The following is taken from PRIME our Political Risk: Insight, Monitoring, Expertise service
As we have outlined in other updates published through our PRIME service, we expect the implementation of the Joint Comprehensive Plan of Action (JCPOA) to continue over the next two years. The JCPOA has broad support in Iran’s political and security establishment as it prevents external economic and military shocks to the country’s stability. In the US, it is viewed as an important tool to achieve foreign policy objectives in the Middle East and to reduce Iran’s ability to weaponise its nuclear programme. Concerns that Iran’s nuclear energy programme could lead to the development of nuclear weapons have been a major source of instability in the region since the late 1990s and one of the most likely potential triggers for an inter-state conflict.
Despite the JCPOA’s implementation, companies considering business in and with Iran will continue to face sanctions risk. This is because significant restrictions will remain on US companies and persons, certain sectors will continue to face US and EU sanctions, and over 200 Iranian entities and individuals will remain sanctioned. Although sanctions compliance should therefore be a primary concern for any company considering opportunities under the JCPOA, any successful market entry strategy will take into account several other risk management issues:
- Reputational risks will be significant for companies with business in the US and other jurisdictions in the Middle East where Iran remains a highly politicised and sensitive issue. Proactive identification and management of stakeholders will be required in order to limit the impact on shareholder value.
- 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.
Map the different scenarios for the implementation of the JCPOA. Companies investing capital or establishing a permanent presence in Iran must understand how different events and outcomes for the implementation of the JCPOA, and additional US sanctions beyond the scope of the JCPOA, could affect their ability to continue doing business in the country. Understanding these scenarios will allow companies to structure contracts that provide some assurance in case of sanctions being reinstated post Implementation Day, particularly in the ‘snapback’ scenario. It will also equip investors with a list of triggers they can monitor to understand how such changes could influence the trajectory and success of their business. These indicators range from the influence of US presidential elections on a potential snapback of sanctions to upcoming national elections in Iran and any ensuing regulatory changes affecting the business environment. Monitoring such factors will allow organisations to review their posture and adapt their market entry strategy and compliance procedures accordingly.
Understand the sector in which you will be operating. Following years of exclusion from international markets and access to technological know-how, and because of the broadly left-wing economic ideology of the Islamic republic, many of the key industrial sectors in Iran are controlled or significantly influenced by the state and its representatives, or by affiliated prominent local businesspeople. This has led to frequent overlap between regulators and regulated entities and a general opacity in decision-making. Investors entering these sectors are likely to face significant regulatory unpredictability as the system is ‘reset’ to provide a better balance between local and foreign interests. Until then, companies could experience frequent changes in the regulations pertaining to their sector, including certain protectionist measures (such as local content requirements) aimed at supporting local businesses and employees. Therefore, investors must identify and understand the key local stakeholders in their sector of operation, as well as the decision-making processes of various regulatory bodies. This will allow companies to get ahead of the game, by helping them to pre-empt regulatory changes, run an engaged government affairs strategy and introduce enough flexibility in the business to allow it to adapt quickly to changes in the local market.
Seek to strongly embed corporate governance standards when setting up a business on the ground. Iran has operated as an isolated market under the considerable stress and strain of comprehensive sanctions since 2006. Competition over scarce business opportunities and an over-reliance on the state have fuelled corrupt practices and, more broadly, poor corporate governance standards among local businesses and employees. Patience and persistence will be required to communicate and enforce anti-corruption and sanctions compliance standards among employees and third parties.