The move to ease sanctions against Iran last year by the EU and US is controversial, but could lead to investment opportunities. Investors and advisors need to be aware of the risks, according to one law firm.

One of the most significant diplomatic and economic events of the past 12 months was the move by the US and European Union to lift sanctions against Iran over the latter’s nuclear programme, in exchange for Iran’s agreeing not to develop nuclear weapons. The move has been controversial because, for example, the process whereby Iran’s compliance with any restrictions is monitored is not as rigorous as some parties – notably Israel – would like. At the time of writing, this agreement is far from being a rock-solid one. At the end of last year, Iran launched rockets in a manner that, according to some reports, is a technical breach of the agreement. The lifting of sanctions has not yet been formally approved by the US Congress. In Iran, President Hassan Rouhani has reportedly ordered his defence minister to expand Iran's missile program, in defiance of the US threat to impose sanctions over a ballistic missile test Iran carried out in October. Any lifting of sanctions cannot, therefore, be treated as a permanent matter.

With all this in mind, Paul Glass and Olivier Swain, who work in the disputes and investigations team at international law firm Taylor Wessing, examine what private client advisors need to understand. The editors of this publication are grateful for the chance to share these insights; as ever, they invite readers to respond.

In the coming weeks, the international business community will eagerly wait for news about the anticipated phased relief of some of the sanctions which have applied to Iran for the last decade. However, along with new and exciting investment opportunities comes a series of complexities and risks. So, what do HNW individuals and their advisors need to be aware of when scoping out ways to take advantage of this development, whilst at the same time ensuring they do not fall foul of the myriad of legacy sanctions that remain in place?

Investment into and out of Iran has historically been impeded by longstanding sanctions which have applied to the country since the 1970s, most recently in the form of the restrictions established by the European Commission and US between 2006 and 2012. However, the recent Joint Comprehensive Plan of Action (JCPoA) signals a way forward, setting out a framework for phased relief from some of the sanctions and paving a way for Iran to transact with the international community once again.

It is important to note, however, that sanctions do and will remain in place, and advisors should proceed with caution when advising high net worth individuals on investment opportunities relating to the country. This is particularly important where US sanctions could apply, as it is likely it will take longer for those to be lifted than for the EU's equivalent.

So what is the JCPoA? It came into effect on 18 October 2015 and was entered into between Iran, China, France, Russia, the UK, US and Germany (the permanent members of the UN Security Council together with Germany), and the European Union. It provides for the current financial sanctions to be reduced with effect from the date on which the International Atomic Energy Agency (IAEA) reports that Iran has complied with the agreed measures to ensure that its nuclear programme is peaceful. That date – "Implementation Day" – has not yet arrived and although some speculate that it will occur sometime during mid-to-late January, there have been indications that Iran's compliance will not be straightforward. For example, a team of UN sanctions monitors found that a recent Iranian ballistic missile test (carried out on 10 October 2015) violated the UN Security Council's resolutions, and the Obama administration, among others, has serious concerns about the Iranian government's conduct.

Iran is, and will remain, a challenging environment for investment. When, however, Implementation Day arrives, European companies will be much more free to engage with Iran (subject to compliance with the US sanctions where appropriate and the remaining EU sanctions). With this in mind, what are the difficulties and what pitfalls do HNW individuals and their advisors need to be aware of when considering investing in or out of Iran?

Sanctions in the US
After Implementation Day, investment into Iran from Europe should become more straightforward: most significantly, Iranian investors will have greater access to the international banking system and to the international market for financial products, although many banks are likely to continue to take a cautious approach, particularly in light of ongoing US sanctions. Iran will also be permitted to sell its oil in the international markets and to seek foreign investment for infrastructure.

The lifting of sanctions in the US will not follow the same pattern. Most of the existing American sanctions will remain: the US is removing only a limited number of companies and individuals from the prohibited "Specially Designated Nationals" list. Those remaining sanctions will prevent US-based service providers, employees and group companies within European firms from being involved in transactions with Iran. Investors must take care to ensure that American partners are not involved in the investment process.

Due diligence
Conducting appropriate due diligence to identify the ultimate beneficial owners of Iranian entities will be crucial. The JCPoA does not extend to companies under the ownership or control of the Iranian Revolutionary Guards Corps (IRGC), which is both a branch of the Iranian armed forces and the third wealthiest business organisation in Iran.

The IRGC controls somewhere between a tenth and a third of the Iranian economy (estimates vary) and it operates in a broad range of industries including engineering and construction, oil and gas, mineral extraction, travel, healthcare and media. Avoiding sanctioned investment into IRGC-related entities is not simple given the extent of the organisation's political and commercial influence. The IRGC's interests in various businesses are not always transparent and ensuring that an investment does not fall foul of this continuing sanction is likely to involve increased compliance costs.

An additional complication with due diligence and compliance arises from the fact that many Iranian business interests are structured as bonyads. Bonyads are ostensibly charitable organisations with quasi-governmental status and operate on a tax-free basis as a result, but in practice they often operate as commercial conglomerates. Beneficial ownership of bonyads is notoriously difficult to establish and there are few local legal requirements relating to disclosure and transparency applicable to Iranian corporations and trusts. Thus the structure can (whether deliberately or otherwise) assist to obscure beneficial ownership of companies, which presents a further challenge when dealing with the sanctions applicable to the IRGC.

Moreover, bonyads are sometimes able to use their quasi-governmental status to block other entities' business activities, for example by thwarting attempts by competitors to gain the appropriate business licences and approvals.

Challenges of the Iranian market
Iran will remain a difficult market in which to operate, even after Implementation Day. Its economy is statist, significant commercial enterprises are often controlled by PEPs and the national government exerts a great deal of control. Business in Iran is conducted within a highly bureaucratic system which is affected by volatility in the political sphere – both internally and externally. Iran's relationships with its immediate neighbours are not stable and political risk is always present.

Iran also ranks poorly in Transparency International's corruption index (it was placed 136 in the 2014 index, alongside Russia and Nigeria) and the link between politics and business is a strong one. Accordingly, for investors wishing to invest directly into Iran, there are risks relating to the Bribery Act 2010 in the UK, and the Foreign Corrupt Practices Act 1977 in the US. It is, therefore, necessary to proceed with caution because of the compliance and reputational risks that come with that legislative scheme.

Despite the cautionary notes sounded above, Iran's qualified return to international markets does constitute a significant opportunity for the well-informed investor. Successful investment will, of course, require appropriate due diligence, care and foresight from expert advisors. But Iran's large and developing consumer base (particularly in the burgeoning middle class), its well-known wealth in natural resources and the prospect of substantial sums currently locked in Iranian financial institutions reaching international markets are clear and tempting targets for investors who understand and deal with the risks.