Legal & political (governance)

Iraq’s Legal and Political Climates – Nation Building in Progress

When the United States first considered implementing a regime change in Iraq, then Secretary of State Colin Powell warned that such a move would oblige the U.S. to conform to the return policy of the popular retail store Pottery Barn…”If you break it you own it.”

Eight years after the incursion the U.S. declared that Iraq was not broken and indeed was now the newest constitutional based democracy in the Middle East…and departed.

Given the country’s long history of autocracy, sectarian friction between Shiites, Sunnis and Kurds, an active insurgency and an infrastructure that was nearly non-functional, Iraq’s fledgling parliamentary democracy has performed admirably. Yes it is still disorganized and sectarian politics block real reform but the fact that a constitution could be ratified and the population could participate in free elections to select a Council of Representatives is an amazing feat when you consider the conditions under which the government was formed.

But it has a very long and bumpy road to travel before it can call itself a truly effective governing body.

The Political Challenges

To understand the fragility of the central government you have to have an appreciation for the Iraqi people and their modern history. There are three major factions in Iraq. The majority Shiites, the former ruling class Sunnis and the ethnic Kurds. Under Saddam the Shiites and the Kurds suffered terribly. Saddam gassed the Kurds killing thousands and drained the marsh homeland of the Shiites as punishment after the first Iraqi War. In short there was no love lost between the three groups and when Saddam was deposed there was a power vacuum that was filled with mistrust, sectarian hate and a burning desire for revenge.

Thanks largely to the Coalition military presence and international civil affairs assistance a workable level of security was finally created that allowed cobbling together a representative democratic government. It’s difficult for Westerners to fully appreciate just how difficult it was, and remains, to get this diverse population base to agree on anything much less form a government.

Tensions still exist today with the Sunni’s fearing that Shiite Prime Minister Nuri al Maliki will continue to sideline ranking Sunni leaders from positions of power in the government. The failure to integrate the Sons of Iraq, a Sunni militia group, into the Iraqi Security Force (ISF) is viewed as a Maliki attempt to ensure the ISF remains an essentially Shiite force.

The Kurds are distrustful of the central government and have taken to unilaterally developing economic and political policies for the Kurdistan Regional Government (KRG) that are in direct contravention to the central government’s.

What does this mean to an investor? It means that the central government may not be strong enough to guarantee incentives that it offers. It means that important business laws get hung up in Parliament. It means that a good working relationship with local government officials is essential. It means that businesses are going to spend more time, and probably more resources, on government relations than would be spent in any other country.

The Legal Challenges

Iraq’s legal system predates that of the United Kingdom. Until the rise of Saddam Hussein the Iraqi culture held their ability to fairly resolve disputes and seek justice in high esteem. Under Saddam the courts became an instrument of the Administration and many laws were either ignored or stripped from the law altogether.

Rebuilding an independent Judiciary has been challenging particularly as the law applies to foreign investment. If you are considering entering the Iraq market you have no doubt heard of the National Investment Law and its many amendments. This is the law that establishes, among other things, incentives for foreign investment. One of those incentives is a 10 year exemption from income taxes. However, a review of the Iraqi income tax law will reveal that there is no provision for excluding licensed foreign investments.

Contradictions like this are not uncommon which means the laws can be interpreted in more than one way. While it is unlikely any investor will be denied an exemption in this example the same can’t be said for contradictory contract law.

Assistance in modernizing the law to global standards is being provided by international organizations but until that objective is met, companies are encouraged to follow the advice of Forbes BusinessWeek to “include arbitration and forum selection clauses into their contracts to take advantage of more familiar venues and laws for resolving disputes.”

Demonstrating Iraq’s commitment to modernizing business law and the legal process, the Supreme Judicial Council created a special “business court” in Bagdad. The court, which has two judges assigned, will handle lawsuits submitted by international companies exclusively. The jurisdiction of the court only extends to companies in Bagdad Province but at least two more are planned for other parts of the country.

There is no shortage of sophisticated, experienced attorneys in Iraq and an international organization interested in doing business in the country would be well advised to seek their council. Navigating the Iraqi legal system successfully can be tricky without a knowledgeable guide.

If you would like to discuss the political climate of a specific area or you have a question on Iraqi law, please don’t hesitate to contact us. While we can’t offer opinions on specific legal questions, we can offer information of a general nature or we can refer you to a qualified source.