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An Open Iran: Normalization dividend with a compliance nightmare

We are perhaps six weeks away from a deal which would open up a country shunned for nearly four decades.

It is a stable country in a highly unstable region. One with a highly educated but underemployed population, where there are untapped and almost unlimited oil, gas, chromium, copper, iron, lead, and zinc reserves; where the national airline has not bought a new aircraft in 37 years, and where every aspect of infrastructure requires renewal. On signing a deal the Iranian government could gain access to $100 billion in liquid funds.

Iran is a country in serious financial straits but has the financial capacity to transform itself into a 21st Century State. But it knows that in order to do that it must engage with multinational businesses that have the products, skills, knowledge, and technology to assist.

To open its markets and to get its money Iran needs to do a deal — and to do a deal it must commit to openness and transparency around its nuclear program. Then, and only then, will the P5 +1 agree to end 37 years of isolation.

But will that be enough for businesses to flock to Iran? In the case of Russia and the CIS when the wall came down it was. Multinationals were queuing at the door to get in. The peace dividend which arose from the normalization of relations between East and West had a huge impact on business not just in Russia but across Europe and America — the boom years of the 1990s and early 2000s were at least in part due to the opening up of the Russian and CIS markets. But will Iran be the same?

Parking for one moment the difference between the European and U.S. positions on the removal of sanctions and what role Congress may or may not have on timing of sanction relief there is a very significant difference between  the market opportunity in Iran now and that of Russia in the early 1990s.

That difference comes in the form of anti-corruption legislation and enforcement which has spread across the globe in the last 10-15 years.

The requirement for businesses to have adequate procedures in place to prevent bribery, to know ultimately who they are doing business with and to know how those entities and individuals do business, can present problems in developed economies.

In a state where religion, politics, the military and business are intertwined, where business ownership information is limited to what appears in gazettes, where there is limited disclosure of ownership of public companies and where there are no litigation records, it becomes almost impossible.

Add to this unique structures such as Bonyads, or “charitable organizations,” and the compliance issue becomes a compliance nightmare. Why? Because while Bonyads are not technically part of the Iranian government, they operate as semi-autonomous organizations, funded by donations and accumulated wealth; they answer, in most cases, directly to Iran’s Supreme Leader, Ayatollah Khamenei. He, in turn, uses their funds to promote a social welfare system and appease hard-line clerics in the country by funding organisations of which they are patrons.

How big is that issue?

The two largest are the Mostazafan Foundation of the Islamic Revolution (the Oppressed People’s Foundation of the Islamic Revoultion) and Setad Ejraiye Hazrate Emam (the Headquarter for Executing the Order of the Imam).

It is estimated that these two Bonyads alone are worth more than a $100 billion and influence between 15% and 25%  of the non-energy sector-related industries of Iran.

These are the problems facing multinationals enticed by Iran’s “normalization” dividend. 

But the problem is also a problem for Iran. 

Unless potential business partners can investigate ownership, can understand how rights have been acquired or transferred, understand their prospective partners’ methods of business operation and their track records, there will be a drag on investment.

Iran must understand that the need for openness transparency and the ability to investigate and verify must go beyond the nuclear or it will continue to find itself starved of what it craves — normalization of business relationships with those who are best positioned to assist.


Bill Waite is a contributing editor of the FCPA Blog. He’s one of the founders of The Risk Advisory Group, established in 1997 with the objective of building Europe’s leading independent risk management consultancy. He serves as the group’s CEO and general counsel. He formerly practiced as a criminal barrister before joining the U.K. Serious Fraud Office in 1991 as a prosecutor. He can be contacted here.

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  1. A great article but suggests that red tape/ lack of transparency is the issue for compliance professionals; the real issue is that the Supreme Leader, Ayatollah Khamenei, is worth an estimated $36 billion, and any significant corporate transaction is likely to flow into his coffers.

  2. The corruption, cronyism and vicious dictatorship are just the tip of the iceberg. Perhaps, 70 – 80% of business in Iran is via the black economy. The role of the Revolutionary Guards in owning whole industrial sectors, means that unless the IRG is removed from sanctions black lists, unlikely, it is almost impossible to do "legitimate" business in the country.

    Of course, those chasing the big bucks inside Iran, may turn a blind eye or cut corners to do business, it is hard to see how any transparent, clean or indeed honest, business can be conducted if sanctions are removed.

    However, the decision to open their Nuclear programme to inspection maybe beyond the pale, for the more hawkish elements of the Iranian regime. There is still more water to flow under the bridge before Iran can become an open market for business.

  3. My comments:
    1) Good points on the ‘Bonyad’ semi autonomous oragnisations, but also need to add the semi -military organizations of revolutionary Guards like Khatam al Anbia (+25bn$ estimates of contracts by 2012) that are major winners of large infrastructure projects and also have their tentacles in other sectors of economy such as telecommunications, etc.
    2) The supreme leader is sick. There are elections by mars 2016 for the parliament and also the council choosing the next leader if the current one dies. Businesses should prepare the ground by making contacts, but should WAIT till mid to latter part of 2016 to make a move or invest.
    3) Sanctions will be removed step by step. The process will begin late 2015, more likely early 2016. This relates mainly to EU and UN sanctions. Most US sanctions will take longer.
    4) The political class is divided in Iran on ‘opening up’. This will play out with each camp trying to win the credit for a potential nuclear deal while battling it out on the domestic front which means resisting any liberalization, meaningful privatizations of large government organizations. Political power is deeply intertwined with economics. Bonyads and the Revolutionary Guards’ organizations will directly confront any real attempts to increase the transparency of the current economic model that is not beneficial to them. An open transparent economy will ultimately hurt such ‘shadow’ organizations and reduce their political clout. As in the previous administration of President Khatami (1996-2004), the hardliners (with the support of the Supreme leader) will prevent any meaningful demands including greater transparency, or compliance. For example, their activities account for 15-30% of the Iranian non-oil sector. Since 1990s, they have resisted calls or attempts by the elected government to open up their books and pay corporate taxes like other companies in Iran! They only answer to the non-elected office of the supreme leader.
    For the next 12-24 months, depending on one’s opinions, we can have two outlooks:
    Pessimistic Outlook:
    It is likely that once ‘the reformers’ get the ‘supreme leader office’ out of the current troubles, they will be dealt with as before during Mr Khatami presidency. Transparency is contradictory to the nature of the regime. Compliance will be given lip service, at best.
    Positive Outlook
    We all hope this time round, the reformers will have learnt from the past and how a game plan to win over the upcoming battles against the ‘office of the Supreme Leader’, and open up Iran to greater transparency and rule of law, and hence becoming a ‘Normal’ emerging market economy.

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