Balancing Opportunities with Practical Business Risks

The removal of many international sanctions on Iran in early 2016 looks certain to boost the country’s economic prospects. However, enhancement of the investment climate in the medium-term notwithstanding. Following years of isolation from the global financial and trade system, the country’s reformist government will need time to help Iranian companies re-connect with the western world, reform its economic structures, and reduce the cost of doing business in the country, in addition to addressing macroeconomic issues and fostering a level playing field for all investors.

Issues to consider are:


  •  Hidden ownership structures of Iranian companies will pose additional risks to investors from a reputational and compliance perspective. Investors will need to conduct enhanced due diligence investigations to identity the ultimate beneficiaries of their prospective Iranian business partners in order to understand whether these entities are linked to sanctioned individuals or companies, or to politically exposed persons.
  •  The reinstating of sanctions (so-called ‘snap back’) will remain a possibility throughout the implementation of the JCPOA over the next decade. Investors should map the different scenarios for the implementation of the JCPOA, monitor those scenarios’ triggers, and structure their contracts and business to account for that threat.
  •  Sectors of strategic importance to the government and/or with high levels of state ownership will likely be affected by regulatory unpredictability and political interference due to factional politics and government efforts to balance private and public interests. Investors will be successful in these sectors only if they understand and monitor patterns of local decision-making and use this understanding to pre-empt and plan for regulatory fluctuations.
  •  A lack of local understanding of international compliance requirements and entrenched corrupt behaviours will challenge corporate governance standards imposed by foreign companies. Investors will have to understand these challenges and factor them in as they shape their local operations.

As a result of these risks, Control Risks recommends that companies looking to conduct business in or with Iran consider the following steps to inform their market entry strategy.Proactively identify and manage the reputational risks of engaging with Iran. Doing business in or with Iran will continue to be a highly politicised and sensitive issue for companies with ongoing business in the US. This is due to the extent of political animosity to Iran and the JCPOA at both a federal and state level. Companies with US business interests must be prepared for US politicians, lobby groups, single-action groups and the media to publicise and criticise their business with Iran using a variety of tactics. Furthermore, Saudi Arabia has indicated that it will seek to limit trade ties with Iran given the recent termination of diplomatic relations between the two countries. Although the implications of this are still being worked out, it is a clear indication that companies with existing business interests in some of the Gulf Cooperation Council states can expect negative reactions to their attempts to do business with Iran. Multinational companies should identify where their brand is most exposed to reputational challenges and take proactive steps to limit the impact of those challenges on shareholder value.

Assure yourself and your stakeholders about the identity of any business partners in Iran through conducting enhanced due diligence investigations. Understanding the beneficial owners of your local partners and clients is particularly important in Iran given the remaining sanctions on Iranian individuals and companies (both state-owned and private). Iranian companies have attempted in recent years to disguise their ownership structures in order to hide the roles of politically exposed and sanctioned entities and individuals. Iran is a complex business and political environment, but in our experience it is possible to identify the role of politically exposed individuals in business transactions in Iran. To achieve this with any degree of assurance, on-the-ground source enquiries are usually necessary. Beyond helping you comply with remaining sanctions, due diligence on third parties will also allow you to assure stakeholders, such as investors, banks and business partners – or even shareholders and boards – that your business is reputationally and legally sound.

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