Over-Compliance on Iran Sanctions Can Lead to Discrimination

Ireland’s Workplace Relations Commission has fined an unnamed bank EUR 20,000 for discrimination against an Iranian couple. As reported by the Irish Times:

WRC Adjudication Officer Marian Duffy found that the bank did discriminate against the two on the grounds of race. Ms. Duffy said that ‘alternative methods to counter money laundering/terrorist financing and US sanction breaches were open to the respondent… These include the implementation of robust IT systems and procedures, customer advice/guidance and information systems and/or a helpline as part of the process to monitor account activities.’

The comission found that the bank’s policy was neither appropriate nor necessary to achieve its stated aims and therefore was not objectively justified. The bank fundamentally was racially discriminatory in their actions. The bank had stated previously that it has no appetite for dealing with Iranian affiliated customers over risks of sanctions and as a result of maintaining a small presence in the US.

In another example of discrimination, S&P Global Platts had banned Iranian nationals from attending a conference it was holding in London over sanctions fears. The company reserved this ban rapidly following a report in the Financial Times which sparked outrage.

In both the case of the Irish bank and the S&P conference, we see an an overreaction to Iran sanctions, which will only be exacerbated by the US withdrawal from the Joint Comprehensive Plan of Action (JCPOA). 

OFAC and the New Culture of Compliance

Compliance officers have a job to do. That job is not easy. Since the global financial crisis in 2008 a whole heap of new regulations have been introduced surrounding financial services on all fronts. Some industries, such as shipping, are plagued by fraud and corruption relating to banking and letters of credit. This leaves compliance officers with the fear of being held personally liable (as officers responsible for anti-money laundering often are) for even the slightest of mistakes. These mistakes can, of course, have serious personal ramifications.

The “take no chances” attitude now common among compliance officers looking to protect a banks from potential breaches and the resulting penalties, is only intensified when you add the factor of Iran.

On one hand banks see Iran as a nation with a large, successful patriotic diaspora who, regardless of what views they hold, have a deep connection to their country both sentimentally, physically, and often financially. Iran is a country with a huge consumer market and significant economic potential. But there is a catch—Iran is on the wrong side of the most powerful financial enforcement authority in the world; Office of Foreign Assets Control, known as OFAC.

For those who maintain connections to Iran—practitioners, businessmen, professionals and Iranians abroad alike—discrimination is unfortunately not uncommon. Bank accounts connected to Iranians or used for Iran related business have been regularly closed over the last ten years, including the accounts of students who rely fully on money sent by family in Iran.

The reason for these closures can be traced to OFAC, part of the US Department of Treasury. OFAC has issued fines ranging from hundreds of millions to billions of dollars against varying institutions—from RBS to Standard & Chartered, and even the Chinese telecommunications company ZTE. In fact, OFAC has generated so much income from sanctions penalties, that the UK decided to set up its own version, OFSI (Office of Financial Sanctions Implementation) in 2016.

From just a brief look at the scale of fines involved—USD 1.2 billion levied on ZTE alone—it is not hard to see why a compliance officer would not want to follow the law to the letter. But therein lies the paradox: which law?

Conflict of Laws and Regulation

We live in an ever-growing and increasingly interconnected financial market. United States is, and shall remain for this generation at least, the crown jewel at the heart of the global financial market. International companies make more money being present in the US market than in any other market, and this requires being on the “right side” of US laws. For this reason, many companies instinctively abide by US laws even in jurisdictions where these laws would seem not apply.

Since the implementation of the Joint Comprehensive Plan of Action (JCPOA) in 2015, the European Union has permitted its companies to invest in Iran by lifting most of the sanctions. But the United States had only removed secondary sanctions as part of the nuclear deal, not the primary sanctions which restrict “US persons” from trading with Iran. Following President Trump’s withdrawal from the JCPOA, and the announcement that secondary sanctions would be returning, many consider the deal to be doomed. But the remaining signatories remain in compliance with the agreement for now. 

This has left compliance officers at many multinational companies somewhat confused. What laws ought they abide by, those of the EU or the US? On international trade, the answer is simple. If you have connections to the US or a desire the conduct business in the US market, it is best you comply with US regulations.

However, it is also important not to breach local laws in other jurisdictions in which you operate. There can be a contradistinction between abiding by sanctions and breaking the law. For example, a compliance officer may advise against doing business with Iran, but he/she cannot take a broad brush approach and punish Iranian customers by virtue of their race. While the “take no chances” approach to sanctions may make it attractive to comply with US regulations absolutely, without considering local laws, companies are playing with fire and leaving their organizations at risk of unlawful activity that could have serious consequences.

On matters relating to human affairs, it simply does not matter at all if a company has a US presence, discrimination can and should have very severe consequences. OFAC guidance is vague on a whole range of matters, including instances where there is a conflict between EU and US law. But case precedent is building in Europe against acts of over-compliance. Regulators and judges may not be as harsh now, as there may be some understanding of the confusion stemming from a fluid situation. But the courts will be far harsher later, once their position has been established.

It is therefore imperative, before any overreaction has been made by the US withdrawal from the JCPOA, that local legal advice is taken. Remember, we are not back in the former sanctions era of 2006-2015. The EU is not participating in sanctions against Iran.

Finally, those on the receiving end of such discrimination should take immediate legal advice. The more cases which are pursued, the greater the chance that justice will prevail in the end. As relayed in the word’s of Arcesilaus, “Where you find the laws most numerous, there you will find also the greatest injustice.”

Photo Credit: Surrey Court

As the Iran Deal Approaches its D-Day, Uncertainty Only Set to Increase

The Joint Comprehensive Plan of Action (JCPOA) was, like many complex pieces of international diplomacy, a necessarily imperfect creation born out of compromise.

The deal is dependent for its survival on continued waivers of US secondary sanctions by the US President (a function of the congressional approval of the deal in the first place). It is also limited—quite deliberately—in the scope of its ambition: it did not seek to settle disputes concerning Iranian intervention in regional conflicts, Iran's human rights record or its ballistic missile program. And, much to the chagrin of Iran hawks in the US and elsewhere, the sunset clauses place no restriction on Iran's uranium enrichment after the first 15 years of the deal, though other aspects of the deal will be in force in perpetuity. From the Iranian side, whilst it provided relief against EU sanctions and US extraterritorial secondary sanctions, the JCPOA offered Iran no access to the US economy or, crucially, the US dollar denominated financial system.

But, imperfect as it was, it did result in the destruction of Iran's stockpile of enriched uranium and afforded the International Atomic Energy Association (IAEA) access to Iran's nuclear sites to verify continued Iranian compliance. And it has allowed Iran access to major European investment in Iran, including high profile deals struck with Airbus and French oil major Total.  

In any event, some of the lingering congenital defects would not have mattered as much, or at all, were it not for other extraneous events. For example, it was always intended by the Obama administration that the JCPOA would be a starting point for further discussions and deals on other areas of difference once the nuclear boil was lanced; negotiating the nuclear settlement was lengthy enough without complicating the negotiations further by involving issues such as Syria and ballistic missiles. And continued sanctions waivers were never thought to be seriously in doubt, even as the Trump campaign gained momentum throughout 2016. The State and Treasury Department reach out sessions following Implementation Day emphasized that the political consequences of a US lead snapback would be so serious that the next President would balk at tearing it up, even if that President was a candidate who described the deal as the "worst ever."

Fix It or Nix It

Even after further criticism of the deal from the newly inaugurated President Trump, that conclusion seemed to hold good. Early forays into extending sanctions against Iran with SDN designations in February 2017 were limited in scope. They did not designate Iranian financial institutions or state owned enterprises. Indeed, they were no different in character to some of the late Obama administration's post Implementation Day Iran designations.  Many concluded that moderate voices within the administration had managed to constrain the President's more hawkish impulses.  

But recent personnel changes amongst the President's close advisors, and the lack of much perceived benefit from the deal in Iran, mean that the defects matter much more now. The appointment of two key Iran skeptics, John Bolton (national security advisor) and Mike Pompeo (Secretary of State) mean that President Trump now has core of foreign policy advisors in place who share his dim view of Iran deal. The President is now determined to either "fix" the perceived failings of the Iran deal or "nix" it.

There is, therefore, a very real fear that President Trump will refuse to renew the next set of waivers that are due to expire on 12 May 2018. Those waivers apply to the secondary sanctions contained in the National Defence Authorization Act (NDAA) 2012 which provides for penalties against foreign financial institutions that engage in significant financial transactions with Iran's central bank. Further secondary sanctions on the provision of significant support to Iran's energy, shipping, shipbuilding sectors or the provision of insurance and reinsurance or refined petroleum products to Iran, which apply under other congressional acts, are due to expire in July 2018 unless the waivers are renewed.

But Iran has its own JCPOA hawks, and the risk is that an abrogation of the JCPOA by the US through a failure to renew the NDAA waivers in May will provide just the excuse they are waiting for to precipitate an Iranian reaction that effectively ends the JCPOA as a meaningful deal.

Caught in the Middle

That concerns the European Union greatly. The EU sees the JCPOA as the most effective way to stop Iran obtaining a nuclear weapon, and precipitating a nuclear arms race in the Middle East that will potentially involve Gulf Arab states, Turkey as well as Israel. As the EU points out, the IAEA has repeatedly confirmed substantial Iranian compliance with the terms of the deal. More immediately, however, it could see European companies that have chosen to engage with Iran since Implementation Day exposed to US secondary sanctions for the first time.

The US did not relax its own self-denying sanctions preventing US persons dealing with Iran after Implementation Day; only the secondary sanctions affecting non-US persons. By contrast the EU lifted most of its general restrictions on trade with Iran except for those on controlled good or remaining designated persons. As a result, European companies that have been able to find means of getting paid (not an easy task when US dollar transactions are still proscribed) have engaged with Iran more enthusiastically—a fact that is no doubt not lost on a President currently jostling with the EU over aluminum tariffs. Any unilateral re-imposition of US secondary sanctions could impact these European companies significantly. The recent application of US secondary sanctions against certain Russian companies and oligarchs illustrates some of the problems that this can cause.

Historically the threat of a divergence between the US and EU over Iran has never been a problem. The two have managed to proceed in concert with each other so that US sanctions which unilaterally sought to regulate or restrict trade and investment activities carried out by persons outside the US were mirrored by the EU's own regulations and restrictions on what EU persons are able to do. But there are earlier precedents for transatlantic fallings out over the extraterritoriality of US sanctions.

In the 1980s the US imposed sanctions on companies doing business on a Russian pipeline in Eastern Europe, provoking a diplomatic falling out. And in 1996 the Helms-Burton Act, which, amongst other things, imposed penalties upon non-US persons "trafficking" in Cuban property formerly owned by US persons, provoked a furious response from the EC which launched blocking legislation and a WTO panel investigation alleging that the extraterritorial restriction of trade between the EC and Cuba breached various provisions of the GATT and GATS. The US countered that it was prepared to rely on the rarely used national security exemption in the GATT. The dispute was only withdrawn after high level political compromise. 

But the prospect of a large scale transatlantic trade dispute over Iran occurring at the same time as a US-EU dispute over US aluminum tariffs and extraterritorial Russia sanctions is deeply concerning for the EU.

To that end the EU has even been looking at further potential sanctions against Iran for ballistic missile activities. The rather circular logic is that new sanctions might persuade President Trump that the EU is being tough enough on Iran to renew the waivers in May and may actually save the Iran deal. The EU recently renewed its existing human rights sanctions against Iran, which date back to 2011 and which impose asset freezes and bans on exports of equipment which might be used in internal repression.  However, a recent meeting of EU foreign ministers failed to reach any agreement on the imposition of new sanctions against Iran.  The clock continues ticking towards May 12.

The Dispute Settlement Process

So what would happen if the US failed to renew the waivers of the NDAA sanctions that expire in May? The JCPOA obliges the US not only to cease the application of its secondary sanctions program but to "continue to do so." A failure to renew the waivers could therefore in theory amount to a breach of the terms of the agreement. Iran could then refer the issue to the JCPOA dispute settlement mechanism, which is a largely consensual process.

The question of US compliance would first be considered by the Joint Commission established under Annex IV of the JCPOA, which consists of the participants from each JCPOA signatory (including Russia and China). The Joint Commission must make decisions by consensus, which would presumably mean that no decision would be made confirming US non-compliance (or no decision would be made within the mandated 15 days). This would then presumably precipitate an escalation to the next level; an Iranian referral of the question of US compliance to a three person advisory board. The board would consist of one person appointed by each of the US and Iran and a third independent person appointed by the first two.

The advisory board can issue a non-binding opinion on the compliance issue and must do so within 15 days. The Joint Commission will then consider the non-binding opinion for a further 5 days to try to resolve the dispute by consensus again. If the dispute has not been resolved to Iran's satisfaction, and if Iran deems the refusal to renew the NDAA waivers as "significant" non-performance, Iran could at that point treat the unresolved issue as grounds to cease performing its commitments under the JCPOA in whole or in part and/or notify the UN Security Council that it believes the issue constitutes significant non-performance.

A referral to the UN Security Council would mean that it must vote on whether to continue the sanctions relief provided by UN Security Council Resolution 2231 (2015) which endorsed the JCPOA and disapplied six previous UN resolutions imposing sanctions against Iran. Under the JCPOA dispute resolution mechanism and Resolution 2231 itself, unless the UN Security Council votes in favor of continuing the sanctions relief, the six former UN resolutions will "snap back" into force automatically. As a veto wielding permanent member of the UN Security Council, the US could, therefore, force the snap back of previous UN sanctions simply by exercising its veto.

Diplomatic Manoeuvres

There are clearly options and opportunities throughout this process for diplomacy and deal making to vary the procedure above. Whilst Iran has already hinted, most recently through its Foreign Minister Javad Zarif, that it would probably react by restarting production of enriched Uranium, it might nonetheless choose to use the fact that some of the waivers expire in May and others in July to bide its time before actually withdrawing from the deal.

It could perhaps choose to take the process through the Joint Commission and advisory board stages, until it reached a point at which it could claim that the unresolved dispute was US non-performance. That point would be reached in mid to late June. It could then refrain from referring the dispute to the Security Council and perhaps even confirm its continued performance (for the time being) despite the lapse of US waivers in May. That would avoid an automatic "snap back" of UN sanctions, or the risk that the US could treat an Iranian abrogation as non-performance and refer the matter to the Security Council itself.

Iran could then utilize the remaining weeks before the next US waivers expire to rally support from concerned EU signatories, perhaps even relying on a potentially positive advisory board opinion, to garner diplomatic sympathy for its position. It would then have a further opportunity to go through the JCPOA dispute resolution process in July if those diplomatic efforts failed and the other waivers were not renewed.

Of course, it is equally possible that Iran's own hardliners gratefully accept any failure to renew waivers in May as the excuse that they have been waiting for to finally tear up the deal. No-one can rule out a last gasp left-field intervention from the US President himself that changes everyone's calculations.

No doubt such diplomatic brinksmanship will cause investors and exporters to Iran to be reaching for their contracts and examining any "snapback" provisions. Would a limited US re-imposition of NDAA secondary sanctions, in the absence of any other secondary sanction re-imposition—let alone any EU sanctions or UN sanctions—constitute a "snapback?" The answer, of course, will depend on what sort of trading relationship is concerned and how the actual clause is drafted. Some are drafted very mechanically requiring specific events to occur; others are more subjective and only require one party to reasonably consider their position is affected by unspecified sanctions. As ever, close attention is required before making any decisions about terminating contracts.

But it is clear that the coming weeks and months will be a rollercoaster ride for all affected.

Photo Credit: Wikicommons

First OECD Complaint Filed Against a European Company for its Activities in Iran

When companies consider the risks associated with doing business in Iran they largely focus on sanctions. Yet this approach misses the increasing normative and regulatory requirements that companies also manage the social and environmental impacts of their activities. While the importance of managing these risks holds for any country, it is particularly salient in the Iranian context due to the scrutiny and politicised climate surrounding investment in the Islamic Republic.

The filing of the first complaint against a European company under the OECD Guidelines for Multinational Enterprises (the OECD Guidelines) for its business activities in Iran is a warning for what might lie ahead. Without prejudging on the merits of the complaint, this case is important for any company looking at doing business in Iran because it highlights a type of regulatory policy businesses are mostly unaware of, and because of its implications on the broader political environment to continue an economic opening towards Iran.

The Complaint

On 13 September 2017, three civil society organisations filed a complaint with the Italian Government against Italtel Group S.p.A, a major Italian telecom company regarding its business activities in Iran.

The complainants argue that the technologies and services offered by Italtel to its Iranian partner, the Telecommunications Company of Iran (TCI), breach multiple provisions of the OECD Guidelines by contributing to internet censorship and other rights violations in Iran and help the Iranian authorities, including the Islamic Revolutionary Guard Corps, to suppress political dissent and civil liberties in the country and in cyberspace. The complainants are asking the Italian government whether the company’s actions are consistent with the Guidelines and more importantly are calling for an immediate moratorium on current negotiations and business engagements between Italtel and TCI until the alleged breaches to the Guidelines are addressed.

The OECD Guidelines 

The OECD Guidelines are recommendations addressed by Governments to multinational enterprises operating in or from one of the 48 adhering countries—that includes the 35 OECD countries and 13 additional countries ranging from Argentina to Kazakhstan to Ukraine. The Guidelines provide non-binding principles for responsible business conduct in areas such as employment and industrial relations, human rights, environment, information disclosure, combating bribery, consumer interests, human rights, science and technology, competition and taxation. Their impact has been felt the most extensively in the areas of human rights and labour relations.

The Guidelines, in line with the other key reference instruments on responsible business practices such as the United Nations Guiding Principles on business and human rights and the International Labour Organization’s Core Labour Standards, make clear that responsible business is not charity or philanthropy but about identifying, managing and remediating adverse impacts on social and environmental issues.

As the Guidelines are not legally binding, one might conclude they can easily be ignored. But the most unique feature of the Guidelines is that they require governments to set up “National Contact Points” whose role is to promote the Guidelines and, more importantly, to receive and handle complaints against alleged non-observance of the Guidelines. These complaints are not judicial cases in the classical sense. NCPs offer conciliation and mediation to facilitate consensual solutions to the alleged violation of the Guidelines. Again, it might be tempting to ignore NCPs due to their apparent lack of judicial standing. However, these cases increasingly lead to concrete consequences for companies found in non-compliance of the Guidelines.

As the OECD's own reports show, findings and recommendations of NCPs are increasingly being used by investors in their assessment of companies’ performances, including in decisions of divestment. Governments are increasingly looking at NCP findings and recommendations when and whether extending their support to companies. The most advanced example is probably Canada, which can withdraw its state support for companies in case of an established violation of the Guidelines or a failure to participate in good faith in the NCP process. More broadly, OECD export credit agencies have coordinated their policies to recommend that agencies take into account NCP statements when deciding whether to provide financial support. Individual NCP cases have also resulted in significant consequences for companies such as loss of future contracts.

NCPs have handled over 400 complaints, addressing impacts from business operations in over 100 countries and territories since 2000. Since 2011 there has been a steady increase in recourse to the NCPs, demonstrating growing confidence in the system. This, combined with the breadth of issues covered by the Guidelines and the relative ease of access to the NCP probably explain why civil society organizations decided to use the OECD system. The Italian case may well be a clear signal that NCPs will likely be increasingly used as a tool of strategic (quasi) litigation in the context of business activities in Iran.

Maybe Italtel activities do not amount to a breach of the Guidelines. Maybe they do, but unwillingly or unwittingly. The issues raised by the complaint are complex. Phone and ICT companies are increasingly forced to assess the balance between respecting basic human rights such as freedom of expression and privacy with government requests based on public security. Vodafone came under fire when it was forced to send out pro-government messages and shut down its network by the Egyptian government during the 2011 uprising. BlackBerry, when it was still a thing, faced a ban in India for refusing to provide access to customers' emails. Google left China after its servers were attacked to access information about activists and Apple recently opposed the US Government over users’ privacy.

In any case, it is fully in the interest of the company to use the opportunity of the NCP case to clarify the situation. NCPs focus on problem solving. It represents in the end a relatively easy way to reach a consensual and non-adversarial solution to its alleged challenges.

Responsible Economic Relations

The importance of the OECD Guidelines can also be felt at a very different level highlighted in a recent feature on Bourse & Bazaar. The feature discussed the question of whether Iran is a “good country” as essential for business leaders and governments as they try to justify market entry plans to board members, shareholders, and their national constituencies while critics of the Iran nuclear deal claims more forcefully than ever that investing in Iran will further enable the “bad behavior” of the Iranian state

This good/bad approach might seem simplistic but it reflects a very real dimension of the broader political environment surrounding companies and governments developing business and economic ties with Iran. They must be mindful of the heightened impact of negative headlines alleging that European businesses are harming people and the environment in the country just like irresponsible foreign investors risk compromising internal support in Iran for opening economic ties.

In this context, responsible business offers an additional tool to demonstrate that investments in Iran are “good” when they respect people and the environment. Reinforcing this perception, based on actual performances, will be crucial to strengthening broad acceptance of economic and business relations with Iran. Said differently, it is in the interest of investors, companies as well as governments in Europe and Iran to respect, support and implement concretely and convincingly the OECD Guidelines and more broadly responsible business practices in Iran.

Photo Credit: Wikicommons

Risky Business: Four Categories of Iran Risk

It must be commonplace in meetings where opportunities for business development or investment in Iran are being discussed. Suddenly it becomes apparent that the pitch was half-baked-- it didn’t include an assessment of risks. With a simple question like “What’s the firm’s reputation?” or even “Is it legal?” the pitch falls flat.

A more systematic and proactive approach to risk assessment can avoid these pitfalls. An assessment should begin with four main categories of risk: commercial, legal, reputational, and political. Each of these categories needs to be explored in depth and in relation to the others in order to craft a useful and durable business development strategy. Even if you aren’t an expert in any of these categories (I certainly am not), having a structured approach helps identify gaps in knowledge early so that the right information can be sourced and solutions can be crafted before a problem arises or a tough question comes up in a pitch meeting.

Below is a basic introduction to the four types of business risk in the Iranian context, which will hopefully be explored in greater detail in subsequent articles.

1.    Commercial Risk

The greatest challenge in evaluating commercial risk in Iran is the way expectations can quickly outpace reality in anticipation of a historic nuclear deal.

Articles in the The Economist, Wall Street Journal, Time, and other publications have trumpeted the impending “gold rush” or “bonanza” that would ensure if Iran is reintroduced into global markets for goods, services, and capital. The enthusiastic reporting of the many possible macroeconomic drivers of Iranian growth—a young population, an untapped manufacturing base, decent purchasing power, limited government debt etc.— makes it seem like investment in Iran is a “safe bet.”

But the reality is that within the positive forecasting for Iran on a macro scale, investors, business leaders, and entrepreneurs— whether foreign or Iranian—need to heed the dynamics of the micro scale. Investment opportunities ought to be judged on their own terms, and not solely in relation to the bigger picture of potential Iran growth.

What does this mean in practice? Whatever the opportunity in question, a commercial risk analysis needs to be done to ensure that the opportunity remains viable for a wide range of macroeconomic scenarios. It is tempting to treat investments as a “safe bet” because the macro projections are so good. For example, an investor might think that a heavily leveraged buy-out of a consumer goods factory, even one that is inefficient and poorly managed, would be worthwhile because consumer demand is likely to surge in the aftermath of the deal—an inefficient factory can still deliver good margins if the price of goods rises high enough. But what happens when this belief leads the investor to shirk the responsibility to make the factory operate better, whether through better management or equipment upgrades? The factory investment remains exposed to a fundamental commercial risk, and if consumer demand does not materialize, the heavily leveraged bet is lost.

Certainly, emerging markets investors in markets like China, Brazil, India and South Africa have the appetite for such risky bets, and sometimes they are able to execute aggressive strategies to great success. But if overly aggressive approaches become widespread in the post-sanctions investment landscape, the tendency will be to ignore or discount the true commercial risk.

Iran only has one chance to emerge from years of isolation and to position itself for long-term prosperity. The last thing the country needs is the wild speculation and risk-taking that typified foreign investment in Russia in the mid-nineties. The “only way is up” attitude towards economic growth ignores the necessary volatility in any major economic reorientation, and also overshadows the reality that a dud business is a dud business regardless of how good the economy might get. The goal should be mitigate commercial risk at the micro level so that the enterprise can prudently navigate any macroeconomic fluctuations.  

2.    Legal Risk

Iran remains subject to the most advanced and comprehensive sanctions program ever instituted. So it is perhaps especially frustrating that entrepreneurs and investors get excited about commercial opportunities before they have a close look at the legalities. When the “post-sanctions” future is imagined, the process of sanctions relief is often simplified as though sanctions will go from “on” to “off.” But the real opportunities will lie in navigating the legal landscape in order to find the viable opportunities first.

Sanctions regulations are complex and were legislated in a messy way. How they will be rolled back remains a point of debate. But generally speaking, where US sanctions go, EU and UN sanctions will largely follow. What is clear is that the rollback of sanctions will likely be a phased process, and therefore the legal landscape will be constantly evolving even in what seems to be a “post-sanctions” moment.

In the meantime, companies will be tempted to try and “outsmart” sanctions.  But this is foolhardy. Compliance is important, and companies should invest in the best legal expertise available on an ongoing basis to learn how to craft an adaptive, compliant business strategy. Failure to comply could mean drastic and long-lasting commercial, reputational, and political damage. It is a bad habit shared by many firms that in order to keep costs low, the lawyer is only hired when the contracts are being drafted.

Additionally, companies shouldn’t forget about the need to comply with Iran’s domestic laws. There is a tendency for multinational firms to flout domestic laws when entering emerging markets. Usually, the perception of lax enforcement and corruption allows companies to think that domestic laws can be heeded selectively. This is also foolhardy. Not only is Iran’s enforcement capacity greater than the average emerging market (it has very strong state institutions, despite levels of corruption), but failure to pay taxes, ensure safety, or abide by environmental protections will earn the ire of the highly-educated Iranian public, who should be respected even more than the prosecutors.

3.    Reputational Risk

I touched on the topic of reputational risk in this November article for LobeLog, and I consider it one of the most fascinating challenges of doing business in Iran. The commercial and legal risk present in Iran is commensurate with levels in numerous markets, but the level of reputational risk is perhaps the highest in the world.

A poll published by BBC World Service in June 2014 identified Iran as the most “unfavorably viewed country” by individuals worldwide. Certainly, much of the international criticism is deserved and companies need to be honest with their customers, employees, and shareholders about their corporate responsibility to support positive social outcomes in all markets, including Iran.

But from the standpoint of business development it is worth considering the specific allergic reaction often exhibited when the ideas of “Iran” and “business” are combined. Special interest groups use public campaigns to name and shame companies that do legal business in Iran. Sometimes even humanitarian trade is targeted.  So when we consider the idea of normalization, we are really discussing a new normal in which the combination of the ideas “Iran” and “business” is no longer the cause for concern or condemnation.  

In practical terms, managing reputational risk will require savvy branding and an excellent communications and public relations strategy. This involves everything from redesigned websites to better disclosure of company activities, announced through new mechanisms of corporate communications. Transparency will be key in order to assuage negative perceptions and present a new normal of a responsible and resurgent business community.

4.    Political Risk

The fourth and final category of risk is perhaps the most difficult to evaluate. Political risk is about “street smarts”— understanding the commercial landscape of a country like Iran in a very deep way, capturing the political, social and cultural dimensions. Those seeking to do business in Iran will have a lot to learn in little time.

At the macro level, political debates around privatization and foreign ownership may impact how commercial and contract law is carried out, but there are actually existing laws written to protect foreign investment and private enterprise—they just have had limited use in a period of low FDI. Firms will need to develop skills in government relations to ensure they stay on top of these debates and the consequences for their business.

Looking to the micro level, Iranian society places great importance on personal or institutional reputation and pride. Any partnership or venture is judged on the reputation of its constituent parties. But rather than seeing reputation as a question of branding, this is a more political understanding of “reputation.”

For example, a certain individual or company might be the most commercially powerful of among the potential partners, but may also have a more questionable reputation within the industry. This partner may be best positioned to mitigate commercial risk in a given venture, but how does the politics of a potential partnership effect reputational or legal risk in the medium to long term? Would a company that is less commercially powerful, but held in higher esteem actually make a better partner?

To be clear, the need to make such political evaluations is not a trait unique to Iran. Even Silicon Valley is a place where the partner you choose or the investor you secure can drastically alter the trajectory for success. In Iran, as in Silicon Valley, political risk means knowing who are the key actors, how they are perceived, and the resources they are able to mobilize. But for a foreign investor or firm, the learning curve in a new market like Iran will be especially steep.

Conclusion

Looking at these four categories holistically, responsible companies will seek to turn risks into strengths. A proactive and careful approach to developing the commercial, legal, reputational, and political facets of a business development strategy can offer firms a competitive edge in the marketplace. Mitigating risks can be expensive and time-consuming, and may require seeking analysts, lawyers, PR consultants or other experts to help fill gaps in knowledge. But companies that can internalize and deeply understand risk/reward calculations for the new phase of Iran’s development will reap immense rewards.

Photo Credit: Morteza Nikoubazi/Reuters