Iran Country Profile

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Business Corruption in Iran

Snapshot

Iran Corruption Flag

Companies operating or planning to invest in Iran face a very high risk of corruption. A powerful system of political patronage , nepotism and cronyism pervades all sectors of the economy. Irregular payments or bribes are often exchanged to obtain services, permits or public contracts. The Rouhani government has addressed the need to curtail corruption but fails to exert enough pressure on hardliners in control of key state institutions, including the Islamic Revolutionary Guards Corps (IRGC) and the judiciary. While there are multiple laws in place that criminalize various forms of corruption in both the public and private sectors, they are not effectively enforced in practice and impunity is a problem.

Last updated: August 2016
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Judicial System

There is a high risk of corruption and political interference when dealing with the judicial system. The Iranian constitution provides for separation of powers, but in practice this is not upheld. While the judiciary is independent from the executive, the head of state (the supreme leader Ali Khamenei) has absolute power over all government institutions, including the judiciary ( BTI 2016 ). Additionally, a system of nepotism and patronage pervades the judiciary; the current head of the judiciary, Sadeq Amoli Larijani, is known to be loyal to Khameniei, who appointed him, and is also the brother of the speaker of parliament (BTI 2016).

Politically sensitive cases are often determined by intelligence services, and rich and influential individuals are often spared prosecution or fare well in trials (BTI 2016). Donations to influential persons by those accused of corruption or embezzlement effectively curtail the judiciary's willingness to prosecute (BTI 2016). Similarly, businesses often pay bribes or other irregular payments to obtain favorable judicial decisions ( GCR 2015-2016 ). A popular exception is the case of former v ice president Mohammad Reza Rahimi, who was sentenced in 2015 to five years' jail time for undisclosed corruption charges ( Al Jazeera , Feb. 2015).

Businesses find that the judicial system lacks efficiency in settling disputes and even more so in challenging government regulations (GCR 2015-2016). Iran has acceded to the New York Convention of 1958 but is not a member of the International Centre for the Settlement of Investment Disputes (ICSID).

Police

The Iranian police force carries a high risk of corruption, with systems of patronage and cronyism pervading overall law enforcement. The police operates highly inefficiently, and c ompanies are not fully confident in the reliability of Iranian police forces to protect them from crime or to uphold law and order (BTI 2016; GCR 2015-2016 ). Aside from the national police, the Islamic Revolutionary Guard Corps (IRGC) and the Basij militia operate in the country, mostly in times of protest or riots. The IRGC owns a considerable part of the economy and financial systems and influences the media, making it a powerful institution that's loyal to the supreme leader ( Reuters , July 2015).

In 2015, allegations of embezzlement of funds worth GBP 350 million within the police force surfaced, but the supreme leader Khamenei forbade probes into the allegations ( Telegraph , June 2015; CDI News , July 2015). Former police chief Ismail Ahmadi Moghadam, who was interrogated and replaced not long after the allegations, commented that he had been forced out of office only after he threatened to expose fellow senior officials ( Telegraph , June 2015; CDI News , July 2015).

Public Services

Companies contend with a high risk of corruption when acquiring licenses, utilities or other public services. Companies report sometimes paying bribes and other irregular payments (GCR 2015-2016). Mismanagement and rampant corruption limits the administration of state services as well as their quality (BTI 2016). Religious affiliation and systems of political patronage rather than technical skills determine hiring and firing (BTI 2016). Moreover, other authorities frequently interfere with the state service administration, further limiting their efficiency (BTI 2016). Government regulations in Iran are often burdensome for companies (GCR 2015-2016). Starting a business takes on average 15 days and is significantly cheaper than elsewhere in the region ( DB 2016 ).

Land Administration

The land administration carries a high corruption risk in Iran. Property rights are generally protected, but widespread patronage also affects the land authorities in practice (BTI 2016). Nevertheless, basic transactions such as buying and selling real estate are normally unproblematic; registering property takes just 12 days (DB 2016). Selling large properties or land is more difficult as it is constrained by patronage (BTI 2016). In addition, when companies set-up mid-sized industrial facilities, they commonly obtain financial support through connections and corruption (BTI 2016).

Tax Administration

The tax administration is a high-risk sector. Irregular payments or bribes in relation to annual tax payments are often exchanged (GCR 2015-2016). The many bodies linked to the IRGC are exempt from tax as are the enterprise-like religious foundations ( bonyads ) (BTI 2016). The tax system is outdated and therefore ineffective (BTI 2016). It takes business executives on average 344 days to prepare, file and pay taxes, considerably more than elsewhere in the region (DB 2016).

Customs Administration

There is a very high risk of corruption in Iran's customs administration. The border administration lacks transparency, and irregular payments in relation to imports and exports frequently occur ( GETR 2014 ; GCR 2015-2016 ). The underground economy grew when sanctions were in place, and foreign brands were frequently smuggled to Iran, often passing through official customs checkpoints ( Quartz , Apr. 2015; Roads and Kingdoms, 2014). When goods such as cigarettes are imported to Iran from Oman across the Strait of Hormuz into Bandar Abbas, Omani officials levy about USD 5 in export duties per package and Iranian officials demand bribes of USD 60 to allow the cargo to be unloaded (Roads and Kingdoms, 2014). There are allegations that the IRGC plays a significant role in smuggling using its control over ports, airports and roads ( Business Insider , Dec. 2015; Al Monitor , Feb. 2015).

Trading across borders is more difficult than elsewhere in the Middle East and North Africa as complying with the border requirements and relevant documents is costly and time consuming (DB 2016). Custom procedures and processes are burdensome and inefficient (GETR 2014).

Public Procurement

Iran's procurement sector carries a very high risk of corruption. As in all other sectors, nepotism and patronage are pervasive. Favoritism is often shown to well-connected firms and individuals when government officials decide upon policies or contracts; the IRGC in particular enjoys access to lucrative government contracts that are not subject to tender (GCR 2015-2016; BTI 2016). Much of the IRGC's business is done through front companies that are not formally owned by the IRGC but by individuals and firms linked to it ( Reuters , July 2015). Apart from favoritism, companies should note that irregular payments are at times exchanged in connection with the awarding of public contracts and licenses (GCR 2015-2016).

Public funds are often diverted, and embezzlement is a widespread (GCR 2015-2016; BTI 2016). Under the Rouhani administration, cases of embezzlement carried out by men of the previous regime are continuously disclosed but without the perpetrators being named (BTI 2016). Even though it is rarely prosecuted, embezzlement constitutes a serious offense in Iran as it involves breaking the Islamic banking law ( International Business Times , May 2014a). An exception is Amri-Khosravi, who was hanged in 2014 for his role in the USD 2.7 billion embezzlement case that also involved money laundering, forgery, and bribery at private and state banks from 2007-2010 ( Al Monitor , Mar. 2014). Three others were sentenced to death in connection with the case, while two others were punished with life imprisonment ( International Business Time s, May 2014b).

Investors are advised to exert caution when bidding on public tenders in Iran and are recommended to use a specialized procurement due diligence tool .

Natural Resources

Iran is estimated to hold around 22 percent of global oil reserves, and the industry accounts for a large part of the country's revenue. As it is Iran's most lucrative sector, it is either controlled by the state or by those with close ties to the state (BTI 2016). After sanctions on Iran were lifted, the oil minister urged foreign investors seeking to enter the energy market to deal directly with the ministry rather than use third parties ( Business Insider , Oct. 2015). It is alleged that such middlemen were commonly used to sidestep oil sanctions ( Business Insider , Oct. 2015).

In a widely publicized case, billionaire and business tycoon Babak Zanjani has been sentenced to death for embezzling USD 2.7 billion for oil he sold on behalf of the Iranian oil ministry ( BBC , Mar. 2016). The case is controversial as Zanjan's defense is arguing that he helped Iran circumvent sanctions by selling oil abroad with the knowledge and backing of government officials ( Reuters , Mar. 2016). E ven the president criticized the handling of the case, questioning who enabled Zanjani to carry out such deals and whether the money could be recovered if he is executed ( Reuters , Mar. 2016).

Legislation

Iran's anti-corruption drive has increased under the current Rouhani administration, but a powerful system of patronage continues to hinder effective prosecution ( Al Monitor , Sep. 2015; BTI 2016).

Iran's anti-corruption legal framework is spread across a number of laws, including the Act on Public and Revolutionary Courts’ Rules of Procedures in Criminal Matters and the Aggravating the Punishment for Perpetrators of Bribery, Embezzlement and Fraud Act. Key provisions criminalizing corruption can also be found in the Islamic Penal Code (IPC). Additionally, there are special anti-corruption by-laws, directives, enactments and guidelines ( UNODC , Mar. 2014). Anti-corruption provisions for public officials include active and passive bribery, trading in influence, money laundering, embezzlement and abuse of functions (UNODC, Mar. 2014). For such offenses, both natural and legal persons can have administrative, civil and criminal liability (UNODC, Mar. 2014). Private sector bribery is primarily addressed under other criminal provisions (such as the illicit acquisition of assets); embezzlement in the private sector is criminalized (UNODC, Mar. 2014).

Iran has ratified the United Nations Convention against Corruption (UNCAC).

Civil Society

Iran's media environment is one of the world's most repressive ( FotP 2015 ). Freedom of expression and access to information are strongly limited both online and offline ( FitW 2016 ). Under President Rouhani the situation has improved slightly, but censorship remains widespread (FotP 2015). Media outlets are often instructed what to report on and outlets that publish critical content regularly face closure (FitW 2016; FotP 2015). Access to information is limited and not well-protected by law (FotP 2015).

Freedoms of assembly and association are also strongly limited, both by law and in practice ( HRW 2016 ). Many people were or still are imprisoned for their affiliation with opposition parties, labor unions and student or other activist groups (HRW 2016). Non-governmental organizations working on non-politically sensitive issues such as poverty or the environment can operate with a large degree of freedom, while those active in the area of human rights are often suppressed (FitW 2016). Activists are routinely arrested without formal charges and sometimes without access to legal counsel (FitW 2016).

Sources

  • Bertelsmann Foundation: Bertelsmann Transformation Index 2016 .
  • Freedom House: Freedom in the World 2016 .
  • World Bank & IFC: Doing Business 2016 .
  • World Economic Forum: Global Competitiveness Report 2015-2016 .
  • Reuters: "Iran nuclear deal set to make hardline Revolutionary Guards richer", 6 July 2015.
  • Reuters: "Iran tycoon's death sentence feeds perception of high-level corruption", 17 March 2016.
  • BBC: "Iran billionaire Babak Zanjani sentenced to death", 6 March 2016.
  • Transparency International: Government Defense Anti-Corruption Index 2015 .
  • Human Rights Watch: World Report 2016 .
  • Freedom House: Freedom of the Press 2015 .
  • Business Insider: "Iran oil minister brands middlemen 'corrupt parasites'", 19 October 2015.
  • Business Insider: "How Iran's mafia-like Revolutionary Guard rules the country's black market", 10 December 2015.
  • Al Monitor: "What Rouhani's done to fight corruption", 29 September 2015.
  • Center for a Democratic Iran (CDI) News: "Iran's Khamenei forbids probe into major corruption case in police force", 7 July 2015.
  • Telegraph: "Money can buy you anything in Iran, says ex-police chief", 15 June 2015.
  • Quartz: "If sanctions are lifted, here's what trade between Iran and the US could look like", 24 April 2015.
  • Al Jazeera: "Iran jails former vice president over corruption", 15 February 2015.
  • Al Monitor: "Billion dollar smuggling industry drains Iran's economy", 13 February 2015.
  • United Nations Office on Drugs and Crimes: Conference of the State parties to the United Nations Convention against Corruption , 20 March 2014.
  • International Business Times: "The Iranian Billionaire Involved in the 2011 Embezzlement Scandal was Executed Saturday, Here's Why", 24 May 2014a.
  • International Business Times: "Iranian Businessman Executed Over $2.6bn Bank Fraud", 24 May 2014b.
  • Al Monitor: "Iran businessman hanged for embezzlement", 26 May 2014.
  • Roads and Kingdoms: "How Iran smuggles its smokes", 2014.