Due diligence is helpful when there is major asymmetric information between two prospective partners or when a strategic market entry is being considered. A careful due diligence is therefore required if foreign firms try to enter Iran due to several reasons.
First, under the current sanction regimes, most US firms are still excluded from dealing with Iran, but the market is opening up for companies from Europe and Asia. However, if they end up doing business with anyone on a blacklist they could face large fines or worse.
Second, while corruption is a major issue in Iran, due to possible damages for the reputation, foreign firms should avoid working with organizations involved in high-levels of corruption. Third, Passed on May 25, 2011, the OECD member countries agreed to revise their guidelines promoting tougher standards of corporate behavior, including human rights. As part of this new definition, they utilized a new aspect of due diligence that requires a corporation to investigate third party partners for potential abuse of human rights. This should be also considered when foreign firms are trying to choose their Iranian business partner. Thus, next to the routine forms of due diligence (e.g., compatibility audit, financial audit, management audit), it’s important to include a section in the due diligence on knowing who owns and runs a company.
But in Iran that can be complicated, especially if you’re dealing with a (semi or seemingly) privately-owned firm. As can be reflected in Farsi (language), there is a culture of ambiguity generally in Iran. It is fact that Iranian companies are not transparent about ownership structures, about financial statements and it is difficult to find trustable information online. Thus it should not be expected that one can very easily find out to whom a company belongs.
Business owners in Iran may not be used to the sort of due diligence processes that Western companies have to insist on, and they could resist attempts to find out the relevant information.
“Due diligence is challenging in Iran and part of it is cultural, especially in anenvironment where people are not used to a very thorough sort of due diligence that for example Western global companies now do,” says Rouzbeh Pirouz of Tehran-based investment firm Turquoise Partners.
Hence, it is crucial to use the “triangulation” method ensuring to have various trustable sources of information in Iran. For foreign firms it is not always to find such trustable “insiders” in Iran due to their possibly weak connections and their lack of understanding its rich but complex business culture.
Things are somewhat easier when dealing with companies listed on the Tehran Stock Exchange (TSE), but not by much. The TSE publishes a list of shareholders in all quoted companies, as long as they have a stake of at least 1%. The list is updated quarterly which is a good thing, but what it can’t tell you is whether the stakeholders are the ultimate owners or if they are, in reality, merely representing other people. In this case, looking into who the board of directors are and their track record as well as their connections could be informative. It is important to see who the different board members represent inside the company. But still those second and third layers are the challenging parts.
All being said, what should a company do if it wants to do a deal in Iran? The first step is to ask your prospective Iranian partner or client for a list of its directors and shareholders. Then carry out some screening checks on those people which won’t be easy due to lack of information as I explained. You could also ask the prospective Iranian partner to sign a declaration confirming that the information they have given you is accurate and that they’ll notify you if anything changes. You could also go an extra mile and ask the Iranian firm to sign another declaration confirming that they do not have any directors or shareholders subject to US or EU sanctions.
Finally and if you still feel unsecure, you could conduct some in-depth due diligence. That might entail hiring a consultancy firm or corporate investigators or similar.
Such steps for due diligence, in my opinion, should significantly reduce the complexity and risk of finding a suitable partner in Iran.