Iran: Sanctions compliance essential in land of opportunity

December 7, 2015

Iran’s President Hassan Rouhani is expected to visit both France and Italy in November, with invitations for the Iranian President becoming the norm after Iran’s signing of a historic nuclear agreement in July. Sanctions will be lifted in six major countries – the United States, the United Kingdom, France, Germany, Russia and China – in exchange for Iran restricting its nuclear activities.

Since the agreement was announced, Tehran has become the Mecca for foreign delegations. The German Vice-Chancellor headed the first European business delegation to Tehran, followed by the Austrian President. French, Italian and other European delegates have also visited Iran to discuss possible cooperation and explore business opportunities once sanctions ease in the first quarter of 2016.

International companies are looking forward to conducting business in what is considered the last untapped major market in the world. After years of sanctions, Iran is in desperate need of significant investment in infrastructure, agriculture, oil and gas, health, and education, among other sectors.

However, Iran remains a country ruled by a complicated web of connected government organisations. The Leader of the Revolution, who is looking to open Iran’s economy to the world and increase international cooperation, is battling the conservative hardliners, who believe that opening to the world will result in the loss of Islamic revolutionary values and will fight any notion of foreign investment. Recent announcements by several conservative officials confirm that foreign companies will have to prove that the Iranian economy will benefit from their investments. Ultimately, Iran itself will decide which sectors to prioritise and which investments to accept.

When it comes to Iran’s economy, the Islamic Revolutionary Guards Corps (IRGC) controls the vast majority of the economic activities in Iran. According to research studies and media sources, the IRGC controls 60 percent of the Iranian economy through interests in the telecommunications, banking and finance, construction and engineering, import and export and manufacturing sectors. Such control made former United States treasury secretary Henry Paulson state that, due to the IRGC’s vast interest in the Iranian economy, it is highly likely that anyone doing business with Iran is actually doing business with the IRGC.

On the other hand, former associate director of Princeton University’s Mossavar-Rahmani Center for Iran and Persian Gulf Studies Kevan Harris wrote two articles (in The Diplomat in 2013 and in The Washington Post in 2015) saying that it is an over statement that the Iranian economy is controlled by the IRGC, and that it is actually controlled by semi-government entities such as pension funds.

In any case, foreign companies investing in Iran will face two main obstacles: corruption and sanctions.

CORRUPTION

Iran is ranked as one of the worst countries in the world for corruption due to its lack of legislation, weak accountability and restricted media. Furthermore, it is believed that the political structure of Iran allows politicians and military personnel to buy loyalty and benefit from illegal gains. Examples of this can be clearly seen through media accounts of corruption cases involving politicians or their family members and businessmen who are close to the Iranian regime.

Iran has several government departments responsible for attempting to prevent and combat corruption, including, among others:

  • Ministry of Intelligence
  • High Council on Anti-Money Laundering
  • Supreme Audit Court
  • General Inspection Organization
  • Financial Intelligence Unit.

However, all of these departments seem to be unable to prevent corruption at its highest level. Take for example the case of Babak Morteza Zanjani, the businessman and alleged associate of the IRGC who was arrested in 2013 after Iran’s parliament began investigating him for allegations of financial corruption and accused him of channelling US$1.9 billion of oil revenues through his companies. And earlier that year, Zanjani and Azeri businessman Reza Zarrab were accused of bribing Turkish ministers to cover oil for gold deals in Turkey.

President Rouhani has called for a stronger fight against financial corruption – especially that involving the elite of the Iranian society, who Rouhani says has taken advantage of economic sanctions.

But despite these calls to fight corruption, it remains one of the main issues facing the Iranian economy and, due to the complicated affiliations of companies and business people on one side and government and military organisations on the other, foreign investors need to be cautious when choosing a partner in Iran.

SANCTIONS

Some sanctions against Iran are supposed to be lifted in the first quarter of 2016 after the International Atomic Energy Agency issued a report verifying that Iran has met its commitments under the Joint Comprehensive Plan of Action. However, sanctions on those organisations and individuals that have been sanctioned for terrorism will not be lifted. This means that the IRGC will remain under sanctions and any dealings with the IRGC or entities related to it will be prohibited. And, as the IRGC is believed to be controlling most of the Iranian economy through frontier and shell companies, it is possible that if foreign investors are not careful they will end up dealing with the IRGC.

Conducting due diligence in Iran is therefore essential for any foreign investor to avoid being caught in dealings with entities that are connected to Iranian individuals or organisations that will remain sanctioned.

Due diligence processes involve the following.

Corporate registry records

Corporate registry records for companies can be obtained from the Iranian Official Gazette, the Iran Chamber of Commerce, Industries, Mines and Agriculture (ICCIMA), and also from the local commercial register offices.

It is very common for companies in Iran to provide foreign companies with translated versions of their registered Persian names. There are usually multiple ways to translate these names into English, meaning that when due diligence firms change the names back into Persian, they may not have the correct name, and therefore will not find the corporate registration of the company in any of the sources. Therefore, it is highly recommended to request the full registered Persian name of the company to help speed up the search process for corporate information.

Reverse directorship checks

Reverse directorship checks are usually conducted when a foreign company wants to look for conflicts of interest or check if any individuals are affiliated with sanctioned entities. In Iran, these searches are usually conducted in the ICCIMA and in the local commercial registry offices.

To guarantee good results from reverse directorship searches it is always recommended to have the names, dates of birth and, where possible, identification numbers of at least three or four individuals. There may be other individuals who share the exact first and last names of some of the people you are searching for, which can result in incorrect hits, so the more names and information you can check against the better.

Media research

Iranian media is heavily controlled by the Ministry of Culture and Islamic Guidance (MCIG), and the internet is also controlled and monitored by the MCIG along with the Telecommunication Company of Iran, Supreme Council of Cyberspace, Commission to Determine the Instances of Criminal Content, Iranian Cyber Police unit and Iranian Cyber Army (which is under the IRGC). Such heavy censorship prevents the publishing of any material that is considered against Iranian law and helps prevent reformists in Iran from organising any events that are considered anti-revolutionary by the Iranian conservatives.

The censorship means that what would be a fairly reliable source of information on corruption and other compliance issues is not available unless the specific information has previously been used by the government or IRGC.

In Iran, media research for due diligence purposes is rarely useful for obtaining important information about the reputation of a company or an individual, let alone for revealing negative information. Therefore, it is never recommended to rely on media searches when conducting due diligence in Iran.

Reputational enquiries

Reputational enquiries are the most important source of information in any due diligence investigations in Iran as they provide a lot of the information that cannot be found through media searches.

Reputational enquiries can also provide an insight on the connections between companies and individuals and reveal the real owners behind commercial entities (who will not be shown when searching official sources for the names of shareholders).

In the post-sanctions era, foreign investors still need to be aware of any affiliations with, and the real owners of, their commercial partners in Iran, as some organisations such as the IRGC will remain under sanctions. These entities control a large part of the Iranian economy and have always conducted business locally and internationally through individuals and companies. Therefore, caution is required.

Litigation checks

Litigation checks are not publicly available in Iran without the consent of the individual or the entity, and usually take considerable time to be conducted.

 

Political relationships that are disconnected from a company’s business agenda can change very quickly and, as a result, compliance functions need to keep a close eye on international relations.

The recent nuclear agreement between Iran and the West has significant implications for multinational corporations (MNCs). Whether the agreement will verifiably prevent Iran from acquiring nuclear weapons or destabilise the Middle East by creating an arms race, MNCs are advised to ensure that their due diligence extends beyond reverse directorship checks. More rigorous due diligence must be imposed that focuses not only on a company’s business conduct and its financial status and reputation, but also on its beneficial ownership.

Such compliance may require a complete overhaul of the business’s due diligence process. Alternatively it may prove to be more cost effective for companies to hire a specialist due diligence firm, especially when dealing with a high number of third parties.

 

 

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