The Status of Forces Agreement and Investing in Iraq: Risky Business?

In spite of ongoing security and political instability, Iraq remains one of the most fertile yet volatile regions in the world for emerging business opportunities, specifically in the petroleum industry. Since the completion of the widely successful “surge” and implementation of the Status of Forces Agreement (SOFA), Iraq has experienced slow but steady improvements in security and economic opportunities in the petroleum sector. As a result, there has been an influx of international companies eager to engage Iraq’s ministries for access to these lucrative markets. However, many challenges lie ahead, including the volatile security environment, the absence of a hydrocarbon law, and an infrastructure (political, economic, and physical) urgently in need of rehabilitation after years of abuse and neglect under the Saddam regime, as well as further deterioration since 2003. However, two principal questions remain. First, what level of stability and security will be present in the petroleum industry following the withdrawal of US military and security personnel? And second, what safeguards must a company put in place to protect its investment and its employees from the massive political and economic risks involved in establishing an Iraqi presence?

From 2003 until 2008, foreign oil and gas contractors had been able to reduce legal risks in Iraq by operating under certain key privileges and immunities offered under Coalition Provisional Authority (CPA) Order No. 17. These privileges enabled companies to insulate themselves from the Iraqi legal system, while operating in a volatile business environment that was constantly affected by the insurgency. This changed dramatically with the execution in 2008 of the Status of Forces Agreement between the United States and the Government of Iraq (GOI), which removed most immunities extended to foreign contractors.

The Status of Forces Agreement

The SOFA, which came into effect January 1, 2009, governs the presence of US and related foreign forces in Iraq until their withdrawal, according to a negotiated phased withdrawal period. Article 5 of the SOFA sets June 30, 2009 as the deadline for all US forces to be withdrawn from Iraqi cities, towns, and villages. Article 24 sets December 31, 2011 as the deadline for all US forces to be withdrawn from all Iraqi territory, water, and airspace. Articles 5 and 24 are not hard and fast rules, considering that Article 4 provides that the GOI may request temporary assistance of US forces to support its efforts at keeping the peace and stability of Iraq, including training and supporting the Iraqi Security Forces (ISF).

The SOFA’s greatest impact on companies conducting business in Iraq is that private US citizens, contractors, and their employees no longer benefit from the limited privileges and immunities offered under CPA Order No. 17. In other words, contractors are now subject to the jurisdiction of the Iraqi civil and criminal courts, and can be arrested or detained for violations of Iraqi law. In particular, Article 12 eliminates the contractor privileges and immunities offered under CPA Order No. 17. Additionally, the SOFA does not guarantee that any US citizen arrested or detained is entitled to basic due process rights. The US citizen is left entirely in the hands and at the mercy of the Iraqi judicial system. Thus, contractors conducting business in Iraq must familiarize themselves with the Iraqi judicial system, and its criminal and civil laws. This provision, among others, creates a significant negative impact on foreign companies conducting business in Iraq. For purposes of this essay, we will focus mainly on new changes in the SOFA that impact the civil side of conducting business in Iraq.

Company Registrations

Following the guidelines in the SOFA, all petroleum companies must register to do business in Iraq in order to continue to perform their existing contracts, or enter into new contracts. Moreover, the Technical Service Contracts outlined by the Ministry of Oil (MoO) mandate that all foreign companies maintain a “domestic presence.” While this may take the form of a branch office or limited liability company (LLC), it is a required element of the first and second petroleum bid rounds that companies have a domestic license and comply with the yearly reporting requirements.

Post-Registration Obligations

Once registered as a branch office or LLC, there are further post-registration obligations. For example, branch offices and LLCs involved in the petroleum industry must register for a corporate income tax file with the General Commission for Taxes’ Corporate Tax Department, and an employee must register for an income tax file with the General Commission for Taxes’ Employee Wage Withholding Department. They must also register a social security file with the Social Security Administration of the Ministry of Labor and Social Affairs.

Visa and Residency Issues

Once registered to do business in Iraq, a company can sponsor non-Iraqi 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). Importantly, no visas may be obtained on arrival. All visas are approved by the Ministry of Interior (Residency Directorate) and then forwarded to the Iraqi Embassy in the country of application for finalization. When entering Iraq, foreign employees must report to the Residency Directorate within ten days of their arrival, and must present themselves to the Ministry of Health for an HIV blood test within the same time period. However, stays of less than one week do not require such reporting. Business visas are typically one month in duration. During this time, the employer must apply for a residency permit for resident employees, and obtain all necessary visa extensions. When planning to depart, non-Iraqis in Iraq must obtain an exit visa within six days of their desired departure date. For non-Iraqis 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 the three months will void the residency. A non-Iraqi will not be able to leave Iraq unless he or she is in possession of an exit visa. Finally, new HIV blood tests are required for non-Iraqis after extended absence from Iraq.

Preparing for Business Investments in Iraq

When considering business investments in Iraq, you must be financially well prepared. Under the new SOFA, US contractors and employees are no longer protected from Iraqi prosecution and enforcement of Iraqi laws. If your company is considering leaping into business in Iraq, it must register quickly. This takes time, so do not wait for any grace period to expire. Also, be sure to educate and culturally sensitize employees to the environment they are entering. When contracting, remember that the Riyadh Convention is the preferred avenue for arbitration, and Jordan is a preferred jurisdiction. Obtain legal advice from US and Iraqi counterparts to ensure your company is in compliance with registration, tax, employment, and visa/immigration laws. You also will wish to establish procedures for your Iraq company and employees to follow in case of arrest or detention so that they know who to call, including their consulates (Iraq is a party to the Vienna Convention). Remember that Iraq is in a transitional phase, and government capacity is low, which can sometimes lead to arbitrary and capricious treatment by government officials. Nothing in Iraq happens quickly, and with an infrastructure that is in such poor shape, there are many instances when phone systems, email, and other methods of communication just are not available. Finally, have patience. The ultimate payoff will be well worth the effort for both your company and for the ultimate success of Iraq as a stable country in a volatile region.