farhad emam Farhad Emam
Publish Date : 02/26/2016

Internationalization of the Banking Law in Iran

EXECUTIVE SUMMARY

Key terms

Parliamentary elections, international banking, luxury industry, legal internationalization

Summary

Parliamentary elections in Iran are taking place today. The major stake in this election is the level of opening towards west, culminating in classifying the opponents into two groups: moderates and radicals. This dichotomy has been of such an importance that even the Supreme Leader of Iran felt the need to raise this issue by dismissing the social classification of political parties -- radicals and moderates -- saying that such classification does not apply to the Islamic Republic of Iran, as reported by Irna News on February 24, 2016:

The Supreme Leader said that the enemies believe that if the moderates win the elections, they will pave the way for friendship with the western governments. Ayatollah Khamenei gave description of Iranian political structure, saying that the Islamic Republic of Iran political structure gave the same nature to both the radicals and the moderates so that they will follow a common line of opposition to hegemony of the western powers.

On the other hand, after singing the JCPOA, the Iranian government is taking every possible measure to convince and encourage foreign companies, investors and banks that the business environment of Iran offers them all that they need to succeed in their business activities in Iran. Despite all of these efforts, the number of foreign companies or countries that have ventured to start a business in Iran is still very limited.

If the moderates win the election, they will have to take serious measures to encourage foreign investors that the business environment of Iran will be “internationalized” in the near future. The first step in this direction is to internationalize the business law of Iran. Iranian business laws and regulations, in comparison with their “rivals” at the international level or even in some neighboring countries, are outdated. It is very difficult, if not impossible, to construct a skyscraper on an old foundation.

To make our discussions more concrete, in this Legal Report we will analyze the recent developments in two major fields of potential cooperation with foreign investors or partners: international banking and luxury industries.

I. International banking

Recent developments in the field of international banking have culminated in some structural, operational and legal rapproachment between the Iranian and the international rules and standards.

1.1. Structural issues

In our Legal Report on “International Banking Operations in Iran”, it was explained that activities of foreign banks in Iran must be carried out in one of the following four legal frameworks: representative office, branch, joint bank, and offshore unit.

1.1.1. Representative office

Bank Muscat, Oman's largest lender by market value, is opening a representative office in Iran, the bank said on Thursday, underlining rapid growth in business ties between the countries after the lifting of sanctions on Tehran (Reuters, February 25, 2016).

1.1.2. Branch Office

According to the Koreal Herald on February 24, 2016:

Iran’s Mellat Bank plans to reopen its Seoul branch as early as next month following the lifting of sanctions on the Middle East country, a bank official said Wednesday.

This reopening raises an interesting legal issue according to the same source:

Discussions are also underway with the U.S. to establish the substitute settlement system using euro, as the bank cannot accept U.S. dollars when trading with Iran due to separate sanctions by Washington. Bank officials said they are expecting a positive conclusion to be reached within next month.

Further, one of the largest Chinese banks is planning to open a branch in Iran according to 4-traders.com on February 6, 2016:

Industrial and Commercial Bank of China Ltd., a Chinese multinational banking company, plans to establish branches in Iran, an official with the Chinese embassy in Tehran said on Saturday. The bank, which is said to be the largest in the world in terms of total assets and market capitalization, has requested to open branches in Iran's Kish Trade Zone and in the mainland, Jang Ey, the spokesperson of the Chinese embassy, said.

1.2. Operational issues

1.2.1. Iran rejoined SWIFT

Iran rejoined SWIFT recently. After few years of being severed from international banking connections, this was a message of hope for a banking system that was secluded in its island of loneliness. It must be noted, however, that according to euromoney.com on Februray 2016:

One thing rapidly becoming clear as Iran’s international banking devices start up again is that the flow of capital is at first going to be with the east, not the west. Just as the tankers leaving Iran, on the morning after the sanctions were lifted, were headed for India rather than the Suez Canal, it is thought that the first foreign bank to resume full banking lines with Iran was China’s ICBC. Then, on January 21, the Central Bank of Iran said that ICBC had formally requested the right to open branches in Iran, both on the mainland and within the free trade zone of Kish Island.

1.2.2. Outdated banks of Iran

It is reported on the website of ft.com on January 19, 2016 that:

Iran’s lenders — most of which are nominally private but affiliated to state bodies — have long operated with low capital adequacy requirements and inadequate regulatory and supervisory mechanisms. They were further weakened by the policies of Mr Ahmadi-Nejad, who forced them to provide cheap loans to small businesses and the poor, as well as the sanctions.

1.3. Legal developments

According to the theaccountant-online.com on January 16, 2015:

Iranian listed companies, approximately 500, will have to prepare their financial statements under IFRS from 2016 onwards, local practitioners told The Accountant. A circular from the Tehran Stock exchange, seen by The Accountant, states that listed companies should comply with the international standards from the Iranian year 1395, which is financial year 2016 according to the Gregorian calendar.

The Central Bank of Iran issued Decree number 94/343723 on February 14, 2016 under which all of the Iranian banks and credit institutions have to prepare their financial statements under IFRS from 2016 onwards.

II. Luxury industry

The luxury industry in Iran is opening the way for major foreign brands to enter the country as if the “luxury diplomacy” in Iran playing the same role that “ping pong diplomacy” played in China in 1971. The latest news is that:

The Roberto Cavalli brand is entering Iran for the first time. The company, controlled by new owner Italian private equity firm Clessidra Sgr, has opened its first monobrand in Tehran. The 3,780-square-foot, two-level boutique is on North Alef Street in Tehran’s elegant Zafaraniyeh area and carries the signature brand’s women’s and men’s wear lines, as well as the gym, junior, eyewear and home collections (wwd.com on February 19, 2016).

This development follows other openings in the last few months:

1. Destinia, the international online travel agency with offices in Dubai, Egypt and Spain, has expanded its presence in the Middle East with its entrance into Iran. The new office opened in summer 2015 and serves as Destinia’s third Middle Eastern hub. (ttnworldwide.com in November 2015).

2. Made in Italy: Piquadro opens its first flagship store in Iran (9colonne.it on July 31, 2015).

3. Pen aficionados and luxury shoppers can now browse and shop the complete range of Montegrappa pens and accessories at Montegrappa Boutiques in Italy, India, the UK, Russia, Moldova, Azerbaijan, Iran, Saudi Arabia, Qatar, and the UAE. (montegrappa.com)

CONCLUSION

The major challenge of the Iranian business law is to create a self-supporting, quasi-independent legal system for international trade with Iran. For example, international banking in Iran is in dire need of adopting the internationally accepted rules and standards. It is a herculean task to encourage foreign investors and international companies to transfer their capital, technology, know-how and management to Iran as long as the Iranian legal system refuses to limit application of its domestic rules and reglations to its domestic legal issues. Internationalization of the business law of Iran needs a well-devised plan and a serious intention to release the system from application of some laws and regulations that date back to the first half of the 20th century!

GOOD TO KNOW

To learn more about the issues mentioned in this Legal Report, you may read the following texts on the website of www.lawiniran.com. If after reading this Legal Report and the following texts, you still have questions that call for detailed responses, you may send them to us by clicking on “Our Services” button on the website of www.lawiniran.com and following the procedure explained there.

RELEVANT LEGAL NEWS:

1. Law in Iran Legal News: Iran-Azerbaijan Joint Bank, Monday August 24, 2015.

2. Law in Iran Legal News: Iran-Russia Joint Bank, Wednesday January 28, 2015.

3. Law in Iran Legal News: Foreign banks in Iranian FTZs, Wednesday July 29, 2015.

RELEVANT LEGAL REPORT:

Law in Iran Legal Report: International Banking Operations in Iran, Sunday, September 6, 2015.

RELEVANT BOOKLET:

Law in Iran Booklet No. 6: International Banking in Iran, Sunday, September 6, 2015.

RELEVANT BOOK:

Farhad Emam, International Banking Laws and Regulations (Chapter on Iran), OCEANA, 2000.

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