The Legal Environment in Iraq:

An Overview

Before

Outreach 2004 Conference

January 11 - 14 — Amman, Jordan

Ayaz R. Shaikh
Partner, Co-Chair, Iraq Reconstruction Team
Pillsbury Winthrop Shaw Pittman LLP
2300 N Street NW
Washington, DC 20037
202.663.8280 | fax 202.663.8007
ashaikh@pillsburylaw.com

Pillsbury Winthrop Shaw Pittman LLP | www.pillsburylaw.com Legal_Environment_invIraq | 1

[Opening Remarks: Historical and cultural perspecitives]
I. Introduction
My aim this morning is to provide a brief overview on the current legal landscape in Iraq.
While a meaningful discussion of the topics presented is not possible in the short time
allotted, I hope to identify the salient issues and challenges to pursuing investments,
contracting or other business opportunities in Iraq.

First, an overarching observation. As Iraq is in the process of a massive transformation,

so too is its legal system in a state of constant flux. Indeed, substantial changes, and in
some cases entire new legal frameworks, need to be introduced in various areas of Iraqi
law as a pre-condition to broader development. That process has already commenced
with the spate of Coalition Provisional Authority (“CPA”) Orders and regulations
promulgated last year. Additional CPA Orders are expected in a number of areas.
Anyone familiar with the CPA Orders can attest to the broad and, often, sweeping nature
of their pronouncements. Further regulations or administrative guidance may be
required to clarify, interpret or fully implement these Orders. Moreover, the viability or
sanctity of the CPA Orders, after the occupation, remains an open question with, in the
least, the acknowledged possibility of further modifications being effected by the
succeeding Iraqi government. In addition, it is anticipated that the Iraqi governing council
and ministries will also continue the broader process of legal transformation, including
addressing areas of the law untouched by the CPA. In sum, this amounts to an
environment of considerable legal uncertainty. This is not said to discourage
participation in the reconstruction effort, but to encourage entry with eyes wide upon. In
the least there must be an understanding of the current state of the law and the
prospects for change; the attendant risks must be identified and assessed, and
transactions structured to manage or mitigate those risks.

My presentation today will be organized as follows:

„ Overview of the existing Iraqi legal system;
„ Discussion of certain significant CPA orders issued to date;
„ Brief identification of the areas where further CPA Orders are expected;
„ Broad observations on post–Occupation issues

Pillsbury Winthrop Shaw Pittman LLP | www.pillsburylaw.com Legal_Environment_invIraq | 2

II. Overview of Existing Iraqi Legal System
Amidst the focus on the extensive legal reforms required in Iraq, it is important to note
the basic principle that existing Iraqi laws will continue in effect, except as otherwise

suspended or modified by the CPA or other succeeding governing authority.

Notwithstanding the substantial new legal frameworks anticipated in a number of areas,
the main body of the Iraqi law reflected in Iraq’s Civil Code will likely continue in effect.
Hence, anyone pursuing business in Iraq needs to obtain advice on the existing legal
regime, and a sophisticated up-to-date understanding of the interplay between the
existing laws and the new legal reforms being implemented. The analysis must perforce
begin with the existing Iraqi law.

A. Civil Law Structure

As alluded to in my opening remarks, Iraq has a notable tradition of law and
jurisprudence. Its legal system pre-dates that of a number of its neighbors, and is
based in significant part on European models.

1. Constitution
Since the revolution of July 1958, Iraq has had several Constitutions. The
latest “Interim Constitution” of 1990 decrees the development of a socialist
system as the basic aim of the state, and contains provisions promoting a
command economy to achieve this purpose. Replacing the Constitution
remains a principle objective of the 25-member Iraqi Governing Council, a task
that has proved more complicated than anticipated. Essential issues of
process and timing, including as to the composition of the drafting committee
have caused delay. While there remains much uncertainty, the one thing that
is certain is that the existing Interim Constitution will be eventually replaced.

2. Civil Code
Like most Arab states, Iraq adopted a civil law system, predicated on a Civil
Code enacted in 1951. This Code remains the core of Iraq’s legal system. It is
the main source of its commercial, tort, property and, in particular, contract
law, including the formation, interpretation, performance, enforceability and
termination of contracts. The Code reflects the influence of French and
Egyptian Civil Codes and Islamic principles. In fact, commentators have
viewed the Code as a fairly sophisticated marriage of European and Islamic
concepts, readily cognizable to anyone familiar with doing business in the
region.

The problem, however, is that the provisions of the Civil Code have in a
number of areas been modified or supplemented by subsequent politically
motivated public laws adopted by the B’aathist regime that curtail private
economic activity, and in particular that of foreigners and non-Arabs. It is some

Pillsbury Winthrop Shaw Pittman LLP | www.pillsburylaw.com Legal_Environment_invIraq | 3

 of these laws that the CPA has begun to dismantle through its Orders in an
effort to promote liberalization, foreign investment, and conversion to a market
economy.

It should be noted again, however, that many of the general provisions of the
underlying Code are unlikely to be abrogated by CPA promulgations. For
example, basic Contract law principles reflected in the Code will likely continue
to prevail.

3. Commercial Code
The Iraqi Commercial Code enacted in 1984 regulates various commercial
matters, including trade names, company registration, bookkeeping and
accounting, negotiable instruments, commercial mortgages, letters of credit,
other financial transactions, and international sales. Like the Civil Code, some
provisions of the Commercial Code have been modified by subsequent public
laws.

4. Islamic Law
As with other Arab countries, Islamic law or Shari’a is expected to play an
important role in Iraq, principally in the formative Constitutional or legislative
phases. Shar’ia is not codified and is mainly derived from the Qu’ran and
Sunna or teachings of the Prophet. Generally speaking, the application of
Shari’a has been confined to family law matters (including inheritance). Shari’a
has played a limited role in commercial matters in Iraq, where the Civil Code
expressly provides that law (meaning civil law) takes precedence over Islamic
law.

5. Other Statutes and Decrees

As previously noted, over the past few decades the Iraqi government issued a
number of public laws and regulations impacting commercial activities. The
major public laws include a Companies Law, a Commercial Agency Law that is
among the most restrictive in the region (requiring among other things that the
agent be an Iraqi national “fully loyal to his homeland”), a Labor Law, Tax Law,
Intellectual Property laws, Trade laws and Arbitration laws, to name some.
Time constraints make it unfeasible to discuss these individually. Instead, I will
simply highlight some of the areas where these laws and regulations present
challenges for those pursuing business in Iraq.

B. Challenges Presented by Existing Iraqi Law

The U.S. Commerce department’s overview of the Commercial Law of Iraq
highlights some of the principle pitfalls presented by the Iraqi legal system. These
include:

Pillsbury Winthrop Shaw Pittman LLP | www.pillsburylaw.com Legal_Environment_invIraq | 4

 „ The Iraqi Constitution prohibits private ownership of natural resources and the
“basic means of production.”

„ The Iraqi Constitution prohibits foreign ownership of immovable real property.

„ The Companies Law prohibits investment in Iraqi companies by those who are
not resident citizens of Arab countries.

„ The Commercial Agency Law has several onerous requirements (as already
seen) and gives broad discretion to the Registrar to consider virtually any
commercial activity as an agency.

„ Several Iraqi laws contain extensive registration and licensing requirements for
commercial companies, agents, distributors, branches, representative offices,
and intellectual property rights. These requirements sometimes include loyalty
oaths.

„ Regulations that require the government to license and inspect all goods coming
into or leaving the country.

„ Lack of protections for U.S. copyright owners since the U.S. and Iraq are not
members of the same copyright treaties.

„ No public system of recording liens or other security interests in movable or

personal property (This poses obvious significant impediments to any project
financing or other secured transaction).

„ Lack of any antitrust or competition law.

„ No law requiring the recognition or enforcement of court judgments or arbitral

awards from non-Arab countries. In order to enforce foreign awards, a company
would have to obtain a judgment from a domestic Iraqi court, and then seek to
enforce that judgment through Iraqi enforcement procedures. This will likely pose
tremendous practical problems. Hence, to the extent possible, parties would be
well served to structure contracts to minimize the need to seek enforcement in
Iraq.

In addition, the Civil and Commercial Codes fail to address adequately bankruptcy
situations. Also, more developed legal and regulatory regimes are required in the
banking, finance and insurance sectors. A number of these areas have been
addressed by CPA Orders issued last year, in particular with respect to foreign
investments, banking, and trade.

Pillsbury Winthrop Shaw Pittman LLP | www.pillsburylaw.com Legal_Environment_invIraq | 5

III. CPA Orders
The CPA has promulgated a considerable number of Orders substantially altering in a
short time the legal landscape of Iraq. Attached as an Annex to this presentation is a
fairly comprehensive list and brief description of the major CPA Orders. I would like to
highlight here the most noteworthy of these.

A. Foreign Investment: CPA Order No. 39

As mentioned, foreign investment in Iraq was restricted to resident citizens of Arab
states. CPA Order No. 39 pronounced sweeping changes to the foreign investment
laws. It permits foreign investors from any country to own and manage up to 100%
of any newly formed or existing business entity in Iraq in virtually every industry
sector, other than the natural resources (which would include oil) banking and
insurance sectors. The Order provides for equal treatment of foreign investors, full
repatriation of earnings, and the registration of branch and trade representation
offices. Notably, it has not alleviated burdensome registration and licensing
requirements, but this may be addressed in future CPA pronouncements. While the
Order perpetuates the restrictions on the outright ownership of real property, it
permits foreign investors to hold long-term leases for up to 40 years. The Order
also sets certain new rules for foreign investors in retail sales, including the
requirement of maintaining a US$100,000 deposit in a non-interest bearing Iraqi
bank account for the duration of its retail activity.

B. Trade
1. Trade Liberaliztion: CPS Orders 12 & 38
CPA Order No. 12 suspended all tariffs, duties, fees or similar charges on all
goods entering or leaving Iraq, with limited exceptions, until December 31,
2003. Under Order No. 38, commencing January 1, 2004, a 5%
Reconstruction Levy will be levied on Iraqi imports, although certain
enumerated goods (food, medicine, clothing, humanitarian aid, Oil-for-Food
imports) are exempt. Also exempt are the CPA, Coalition forces, and
reconstruction contractors.

2. Trade Bank of Iraq: CPA Order No. 20

The Trade Bank of Iraq was established under the CPA’s early Orders in order
to facilitate trade flows by bolstering confidence in the prospects of payment
for goods delivered. A consortium of 13 international banks led by JP Morgan
Chase was selected in September to manage Trade Bank operations. The
Trade Bank will be essential in facilitating the import of reconstruction
equipment and machinery, and its role will likely evolve over time. The Trade
Bank will have an initial 12-year life, with the option to extend for an additional
3 years. U.S. Exim Bank’s Board of Directors has approved a $500 million
short term insurance facility supporting Trade Bank operations.

Pillsbury Winthrop Shaw Pittman LLP | www.pillsburylaw.com Legal_Environment_invIraq | 6

 C. New Bank Law: CPA Order No. 40
The new Bank Law comprises a substantial piece of legislation (nearly 80 pages in
length) that establishes an entirely new system of bank regulation for Iraq, modeled
closely on the Western approach. It contains broad provisions governing the
licensing and management of banks, including: minimum bank capital
requirements (10 billion dinars or the equivalent of $5 million for Iraqi banks, 50
billion dinars or the equivalent of $25 million for subsidiaries of foreign banks);
rules for the conduct of traditional banking activities; financial reporting
requirements; audit requirements; and provisions for liquidation and receivership.
The law vests the Central Bank of Iraq with the authority to discharge a full range
of bank supervisory functions: chartering and licensing; issuing regulations;
auditing reports; performing on-site examinations; and imposing penalties and
enforcement measures.

Notably, the Bank Law authorizes activities expected of a modern bank operating
in the international banking system. These include:

„ Receiving interest bearing deposits;

„ Extending various types of consumer or commercial credit facilities;

„ Buying and selling for the bank’s account or customer accounts, money market
instruments, currencies, securities, interest rate instruments, swaps, forwards,
futures, and other derivatives;

„ Issuing guarantees and letters of credit; and

„ Providing clearing, settlement and transfer services for money, securities and
payment instruments.

A number of the new Bank Law provisions bespeak the influence of Western
standards. These include the risk-adjusted capital adequacy requirements; lending
limits based on percentages of the bank’s capital; regulatory approvals for
acquiring a 10% interest; limits on extensions of credit to related persons; and on-
site examination rights vested in the Central Bank. The law also makes anti-money
laundering procedures a licensing condition, and requires banks to file reports of
suspicious transactions.

Most importantly, the new Bank Law is clearly designed to encourage foreign
investment in the Iraqi banking sector. It enables foreign banks to enter Iraq
through branches, subsidiaries, representative offices, or joint ventures. It affords
ultimately a fairly liberal system of foreign ownership – allowing up to 6 Iraqi banks
to be controlled (up to 100%) by foreign banks within the next 5 years, and
thereafter placing no such restriction on foreign bank entry.

Pillsbury Winthrop Shaw Pittman LLP | www.pillsburylaw.com Legal_Environment_invIraq | 7

 We understand the first two of these 6 entrants will be “fast-tracked,” with
substantial lending capacity being an important entry criteria. An unlimited number
of Iraqi banks may be owned up to 50% by foreign persons. Once established,
foreign banks are to be afforded “national treatment” – they may engage in the
same activities and must be treated under the laws in the same manner as an Iraqi
owned domestic bank. As previously mentioned, the equivalent of a $25 million
capital requirement is imposed on subsidiaries of foreign banks, but there is no
restriction on where that capital may be invested.

D. Tax Law: CPA Order No. 37

Order 37 imposed a tax holiday for 2003 on all taxes other than certain specific
taxes identified in the order. The tax holiday is lifted commencing January 1, 2004,
but the highest individual and corporate tax rate is limited to 15%.

For a broader listing and description of the significant CPA Orders please refer to
the attached Annex.

IV. CPA Orders

The CPA Orders issued to date address a number of the areas in dire need of legal
reform, particularly in liberalizing the rules for foreign participation in the Iraqi economy
and encouraging foreign investment. If Iraq is to follow the course of economic
liberalization and privatization contemplated by the Coalition – a course currently
followed by a number of countries in the region -- then similar sweeping reforms are
needed in other areas of Iraqi law to adjust to the demands of a free market economy.
Among the reforms needed include:

„ A revision of or adoption of a new and better developed Company Law

„ A new Bankruptcy law.

„ Revised Labor laws

„ Revised and more fully developed Intellectual Property laws providing for broader
protection of intellectual property rights

„ New securities laws and regulations

„ A competition or anti-trust law

„ A more fully developed Tax law

„ A liberalized Commercial Agency law

Pillsbury Winthrop Shaw Pittman LLP | www.pillsburylaw.com Legal_Environment_invIraq | 8

 „ An arbitration law that recognizes and requires that enforcement of foreign arbitral
awards

Additionally, as mentioned, CPA explanatory memoranda, or other administrative

procedures will need to be established to implement some of the new Orders previously
promulgated, such as the new foreign investment law.

It is anticipated that a number of these areas will be addressed by new CPA Orders in
the several weeks and months ahead. The CPA, in conjunction with the Governing
Council and the relevant Ministries, continues to develop a rational strategy and time
frame to implement the most significant reforms.

V. Post-Occupation Issues
In the brief time remaining, I would like to point to 3 considerations regarding the period
after the CPA has transferred authority to an Iraqi government.

A. Viability of CPA Orders Post Occupation

The extent to which the laws established by the CPA will continue to survive in
their existing form after the emergence of a sovereign Iraqi government is far from
certain. As a matter of course, these laws will continue in effect following the end of
the occupation until they are modified or repealed. Whether the new government
will be inclined or pressured by prevailing sentiments into altering the legislative
legacy left by the occupation is impossible to predict. Measures such as the new
Investment and Banking laws introduce highly liberalized approaches to foreign
investment, permitting up to 100% foreign ownership virtually unfettered. It is
unclear whether the Iraq people are prepared for this, or would prefer to impose
some degree of protectionist measures to ensure local participation and ownership.
Any foreign participant relying on the CPA orders should be aware that there can
be no guarantee these orders will not be modified to their detriment by the
succeeding Iraqi government

B. International Conventions and Treaties

A sign of Iraq’s isolation from the international community is the fact that it is not
party to many of the basic international conventions and treaties that form the
framework of the modern global economy. These include the GATT, the New York
Convention on the Enforcement of Foreign Arbitral Awards, bilateral double tax
avoidance treaties and several other similar treaties. Once an Iraqi government
emerges, the speed of its entry into these international arrangements may be one
measure of its progress towards joining the global market community. This will also
directly impact the legal climate in Iraq, including addressing some of the issues
raised in this presentation.

Pillsbury Winthrop Shaw Pittman LLP | www.pillsburylaw.com Legal_Environment_invIraq | 9

 C. Contracting with the Iraqi Government
Upon the CPA’s departure, the emergence of a viable central Iraqi authority that
can credibly enter, guarantee and facilitate long term commercial arrangements will
be essential for broader development. Indeed, beyond democracy, sustained
development will depend on a central Iraqi authority that can assure continuity.
While perhaps only a decentralized federal structure is possible, any approach
where regional leaders can trump state directives will present considerable legal
and practical challenges to broader development. On a related note, parties
contracting with various Iraqi ministries or instrumentalities of the state ought to
confirm that these arrangements are backed by the full faith and credit of the
central authority. Otherwise a party may find itself caught between different
ministries or provisional entities without recourse to an authority that can effectuate
the underlying arrangements. Even if fairly focused on industry and geographic
area, rarely will a project or enterprise not fall solely within the aegis of single
national and provisional agency or ministry.

VI. Conclusion
Not withstanding the persistent pitfalls, continuing uncertainties and constant change,
the legal environment for business in Iraq is more open than it was one year ago. While
considerable reforms are still needed, sweeping strides have already been made. Even
if the succeeding Iraqi government claws back some of most liberal provisions of new
CPA orders, Iraq will still emerge with a legal climate that promises greater economic
freedom and opportunity to its people, and is more inviting to the rest of the world. The
risks presented by this transition period – some obvious, others hidden -- may be
prohibitive to many. For others willing to take the plunge, awareness of the environment,
informed decision-making, and strategies designed to manage the legal uncertainties
may mean the difference between success and unmitigated failure.

Pillsbury Winthrop Shaw Pittman LLP | www.pillsburylaw.com Legal_Environment_invIraq | 10