Babak Boghraty specializes in U.S. laws governing business conduct overseas, including anti-corruption and sanctions. He brings two decades of combined legal and business experience to this field, having assisted global enterprises extend their presence to the most inaccessible markets.
Professor Boghraty currently teaches a course in the Executive LL.M. program that focuses on managing compliance risks for international business networks. (Full bio). This is his first guest blog for the ELLM program:
In the course of 2015, we will likely witness the dismantling of economic sanctions against two longstanding US foes: Cuba and Iran – without a reciprocal commitment on human rights or democratic reforms. The Obama administration reasons that integrating these nations into the global economy will be more effective in bringing about positive change in their governments than embargoes and isolation.
The prospects of a return to these markets has electrified western investors and raised hopes in both countries for a better future. But in reality, this time is fraught with risk for all involved – for Cuba and Iran; for western businesses ready for the mad dash into these frontiers; and, for US credibility.
Consider Iran, the larger of the two markets. After more than three decades of economic isolation, it ranks 136 out of 174 on Transparency International’s Corruption Perception Index. Most of Iran’s economy is owned or controlled by the government and the ruling elite, and it lacks market-oriented institutions like a transparent regulatory system, sophisticated accounting and banking profession, effective legal and judiciary system or a broad-based tax system. Given these conditions, an abrupt and massive injection of foreign capital and technology into Iran’s economy is unlikely to inure to the long-term benefit of its public — let alone advance human rights or good governance. Judging from past experience in other emerging markets like Russia and China, globalization and rapid growth will tend to increase the wealth and power of the ruling elite at the expense of the environment and the social fabric.
The risk is no less foreboding for the first wave of businesses to brave the Iranian market. For the last decade, global efforts to combat corruption have focused on multinational business as the source of the problem. Members of the Organization of Economic Development and Cooperation (OECD) – the origin of most of the funds invested in emerging markets — have all enacted anti-corruption laws that severely restrict dealings with foreign officials and state-controlled entities. The Foreign Corrupt Practices Act (FCPA), for example, casts a wide net — holding multinational businesses liable not only for the corrupt conduct of their employees and subsidiaries, but also their local affiliates and collaborators.
The blurred lines in Iran between government and private business, the opaque regulatory system and the lack of access to reliable information will challenge western companies’ ability to manage their FCPA risk. As some commentators have observed, such elevated FCPA risk may ultimately deter Western investors, acting as de facto sanctions. Such an outcome would pave the way for the so-called “dark knights”–investors from countries who do not subscribe to the West’s anti-corruption agenda.
Finally, US interests are at risk. As the Obama administration’s rhetoric suggests, the US is retooling its foreign policy by reducing its reliance on blunt tools like embargoes in favor of more subtle tools like the FCPA, targeted sanctions and export controls. While the new “soft” tools conveniently shift the burden of advancing US policy to the private sector, their efficacy remains unproven. The course of events in Cuba and Iran after sanctions will not only test these new tools but also US credibility.
In sum, though it may be tempting to fall for the hope and euphoria generated by the talk of ending sanctions, this moment calls for sobriety. The outlined risks can only be mitigated if: 1) the US and other OECD members remain focused on using their new policy tools like the FCPA to prevent misallocation of Western capital and technology; and 2) global businesses and investors avoid a rush and deliberately channel their resources in a manner that protects their Cuban and Iranian stakeholders; and, at the same time, discharges their legal obligations.