Understanding Business in Iraq: Legal Aspects & Challenges in 2009

1. Immunity Gone! Will Jail Be Next?What You Need to Know About Doing Business in Iraq in 2009and BeyondIf you are experiencing any technical difficulty, or if you are unable to listen to the webinar through your computer, please contact Technical Support toll-free at 1-866-229-3239.

2. INTRODUCTION

3. Presenters • Moderator – Stephen J. HirschfeldCEO, Employment Law AllianceSan Francisco, CA • Speaker – Mohamed H. el RoubiI&D Iraq Law AllianceBaghdad, Iraq

4. Mohamed el Roubi Mohamed el Roubi is a founder and managing partner in I&D Iraq Law Alliance, FadelEzzeldin Al-Qadi & Partners in Baghdad, Iraq.  His practice is focused on assisting foreign investors operating throughout Iraq and across the Middle East. He started his career working on international boundary disputes of oil producing states and on Saudi Arabia’s Natural Gas Initiative.  Mohamed’s current practice focuses on corporate and commercial transactions with a particular emphasis on mergers and acquisitions, project finance, telecommunications, and oil and gas.   A significant portion of his practice is spent advising clients on labor and employment and tax aspects of their operations in Iraq. Mohamed has been based in Baghdad, Iraq since June 2003.  He received his B.A. in Business Administration from the American University in Cairo, Egypt (“AUC”), his M.A. in Middle East Studies from AUC, and his JD from Northeastern University School of Law in Boston, MA.  

5. SOFA Overview • Status of Forces Agreement (SOFA) between the United States and the Republic of Iraq came into force on January 1, 2009. • Similar agreements concluded with other force- contributing countries of the Multinational Forces in Iraq. • To govern the presence of foreign forces in Iraq until their withdrawal according to the negotiated time frame.

6. SOFA Overview • Transitional process currently underway – temporary “stay of execution” on some aspects possibly until March 31, 2009. • Contractors to US Forces in Iraq are no longer covered by privileges and immunities they used to enjoy under CPA Order 17.

7. CPA Order 17Privileges and Immunities • Under CPA Order 17, Contractors were defined as: “non-Iraqi legal entities or individuals not normally resident in Iraq, including their non-Iraqi employees and Subcontractors not normally resident in Iraq, supplying goods or services in Iraq under a Contract.”

8. CPA Order 17Privileges and Immunities • A Contract is defined in Order 17 as: • a) a contract or grant agreement with the CPA or any successor agreement thereto, or a contract or grant agreement with a Sending State, to supply goods or services in Iraq, where that supply is: • i) to or on behalf of the MNF; • ii) for humanitarian aid, reconstruction or development projects approved and • organized by the CPA or a Sending State; • iii) for the construction, reconstruction or operation of Diplomatic and Consular Missions; or • iv) until July 1, 2004, to or on behalf of Foreign Liaison Missions; or • b) a contract for security services provided by Private Security Companies to Foreign Liaison Missions and their Personnel, Diplomatic and Consular Missions and their personnel, the MNF and its Personnel, International Consultants, or Contractors.

9. CPA Order 17Privileges and Immunities - 2 Per Order 17, Contractors were entitled to the following privileges and immunities: • “Contractors shall not be subject to Iraqi laws or regulations in matters relating to the terms and conditions of their Contracts, including licensing and registering employees, businesses and corporations; provided, however, that Contractors shall comply with such applicable licensing and registration laws and regulations if engaging in business or transactions in Iraq other than Contracts. Notwithstanding any provisions in this Order, Private Security Companies and their employees operating in Iraq must comply with all CPA Orders, Regulations, Memoranda, and any implementing instructions or regulations governing the existence and activities of Private Security Companies in Iraq, including registration and licensing of weapons and firearms.”

10. Popular Misconceptions and Myths about Privileges and Immunities under CPA Order 17 • A single US Government/Coalition Contract will exempt my company from the application of Iraqi law regardless of what other activities we carry out in Iraq. • Because we are a Contractor we owe no obligations to the Iraqi Government including in relation to our Iraqi and normally resident employees. • Private Security Companies are covered by CPA Order 17 and are not subject to Iraqi law. • Contractors in Iraq operate in a “legal vacuum.”

11. Harsh Reality about Privileges and Immunities under CPA Order 17 • They do not apply to normally resident companies or individuals, and they do not apply when companies engage in other business transactions in Iraq outside of the Contracts. • Contractors are still liable to withhold and remit employee income tax for their Iraqi and normally resident foreign employees and must contribute to and withhold social security for their Iraqi and normally resident foreign employees. • Despite mention of Private Security Companies in Order 17, PSCs are excluded from CPA Order 17 by Memorandum 17 and subsequent Ministry of Interior Orders requiring business registration and therefore a “normal residency” in Iraq. • Privileges and immunities afforded were for the benefit of the Sending State and not the Contractor. The Sending State could waive immunity (thereby subjecting the company or the employee to Iraqi jurisdiction) or they could subject Contractors to their own laws.

12. The Even Harsher Realityof the SOFA • Despite the limitations of the privileges and immunities under CPA Order 17, Contractors were permitted to act with little fear of legal consequence. • Media reports covering events such as the Aegis and Blackwater shootings perpetuated the impression that no law applied to Contractors and that Iraq was the “Wild West of the East.” • Iraqi anger grew over a number of spectacular incidents and there was no appropriate action taken by the US and the Coalition Forces to hold Contractors accountable.

13. The Even Harsher Realityof the SOFA • As a result, excluding Contractors from the privileges and immunities to be granted under the SOFA became a major negotiating point for the Iraqi Government. Exclusion of Contractors from privileges and immunities under the SOFA is not an oversight. • As one e-mail from a Contracting Officer to one of our clients read: “As you are probably already aware, the implementation of the US/Iraq Security Agreement rescinds the U.S. contractor immunity provisions of CPA Order 17. Effective 01 January 2009, U.S. contractors will no longer enjoy special protections and must operate in Iraq in accordance with the Security Agreement and Iraqi law.  Contract holders are advised to seek competent legal counsel in order to ensure compliance with the Security Agreement and Iraqi law.”

14. Consequences of Loss of Immunity • All Contractors must register to do business in Iraq to continue to perform their Contracts. • All Contractors must comply with Iraqi corporate and personal income tax obligations. • All Contractors are subject to Iraqi civil and criminal laws and the jurisdiction of its courts. • Contractors must obtain entry, exit, residency, and exit/reentry visas.

15. Registration to DoBusiness in Iraq • Permanent Establishment (PE) risk is triggered the moment a company has a place of business, administration, or adds value in Iraq. • Having a PE does not only trigger a tax liability, but entails a registration requirement. • Providing goods or services to Iraq from abroad where there is no place of business or administration, and no value is added in Iraq is considered international trade with Iraq and does not give rise to a PE or an obligation to register in Iraq. • Iraqi tax law contains anti-avoidance provisions that allows the Tax Commission to see through relationships and structures that are designed to hide a PE as international trade with Iraq.

16. Options for Registration There are three basic options for registration in Iraq: • Register a representative office (NOTE: rep offices may not conduct commercial activities in Iraq. They may only market and canvas for opportunities). Rep offices may not be used to perform Contracts in Iraq. • Register a branch office if the company has a contract with the Iraqi Government (NOTE: in the Kurdistan Region, the requirement of a government contract does not exist). Branch offices may not be used to perform US Government Contracts in Federal Iraq (they may be used in the Kurdistan Region). • Register a wholly owned limited liability company. A foreign company may establish a limited liability company with a single shareholder to carry on business activities in Iraq. For Contractors that have only US Government Contracts in Federal Iraq, this may be their only choice.

17. Branch Offices • Branch offices have no independent personality from the mother company. There is no corporate veil. Liability in Iraq will flow back to the mother company. • There is no capital for the branch office (although the mother company must undertake to be liable for any debts of the branch office in Iraq and must submit to Iraqi jurisdiction). • Branch Office will be able to carry on business activities in Iraq in the name of the mother company.

18. Limited Liability Subsidiaries • Can be established with a single shareholder. • Minimum Capital is ID1M (approximately $850 by current exchange rate), although capital should be appropriate for activities to be carried out by the LLC. • In Federal Iraq, the company must trade under a name that is made up of Arabic words having an original meaning (i.e., “Microsoft” or “Pepsi” will not be acceptable). Name must also contain a reference to the activities of the company – i.e., Solar Rays Company for Electrical Power General Ltd. • In Kurdistan Region, Arabization rule is not enforced and LLCs can be established with non-Arabic words or words having no meaning in any language.

19. Registrations RequiredPost-Establishment • Branches and LLCs must register for: • A corporate income tax file with the General Commission for Taxes – Corporate Tax Department. • An employee income tax file with the General Commission for Taxes – Employee Wage Withholding Department. • A social security file with the Social Security Administration of the Ministry of Labor and Social Affairs.

20. Corporate Income Tax Requirements • Currently corporate income tax is assessed at a flat rate of 15%. • Audited financials need to be prepared and submitted by May 31 of year following closing of financial year. • Financials to be prepared according to Iraqi financial standards and prepared and audited by certified Iraqi accountants and auditors. • General Commission for Taxes can be aggressive, may make assessments and conduct audits, and in the event of appeals to assessments taxes must be paid for appeal to be heard. • Five-year statute of limitations for tax issues.

21. Employee Wage Withholding Obligations • Employer is responsible for withholding and remitting employee income taxes. • Employee income taxes are assessed on a sliding scale from 3% to 15%. • Up to 30% of base salary can be provided to employee in the form of special allowances including for food, clothing, hardship, etc. • Errors in withholding or failure to withhold or remit subjects the employer, not the employee to penalties and obligations to pay back taxes and penalties.

22. Social Security Obligations • Social Security rate is 17% of base salary. • Employer has an obligation to withhold 5% of employee base salary on account of social security. • Employer must contribute 12% to employee’s social security. • Social Security, like most labor and employment issues, is considered a matter of public order and may not be contracted around.

23. Visas and Immigration • Once a company is registered to do business in Iraq, it can sponsor employees for visas and residency permits. • Visas must be obtained prior to an employee’s arrival in Iraq (except for entry via the Kurdistan Region). No visas can be obtained on arrival. • Visas are approved by the Ministry of Interior, Residency Directorate, and forwarded to the Iraqi Embassy in the country of application. • Upon arrival, employees must report their arrival to the Residency Directorate within 10 days and must present themselves to the Ministry of Health for an HIV blood test within the same time. Stays of less than one week do not require such reporting.

24. Visas and Immigration • Business visas are typically of one-month duration. During this time the employer must apply for a residency permit for resident employees, and obtain the necessary visa extensions during processing time. • Foreigners in Iraq must obtain an exit visa within six days of their desired departure date. For foreigners who hold a residency permit, the exit visa will include a reentry visa valid for up to three months from the date of departure. Failure to return within three months will void the residency.

25. Visas and Immigration • A foreigner will not be able to leave Iraq if he or she is not in possession of an exit visa. • Periodic HIV blood tests will be required, particularly after a prolonged absence from Iraq. • There are currently no Iraqi employment quotas, although some Ministries have started trying to introduce Iraqization programs with requirements of as high as 80-90% Iraqi employment for companies holding Iraqi government contracts.

26. Iraqi Labor Law Highlights • Iraqi Labor Law (No. 71 of 1987) has a socialist backdrop and is highly protective of employees. • It is very difficult to fire employees. • Temporary or limited term contracts are only possible where the nature of the work to be performed is temporary or limited in nature (such as project or seasonal work).

27. Iraqi Labor Law Highlights • An employment relationship exists whenever an employer exerts administration and supervision, regardless of how the relationship is described in a contract. • Labor and employment matters are issues of public order and may not be contracted around. The Law establishes the floor, not the ceiling, of employee rights. However, benefits over and above those provided for in the law, extended in a consistent manner over a period of time, may become vested rights and the employer may find itself unable to cancel or withdraw them.

28. Working Conditions • Employees may work eight hours per day for a maximum of six days per week. • The number of hours to be worked and the length of the week may be shortened in cases of hard labor. • The law requires that employees be allowed a break of not less than one-half hour, and not more than one hour during the working day. • Employees are not required to work more than five hours continuously without a break.

29. Working Conditions • In the event the employee works two shifts during the day, the break between the two shifts must be not less than one hour and not more than four hours. • In working two shifts, the employee may not be required to remain at the place of work for more than 12 hours during the day. • In certain limited conditions, the number of hours an employee may work may be extended, particularly in the case of emergencies or force majeure. • Overtime must be paid.

30. Safety and Security • Employers are obliged to provide all safety and security precautions and equipment necessary to overcome the risks imposed by the working conditions. This has traditionally been considered to include such precautions as hard hats and eye protection on construction sites, and first aid kits on work sites. • Although there is no precedent to this effect, employers are cautioned that an Iraqi court could read the obligation to include providing professional armed security, hardened shelters, body armor, etc. where kidnapping, shelling, or shooting are known risks of the job.

31. Vacations • Employees are entitled to an annual paid vacation of 20 days per year. • For employees working in difficult conditions, or performing work that is hazardous to the health, the entitlement is for 30 days per year. • Employees serving more than five years with the same employer are entitled to an additional two days for every five years of seniority they accrue with the same employer. • Employees are not permitted to work for another employer during their vacation. • The employer may control when the employees take their vacation, by specifying so in the internal regulations of the company.

32. Sick Leave • Employees are entitled to take up to 30 days per year of paid sick leave. • Thereafter the employee may take up to a total of 180 days of sick leave, but such time will be paid by the social insurance, and not by the employer. • Sick leave must be granted when the illness is documented by medical evidence provided by a doctor.

33. Employee Discipline • Employers must have internal regulations that are approved by the labor office or they must use the model regulations provided by the labor office. • The internal regulations provide for an escalation of disciplinary measures up to dismissal. • Reasons for dismissal, however, are extremely limited.

34. Causes for Dismissal An Employer may dismiss an employee only under the following circumstances: • If the employee commits gross negligence, which causes material damage, on condition that the employer informs the Labor Office within 24 hours of the event; • If the employee discloses the employer’s secrets resulting in damage to the employer; • If the employee violates the instructions of the employer with regard to occupational safety more than once, on condition that these instructions are in writing and clearly posted; • If the employee is found, more than once, in a state of intoxication or under narcotic influence while at work;

35. Causes for Dismissal • If the employee behaves, more than once, in a manner unbecoming to the status of the employer and the work; • If the employee assaults the employer or his representative or any of his superiors at work or outside the work place, on condition that the employer informs the Labor Office in the relevant governorate within 24 hours of the event; • If the employee commits a misdemeanor or a felony against any of his/her fellow workers, during work, and is duly convicted thereof; • If the employee is sentenced to imprisonment of more than one year and the conviction is final; • If the employee is absent from his/her work for a period of 10 days continuously, or 20 days non-continuously, without prior notice or acceptable explanation, on condition that the employee has been warned by the employer of his/her absences prior to termination.

36. Causes for Dismissal NOTE: This list was intended to be non-exhaustive, but has come to be considered by courts to be an exhaustive limited list. Dismissal outside these limited situations will give an employee a claim for abusive termination. In such cases, reemployment is not an option, but the employer may be required to pay financial damages assessed according to salary for a number of months per year employed by the company.

37. Criminal Law • Crimes, misdemeanors, and infractions committed by any person in Iraq (whether foreign or Iraqi) are governed by the Penal Code No. 111 of 1969 as amended, with the exception of individuals who enjoy immunity as determined by international agreements or international law (no longer includes Contractors).

38. Types of Crimes Crimes are divided into three types: Felonies, Misdemeanors, and Infractions.   • Felonies are crimes that are punishable by any of the following penalties: • Death; • Life imprisonment; • Imprisonment for a period of between five and 15 years.

39. Types of Crimes • Misdemeanors are crimes that are punishable by any of the following penalties: • Harsh or simple detention for a period between three months and five years; • A fine (the dissolved Revolutionary Command Council issued decree number 5 on 17 January 1998, replacing the penalty of paying a fine with the penalty of detention provided that it be simple detention for a period of three months per misdemeanor).

40. Types of Crimes • Infractions are crimes that are punishable by any of the following penalties: • Simple detention for a period of 24 hours to three months; • A fine.

41. Criminalized Behavior – Myths and Realities • Iraq is not Saudi Arabia, but it is not California either. The Penal Code is informed in parts by Islamic principles, but it is not Islamic Shariaa in and of itself. • The law contains all the crimes you would expect to be there, but you should also expect the unexpected. • Drinking alcohol is not a crime, but public drunkenness is. • Gambling in a public place or opening gambling to the public is a criminal offense, but the Friday night poker evening among friends is not.

42. Criminalized Behavior – Myths and Realities • Sexual relations conducted in private between single consenting adults is not a crime, but if you have a communicable disease and you knowingly or accidently spread it, you are committing a crime. If the disease leads to death, you could be charged with assault leading to death. • Publicly insulting the Arab community or the Iraqi people or any section of the population or the national flag or the State emblem is a crime; so is insulting Islam or any religion (a Kurdish joke can get you in as much trouble as urinating on, or shooting at, the Holy Koran). • Murdering or assaulting the President of Iraq is a crime, and so is throwing a shoe at President Bush during a press conference.

43. Criminalized Behavior – Myths and Realities • Insulting agencies of the State or the branches of government is criminalized, as is insulting the United Nations and other international agencies (even if they deserve it). • A woman who commits adultery has committed a crime, as has the man with whom she committed adultery. The man is deemed to have knowledge of the marriage regardless of whether or not he actually knew. • However, a man who commits adultery has not committed a crime unless the adultery took place in the conjugal home. • The crime of adultery cannot be prosecuted if the spouse accepts to stay in the marriage after knowing of the adultery, or if he/she consented to it.

44. Criminal Procedure – Investigation of Crimes and Arrest of Suspects • The Criminal Procedures Law No. 23 of 1971 as amended applies whenever a person commits a crime in Iraq. • Criminal action is initiated against a suspect by a complaint presented to an investigative judge, judicial investigator, or any official in a police precinct. • Preliminary investigation is conducted by an investigative judge as well as by judicial investigators and police officials acting under the direction of the investigative judge.  Statements are taken from the complainant, any victims, and the suspect him/herself.  This will result in the investigative judge, judicial investigator, or police official issuing a summons to the suspect to appear before the investigative body.

45. Criminal Procedure – Investigation of Crimes and Arrest of Suspects • No arrest or detainment may be made except in accordance with an order issued by a judge or a court. • Bail is possible (either financial or release on presentation of an undertaking to appear) at the discretion of the investigative judge. • The investigative judge or the judicial investigator may question the defendant during the 24 hours after his/her appearing, but the defendant shall not be obliged to answer any questions directed at him/her, and no illegal measures may be used against him/her to induce the defendant to confess.  Illegal measures of duress shall include harsh treatment, threats of injury, incentives and promises, mental duress, and the use of drugs or intoxicants. • The defendant may demand the presence of his/her attorney at all stages of the preliminary investigation and court proceedings.

46. Criminal Procedure – Investigation of Crimes and Arrest of Suspects • If the defendant’s statement includes an admission that he/she committed the crime, the judge shall record the admission himself and present it to the defendant.  • If the investigative judge determines the actions do not constitute a criminal act, or that the complainant dropped the charges or waived his/her complaint, the judge shall issue an order dismissing the charges and close the case with prejudice. • If the actions of the defendant constitute a criminal act and the investigative judge finds that the evidence is sufficient to present the defendant for trial, the judge shall issue an order transferring the case to the court of competent jurisdiction.   • If the evidence is not sufficient to support the charge, the judge must issue an order to free the defendant and close the case without prejudice with a record of the reasons for the temporary closure.

47. Theory vs. Practice • Theory:New Constitution of Iraq provides that all persons shall have the right to life, security, and freedom, and no person shall be deprived of these rights except in accordance with the law and pursuant to a judgment issued by a competent judicial authority (Article 15). Criminal Procedures Law, which predates constitution also provides for protections or the accused. • Practice:Media reports and human rights groups have publicized severe abuses of Iraqi constitution and law in regard to detention and treatment of criminal suspects with inadequate safeguards and oversight.

48. Criminal Procedure – Prosecution, Convictionand Appeal • The trial of the accused begins with the transfer of the case. The court will hear the testimony of the complainant and the statements of the civil prosecutor, followed by the statements of the witnesses and the testimony of the accused.   • The court will also hear the statements and demands of the complainant and the public prosecutor.   • If the court finds that the evidence does not lead to the conclusion that the defendant committed the crime he/she is accused of, then the court shall order his/her release.  However, if the court is satisfied that the defendant committed the crime that he/she is accused of, the court shall convict the defendant and sentence him/her to the appropriate penalty.  

49. Criminal Procedure – Prosecution, Convictionand Appeal • If the court is satisfied that the defendant did not commit the crime he/she is accused of, or the court finds that the act does not constitute a crime, the court shall acquit the defendant of the charges against him/her. • The Chief Justice of the Felony Court shall appoint a lawyer for a defendant accused of a felony if the defendant has not appointed a lawyer him- or herself, and the court shall set the compensation for the lawyer to be paid from the state treasury. • Each of the public prosecutor, the defendant, the complainant, and the civil prosecutor may appeal to the Federal Cassation Court any judgment of the Felony or Misdemeanor courts if the judgment is based on an error of law or the implementation thereof.

50. Concluding Practical Advice • Get registered ASAP. It takes more time than you think, so do not wait for the grace period to expire. • Educate and culturally sensitize employees to the environment they are entering. • Obtain home jurisdiction and Iraqi legal advice to ensure that your company is not exposed in one jurisdiction or the other to employee claims, including from personnel you thought were contractors or consultants.