By Ramsey Jurdi

The risks of rushing into investing in Iran, for Americans and non-Americans alike, are significant and underreported.

You would be hard-pressed to read any major publication today without encountering at least one story about the rush to Iran, the incomparable opportunities, or the welcoming arms of the Iranian government. The nuclear agreement with Iran does in fact provide significant opportunities for banks and financiers, if the risks can be managed or priced.

Beyond the stories of red carpets, minister-led business delegations, and bustling hotels in Tehran, Western business executives are having serious conversations about whether the potential reward of being first to market outweighs the risks of charging into a country that is, for example, ranked 137 for corruption and ranked 130 for ease of doing business. Iran’s history of expropriations and reneging on nuclear deals must similarly be factored into decision making.

In this article, we step back from the hype of endless opportunities to take a stark look at the key factors that executives are, or should be, discussing.

The Legal Obstacles

The Iranian economy will remain largely closed to US businesses and US nationals for the medium term, as Chadbourne reported in a client alert in July. The EU sanctions relief is fairly comprehensive, with exceptions, but the US sanctions relief provides openings currently for only export of civilian aircraft, civilian aircraft parts and related services, import of Iranian foodstuffs and carpets, and transactions by non-US companies owned or controlled by US companies or persons. Further, the sectors of the Iranian economy that are under control of the Iranian Revolutionary Guard Corps, or IRGC, will remain off limits for US and EU companies alike regardless of whether the specific business activity is permitted under the expected sanctions relief.

For US companies, the loosening of sanctions for US-owned or controlled companies that are established outside of the US provides the most significant, yet little understood, opportunity. Guidance on the sanctions relief, which is expected to be issued in October ahead of its implementation in the first half of 2016, should provide much needed clarity on the extent of the relief for foreign subsidiaries of US companies. The agreement with Iran appears to contemplate the issuance of a general license for US-owned or controlled companies established abroad, but without a broader loosening of the restrictions on US nationals, this relief will be of limited value in practice. The US’s prohibition on “facilitation” by US nationals of non-US transactions with Iran prohibits US nationals from taking affirmative action to allow their foreign affiliates to transact business with Iran. US nationals employed by the foreign affiliate, or by non-US companies, will similarly be prohibited from participating individually in any transaction with Iran.

Another critical obstacle, for both Americans and Europeans, will be the prohibition on conducting transactions with entities and persons subject to an asset freeze, commonly referred to as blacklisted persons. The IRGC controls large portions of the Iranian economy and will remain blacklisted by both the US and EU for approximately eight years under the deal with Iran. Transactions with the IRGC or its blacklisted officials, directly or indirectly, could subject companies to criminal or civil penalties by the US or EU.

To mitigate these risks, companies operating in any sector in Iran will need to screen business partners and beneficial owners diligently and comprehensively for blacklisted persons, as well as screen for government officials in connection with anti-corruption laws. Documented compliance programs will be necessary not only to ensure the integrity of this process, but also to ensure that agents, business partners and vendors are similarly abiding by these restrictions when applicable. Notwithstanding the due diligence, companies will inevitably encounter transactions in which participation by a blacklisted entity will be unavoidable, and thus the transaction will be prohibited without authorization.

If companies can come to terms with these obstacles and the other risks identified here, then the remaining EU sanctions should not pose significant legal obstacles for the non-US finance industry. An explicit and repeated provision in the agreement with Iran is that the Europeans will provide finance and export credit assistance to Iran. Additionally, frozen funds estimated to equal between $30 and $100 billion will be released to Iran as part of the agreement. The agreement removes the asset freezes from Iranian banks, permits the transfer of US dollars to Iran (by non-US persons), and allows the unimpeded transfer of funds between non-US banks and Iranian banks. One significant financial restriction will remain in place for the first eight years of the agreement: the EU prohibition on the provision of financial messaging services to Iran.

The Business Environment

Legal risks can usually be identified and managed, but the business risks of investing in Iran will be difficult to quantify. Red tape, corruption, violation of the nuclear accord, and vested interests are some of the obvious challenges that new entrants to the Iranian economy will immediately need to consider and factor into decision making on how fast to enter the market. These are the factors that will dominate boardroom conversations over the next few months. Most media reports address them only in passing.

The biggest business risk, by a good measure, is a violation of the nuclear accord by Iran causing a “snap back” of sanctions. Western businesses investing in Iran might price in the risk factor that the Iranian government reneges on its commitments. The US (or any party to the agreement with Iran) can cause an automatic snap back of UN sanctions on Iran by unilaterally submitting that Iran is not complying with its obligations under the agreement. The snap back would be automatic and could take place in as few as 65 days from the first submission by the complaining party. Absent an affirmative vote by the UN Security Council (which any of the permanent five members can veto) or a resolution between the parties, the UN sanctions would be automatically reimposed.

The agreement with Iran provides a safe harbor for existing investments in the event of a snap back of sanctions, which should provide some comfort to investors. However, the practical value of this safe harbor would probably be limited because further investment could be prohibited and Iran could once again become cut off from the international financial system. The snap back would only apply to UN sanctions. The US (assuming it is the complaining party) might find it difficult to convince its European allies to join the US in reinstating unilateral sanctions on Iran, but current attitudes could change in the future.

The second major business risk is the relatively opaque and underdeveloped business environment in Iran. The World Bank’s Ease of Doing Business report, which ranks Iran at 130 overall, provides comparatively positive rankings for Iran in only two areas: enforcement of contracts and business set up, at 66 and 62 respectively. In the areas of construction permits and property registry, Iran is ranked near the bottom at 172 and 161, respectively. Protection of minority investors, trading across borders and paying taxes are also poorly rated.

On paper, Iran’s Foreign Investment Promotion and Protection Act provides the right incentives for foreign investment, such as 100% foreign ownership, repatriation of profits and tax incentives. However, this 2002 law has not been significantly tested. Iran is not a standard-bearer for the rule of law, and as vested interests come under threat from the influx of foreign investment, pushback from these powerful interests would not be surprising. Careful consideration of these risks, an understanding of the existing industry participants (and their beneficial owners), and reliable access to legal recourse will be factors that companies should address before making major investments.

Missed Opportunities

The common sentiment among US businesses at the moment, that they will miss out on opportunities in Iran while EU companies snap up the contracts, is simplistic.

For Americans, the opportunities in Iran will remain if and when US sanctions are lifted and public opinion changes. The demand for advanced technology, quality and finance – often the American differentiator abroad – will not disappear. The Europeans, Russians, and Chinese might have their pick of the low-hanging fruit in Iran, but Iran is not rolling out the red carpet for American investors at the moment, regardless of the legal restrictions. Iranian authorities have said on several occasions since the nuclear agreement was reached that attitudes toward the US will not change.

The US government chose to keep most restrictions on US companies in place for what could be very good reasons. A charge into Iran by US business will limit the options for US foreign policy and potentially endanger US citizens in a worst-case scenario. In the event of a breach by Iran of the nuclear accord, a strong US business presence in Iran would also limit the US government’s options from a domestic special-interests perspective. From an international perspective, a strong US presence in Iran will provide the Iranians with leverage vis-à-vis the investments and people in the country.

In summary, Iran is not the untapped paradise that the media reports are portraying it to be, and the Europeans are undoubtedly discussing the same issues addressed in this article. Being first to market can undoubtedly result in huge windfalls. However, as those who rushed into Iraq, Libya and South Sudan can attest – three countries that recently led the world in GDP growth – the risks attendant to being first to market can often rise to the level of 100% loss of investment. For now and for Americans in particular, the cautious choice is to wait and see.