TLab’s Recommendations: Iran’s Business Sector

Recommendations for Improving Transparency and Anti-Corruption Measures in Iran’s Business Sector

Improved transparency and anti-corruption measures in relation to businesses and public procurement are of paramount importance for several compelling reasons. Firstly, they are closely intertwined with economic growth and sustainable development. Secondly, these measures foster a level playing field for businesses and cultivate public trust. Moreover, they enhance investor confidence, thereby attracting both domestic and foreign investors. Additionally, they contribute to the enhancement of public service delivery, ensuring that public funds are utilized for their intended purposes. Lastly, these measures fortify the rule of law, promoting a just and accountable society.

The business sector in Iran, like many others, grapples with significant challenges concerning transparency and corruption. This article sheds light on some of the most pressing issues in this regard, followed by a discussion on potential solutions that could lead to tangible improvements. It is essential to acknowledge that due to the intricate entanglement of the state and private sectors in Iran, it becomes arduous to delineate the boundaries where the state ends and the genuinely private sector begins. Consequently, meaningful and sustainable changes in the business sector in Iran necessitate genuine cooperation between the state and relevant stakeholders.

A lack of counterparty transparency

One of the foremost challenges facing both Iranian and foreign companies in the Iranian market is understanding the exact ownership of their potential counterparties. Conducting due diligence in Iran can be a challenge because identifying information about companies is often difficult to access. Iranian companies do not necessarily include important company information such as the company number, trading names, office locations, key personnel, board members, or the shareholder structure on company websites. While information regarding company registration and ownership is available with the Official Gazette (روزنامه رسمی), this information is not searchable from abroad. In many cases, this information is only available through an in-person visit to the registrar’s office. Iranian companies will therefore often proceed to establish a business relationship on the basis of trust, rather than through a thorough verification of the counterparty’s key details. Foreign companies that do wish to conduct thorough due diligence will often need to hire a specialist firm at great cost to conduct research, including through source interviews. A lack of accurate information about counterparties creates domestic and international risks, including risks associated with possible exposure to sanctions.

 Recommendations:

• Iranian government should be encouraged to make company registration info searchable online, including by foreign individuals.

• Iranian companies should be encouraged to more proactively share identifying information and this could be an initiative of the Iranian private sector

• Iranian companies could be encouraged to use international registration services such as Dun & Bradstreet to create an eternal record of key company details

Unfair and uncompetitive business practices

Iranian companies and foreign companies operating in the Iranian market must contend with unfair and uncompetitive business practices that arise from political favouritism and outright corruption. To secure contracts or other business opportunities, Iranian companies may be pressured to provide bribes and kickbacks or to engage in fraud or manipulations. Foreign companies may also be pressured to engage in practices that would violate laws in their home jurisdictions or might contravene the company’s own rules.

Recommendations:

• Foreign companies should take a unified approach to improving the regulatory environment in Iran

• Programs to instil anti-bribery standards are often led as part of government technical assistance, but a private sector effort may be needed in lieu of governmental programmes

• Exchanges should take place between Western and Iranian chambers of commerce focused on effective lobbying of government to improve enforcement of anti-bribery and anti-corruption legislation as a way of levelling the playing field

• Investment in business journalism, especially investigative journalism, could help create better accountability mechanisms

Weak intellectual property protections

Despite its accession to the World Intellectual Property Organization (WIPO) and several other international treaties focused on property right protections, Iran has weak protections for intellectual property and there are various forms of infringement. Types of infringement include unfaithful infringement, whereby companies register similar trademarks, designs, or patents with the aim of entering litigation against targets, frequently foreign companies. Patent and trademark trolls have also become more active, registering intellectual property with the intention of taking enforcement action. Iranian companies are also known to copy the designs of successful competitors, including foreign companies, to confuse consumers and siphon sales.

Recommendations:

• An education campaign should be conducted to inform Iranian companies and consumers about the importance of intellectual property rights

• The Official Gazette, in which intellectual property and trademarks are registered, should be digitised, and made searchable

• Foreign companies should have better resources, including from the relevant Iranian government agencies, informing them about the necessary steps to protect their intellectual property in Iran, even if they are not operating in the Iranian market. For example, many foreign companies are unaware that registering with the International Trademark System is insufficient and that a local lawyer must finalise the registration process for the registration to be recognised by Iranian courts.

A lack of financial transparency

 While publicly listed Iranian companies do publish financial results, it is uncommon for private companies to make information about their financial performance public. It is not customary for business owners to share information about the company’s financial performance with staff. Business owners may even withhold some financial information from the C-Suite. This lack of transparency may negatively impact the degree to which individuals in the company feel empowered and incentivised to help the company meet commercial targets. But perhaps more importantly, the lack of transparency also means that company employees are unable to hold company owners accountable, creating opportunities for owners to engage in unethical financial dealings.

Recommendations:

• Iranian companies should be encouraged to adopt open-book management in which company owners and the C-suite share financial information with employees. This would help create a growth culture in firms, but it would also create an accountability mechanism.