scott's challenge set off a domino effect, prompting the Government Accountability Office to dismiss protests brought by two major private security contractors the Army had removed as potential bidders -- Erinys Iraq, a British firm, and Blackwater USA of North Carolina.

I don't know who Scott is, but I can just imagine the looks of hatred that the mercenary's lawyers must have given him.
The 1893 law in question is the Anti-Pinkerton Act.
It took some looking to find the text of this law, but I found it.

AN INDIVIDUAL EMPLOYED BY THE PINKERTON DETECTIVE AGENCY, OR SIMILAR ORGANIZATION, MAY NOT BE EMPLOYED BY THE GOVERNMENT OF THE UNITED STATES OR THE GOVERNMENT OF THE DISTRICT OF COLUMBIA

Short, sweet, and to the point.
But vague (except for the Pinkertons). Fortunately the courts clarified the law in 1977.

In 1977, the US Fifth Circuit Court of Appeals interpreted this statute as forbidding the US Government from employing companies offering mercenary, quasi-military forces as strikebreakers and armed guards for hire. United States ex rel. Weinberger v. Equifax, 557 F.2d 456, 462 (5thCir. 1977)

That appears to be clear enough. No mercenaries like Blackwater. Period.
As far as I know, the law has not been overturned (although I could be wrong).
So it appears that our massive mercenary army is completely illegal.

I know that just a few months after Scott caused Blackwater so much grief, Blackwater was directly sued under the Anti-Pinkerton Law.

Yesterday, the estates of three Iraqi civilians who were allegedly shot to death in Baghdad’s Nisour Square by Blackwater USA security contractors sued the company and its founder Erik Prince in federal court in Washington, D.C.
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Though the claim is not critical to the case, the suit alleges, among other things, that contracts between the government and Blackwater are prohibited by the Anti-Pinkerton Act, an 1893 law the bars the federal government from contracting with people employed by “the Pinkerton Detective Agency, or similar organization.”

If only laws were being enforced for the powerful, companies like Blackwater (Academi) would not exist, and someone would be in jail.