When opening up a business in Iraq, there are several issues potential investors need to think about, warns David Tafuri, who is now a partner with Washington, DC, law firm Patton Boggs. He worked for 15 months as the Rule of Law Co-ordinator in Iraq for the US State Department. Working with judges, lawyers, police chiefs and prison heads, he helped Iraq jump-start its legal system after the war in 2003.

Mr Tafuri now assists corporate clients with international business, litigation and regulatory matters with a focus on the Middle East.

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One of the most important things – new this year – is the Status of Forces Agreement (SOFA) which is an agreement between a country and a foreign nation that has stationed military forces in the country.

A SOFA focuses around the legal issues associated with military individuals and property and looks at entry and exit into the country, tax liabilities and employment terms for locals. Before the SOFA was signed between the US and Iraqi governments, contractors were immune to Iraq’s laws, but that has all changed. “Companies are well aware that the law changed, but many are not sure how to come into compliance with Iraqi law,” says Mr Tafuri.

Registration requirements

The government now requires that any company operating in Iraq must be both registered with the Ministry of Trade and the Ministry of Interior. Companies can register options – they can open a trade representative office, a branch office, or incorporate in Iraq – which offers an immediate challenge.

According to the ‘Investor Guide to Iraq’, companies that are interested in investing in the country should first obtain business licences by submitting requests to the National Investment Commission (NIC) indicating a desire to invest that should include the proposed investment sector and the geographic area of interest. The request can be made via the NIC website: www.investpromo.gov.iq. Investors also need to include a certificate of good standing from a certified bank, a list of previous projects completed both inside and outside Iraq and a timetable for executing the project.

After registering the company – including everything from listing a trade name, submitting a contract by all the founders of the company and paying all the legal fees – companies must employ an attorney from their country’s Bar Association, hire a chartered accountant and appoint an executive manager.

Corruption concerns

Among the key legal considerations for foreign companies is staying on the right side of Iraqi and home-country law. Corruption is a delicate issue. “The Iraqi government is working on reducing corruption and it is saying the right things and beginning to do the right things, but more progress is needed,” says Mr Tafuri. “US companies need to carefully vet their local partners and ensure their employees are aware of the Foreign Corrupt Practices Act to make sure they are complying and that companies are not providing anything of value in order to get contracts,” he adds.

If companies are faced with corruption, it is strongly recommended that they tell the Iraqi government, taking it to the highest level. Because the government is committed to attracting foreign investors, Mr Tafuri says it is integral to let it know what is happening as soon as possible. “The government is concerned about its reputation for corruption and it wants to improve it,” he says.

Security and political risk

Security in the country has improved, but it is still an issue and it is important that companies are cognisant of issues in the particular areas where they plan to do business.

Not surprisingly, political risk is still also a major concern. Things have improved in the country over the past year. However, it is unclear how things will develop in the future, especially as parliamentary elections will be taking place in the early part of 2010.

It is important for companies to have good counsel and to be aware that the political situation could change and, if that happens, what the ramifications of those elections could mean for a company’s investments, Mr Tafuri advises. Companies should strongly consider taking out political risk insurance to ensure themselves for the loss of revenue or assets that could occur if the country has a sudden change of government or if an event affects the country’s stability.

“Say there is a coup or a civil war and a company is not able to continue its business,” says Mr Tafuri, “if a company has political insurance, it can be compensated for that loss of business and revenue”.

Arbitration clauses are also important in case a company ends up in a dispute with an Iraqi partner, providing an opportunity for the company to resolve a dispute in a neutral forum. At the moment, though, there are still some pitfalls as Iraq has yet to sign the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (more commonly known as the New York Convention) which ensures a company can enforce a judgment from a foreign arbitral forum.

“Iraq is a tough place to invest in and a tough place to travel to,” says Mr Tafuri. “Like other Middle Eastern nations, you need to spend time building relationships, but the foundations are there for good business opportunities and there are going to be a lot of good prospects.” A solid legal foundation is essential to pursuing these prospects prudently.

The cost of this supplement was underwritten by the United States government. Reporting and editing were carried out independently by fDi Magazine.