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What’s driving Chinese trade and investment into Argentina?

Over the years, there has been unabated interest of Chinse parties in strategic areas of investments in Argentina: energy, infrastructure and natural resources, which fall within both Chinese and Argentine governments’ priorities in promoting investment and mutual cooperation. With our rich expertise and unique experience in advising Chinese companies in the relevant industries, Beretta Godoy is ready and willing to be your trusted Argentine counsel in building a future together.

How is Beretta Godoy positioning itself to help clients capitalise on these opportunities?

Beretta Godoy works extensively with Chinese companies, in particular state-owned enterprises with strategic operations in Argentina. Having advised numerous Chinese investors in their projects, we thoroughly understand the legal, commercial, cultural and linguistic challenges they face in Latin America’s business environment. Our trilingual team of professionals fluent in Spanish, English and Chinese works seamlessly with the clients’ legal team and external PRC counsel in delivering practical advice and service that address these challenges.

What are some of the challenges Latin American entities need to be mindful of when engaging with PRC counterparties?

Under the bilateral investment treaty between China and Argentina, Chinese investors are entitled to the protection against discrimination, the guarantee of fair and equitable treatment and against expropriation, and the right to freely transfer their returns out of Argentina. Further bilateral framework agreement and protocols are in place with a view to promoting investment cooperation, highlighting priority areas such as energy generation, telecommunications, land transport and port infrastructure, etc. Direct award to state-owned enterprises of infrastructure projects in these areas is possible upon the fulfilment of certain conditions set out in the relevant treaties.

Uruguay is one of the main gateways to doing business in Latin America. This is so because of social, political and legal reasons.

Uruguay is well known for its political and social stability. Independent publications usually rank Uruguay at the top in terms of democracy, rule of law, low levels of corruption, and the independence of its judiciary. The country is well irrigated and has rich and diverse agricultural production. Such conditions, coupled with a flexible regulatory and legal regimes, have made of Uruguay one of the main legal platforms to conduct business in Latin America.

Some of the main characteristics of the system are:

• Inflow and outflow of foreign currency is absolutely free, there are no exchange controls and there is no foreign investment registry. Foreign investment merits the same legal treatment as domestic investment.
• Contracts expressed in any foreign currency are fully enforceable. Foreign judgments and arbitral awards are equally enforceable with no review over the merits. Uruguay’s flexible corporate system allows for a single shareholder or a single director, whether resident or non-residents; the transfer of the stock is effected by means of the physical delivery of the stock certificate.
• Companies are only taxed on locally sourced income. Companies with no activities in Uruguay remain essentially untaxed. Uruguay has entered into a wide extended network of both double taxation and information exchange agreements; as of today Uruguay is a member of the OECD Fiscal Affairs Committee.
• Uruguayan free trade zones have played a key role in the attraction of foreign investment. The most important privately owned investments in Uruguayan history have been conducted under a free trade zone status.
• Uruguay is an immigration-friendly country. As long as local means of support can be evidenced, applicants can start working in Uruguay right after the beginning of the immigration application procedure.

What’s driving Chinese investment into the Dominican Republic?

Even though the Dominican Republic always had commercial relations with China, the business relationship between these countries is rapidly evolving. The reason behind is that in May 2018, the Dominican Republic and the People’s Republic of China established diplomatic relations, an alliance which promises to increase and strengthen cooperation in areas such as infrastructure, finance, technology, tourism, education and energy. In fact, we have seen an immediate and significant response from Chinese investors after May 2018. It is also worth noting that in the last two years, China has become the Dominican Republic’s second largest export partner.

The sectors where the greatest interest is displayed by Chinese investors are, first of all, energy. Specifically, there is interest in the generation of clean energy (solar and wind projects), as well as the development of transmission lines. We have also seen an increase in interest in developing public infrastructure projects, such as roads and cable cars.

How is Pellerano & Herrera positioning itself to help clients capitalise on these opportunities?

For more than a decade, our firm has advised Chinese investors or companies looking to deploy Chinese capital. In recent years clients of this nature have increased.

First of all, Pellerano & Herrera is the first and only law firm in the country that has an established China desk made up of a multidisciplinary team of lawyers with expertise on the Chinese market, with particular know-how and understanding of the needs of Chinese companies. We offer comprehensive advice on all business-related legal matters, custom tailored for the special profile and needs of Chinese investors. From market-entry strategy to guidance on bridging cultural differences, we can assist in all stages of your activities in the Dominican Republic. The leaders of our Chinese desk, Ricardo A. Pellerano and Alessandra Di Carlo, visit China regularly to meet clients and potential clients located in different cities.

In order to set up this China desk, our firm engaged the ongoing services of a consulting firm with vast knowledge of the Chinese commercial market to assist us, mostly to surpass the cultural differences; providing strategically guidance to the team on matters related to Chinese clients and potential clients.

As part of this process, our firm translated its Doing Business in the Dominican Republic legal guide into Mandarin. For the past 28 years, Pellerano & Herrera has been publishing this guide, which is known as the official investment tool of the Dominican government, to help those interested in investing in the country and provides basic information about the laws that regulate its economy and society, as well as the Dominican investment climate. Additionally, we have translators available in the Chinese language when needed. However, in most cases we have noticed that this is not necessary, since most executives of Chinese investment companies fluently handle the English and/or Spanish language, as the case may be.

Pellerano & Herrera also has a wide experience of advising Chinese clients on some of the most significant matters in the Dominican Republic. Among other clients and cases, our firm has helped important Chinese construction companies to establish operations in the Dominican Republic and provided guidance in connection with these companies’ participation in public infrastructure biding processes. We have provided assistance for the acquisition of a power purchase agreement (PPA) and a concession for development of a wind energy generation project in Dominican Republic whereby the finance was granted by a Chinese company, being this the first Chinese investment to energy sector of the country.

Our firm works with PRC-based law firms to help facilitate matters. As the exclusive member firm in the Dominican Republic for Lex Mundi – the world’s leading network of independent law firms with in-depth experience in 100+ countries worldwide – we have direct access to the member firm in China, in those cases where we need to liaise.

Among our clients are the most prominent Chinese companies from different industries, such as banking, construction, mining, energy, infrastructure and technology. We have also assisted the Chinese offices of international law firms, such as White & Case, Clifford Chance, Dentons and Jun He, in legal matters in the country.

What are some of the challenges Latin American entities need to be mindful of when engaging with PRC counterparties?

In our opinion, the most important challenge is cultural difference. It is a fact that we must accept. Our cultures are very different, and that difference, without a doubt, is reflected in the way of doing business. Naturally, this must imply an imminent and necessary change in the way of thinking of our Latin American countries, as is the case of the Dominican Republic, as countries receiving the investment. Distance, indisputably, is another challenge. However, with the available digitalisation and technology, this gap will be increasingly reduced.

For investors of any nationality, understanding these difficulties is key. In the case of Chinese investors, we always recommend paying special attention to the due diligence phase prior to an investment or acquisition, since considering the cultural differences, language differences and what may be a completely new legal framework. It is important to be aware of all aspects of a project. At the end of the day, part of our distinctive assistance, and our added value, lies in precisely helping the client to overcome these challenges smoothly.

What’s driving Chinese investment into Peru?

Many in Peru expected to have an important flow of PRC-based companies in the last years but investment has reduced considerably.

The sectors in which we see particular interest are construction, infrastructure, energy and transportation. There are several interesting opportunities in these sectors with, essentially, public projects such as a gas pipeline from the central jungle of Peru all the way down to its southern coast, and a commuter train around Lima, Peru’s capital.

How is García Sayán positioning itself to help clients capitalise on these opportunities?

We try to find alternative solutions to the aforementioned challenges, especially to get the documents in order to comply with the requirements established by Peruvian laws. For this, we usually work with the Chinese Peruvian Chamber of Commerce and the Chinese consulate, which are very helpful issuing letters to the local authorities explaining the purpose and characteristics of certain documents issued in China in order to make such documents acceptable for purposes of all legal procedures. As an example, we have been able to have the Public Records Office accepting the municipal license of a PRC’s company willing to stablish a Branch in Peru, as its certificate of good standing which is the regular requirement and a document of a different nature.

What are some of the challenges Latin American entities need to be mindful of when engaging with PRC counterparties?

All our PRC clients are SOEs aiming to enter into contracts with the Peruvian State; hence, in addition to incorporating a local branch or subsidiary, they needed to deal with the proper regulator in order to obtain specific registrations depending on the activity they plan to perform.

Peruvian government entities have set certain processes or requirements for local or foreign investors which may be complied-with as long as they understand and share similar documentation and procedures. PRC companies will have to deal with the limited scope of action of, for example, Chinese Notary Publics, which cannot issue all the certifications that a regular Notary Public in Peru or in other countries with an analogous legal system can do.

More than legal considerations, however, there are practical matter to be taken into account. Language is an issue. Many representatives speak some English and very little Spanish; hence attending meetings with an interpreter may cause certain communication problems with government officers. There are also cultural issues such as negotiation styles, where Chinese citizens have an advantage, although having them speaking in Chinese in front of their local counterparts may not be always advisable. Sometimes the decision making process may generate delays when an approval from a higher authority, located in China, is needed. The time difference plays a key role in this last situation.

Finally, courtesies and discounts are expected as part of the Chinese culture, but clients have to be careful not to participate in practices that could be later related to compliance regulations infringement.

What’s driving Chinese trade and investment into Mexico?

Trade and investment between China and Mexico is growing but remains small when compared to other countries in the region. For example, while China is now Mexico’s third largest trading partner the value of this trade is less than a tenth of Mexico’s trade with the US.

Increased interest from Chinese entities is driven by interest in the telecommunication and auto parts sectors. There has also been some increase in financing for projects related to transportation and infrastructure, though this does still not meet the full potential of Mexico-China bilateral relations.

So far, all of China’s notable investments in Mexico have been made by SOEs. These investments have been focused on transportation (mainly in connection with railways and trains), infrastructure and projects (for example, the Mayan Train Project), mining and energy (specifically in renewable energies and exploration and extraction of hydrocarbons, including oil refining), telecommunication and auto parts.

How is Basham positioning itself to help clients capitalise on these opportunities?

To help clients navigate the rise of Chinese trade and investment, Basham is setting up a China desk. In the long-term this will include Mexican lawyers fully knowledgeable about Chinese business, culture and language.

Because Chinese entities are still relatively unfamiliar to Mexican clients, we provide as much information as possible, giving a clear and detailed explanation in connection with ongoing investment opportunities and projects being developed or planned in Mexico, including the challenges that such projects represent. In addition, we work as firm to ensure the lawyers advising on these projects and serving clients engaged with PRC counterparties are fully aware of the cultural and legal requirements typically associated with these counterparties. We also
work to help our clients overcome the cultural barriers that exist between Latin American parties and PRC parties.

From our experience of these matters, we identify the following important considerations:

Tax considerations and impacts: It is important to be clear on who will be covering the corresponding taxes of the operation;

Immigration: It is essential to analyse the immigration status of any Chinese workers that will be brought to the project, when applicable. More generally, it is important to undertake due diligence around labour, especially when Chinese workers will be brought to the project;

Compliance: Carrying out a detailed and accurate due diligence revision of the project to verify compliance with Mexican legislation;

Clients must also understand which guarantees are to be executed as part of the transaction, the extent to which FCPA and anti-bribery laws come into play, any relevant import and export legal dispositions and anti-corruption issues that may arise.

What are some of the challenges Latin American entities need to be mindful of when engaging with PRC counterparties?

In business as in general culture, Mexico is closely aligned to the US. Therefore, there is a significant cultural barrier when it comes to doing business with Chinese counterparties. Developing Chinese business contacts and networks should be a long-term aim of any Mexican entity that is looking to capitalise on growing Chinese trade and investment.

The cultural and language barriers and differences are particularly notable when one compares how businesses are developed and managed in Latin America with how they are handled and managed in the PRC.

The best way to remedy this is to create an environment in which both parties can trust and understand each other, facilitating a positive business relationship. However, Mexican parties must be aware that bureaucracy in connection with some PRC internal procedures may result in delays to the project timeframe.

Foreword

After 40 years of misfortune, Iraq is desperate for a new start. Dictatorship, sanctions, foreign invasion, civil war and terrorism have left the country needing investment in almost every sector, and a virtually untapped market of 40 million consumers hungry for a new life.

For foreign investors with an appetite for risk, the potential rewards are high. But investing in Iraq is not a simple matter, and as anyone who has explored the market will tell you, finding the right legal and strategic advice is essential.

To gain an insight into the legal and business dynamics of the new Iraq, The Legal 500 partnered with Al Tamimi & Company for this special report, surveying over 100 legal counsel and foreign investors currently active in the country. The results were surprising.

Over a quarter (26%) of respondents rated the outcome of their investments as excellent, with only 9% rating them as extremely poor. The scale of opportunity Iraq offers was also clear, with 40% of those surveyed citing a lack of competition as the chief reason for their investment.

Of course, the challenges and risks presented by Iraq were also widely discussed. Dealing with government authorities was reported as a chief difficulty faced by 35 of the companies surveyed, while understanding local market conditions (32 companies) and protecting intellectual property rights (28 companies) were also pressing concerns.

The fact that practical challenges such as underdeveloped supply chains (reported as a chief difficulty by just seven companies) and obtaining insurance cover (12 companies) – issues that even the largest multinationals have struggled with – were so low down on the list of concerns, only serves to highlight just how undeveloped the market is.

Over three quarters (77%) of those surveyed had taken legal advice on their investments, with most looking for help dealing with government departments and ministries (38 respondents), understanding the licensing regime (42 respondents), establishing an office or branch (52 respondents), and advice on tax (47 respondents).

It all adds up to a complex picture of a market where opportunity and risk are often inextricably linked. To help cut through the chaff, we have drawn on a number of experts, including general counsel with expertise in Iraq, Al Tamimi partners who have helped businesses thrive in challenging conditions, as well as frontier investors who are betting on the country’s growth.

We have also tried to shine a light on a different, lesser-known side of the country by documenting its nascent start-up scene and examining the prospects for a young generation of Iraqis who find themselves in a country that is finally open to the world. Above all, we present the views and lessons of those who got it right, and those who got their fingers burned. As one GC commented, ‘No one says it’s easy to do business in Iraq, but it’s not impossible either. Learning from the mistakes of others is the quickest route to success.’

The Legal 500 In-House Legal Research Team

John Anthony Tucknott MBE

The Legal 500 speaks to Tucknott, British Deputy Ambassador to Iraq and UK Trade Champion, about the opportunities available to UK businesses in Iraq.

Anthony Tucknott MBE was appointed British Deputy Ambassador to Iraq in 2017. He was formerly British Ambassador to Nepal, British Deputy High Commissioner, Karachi and UK Trade and Investment Director for Pakistan. Between 2007 and 2009 he served in the British Embassy in Iraq, and has followed the country’s development ever since.

‘What amazes me is the resilience of the Iraqi people, who have endured 40 years of sanctions and conflict, and the hope and belief they have in a better future for themselves, their families, their nation and their country,’ says Tucknott. ‘I know that all of us working for the British Government in or on Iraq are determined to do all we can to assist all Iraqis to achieve their aspirations and dreams.’

The British Government’s commitment to help make the country a success is also good news for UK businesses looking to build trade ties with Iraq.

‘UK Export Finance (UKEF) has announced an additional £1bn of support for projects in Iraq, giving UK companies operating in Iraq huge advantages, as prime contractors seek to ensure there is sufficient UK content in their supply chains to meet UKEF’s requirements. The Department for International Trade (DIT) Iraq and the Iraq-Britain Business Council (IBBC) stand ready to support any UK company preparing to enter, or looking to grow its presence in Iraq.’

For those businesses willing to take the plunge, the benefits could be vast.

‘There are substantial opportunities in Iraq for UK companies in a variety of sectors. Over the coming years, Iraq will embark on a huge programme of projects to develop and rehabilitate the country’s power and water infrastructure. These will provide business opportunities requiring the expertise of British construction, engineering, electrical and project management companies, to name but a few. Following the traumatic years of the fight against Da’esh, Iraq is looking to modernise its armed forces and its government administration; this will create opportunities for companies providing professional services, business process outsourcing and a range of consultancy services, in addition to those traditionally supplying the defence sector.’

While the 200 or so UK businesses currently operating in Iraq provide highly-specialised engineering, oil and gas projects, or defence and security services, the opportunities for business are far more widespread.

‘Iraq is a challenging market to enter, and larger companies or those with greater risk appetites have traditionally led the way. But this should not put off smaller companies or those outside of the security and oil and gas sectors, providing they engage intelligently with the support available. This is particularly the case for companies who already have operations in, or experience of, the Middle East. DIT actively supports prime contractors to identify UK suppliers. Attending a DIT roadshow event, trade fair or visiting the Business Opportunities Website are the best ways of identifying specific opportunities to supply established players in the Iraqi market. IBBC and DIT can then provide advice on identifying the best local partners and overcoming market access barriers.’

‘In addition to major infrastructure and defence projects, there is a large and growing demand for British goods and services among Iraq’s increasingly prosperous middle class, particularly in education, in which UK qualifications are a source of great prestige, and in the country’s booming retail sector.’

Even with the government support, businesses should be prepared to undertake enhanced due diligence on their proposed activities.

‘The biggest problems faced by UK companies entering the Iraqi market are: lack of business intelligence about the opportunities available; navigating the bureaucratic and regulatory system to obtain permissions or get contracts signed; corrupt, arbitrary and inefficient customs processes; and finding the right local partners. DIT and IBBC can provide support to navigate or mitigate these challenges. But British companies looking to enter the Iraqi market should prepare themselves for a challenging business environment.’

And while the state will remain the dominant economic actor in Iraq for the foreseeable future, the Iraqi Government is looking to encourage investors to works with the country’s private sector. ‘Iraqi Ministers are aware that bureaucracy is stifling Iraq’s economic development.

Many hope that privatisation and outsourcing offer a way to stimulate greater international trade and investment. This is likely to mean that private companies will play a bigger role in Iraq’s economy in the future than they have traditionally. However, they will, for the most part, be chasing government contracts. The growing retail sector, along with healthcare, education and financial services, are likely to be the areas in which a genuine private sector will have the space to emerge in the years ahead.’

Unlocking a new future

For the first time in nearly 40 years, the outlook in Iraq is bright.

The fall of ISIS, which nearly broke Iraq apart and consumed its resources in a three year fight, has finally brought a semblance of political and financial stability. While the political situation in neighbouring countries – particularly Syria and Iran – will have a huge impact on Iraq’s ability to progress, improvements in domestic security have transformed the country’s prospects. Meanwhile oil, the country’s main source of income, is once again on the rise.

For investors, the scale of the opportunity is clear: a population of over 40 million, roughly 70% of whom are below the age of 30, is coming back to the world stage. As Mohammed Norri, a partner in the corporate commercial practice of Al Tamimi and head of the firm’s Baghdad office, puts it: ‘Iraq has been starved of investment in every single sector of its economy since 1982. Whether it’s healthcare, education, oil and gas, or industrial production, there are opportunities everywhere. What Iraq offers investors, almost uniquely in the global market, is an opportunity to invest and see growth for the next 50 years.’

There are other signs of this growth potential, adds Zaab Sethna, co-founder of Northern Gulf Partners, one of the few frontier funds to specialise in Iraq.

‘The figure we like to use as a benchmark is the total market capitalisation of the stock exchange to the gross domestic product (GDP) of the country. Iraq’s market cap today stands at around $11.7bn, which is under 6% of the country’s GDP [of roughly $200bn],’ he says.

‘The closest comparable country in terms of population, geography and reliance on oil is Saudi Arabia, which has a market cap to GDP ratio of 75%. That shows you there is tremendous potential for growth in Iraq. That’s the story we are investing in.’

Mohamed Hawary, director of investment for the Middle East and North Africa (MENA) at GroFin, an investment fund manager specialising in the finance and support of small and growing businesses, sees a similar scale of opportunity.

‘If you throw a dart almost anywhere on the board you’re going to be successful because there are opportunities in every sector, from food production to entertainment,’ he says.

‘Iraq has the highest investment potential in the MENA region simply because it’s coming from such a low base. Even a small improvement in stability or infrastructure will make a big difference and you will see growth in a relatively short space of time.’

Of course, opportunity is only part of the story.

While fledgling businesses may have a good grasp on the scale of the opportunities available, implementing and realising those opportunities can too often be another story all together. The challenges apparent are vast: finding and retaining talent, navigating a complex legal and governmental framework, in addition to starting-up in a country still finding its feet on the global stage.

‘Iraq is a phenomenally difficult place to invest, but that’s why you employ a lawyer. You say to them, “find a way to overcome these challenges so that we can capitalise on this growth story,”’ says Mohannad Al Nabulsi, general counsel of Samsung Electronics Levant.

For those willing to take the risk, now is the time to get in. Those taking a ‘wait and see’ approach may find the most interesting opportunities disappear rapidly.

NEW BEGINNINGS

One of the biggest drivers of investor interest has been the dramatic improvement in Iraq’s security situation over the past two years. The number of people killed in acts of terrorism and conflict-related violence fell from over 7,500 in 2015 to under 1,000 in 2018, while the number of people injured showed a similar decline, falling from nearly 15,000 in 2015 to around 1,600 in 2018. These improvements in domestic security have transformed the country’s prospects and led to a rise in interest among investors.

‘We used to receive two or three enquires a month from companies interested in setting up or investing in Iraq,’ says Norri. ‘Now we receive around five a week, with a big increase from entities outside of the GCC [Gulf Cooperation Council].’

To get a sense of the challenges Iraq presents, we surveyed over 100 senior legal figures across a range of industries, with 88% of those surveyed currently operating in Iraq. The bulk of those we surveyed represented multinational organisations headquartered in the Middle East (38%) and elsewhere (44%) and reflected an investment landscape still dominated by construction (19%), and energy – including oil and gas (35%).

Crucially, the results show that security concerns are no longer dominating the risks monitored by investors. While 28% still saw security as the primary risk to investing in Iraq, far more (40%) were monitoring the risks arising from corruption, while nearly a fifth (18%) were concerned with the lack of protections offered to investors. For many businesses we spoke to, these challenges are just the start.

‘We operate in some challenging jurisdictions, but I would classify Iraq as toward the top end of the scale when it comes to legal, operational and logistical complexity,’ says Christina Ibrahim, executive vice president, general counsel and corporate secretary at multinational oilfield services company Weatherford.

 

‘Considerations about safety of personnel and how to move them around the country come into play constantly, but the bigger difficulties come from a lack of transparency over processes and requirements when dealing with government authorities. The term “developing market” is accurate here in more ways than one: the country is always changing and the operating requirements can change quickly and without notice. Even for experienced counsel it can be difficult to get a clear understanding of the rules of the road.’

Simon Nai has spent the last 12 years in Iraq, where he heads the legal and audit department at Chinese oil giant CNOOC. While progress has been made, he admits that it can still be a struggle to understand what is required by law.

‘Legally, Iraq is not an easy place to operate. Many laws and regulations date back decades, and new laws are published regularly. Some of these follow the original civil code, others have a more Anglo-American style overlay. The result is a complex and sometimes contradictory set of laws that are complicated further by difficulties with health and safety, employment, and visa requirements,’ he says.

 

‘There is also a large number of government ministries in Iraq, which can make it difficult to know what to do in any given situation, particularly when different authorities have different interpretations of the requirements. After many years, I am getting more familiar with the Iraqi operating environment, but as for the exact provisions of the law I cannot say I understand all of them. Frankly, I do not think anyone does.’

A further challenge is highlighted by Koray Koҫak, general counsel at Taq Taq Operating Company (TTOPCO), a joint venture between UK-based Genel Energy and China’s Sinopec operating in the Kurdistan region of Iraq. He has found, like many GCs in the oil and gas sector, that the pressure to use local contractors can create compliance challenges.

‘There is a consistent demand placed on oil and gas companies in all geographies to work with local companies and employees, but in an Iraqi context, “local” can mean belonging to a particular group or village. We do acknowledge that multinational companies need to help build capacity, but it remains one of the biggest risk exposures any international business faces.’

 

Ibrahim adds: ‘Local content requirements can be very difficult if you want to run a technically complex project that requires skilled labour. It is a challenge to find qualified individuals or to train people to the required standard, which can have health, safety and security implications. It is also a business challenge. Building a processing facility requires a lot of technical expertise and it is rare to find it in remote locations.’

While giving preferential treatment to local contractors is widespread across the Middle East, it presents far greater challenges in Iraq, and not only for those operating in the oil sector.

‘Manufacturing facilities are either not available or of a poor quality. The insurance costs are high, it is extremely difficult to move goods or components around the country, and for certain products you will need international approvals or certifications, which are almost impossible to obtain from within Iraq,’ says Zeid Uteibi, head of legal for the MENA region at Hikma Pharmaceuticals.

‘The solution the government appears to have come up with is to apply regulations that bypass the local manufacturing regulations, allowing you to import semi-manufactured goods that are simply completed at a site in Iraq.’

A COMPLEX ENVIRONMENT

Even when products can be imported and distributed, businesses will find they need to meet regulatory requirements that can seem bizarre. As one GC commented, ‘We operate a franchise for a chain of cafés across the region, but we can’t get chocolate chips for the cookie dough into the country. There is no standard defined for cookie dough, which means it can’t be imported. That’s how it works.’

Mohamed el Roubi, general counsel at the international division of international security contractor GardaWorld, has a wealth of knowledge when it comes to operating in Iraq. In 2003, the then Egypt-based el Roubi decided to take a risk and help set up a law firm in Baghdad. He has since continued to follow the market with interest, and regularly oversees GardaWorld’s investments in the country. Too often, he says, the regulations act as a barrier to investment.

‘Almost all industries are heavily regulated, which means you will need to obtain licences and sub-licences from a large number of ministries. In the security industry you need a licence from The Ministry of Trade, but they won’t register you as a company unless you have approval from the Ministry of Interior. Before you can operate you need a licence for weapons, a licence from the telecoms regulatory authority for the frequencies of your radios, plus a licence for the tracking systems you put in your vehicles. It’s just endless,’ says el Roubi.

‘All the licences will have been obtained at different times, which creates a massive administrative burden, as you have to constantly monitor which ones are expiring and which are still active. If I were a foreign investor, I’d look at the licencing situation and think there’s easier money to be made elsewhere with less risk. The government should engage with proper investment thinking and simplify the whole process to become a one-stop-shop that covers all activities.’

FINDING SOLUTIONS

At Al Tamimi, the firm has been working to support various non-governmental agencies, and the Iraqi government, to help improve the understanding of international investment laws, but there is still a long way to go.

‘The investment laws needs to be amended, the companies’ law needs to be amended, the visa laws need to be amended. A lot of these laws can discourage investment for no real reason,’ says Norri.

‘For example, under Iraqi law each company must appoint a single, named manager. Certain companies will have a policy that says there must be two signatories to any amount above $100,000, which is not permitted in Iraq. It is not reasonable to enforce laws at this level of detail. A company should be free to operate in the way it thinks best. This type of bureaucracy becomes burdensome on those who wish to operate in the country.’

Operating in a country that is heavily bureaucratic, where government processes can be confusing – even to those who have spent years in the market – and where legislations dating back to the 1970s can block business on seemingly illogical grounds, frustrated many we spoke to. Indeed, it was notable that only 14% of those we surveyed considered currency fluctuation and market volatility to be the chief risk they would face in the market.

As Uteibi comments: ‘On international investments, I will usually act as part of an advisory team looking at commercial and financial risks such as currency fluctuation or devaluation. When it comes to Iraq we don’t even get that far because we are still looking at basic things like security and how to move products around. It’s just a very different world.’

He adds that acting for a UK-listed multinational means keeping on top of the UK Bribery Act and other anti-bribery and corruption laws is top of his list of concerns. ‘The Serious Fraud Office reviews a lot of the work done by companies active in Iraq, which means you have to have a very sharp eye and be very prudent when it comes to business partners. The most important thing is to make sure you have an audited and credible business model to ensure compliance with the regulatory requirements.’

Another GC we spoke to, who wasn’t authorised to comment publicly, characterised it even more starkly: ‘If I were a financial adviser I would not advise my clients to go anywhere near Iraq. If anything goes south, there are very few options available to get your money back. Besides, most of the big money is government-related, typically through state tenders for big projects. It can be very tough to succeed in the market and unless you absolutely have to be there I would explore other options first.’

In such a tough market, getting close to government decision-makers is essential. A number of those interviewed for the report commented on the difficulty of conducting legal matters on paper – rather, personal relationships were key to progressing matters – making a local presence a necessity.

‘Matters need to be followed up personally. There have to be some control points on each step and local authorities should be informed prior to the process so they have your general objectives in mind,’ says Koҫak.

‘You also need to manage the local media and popular representative bodies; if they are not on your side a project will almost certainly fail.’

Norri adds: ‘Typically, we are not only advising on legal matters when it comes to investments in Iraq. Beyond understanding the law, clients want to know how the government or larger private sector companies will respond to a particular plan. We can tell them which laws are applicable, but more importantly, we can tell them what to expect.’

It is a view shared by Paul Bailey, founder of Devonport Capital. Before setting up UK-based Devonport, a specialist lender that provides bridge-financing to SMEs operating in Iraq, Bailey worked as both a lawyer and investment manager in Iraq.

‘When I first moved to Iraq in 2007, legal advisers worked almost exclusively with multinational clients,’ he says. ‘Today, if we review the contracts our borrowers have or engage in investments directly, it is almost always the case that both the international and Iraqi party has appointed a lawyer, often from an international firm. More and more people see the lawyers as a value-add, in terms of clarity and professionalism, and the sophistication of business is improving rapidly.’

However, perceptions will take a long time to change. While around a third of those surveyed (31%) had not seen the anticipated risks materialise in Iraq, only 3% had changed their risk assessments in response to a more favourable operating environment. Indeed, only 28% of our survey respondents had been directly affected by the expected risks materialising, with a further 38% having been indirectly affected by the expected risks materialising (by experiencing disruption to supply chains, for example). As Al Tamimi’s Norri concludes, ‘there are lots of success stories in Iraq, it all depends on the right approach. A long-term investment strategy will pay off in the end. This is what has been proven so far.’

CAPACITY BUILDING IN IRAQ

Zaab Sethna, Partner, Northern Gulf Partners

A former adviser to the Government of Iraq following the fall of Baghdad, Sethna shares his perspective on what is needed to return the country to prosperity.

I worked in the Iraqi government from 2003 to 2006. I was a consultant in oil and then in finance, before I left to work in the private sector. During my time working for the government I’d signed up some foreign companies as their door-opener in Iraq.

What I realised by engaging with both these companies and the government, is that firstly, there is great potential for Iraq, a country that while currently impoverished, is one of the few on the planet that can lift itself from the ranks of the poor to the rich. The capacity is there. Secondly, it needs everything in every sector – the country has been cut off from the world and subjected to every bad idea known to mankind in the twentieth century.

Iraq is going through two transitions at the same time – from war-torn to post-conflict and from centrally-planned to free market. It’s fiendishly difficult to manage these two transitions at the same time.

Iraq has natural resources, fertile land, intelligent people, a long history of urbanisation, and world heritage sites. It’s been a victim of bad management, but that is slowly improving. There is some good human potential in Iraq, too. There are companies which are market leaders; there are families that have been in business for generations; there are young people with start-up ideas.

What they are all starved for is capital. There is no source of financing in the country. The banks aren’t lending and the government has little knowledge of the private sector. They are also starved of international links – they’ve been cut off from the outside world for a generation. They are starved of modern management skills and know-how.

Corruption is an issue but I see movement in a positive direction. Irregular enforcement of rules and laws is another problem, particularly from a foreign investor standpoint. The bureaucracy is very strong, but it’s not very capable or competent, which I think is a legacy from a dictatorial regime. When it’s a dictatorial regime, one in which you can lose your life for making a decision, you cement in a culture of doing nothing. To an Iraqi bureaucrat the default answer is always ‘no.’

People don’t realise that per capita GDP in Iraq has more than trebled in the last ten years. It’s roughly $4,000. It was $900 in 2003. It’s out of the impoverished zone and heading toward middle income. After the oil sector, the second largest flow of money into Iraq is Iraqi expats sending money back in. They know the country and know the potential, maybe they also feel they can mitigate the risks with their own local knowledge and networks. A lot of businesses like private medical clinics are founded by Iraqi doctors abroad who see the opportunity.

It’s impossible to put a date on when returns will come or to set horizons, but what we can do is look at other post-conflict societies and track against their development. Nothing is a perfect guide, but you can make predictions.

Mohamed el Roubi, General counsel, GardaWorld International Protective Services

Initially moving to Iraq to set up his own firm and assist in the reconstruction efforts, el Roubi shares the benefit of his 16 years’ experience in discussing how the country is developing for business and investors alike.

I first moved to Iraq in 2003 to start a law firm. It wasn’t me who saw the opportunity, but rather, a partner that I worked for in an Egyptian law firm. He went in May of 2003, following the fall of the Saddam regime. We had the idea that Iraq was a country that was going to undertake a massive reconstruction following a rather devastating civil war, combined with years of sanctions and neglect. By June 2003, I was there. We found an Iraqi partner, created a three-way partnership and set to work!

There’s definitely been a positive progression in Iraq. There were some particularly bad years – 2006 and 2007 come to mind. But even before then, when the insurgency truly got going, I had in my mind that there would be an active period of perhaps five years of really bad violence that would eventually simmer down to a relatively stable country like Turkey, with just pockets of instability. Now what you have is a democracy that’s sort of dysfunctional. It’s not properly technocratic – that base is still developing – but it’s getting there.

What you see as an investor is that during periods of political disagreement, the decision-making process gets suspended and you get periods of hostility toward, or mistrust of, investors. But having been through a few of these cycles now, I am starting to see a pattern form where, even though it can be a slightly dysfunctional process with horse-trading, there are rules and arrangements for how it plays out.

However, I see reasons to be optimistic. Iraq’s younger generation now live in a completely different world. Iraqis are very smart people with a voracious hunger for information and technology. That is absolutely a positive sign for the country.

The law is a bit outdated, but there aren’t a lot of surprises. The problem is when you get into new areas of commerce and investment like technology and intellectual property rights, all the things businesses depend on today. You need to have an interpretation of how those provisions of the civil code apply to this matter – particularly in disputes, this is a problem.

In a world of technology, where you have royalties and income offshore for example, that’s where there is a lack of sophistication and where the lack of a technocratic base in government is a problem, rather than the state of the law itself. The government is not going to rush ahead to develop new business-friendly laws because they themselves don’t understand it. These are party lists that are heavily religious or ethnically dominated that have a different priority. That will be a problem going forward.

STARTING-UP A NEW IRAQ

The Middle East venture capital market is surging off the back of a slew of recent high-profile exits. As investors scramble to find the region’s most promising ventures, we investigate an emerging start-up scene looking to overcome the odds in Iraq.

In recent months, attention has turned to the Middle East’s growing technology space. Following a number of recent success stories from those who have taken the plunge into Iraq, there has been a swell of interest among high-net-worth individuals, institutional investors and middle-class professionals alike, who increasingly see opportunity for new initiatives in the region. Boosting these prospects, a growing number of angel investor groups and regional corporations setting up venture arms have diversified the sources of financing available – a marked change for the contemporary investment climate.

‘Three years ago, there were really only three VC firms in the Middle East and maybe two or three corporate VC arms,’ says Abdullah Mutawi, head of corporate commercial at Al Tamimi. ‘There had been a few eye-catching exits involving regional companies, but you couldn’t call it a particularly prolific or active regional ecosystem.’

That all changed in 2017, when Amazon made headline news with its competitive acquisitions of Dubai-based e-commerce platform Souq for $580m. Then, in early 2019, Uber bought Dubai-based transportation network company Careem for $3.1bn, marking the largest tech start-up exit in the Middle East to date.

‘Now the space is suddenly getting flooded with cash and the net is being cast ever wider to countries like Egypt, Syria and Iraq in search of the best returns,’ adds Mutawi, who has worked on dozens of venture deals in the technology space as a lawyer while also acting as an angel investor to start-ups across the region for the past decade. In 2016, he co-founded Dubai Angel Investors, a venture capital fund that now holds a portfolio of 18 technology companies, seven of which are domiciled in the Middle East.

‘Across the Middle East there is a lot of untapped skill among younger people, many of whom are now finding opportunities to work in technology, whether by developing new tech or working on the localisation side, by converting Western business models to fit the needs of the region,’ he explains.

‘It is a great way to escape being trapped in a job market that is dominated by the state and marked by high levels of unemployment. As long as you have a computer and the internet, you can plug in to a project anywhere.’

With one of the youngest populations in the world, Iraq could present a rich source of talent for investors with a high tolerance for risk.

‘There is a generation of young entrepreneurs who are hungry for opportunities,’ adds Ahmed Tabaqchali, chief investment officer of Asia Frontier Capital’s Iraq Fund and an adjunct assistant professor at the American University of Iraq, Sulaimani (AUIS).

‘There are some wonderful start-ups and entrepreneurs and the interest among the younger generation in non-traditional paths to employment is growing rapidly.’

BUILDING THE PLATFORM

While still early days, there are already a number of promising start-ups emerging in Iraq. These include grocery delivery company Mishwar, which has secured funding from angel investors, food delivery apps Brsima and Lezzoo Eats, Kurdish music-streaming app AWAZA, e-commerce platforms Shopini, Miswag and ShopYoBrand, tourism app Bil Weekend, and logistics provider Sandoog.

A number of technology incubators and co-working spaces have also started sprouting up in Iraqi cities, notably The Station in Baghdad, as well as re:coded, Tech Hub and Five One Labs in the Kurdistan region, where institutional support is also offered by the AUIS Entrepreneurship Initiative. There are promising signs, but still a long way to go.

‘The education system has not traditionally been oriented towards problem-solving, there are negative attitudes towards failure that put people off trying something new,’ says Pat Cline, director of the AUIS Entrepreneurship Initiative and senior lecturer at the university’s business department.

‘Add to that, until very recently, there were no real entrepreneurial role models for young people in Iraq, and it can make it tough for people to understand what building a business really means. I still encounter people who tell me they want to start a tech business so they can work for three hours a day while having a good standard of living.’

Even those who understand the commitment involved will find it difficult to grow businesses at speed. One of Cline’s former students, Hevi Manmy, started Brsima while at the AUIS. The food delivery app has grown into one of Iraq’s biggest start-ups, but the journey was not an easy one.

‘It’s tough to get a product built in Iraq. Manmy had this great idea, but when it came to building a team that could deliver it, he hit real technical challenges,’ explains Cline.

‘There just isn’t the depth of coding and tech talent in the market to support a lot of these businesses. You have to take the long view and accept that the local market will take at least a few years to hit a level of maturity that can allow it to really grow.’

To help address this technical skills gap, organisations across the region have taken to evangelising the need for coding skills, while working on upskilling would-be entrepreneurs. For example, Kuwait-based Barmej (the Arabic verb meaning ‘to programme’) is on a mission to teach coding skills in Arabic, seeking to help young and displaced communities in countries like Syria and Iraq who lack the English language skills needed to follow online tutorials and courses.

Alice Bosley (left) and Patricia Letayf (right), co-founders of Five One Labs

In Iraq itself, many of the most successful start-ups have passed through incubator and co-working space operator Five One Labs. Based in the Kurdistan region, Five One Labs launched in 2017 to help internally displaced people (IDPs) find new opportunities through entrepreneurship. It has since branched out to become an incubator for all, offering training and mentorship delivered by leading entrepreneurs from the US and the Middle East, though it continues to run regular training programmes in refugee camps and keeps IDPs as its North Star.

At Five One’s incongruously modern offices in Erbil and Sulaimani, visitors are greeted with yellow-painted walls that ask, ‘What’s your big idea?’. It all looks very unlike the war-torn, left-behind Iraq commonly seen on the news. And that is the whole point.

Stories about corruption and setbacks that keep getting picked up in the media are important, but there is more to Iraq. It is important to build awareness of the high-fliers who are doing new things, but also of the very real shift that is taking place among the interests, ambitions and demands of young Iraqis,’ says Tabaqchali.

‘Ultimately, disassociating the country from the perception that it is a failed state with no hope for the future will have a huge impact on the way investors and businesses see the country, while helping to reshape the way Iraqis themselves think about work and society.’

FINDING FINANCE

But changing perceptions alone will not help to grow Iraq’s start-ups into viable businesses. In the coming months, Five One Labs will turn its attention to one of the biggest problems entrepreneurs in the country face: finding investment.

‘We are only just starting to hear people talk about investment opportunities and paths to market,’ says Patricia Letayf, co-founder and director of operations at Five One Labs.

‘While there is a lot of money in Iraq, it is not being deployed as investment capital. International investors are starting to show some interest, but it’s also critical for us to have local buy-in. We need to make sure we get investors from Kurdistan signed up before we go out to the rest of the world. There is no reason why we can’t grow the space locally. It has already happened in places like Palestine. If one frontier market can find ways to connect home-grown angel investors to businesses, why can’t Iraq?’

Until that happens, entrepreneurs approaching the small number of angel investors active in the local market will find that even small investments will come with demands for high equity – such is the reality with a high-risk profile and a limited number of success stories to point to.

‘The number of people willing to finance these businesses is so low that those who are prepared to put up cash can demand a greater return,’ says Cline.

‘That makes entrepreneurs sceptical of finance, leads to fewer investable projects, and reduces the interest investors have in the space. That is a problem right now, but even in the last two years I’ve seen big changes. Will there actually be a VC industry making quarter-million-dollar investments in Iraq? Absolutely. It’s just a question of how long it will take.’

Al Tamimi’s Mutawi is even more bullish, pointing to a changing landscape in other parts of the Middle East as inspiration for what Iraq’s future may hold.

‘Sophistication is growing on both the investor and entrepreneur side. In Dubai, it is now much more common to see Silicon Valley-style financings for even early-stage entrepreneurs,’ he says. ‘While businesses in less mature markets will of course be asked to give up more equity, what we are seeing is savvy entrepreneurs across the region realising that they can wait it out. If you have a really good product or idea, you can always turn away bad offers and get money from more experienced and sympathetic investors further down the line.’

However, those interviewed as part of this report feel that there needs to be more of an effort to educate entrepreneurs and investors on how to strike a balance that is mutually beneficial, particularly given the nature of Iraq.

‘We need more of a push to engage with potential investors and explain that the terms they are demanding are not good for either side, but we also need to acknowledge that the VC scene anywhere in the world places a lot of responsibility on entrepreneurs to present investors with accurate data,’ adds Cline.

‘If the VC has to do your homework for you, you’re sacrificing a lot of your bargaining power. Among the things we are focusing on at AUIS right now are crash courses in accounting, legal and business issues, so the financials and the books of start-up companies are good to go.’

If the aforementioned balance can be found, research by The Legal 500 suggests that there is a willingness to put cash into Iraq in the right circumstances. Of those surveyed as part of this report, 40% said that the main incentive for investing in Iraq at present was a lack of strong local competition. Finding a unicorn company may be a way off yet, but for those start-ups that are able to establish themselves in niche industries – outwardly, at least, there appears to be a positive disposition towards helping them take the next steps.

BARRIERS TO ENTRY

Antiquated laws and regulations – many dating from the 1970s – in conjunction with a bureaucracy that is not used to moving at speed, represent additional major challenges for Iraq’s start-ups. ‘There is a rather onerous list of requirements to incorporate and maintain a company in Iraq,’ says Tabaqchali. ‘This places huge time and resource demands on start-ups, at least those that want to expand away from the shadow economy and enter the mainstream. Improvements to these legal processes are just as critical as anything else for Iraqi businesses to succeed.’

Difficulty dealing with the government was the most frequently cited barrier to success for those companies operating in Iraq, with 35 respondents having encountered issues here. Whether through a lack of willingness or sophistication, the legal frameworks, and those tasked with administering them, continue to cause issues for business.

‘While businesses in less mature markets will of course be asked to give up more equity, what we are seeing is savvy entrepreneurs across the region realising that they can wait it out.’

Abdullah Mutawi, Head of corporate commercial, Al Tamimi

While more established companies are able to turn to external law firms for help in understanding the local licensing regimes (42 respondents) and dealing with government departments (38 respondents) – among the most widely sought areas of assistance according to The Legal 500’s survey, – finding a solution for start-ups can be more trying.

‘When I was first trying to set up Brsima, as there is no e-commerce law in the Kurdistan region of Iraq, I was basically told the business did not constitute a company. I spent days at the registration bureau arguing with them until they had agreed what a registration document for that type of business might look like,’ says Manmy.

Adds Cline: ‘Those trying to register an e-commerce business will be told they are basically operating a shop, which means they need to have a physical space registered in all the places they want to trade. That makes no sense to an e-commerce provider that wants to operate with a light footprint rather than opening premises all over the region.’

The upshot is that for start-ups in Iraq, taking a deliberate, pragmatic approach is oftentimes the only pertinent path. Consider food delivery business Lezzoo Eats – another fledgling company to emerge from the Five One Labs programme – that ran afoul of local licensing laws when trying to incorporate using an English name.

‘The use of the English words in a company name makes the registration process more difficult and expensive and follows a different process,’ explains Astara Maiure, training and business development manager at Five One Labs.

‘You also can’t just pick a random name you think is cool, because the authorities won’t allow words that are not in the dictionary. You probably wouldn’t get away with Google, and Hulu would be ruled out entirely!’

The difficulties founders face when registering their businesses are compounded by rules that do not allow for blanket registration covering the whole country.

‘There are a few specific types of trade you can register as being in a particular city, but you need to re-register if you want to expand operations into a new location. You can apply for a broader type of registration that will allow you to operate as a company across a number of locations, but it is significantly more expensive and will only cover you in one region,’ explains Maiure.

Even then, businesses can struggle to trade in a new city. Bureaucratic processes are not yet fully digitised and different branches of government do not always communicate effectively.

‘Even if you are technically registered to operate across a region, you can never be sure the authorities in a different city will have received a record of it,’ says Letayf.

‘The Deputy Prime Minister’s Office is pushing for more digitisation and moves are underway, but making it happen requires a developed technocracy.’

A tech mentor advising entrepreneurs during the Iraq Innovation Hackathon

The extent to which start-ups can protect their IP is the final piece of this bureaucratic puzzle, and one that businesses of all shapes and sizes are encountering. Of those surveyed for this report, 28 respondents cited difficulties with protecting intellectual property rights as a chief difficulty with investing in Iraq.

‘IP tends to be an afterthought, because no one really believes it can be protected. The widespread belief is that protections are costly to obtain, and if someone ever did infringe, it would be a nightmare to litigate,’ says Letayf.

‘We have brought in lawyers to talk to the entrepreneurs and explain how the process works, but there remains a general reluctance to share ideas due to a lack of trust and a perpetual fear that someone is going to steal those ideas.’

While concerns over protecting IP scored highly among the GCs and businesses surveyed for this report and are anecdotally among the biggest concerns for entrepreneurs and founders, below the surface there may be a more pressing set of challenges.

‘IP tends to get looked at as trademarks and patents. Trademarks are very well protectable around the region, while patents are not such an issue for tech companies anyway because they are building consumer-facing platforms rather than patentable technology. Unless you’ve invented something really novel, you’re not going to get much of a patent anyway,’ says Mutawi.

‘The more interesting part of IP for me as an investor and a lawyer advising emerging companies, is how to protect business secrets so employees can’t run off and use those secrets – whether in the form of processes, business plans, or financials – to set up a competing business. If you take shares in a start-up anywhere in the region, you want to be sure that it has the right to exploit its intellectual capital via the product, processes and systems that have been built into it over time.’

He adds: ‘While protecting trademarksand patents is of course important, I would advise any investor to take a closer look at the protections around business secrets. That’s where you’re most vulnerable. You need to create a different type of IP protection that works through clauses in the employment contract stating that everything an employee does or produces in the company permanently belongs to the company.’

AN IRAQI CHAMPION?

Start-ups in Iraq are still to some extent an imitation game. While that happens in even the most sophisticated markets, breaking through imitation into genuinely new technologies will be the true test of the ecosystem’s maturity. As Mutawi puts it: ‘When investors in the region see something like that, they think this isn’t just a region where someone takes Uber, turns it into a local version and sells it back to them. However, the rapid spread of the VC movement in the Middle East will encourage more and more people to give it a shot, which means it will surely only be a matter of time.’

PAYMENT SOLUTIONS

Once financing is secured, start-ups in Iraq must find ways to make money. Like many developing markets, the vast majority of Iraqis are only able to deal in cash. That means start-ups are unable to simply copy the Silicon Valley playbook.

‘All start-ups need something in their business plan to clarify how they are going to get around the cash-based economy problem, or investors are not going to touch them,’ says Patricia Letayf, co-founder and director of operations at Five One Labs.

‘If you look at e-commerce companies in Iraq, they are essentially ordering goods on behalf of other people and collecting cash on delivery. There will inevitably be a failed order rate, which very much increases the cost of doing business. That’s one of the unique aspects of the local start-up scene – the most successful operators are not necessarily the ones with the best tech, but the ones that have been clever at finding solutions around the cash problem.’

Telecoms businesses are likely to play an important part in this development due to their widespread presence in emerging markets. In countries that lack fixed-line infrastructure, people rely on mobile providers to stay in touch. Although Iraq has one of the lowest levels of smartphone penetration in the world, its three main mobile networks operate in more physical locations than any other single private entity in the country. That makes their retail outlets ideal places for payment processing.

Telecoms providers are also helping to plug the gaps in Iraq’s financial infrastructure by bringing new services to the unbanked and underbanked. Kuwait-headquartered telecoms provider Zain has been operating in Iraq since 2003 and is now the country’s largest mobile operator by customer numbers. A long-standing supporter of the local start-up scene, the company launched ZainCash in 2015, offering Iraqis a mobile money transfer, mobile wallet and bill payment service licensed by the Central Bank of Iraq. The company’s other initiatives include a mobile money platform partnership with technology provider eServGlobal and a prepaid Switch Mastercard that can be topped up through ZainCash wallet.

These services, notes Letayf, are already having a marked impact.

‘I visited Berlin with a group from Iraq recently and every single person from Baghdad and Mosul came with Zain pre-paid cards. What this does is allow people to venture beyond Iraq in ways that were previously very difficult. That makes a huge difference, and I am seeing a lot of start-ups looking to find ways of harnessing these services to meet the challenges they face.’

Anwar El Khatib, General counsel, Oman Insurance Company PSC

El Khatib shares his experience on the realities of setting up and doing business in Iraq, detailing the difficulties of navigating a complex and disparate regulatory regime.

My experience in Iraq is limited to Erbil, in the Kurdistan region. There, they have their own regulations and try to distinguish themselves to some extent from the rest of Iraq – something which is especially true in the insurance sector.

Insurance companies are regulated under federal regulations in Iraq. In Erbil, they tried to have their own set of regulations – but they weren’t very clear, rather, it was one page of instructions instead of an actual law. It was a bit weird!

We tried to incorporate and open a branch in Kurdistan at first, but that never happened, largely due to a stipulation that required a large amount of money to be deposited in one of their banks as a guarantee. It had to stay there untouched, with no interest paid on it and no clear stipulation on why that had to be there. It could have been to protect the insured in the event of insolvency, but that was not clear. Following that, we attempted to acquire an existing incorporated company. It was easier in a sense because the company was already incorporated, had capital and we were very close to closing the deal. In the end, we decided not to proceed – going through the process of approvals to acquire the shares in the company and become a major shareholder, nothing was clear and everything was a struggle.

The regulators did not know how to deal with a foreign entity coming to acquire shares in a company that already exists. It’s kind of novel to them and they really didn’t seem to know what to do in the situation. The company was already licenced by the federal regulator. It had to report also to the Kurdistan regulator, which made it very confusing.

What was particularly difficult was trying to attain clarity on how to proceed – even a lot of the law firms had no idea. I ended up meeting the regulatory board over there – it was totally unsophisticated and we did struggle a lot – but I met with them and was able to understand what could and could not be accomplished.

One of the most surprising things about this whole process was that I did not see much appetite for developing the regulatory capacity. Perhaps it was a consequence of the sector. Insurance, and perhaps by extension, finance, did not appear to be something they had much exposure to.

Zeid Uteibi, Head of legal – MENA, Hikma Pharmaceuticals

Having previously worked in Iraq during the mid-noughties for Orange, Uteibi discusses how the business environment is evolving from the perspective of his new role at Hikma Pharmaceuticals.

I am the general counsel for Middle East, North Africa and emerging markets. I have a head of the Gulf Cooperation Council (GCC) and Iraq that I have appointed, but I supervise the agreements or arrangements or acquisitions that we do in Iraq. I supervise our operations in terms of how we get money out of Iraq, compliance arrangements, and our technical and behavioural investigations. A lot of legal issues arise when you are in Iraq.

Going back further, I have very good experience in Iraq. I started covering the GCC area with Orange then became MENA legal lead, which covers Iraq also. I know Erbil, and I’ve known Iraq from the era where it was sheltered, up to now. I know how the supply chain moves, what is acceptable, what is the difference between Erbil and central government in Iraq, what is practical and what isn’t.

I joined Hikma in 2013 as head of Iraq and the GCC. We started seeing the business models for pharmaceutical companies in Iraq, the way the supply chain works, how the structures work, how the investment criteria work.

Pharmaceutical products are basically the biggest need behind food and milk in Iraq – so for us, it’s a big market. Iraq is well educated on health matters. They will go to doctors and discuss and research new drugs. You have a market there. A potential market, because it is now mainly tenders. But that will change.

A major challenge for multinationals is the UK Bribery Act and the ABC clauses. You need to ensure you are compliant with regulatory requirements in the UK, especially for Hikma as a UK-listed company. The SFO reviews a lot of the work done by companies active in Iraq. So you have to have a very sharp eye when it comes to these challenges in Iraq.

There is clear political influence that needed to be properly managed as well. We had some dilemmas with our employees, and even the employment side required certain arrangements to secure people on the ground.

You also have to be very prudent when it comes to business partners. Most of the distributors in Iraq will usually open companies in Jordan or Dubai, and they will offer to pay you in Dubai or Jordan. But under the new UK anti-money laundering act it is illegal to do this unless you are established substantively. That means the most important thing is to make sure you have an audited and credible business model to ensure compliance with the regulatory requirements.

The final frontier?

Investing in post-conflict markets is a difficult proposition for even the most experienced and well-capitalised investors. The underlying challenges and inherent risks – not to mention uncertainty – are often enough to dissuade all but the most bullish of investors. But the potential rewards on offer for those with an appetite for risk can be significant. However, as many have discovered, Iraq is a market where the risks and rewards are inextricably linked.

‘As the economy develops the market will grow and if you get in early enough, you can make enormous returns. Of course, that doesn’t come without enormous risks. But the really attractive part is that Iraq is a post-conflict economy. As the country goes from destructive and non-productive war towards economic activity, there is a huge peace dividend to be had,’ says Ahmed Tabaqchali, chief investment officer of the Asia Frontier Capital Iraq Fund.

Now, the small print.

‘Iraq has had every conceivable conflict non-stop since the 1980s. Nearly 40 years of destructive conflict, civil war, dictatorship – you name it. That means the time to realisation is going to be longer. Other markets have emerged from conflict, but not from such a sustained and deep conflict. It really requires patience. The returns will come, I am sure, but we are not looking at easy wins here.’

Countries like Iraq – developing nations which are yet to meet emerging market status because of size, risk and liquidity issues – are typically termed as frontier or pre-emerging markets. While there is an expectation that in time they will develop into more stable investment markets, the risk profile and nature of the investments – often long-term and with high barriers to entry – make them unattractive to investors without the requisite country knowledge and risk tolerance.

‘There are all sorts of challenges that come from [Iraq’s] lack of development, starting with the legal challenges and the day-to-day operations, how to conduct them and the high costs of operating there,’ says Mohamed Hawary, director of investment for MENA at GroFin, an investment fund manager specialising in the finance and support of small and growing businesses.

‘The upside of that is that when I look across the region, I see that Iraq has the most investment potential simply because it’s coming from such a low base. Any degree or period of stability will make a big difference and you will see growth in a relatively short space of time.’

That low base from which Iraq is rebuilding from was the most commonly cited reason those surveyed for this report gave when asked about their main incentive for investing in Iraq, with 40% pointing to a lack of strong local competition. That said, many anticipate an extended investment horizon before the prospect of any real rewards materialise.

‘It’s impossible to put a date on when returns will come or to set horizons, but what we can do is look at other post-conflict societies and track against their development. Nothing is a perfect guide, but you can make predictions,’ says Zaab Sethna, partner at Northern Gulf Partners, a frontier-focused investment firm specialising in Iraq.

‘The country may be impoverished now, but it has the capacity to very quickly raise itself into the ranks of the middle-income economies and eventually be a rich country. The country has been cut off from the world and subjected to every bad idea known to mankind in the twentieth century. They are also starved of international links – they’ve been cut off from the outside world for a generation.’

RESOURCE RICH

It will come as little surprise that most international investors are still looking to the oil sector. Iraq has 12% of the world’s total oil reserves and is second-largest crude oil producer in the Organization of the Petroleum Exporting Countries (OPEC), after Saudi Arabia. It is also the fourth largest exporter of oil (holding the fifth largest proven reserves). Oil production has doubled in the last decade, creating demand for exploration and production companies, as well as oilfield service providers.

‘Most investments are concerned with the resource advantages in Iraq, most obviously in gas and oil as well as downstream. The big and major investments are currently downstream,’ adds Amar Shuba, partner at Management Partners.

‘All of the international oil companies are here already. The big foreign direct investments which are supposed to happen are all in downstream. That is a long and tedious process that will take time.’

Many of the 90 fields that currently exist in Iraq are not operational or need significant investment to produce efficiently. It’s a similar story for the country’s gas infrastructure: Iraq has the potential to be one of the largest gas producers on earth, but around 70% of it is burned on discovery due to a lack of infrastructure to capture and transport it to market. Yet despite there being a glaring need for investment, a number of those who we spoke with reported significant barriers for international companies to overcome.

‘As a general rule, if it’s a massive, too-big-to-fail infrastructure project that can’t go wrong then international companies are not precluded from bidding for it – there is no one else who can provide those services,’ says Paul Bailey, founder of Devonport Capital, a specialist lender that provides bridge-financing to SMEs operating in Iraq.

‘But for a smaller contract, there can be incredible pressure to use local contractors who are sub-optimal and poorly qualified. It’s poorly focused politically, and it’s never the best value or best qualified candidate who wins a bid but the best connected.’

Reflecting the regional divisions that still mark Iraq, oil contracts in the KRG were structured very different from those in the south. While operators in Kurdistan have entered into production sharing agreements with the government, giving investors some degree of title over the oil in the ground, companies working in Federal Iraq – including those based in the super-giant Rumaila field, considered to be the third largest oil field on earth – are operating under technical service contracts that grant them a fixed percentage of the exploitation. Unfortunately for Iraq, these contracts, and the formulas used to determine returns, were poorly designed.

For investors who aren’t willing to take on the risks associated with projects in oil and gas in Iraq, they will largely struggle to gain exposure to oil and gas through other investment vehicles.

‘There is no company related to the oil or energy sector that trades on the Iraq Stock Exchange, which is a bizarre anomaly given that it is the huge driver of the economy,’ says Senath.

‘That’s a legacy of the centrally planned economy of the Saddam era, where oil was something that was highly controlled by the state. The government is trying to encourage the development of Iraqi private sector companies in the oil space; it is happening slowly and there are some decent ones, but still none of them are listed and it remains state dominated.’

CASH POOR

Despite not having exposure to oil and gas, Northern Gulf Partners’ investment fund, Iraq Investment Partners I (IIPI) was the world’s best performing emerging markets hedge fund according to data compiled by the BarclayHedge Global Hedge Fund database. In the coming years, Sethna sees further opportunity for investment into Iraq’s stock market.

‘The figure we like to use as a benchmark is the total market capitalisation of the stock exchange to the gross domestic product (GDP) of the country. Iraq’s market cap today stands at around $11.7bn, which is under 6% of the country’s GDP [of roughly $200bn],’ says Sethna.

‘The closest comparable country in terms of population, geography and reliance on oil is Saudi Arabia, which has a market cap to GDP ratio of 75%. That shows you there is tremendous potential for growth in Iraq. That’s the story we are investing in.’ That story is resonating with an increasing number of investors in recent years says Grofin’s Hawary, who reports an uptick in interest for Iraqi investments across the board.

‘When we first went there, we didn’t have a lot of investors at all. But now we are definitely getting more and more enquiries and seeing more interest. It is gaining momentum, especially in the last two years,’ he says.

‘Right now probably around 15% of the portfolio covers Iraq but it is growing fast. We think that in a couple of years it can grow to around 25% of the total portfolio.’

But while increasing numbers of investors are considering investing in Iraq, a dearth of available capital remains one of the biggest impediments to progress – particularly for small companies.

‘There are companies which are market leaders; there are families that have been in business for generations; there are young people with start-up ideas. What they are all starved for it capital. There is no source of financing in the country. The banks aren’t lending and the government has little knowledge of the private sector,’ explains Sethna.

‘In Iraq, high liquidity is essential. Because there is no credit system and so forth, most businesses carry a lot of cash. As a result, many function very inefficiently,’ adds Tabaqchali.

‘That means there is a huge amount of wealth to be unlocked once they start to function differently. If you unlock all this cash once the country transitions toward a market economy, it will open up enormous opportunities.’

International businesses have had their own issues with acquiring capital for use in Iraq too, which has made investment difficult – or impossible – for many prospective investors. But a lack of available capital and an inability to carry out the required due diligence in a cost-effective manner has spelled opportunity for some businesses in Iraq.

‘We found the most lucrative thing we did was short-term loans. We had our own cash in the bank and found that sensible companies from the UK or US would win contracts from one of the oil majors to supply parts in places like Kazakhstan, Abu Dhabi or the Gulf of Mexico. Then the oil major suddenly decides it needs to be in Iraq and asks the supplier to work with them. When those suppliers go to the bank and show them a contract for services in Iraq they suddenly find there is no funding available,’ says Bailey.

‘If you’re looking for $200m for a 20 year loan the bank will take the time and effort to educate themselves about it, but when you’re a smaller supplier asking for $500,000 for 90 days as a bridge payment then it’s not worth the time and money for the bank to fund it. They won’t make enough off it to cover the costs of scrutinising that loan – the amount of paperwork you need to extend a small loan in Iraq is similar to a loan ten times the size elsewhere. The risk to reward ratio is so skewed that a bank will just turn them away.’

INVESTMENT DIFFICULTIES

With due diligence on major investments often falling under the remit of in-house counsel, those who participated in our survey were well placed to comment on the current procedures used by those currently – or considering – the difficulties presented by investments in Iraq. It was clear that one of the biggest challenges investors and businesses faced was the opacity of the Iraqi market.

‘Ten years ago, the idea that someone would pay outside counsel for advice was anathema to an Iraqi business, even a very large one,’ says Bailey.

‘Now, both sides of the transaction have international lawyers. More and more, lawyers are being seen as a value add in terms of clarity and professionalism, and not a leaching cost.’

That notion aligned with the results of our research, with 77% of those having engaged a lawyer on Iraq-facing matters in the past 12 months, with help establishing an office (52 respondents) and tax related advice (47 respondents) being the two most common reasons to seek outside counsel. While the country’s undeveloped arbitration laws were only cited by 5 respondents as a major concern, it was clear from those we spoke to that dispute resolution remains a big issue.

‘When I worked in private practice, the position was always that you can’t really do arbitration in Iraq’ says Mohamed el Roubi, general counsel at GardaWorld International Protective Services. The country is still not party to the New York Convention so you either have to do it in Iraq or find places where there is a bilateral or multilateral agreement to feel secure.’

The New York Convention has since been ratified by the Cabinet in Central Iraq but needs to be approved by the parliament in Federal Iraq in order to be applied across the whole country. The question of when Iraq will become a signatory to the New York Convention is a huge issue for international investors.

‘Although the New York Convention has been ratified we are still waiting for it to become effective. Until then, businesses operating in the country will face uncertainty,’ explains Simon Nai, deputy manager of legal and audit department at CNOOC Iraq.

‘While there are ICC cases in progress, businesses generally lack practical examples when it comes to arbitration against an Iraqi company or the national government, which makes it difficult to understand how strong the enforcement mechanisms are.’

In the meantime, a number of initiatives are underway to help improve business confidence, including a network of specialised commercial courts established in 2015 to help provide alternatives for resolving resolve disputes involving international investors. But Mais Abbas Abousy, who worked to help establish the courts in her role as attorney-adviser at the Commercial Law Development Program, says that businesses are failing to make the most of the opportunities they provide.

‘The biggest test is ultimately whether the system can be sustainable. We have seen that it has the potential to be – I know of many cases in the courts rule in favour of the non-Iraqi party. However, the question is not so much whether protections in Iraq are strong, but whether the international party wants to take it to court,’ she says.

‘Many companies do not utilise the service that everybody worked very hard to establish because they’re afraid of the impact it could have on their reputation or the cost to their operations in Iraq. That has nothing to do with the courts themselves – from what I’ve seen, the commercial courts of Iraq are as strong as any others in the region.’

A BRIGHTER FUTURE

Despite there being a host of challenges remaining for Iraq to overcome, there remains reasons for optimism, particularly when current progress is contextualised against the difficulties which plagued Iraq even a few years ago.

‘Iraq is going through two transitions at the same time – from war-torn to post-conflict and from centrally-planned to free market. It’s fiendishly difficult to manage these two transitions at the same time,’ says Sethna.

‘But what a lot of people don’t realise that per capita GDP in Iraq has more than trebled in the last ten years. It’s out of the impoverished zone and heading toward middle income.’

Whether that will prove sufficient to attract further investment in the short-term remains to be seen. But with positivity emanating and an increasing number of success stories to point to, as well as improving investor protections and international links, the point where the risk profile of Iraq becomes more tolerable for investors appears to be approaching.

Foreword

The way global companies handle data is set to change dramatically on 25 May 2018, when the European Union’s (EU) General Data Protection Regulation (GDPR) comes into force. Designed to address concerns over the security and use of personal data, GDPR will apply to data processing activities regarding personal data within Europe as well as data transfers within the EU and between the EU and non-EU countries, and it looks likely to become the global benchmark for protecting personal data.

Legal teams are front and center as companies get ready to comply with GDPR, and the stakes are high. Companies that do not get compliance right risk fines of 4% of global turnover or €20m, whichever is greater. Regulators have made it clear that they intend to fully flex their powers to enforce the regulation.

Juerg Birri, Global Head of Legal Services
KPMG International

Compliance with GDPR aside, no business wants to face the reputational fall-out of failing to protect their customers’ personal information – as the WannaCry, Cambridge Analytica and far too many other breaches show.

How are legal teams working with businesses to prepare for the new regime, and are they confident they will be ready? KPMG International sponsored The Legal 500 to find out.

The results of a survey of 448 legal counsel and in-depth interviews with over 30 senior general counsels, set out in this report, combine to offer a view of the state of GDPR implementation worldwide. The countries, regions and jurisdictions covered in this survey – Australia, Brazil, Germany, Ireland, Italy, Russia, Spain, Taiwan, United Kingdom and United States – cover a range of key markets, both within and outside the EU.

The results of this survey reveal that legal teams face significant hurdles as they seek to implement a data protection management system that allows them to continue operations and capitalise on the valuable data they hold. Among the biggest challenges respondents faced:

• • GDPR affects all parts of the organisation, which can frustrate efforts to determine responsibility and accountability. Implementing policies across the organisation was named as the top challenge by about one in five respondents.

• • While the legal team is central to preparation efforts, success depends on its ability to work with other departments to map issues and develop solutions.

• • The GDPR regime is based on principles rather than prescriptive rules, and interpretation of legal requirements and obligations can be difficult in the absence of precedents or additional guidance.

• • GDPR compliance requires understanding and control over all of the IT systems and processes for handling personal data collection – including data that may be hidden in legacy architecture and systems.

• • Few organisations have sought to understand the risks arising from the actions of third-party suppliers and other commercial partners; only 10% have made contact to check third-party compliance with GDPR.
  • Finally, most organisations have struggled to identify all data processing activities or gain a broad internal overview of their processes. For GCs, this has made compliance a continually moving target.

Faced with challenges like these, only a minority of the legal counsel surveyed feel confident that their organisations have done enough to comply. Fewer than half (46%) of respondents believe their organisations are prepared for GDPR, while under 10% of respondents believe that employees at their organisation are fully aware of their data protection obligations under GDPR and national laws.

This report offers a view of how legal teams are addressing the challenges of GDPR and identifies a number of leading practices for getting organisations systems and processes onside. As legal counsel reported in interviews, the best solution to these challenges may be to focus on the opportunities. For example:

• • Demonstrating GDPR compliance can be a good opportunity to differentiate your business by winning more consumer trust and thus competitive advantage.
  • GDPR compliance can benefit the organisation’s culture, as stronger governance structures for handling data help mitigate other risks (e.g. security, bribery, corruption).
  • More disciplined management of customer data can produce opportunities to build connections with customers and produce better products.

By approaching GDPR as a chance to invest in a leading-edge global data protection management system, KPMG member firm legal teams can help their clients get more control over data and leverage that data to gain more strategic value.

 

KPMG’s Global Legal Services practice is proud to support The Legal 500’s survey to better understand how organisations inside and outside the EU are preparing for GDPR as well as identify challenges they are facing along the way. The KPMG network of Legal Services firms are uniquely positioned to offer advice in this area due to our multi-disciplinary service approach, deep industry knowledge, and global reach. Our legal practices operate in 75 countries with over 1,650 legal professionals.

KPMG member firms may render legal services where authorized by law, with full observance of relevant local regulations. Legal services may not be offered to SEC registrant audit clients and/or affiliates or where otherwise prohibited by law.

The challenges of GDPR

Our detailed survey took the views of legal counsel at 448 institutions globally, more than half (63%) of which had already appointed a dedicated data protection officer (DPO) or local representative in the EU. The median annual turnover of the organisations surveyed was $4.3bn.

The results of this survey, combined with in-depth, structured interviews with over 30 senior GCs globally, show the following issues are challenging legal teams when it comes to implementing GDPR.

 

‘While the legal team is a key part of any GDPR strategy, ideally an organisation needs to appoint a ring-fenced team that is dedicated to compliance. This team should work with other departments to establish key areas of concern. Leaving it all to legal teams makes no sense in a business environment where the legal team already has a thousand other compliance challenges to meet’ (General counsel, TMT company).

Lack of support from the wider business

‘A lot of GCs are almost victimised by their organisations over this. If your IT teams won’t talk to you and show you the systems – either because they don’t see it as their job or they are not properly incentivised – then you can’t really do much’ (General counsel, consumer goods company).

Understanding GDPR itself

‘GDPR is not overly prescriptive about how to achieve compliance. It seems to allow for a degree of interpretation. While this is a positive, it does mean that organisations need to prioritise and decide on their policies. This feels like uncharted waters for me as GC. I am advising on something that I cannot control in reference to the law itself’ (General counsel, TMT company).

Maintaining a consistent approach globally

‘Ideally, a common language should be adopted and used to discuss compliance in all jurisdictions. That sounds very good in principle, but when you try to implement it in practice you realise it is all but impossible. We have too many staff to standardise our approach to compliance’ (General counsel, financial services company).

Understanding IT systems and processes underpinning data collection

‘We have spent a long time looking at data security and our handling of customer data and I have spent a long time on this personally. Like every GC, I have realised that the closer you look at it the more problems come out of the woodwork. Particularly when you dig into IT architecture and legacy IT systems. We are constantly finding stacks of data we’d forgotten about. We then need to address where it has come from and how it is being used’ (General counsel, consumer goods company).

Coping with ambiguity

‘GDPR has hit the IT community particularly hard and they have a very specific way of working that engenders itself to finding a right answer. As a compliance practitioner, I need to tell them it’s not always straightforward – there’s not always a right answer’ (Head of compliance, consumer goods company).

Assessing risks in the supply chain

‘The real difficulty with GDPR is working out which third-party relationships might get us into difficulty. Knowing how our commercial partners use data is a critical part of our compliance strategy but it is very difficult to monitor effectively. Even though we are not looking to monetise customer data it is absolutely crucial to be 100% on top of things’ (General counsel, TMT company).

 

Preparing for GDPR

With just over a month to go before GDPR comes into force, fewer than half (46%) of respondents feel their organisations are sufficiently prepared.

Put another way, our survey shows that more than half of global businesses have failed to prepare for GDPR. Given the penalties organisations may face if they fail to comply by 25 May, this represents a significant source of regulatory risk in the market.

The good news is, it is not yet time to panic. GDPR compliance is a challenge for all organisations, but big steps toward meeting the regulation’s requirements can be made in a short space of time. In the following report, we hope to give a sense of how GCs are finding solutions to the problems of GDPR and how, by following their best-practice approach, others can address the challenges of GDPR compliance within their organisations.

Of all the challenges facing legal teams, establishing or adapting processes to ensure compliance is the most pressing.

 

 

Over a fifth (21%) of respondents said implementing policies across all divisions of their organisation or group was the biggest challenge they faced. However, the perceived challenges varied greatly by country. Updating systems and changing the way in which the organisation stores data so that new rights such as the right to be forgotten can be implemented effectively was seen as the biggest challenge in the UK and Ireland, while ensuring ongoing compliance with GDPR was the top priority for businesses in Germany.

Transferring data to third parties, including those outside the EU, is also presenting a challenge. Just over half (51%) of organisations globally use EU standard clauses when transferring personal data to third parties, while less than a fifth (18%) are relying on adequacy decisions of the EU Commission.

Ensuring employees throughout an organisation are aware of how the new obligations apply to them is likely to cause problems long after 25 May.

While four fifths (80%) of respondents felt that employees were either somewhat aware or mostly aware of their responsibilities, it was notable that confidence fell off markedly at organisations with a group global annual turnover exceeding $1bn.

It was also clear that a significant number of organisations are likely to encounter serious problems related to employee awareness.

Fewer than 10% of respondents believe that employees at their organisation are fully aware of their obligations under GDPR and applicable national laws, while more GCs think the employees across their organisations are completely unaware of GDPR than think they are fully aware.

 

Employees specifically responsible for processing personal data will be particularly important to an organisation’s compliance strategy. While more than half (55%) of respondents believed those handling and processing personal data understood the implications of GDPR, it was striking that nearly a quarter (24%) felt even these key employees were not aware of their responsibilities. Running due diligence on these employee groups is essential before 25 May.

Surprisingly, organisations based outside the EU reported low levels of preparation anxiety.

Respondents in Brazil expressed the most confidence (52%) that they would be fully prepared for GDPR, with similarly high confidence levels reported in Russia (44%), Australia (51%) and the US (51%).

It seems likely that these organisations may not be fully aware of what GDPR compliance entails.

Many respondents showed either a lack of familiarity with the regulation or a lack of concern over its extra-territorial scope. One Russia-based GC, representing a multinational organisation handling the data of EU citizens, stated: ‘We fall outside the scope of GDPR. Russia has its own data protection regime and is not in the EU, [as a result, GDPR] will not affect us.’

Such misplaced confidence may come at a high cost. A high proportion (72%) of these respondents represented organisations with subsidiaries or branches in the EU. Their organisations will certainly need to establish how personal data will be compliantly transferred between jurisdictions. Moreover, organisations not located within the EU but processing personal data of EU citizens must comply with GDPR, even if they only plan to use this data for the purposes of monitoring customer behaviour rather than direct marketing.

Within the EU, respondents in Italy were the most confident of all, with two thirds (64%) feeling their organisations are ready for GDPR – the highest of all countries surveyed globally.

However, fewer than half (49%) of Italian respondents had an overview of all data protection measures within their organisation, while just 38% said their organisations documented all data processing activities, the lowest rate among those surveyed. Complying with GDPR without such a record of activities will be difficult.

Our survey shows that, even for those organisations located within the EU, there is a high degree of misplaced confidence when it comes to assessing preparations for GDPR.

The views in brief

Who is responsible for GDPR?

GCs are taking ownership of GDPR. Across the organisations surveyed, GCs were responsible for setting data protection compliance policies in over a third (34%) of cases. Chief compliance officers took on the data protection burden in just a quarter (25%) of cases.

Whether or not an organisation’s GC is expected to manage GDPR compliance, legal teams will play a critical role in the process. Finding ways to work with different business functions, and to win organisational support for the project, will be essential to success.

Our survey shows that organisations where data security and cyber risk is deemed a priority for the board tend to be further along their GDPR journey than those who do not.

Fully half (50%) of respondents who reported that their organisation saw these topics as a board-level issue also reported that they felt their business was sufficiently prepared for GDPR, compared to just 13% of those for whom data security and cyber risk were not board-level issues.

Making sure data security reaches the attention of senior management is the single most important thing GCs can do to prepare their organisations for GDPR. Our survey shows that an engaged board helps at every stage of the journey toward compliance.

 

Systems and processes

For GCs appointed to the role of data protection officer (DPO), getting an overview of the various data collection and processing systems across their organisation will be a challenge. This challenge is particularly pronounced at multinationals where staff operate in many different jurisdictions, each with its own data protection regulations.

‘Many of the elements of GDPR were already required in certain countries,’ says Jan Bredehoeft, head of legal for Germany at Huawei. ‘However, ensuring these elements are understood and complied with globally is a big challenge for a diverse, multicultural and data-heavy organisation. Data security and compliance processes are in place across various parts of the organisation, but putting them together to make sure there is a comprehensive control and follow-up strategy is a major piece of work.’

Establishing global data protection standards has, however, proved difficult for many. Just under half (47%) of organisations said data privacy was managed by a single, centralised function, while over half (55%) said they had put in place a single, global data protection standard.

 

Further, as interviewees reported, ensuring on-the-ground compliance with these standards is a big challenge. Even for those based in countries with comparatively well-established data protection standards can struggle. ‘The main challenge is to implement structures across the whole group, including in markets where data protection law is not really common’, says Alexandra Albrecht-Baba, head of corporate compliance at Hochtief.

While software is being sold as a panacea for GDPR compliance, only 35% of businesses globally have implemented a software or IT-based GDPR compliance system.

Ireland-based organisations were the lowest adopters, with only 21% having introduced a software-based platform.

When it comes to monitoring compliance, most organisations are focusing on training staff in their use of email and IT systems. Just over half (51%) said they had developed internal policies for this purpose. However, as one GC pointed out, this is not exactly a surefire way to ensure compliance: ‘Knowing whether staff understand the risks surrounding use of data is the biggest challenge we face. You can send a circular message out about GDPR but you cannot police whether it will be read or followed.’

The views in brief

The risks

SUPPLY-CHAIN RISKS

Significant GDPR compliance risks can lie outside an organisation’s own staff or systems and processes. Any third parties to which an organisation transmits personal data must also be evaluated as part of its compliance strategy. While larger organisations will be able to access sophisticated compliance teams to help them implement GDPR, they will also face greater difficulties in addressing GDPR risk across their supply chains.

Just 10% of the 448 senior counsel polled for this report said that their organisation had contacted commercial suppliers and partners to check their compliance with GDPR.

Given the difficulties organisations will face in scrutinising global supply chains, many are looking to reduce the number of suppliers they work with. For example, one GC reported his team had helped shed over 50,000 suppliers in the past seven years. As an increasing number of companies begin to examine the compliance standards of their suppliers and review third-party contracts, it is likely that GDPR will cause a ripple effect that touches a far greater number of businesses.

For organisations based outside the EU, a mixture of political will and financial risk is likely to drive awareness. ‘Taiwan’s laws have historically been very close to the EU when it comes to data protection’, comments Lawrence Ong, a partner at KPMG Law Firm in Taiwan. ‘But while Taiwan had similar laws to the EU, it was never so serious when it came to fines. GDPR will change that and is helping to focus people’s minds.’

‘Taiwan is a very export-oriented economy and will do a lot to ensure its businesses are not at a competitive disadvantage’, Ong continues, ‘as such, there will be strong political support for GDPR compliance. However, for organisations themselves, the prospect of significant fines is much more likely to spur compliance.’

Adapting to the new laws will not be easy. ‘Data protection teams at Taiwanese organisations tend to be led by computer engineers rather than lawyers, but GDPR compliance is not a back-end, IT security issue. That means people need to adjust the way they think about privacy and take an approach that empowers legal teams to set strategy. Fortunately, a great many Taiwanese organisations are waking up to the fact that GDPR will apply to them and that a coherent compliance strategy will allow them to sell services to partners and customers much more effectively.’

HOW WILL THE REGULATORS RESPOND?

One small comfort for GCs has been the level of clarity offered by the regulations themselves. The work of The Article 29 working party was widely praised for achieving a workable approach to data protection by those we spoke to.

At the same time, a lack of certainty around how these will be enforced makes the precise level of risk difficult to judge.

Some believe that the regulators’ approach will be measured. As one Italy-based legal director commented, ‘data protection regulators are likely to make a distinction between those who have made sincere efforts to comply and those who have not.’

However, says Dr. Konstantin von Busekist of KPMG Law in Germany, there will be very little manoeuvrability on the part of regulators when assessing and imposing penalties for breaches. ‘The question of whether to prosecute is not at the discretion of the authorities. Whenever they have knowledge of an offence they have to prosecute. Even companies which fall outside high-risk sectors such as TMT and healthcare can be at risk from a strong works council, which may have a political interest in bringing the company before review.’

And, adds one GC with close connections to the regulatory authorities, ‘within six months of GDPR’s implementation the regulators will look to penalise a large corporate which has not complied. It’s certainly what I would advise them to do. If a year goes by without any large fines there is a risk that companies will become complacent.’

Andrew Yorston, head of risk and compliance at Vodafone UK has a similar take. ‘Our group audit and risk committee asked “what is the precise risk we face here?” It is hard to quantify the risk, but I advised them that, for GDPR to work as it should, there will have to be investigations. A single customer complaint will be enough to trigger an investigation’.

Conclusion

MAKING THE MOST OF GDPR

‘The problem with GDPR’, says Rob Green, data privacy director at Canon Europe, ‘is there are so many people with different opinions that you can run yourself into a circle of despair. GDPR clearly does represent a massive change, but GCs need to keep a cool head. A lot of this is not new at all.’

Gordon Wade of KPMG in Ireland offers similar advice. ‘There has always been and will always be a data protection compliance requirement. GDPR contains many of these existing principles and should be seen as an evolution rather than something to worry about.’

While the 25 May deadline does not leave GCs much time to work with, a lot can be done in a matter of days. Focusing on quick wins is the best approach for those who feel their planning is behind schedule.

Alexandra Albrecht-Baba, head of corporate compliance at Hochtief, puts it more bluntly. ‘There is a theoretical approach and a pragmatic approach [to compliance]. My impression is that all GCs are going to take the pragmatic approach until 25 May this year and only then try to consider what the best theoretical approach may be.’

Finally, as a number of GCs reported, the best solution to the challenge of GDPR is to make the most of it and focus on the opportunities it presents to an organisation.

GDPR IS AN OPPORTUNITY TO DIFFERENTIATE YOUR BUSINESS

Jeff Langlands, general counsel, BT business and public sector

‘For a number of businesses, GDPR compliance can be a differentiator in the market. In the telecoms space that is definitely true. The money we spend on GDPR compliance is not a sunk cost, it is a way of getting an advantage on our competitors. There are also cultural benefits to GDPR compliance across the organisation. It stirs the pot and makes sure other risks – from security to modern slavery and anti-bribery and corruption – are placed under a better governance structure.’

Dan Guildford, general counsel, Financial Times

‘GDPR presents unique challenges for the media sector. Subscription-based media companies such as FT rely heavily on user data to help promote subscriber acquisition, retention and engagement, and GDPR also poses potential risks for journalistic freedom. We need to ensure that all of our lawyers have a good knowledge of data protection laws and are taking the lead on ensuring the company fulfils with its regulatory requirements under GDPR. Ultimately, if we get this right we will be well ahead of other organisations in our field.’

Martin Bowen, general counsel, Dyson

‘GDPR is often seen as a very onerous thing to comply with, but we see the opportunities. A future where we are connected to our consumers looks more and more likely. A rich seam of information will help us produce even better products if we can get the discipline of handling the data properly in place.’

Carolyn Jameson, group general counsel, Skyscanner

‘There is a big drive to personalise our product line, which will mean collecting more personal data. In this sense, GDPR has been fortuitous for the business and for me as DPO. It has given us an opportunity to think systematically about what we want to do with data before we collect it.’

 

Foreword

Whereas intellectual property (IP) law firms hitherto concentrated on legal advice, they are today confronted with a great variety of demands by their clients and a rapidly changing market environment. Thus, traditional approaches are in many cases no longer feasible.

Historically, most companies outsourced all of their IP work to external law firms. Nowadays, a growing number of companies have in-house IP departments coping with some or even a major proportion of the work. While some companies still outsource the high-profile work, such as litigation, freedom to operate and opposition, other companies tend to mainly outsource drafting and prosecution.

In addition, whereas IP firms were in the past dedicated to the whole value-added chain, from filing to the end of the lifetime of the patent, more and more tasks, such as annuities or validation of a European patent, have been taken over by IP service providers not offering any legal advice and often being capital driven.

To offer the whole range of tasks, IP firms, however, have to have available patent attorneys adequate for both the high-profile work and prosecution, and highly qualified paralegals attending to the formal work. Whereas the costs for the high-profile work are generally not an issue, there is a high cost pressure on prosecution and drafting as well as on formal tasks.

To strike a balance between loss of business to service providers and the still desired need for high responsiveness and quality, the pricing structure of IP firms is in a state of flux, with a tendency to increase hourly rates for the legal advice. To put it differently, the pricing structure of German and European IP firms will likely change towards the pricing structure most companies are used to from their US counsels.

Moreover, there is a move towards new ‘products’, such as taking over the IP data management or to offer tools that allow automatic transfer of or access to the necessary data. Due to the great variety of patent management systems on the market and used by companies, there is no easy solution for IP firms to satisfy those needs.

Besides legal advice, law firms are now also concerned with automation of processes. They make use of application programming interfaces in order to enable communication between their database and the various databases and patent management systems of their clients. Web-based communication and internet platforms are also in the picture.

In any case, it is of high importance for the law firm to obtain knowledge about the actual needs and expectations of the companies, apart from the legal advice they traditionally expect.

Best practice: engaging with outside counsel

The Legal 500 Deutschland IP survey sheds light on when it is best to engage external legal advisers on IP issues, and how best to ensure the engagement is run efficiently and effectively

Striking an appropriate balance between building in-house intellectual property teams against outsourcing matters to external law firms is not a straightforward conundrum. In-house professionals are typically immersed in the business, understand its priorities and can quickly engage and collaborate with internal colleagues, such as management and those in research and development (R&D).

External law firms have the advantage of economies of scale, and the ability to develop more specialised expertise and more rounded industry expertise, from advising and representing multiple clients in a number of industries. Often they will have an international network or at least a raft of international connections.

In-house legal teams have grown considerably in recent years, as the global regulatory environment has become more burdensome. They have also expanded as businesses have sought to cut costs by reducing the use of more expensive external lawyers and lowering the inherent inefficiencies of engaging outside counsel.

The crux of the issue is utilisation; there is no point in building in-house teams unless they are equipped to handle a consistent flow of matters. Where niche or a higher level of expertise is required, or where a business simply does not have a sufficient flow of intellectual property (IP) requirements in a particular area to warrant having an internally assigned professional, then it needs to think about effective engagement with an external law firm.

In our survey of over 100 professionals that have responsibility for IP issues, most revealed that they outsourced some of their requirements to external law firms. Moreover, 43% indicated that they outsourced everything. This illustrates the continued significant demand for specialist IP expertise in private practice law firms and the fact that companies simply cannot build a business case for having a fully fledged internal department that can handle all IP matters. In many instances, businesses would effectively need to administer a large and consistent flow of IP applications and related business before they could bring this all in house.

Regulations also play a part in Germany. A senior legal counsel at a major automotive company says that it will always engage outside counsel for a dispute, not just because they have the court experience, but because the business is able to claim their legal costs from the opponent if they win the case; this occurs whether or not the dispute reaches the courts.

Beyond this, the international requirements surrounding effective exploitation of IP will typically ask too much of an in-house department. They will need to engage counsel in various jurisdictions to ensure that their IP assets are properly enforced and protected. Christof Wolpert, vice president global legal innovation at adidas, explains why having a network of specialised external counsel is necessary: ‘There are certain skillsets in our corporate structure that we don’t have in-house. We operate 170 subsidiaries around the globe and we have IP-related litigation in more than 60 different jurisdictions, so we need to work with local counsel.’

Wolpert believes that it is fruitful to retain much of the core business in-house, because it boosts institutional knowledge, which can be reapplied and refined over time. ‘We do the clearance or freedom to operate in-house because we build experience,’ he explains. ‘We like to build that know-how internally, which enables us to make decisions faster.’

On less critical issues, Wolpert believes that engaging outside legal advisers and the economies of scale that they can provide makes good business sense: ‘I want people in my team working on clearance and strategy, and not on drafting. That doesn’t broaden your skillset as an in-house counsel. We want people to advise on what the business can or can’t do, what are the possibilities, the risks and the threats, and that is how we add value to the process.’

There is a widely held view that in-house teams are better equipped to take more risks, to take more commercially driven decisions even if there is a chance of a negative outcome. In-house counsel recognise that law firms have to minimise their potential liabilities and this necessitates that they pay
more attention to possible downsides, which is not always strategically optimal.

Cross-border expertise is especially important, as illustrated in our survey, which showed that 82% of respondents do business in more than one EU country and 85% do business outside of the EU. The importance of cross-border and international capabilities is brought into sharp focus by the survey, which reveals that 62% of respondents have a dedicated internal resource to manage IP registrations in multiple countries. At the same time, 54% of survey participants outsource this responsibility to external law firms.

Needing a helping hand

When to turn to external legal advisers can pose a problem. For many smaller businesses, they simply do not have the expertise or resources to manage any of their IP matters. For others, they would engage external counsel when there is a cross-border component or if the issue was so complex that it would require specialist or niche expertise. Other businesses prefer to use outside legal expertise for more routine and volume matters, where economies of scale can be beneficial.

Christian Reinders, chief IP counsel at Dräxlmaier Group, the German automotive component supplier, says that he needs to constantly assess capacity and utilisation in his own team, and identify when it simply does not have the expertise, experience or geographic capability to handle a matter: ‘We look at what resources we have internally, whether we can manage that or if the case is so complex that it would make sense to engage outside counsel with specific expertise in that field.’

Carmen de la Hoz Llarandi, head of the industrial property office at Banco Santander, says the bank routinely looks to external legal advisers when matters become ‘complex and require more expertise’. The bank was involved in a long-running trade mark dispute with Sparkassen, the German savings bank, over the use of a particular hue of red in its branding.

Reinders believes that as the global economy develops, and innovative technologies become more integral to manufacturing and product design, businesses inevitably have to think carefully about looking outside for particular skills and knowledge that do not exist in-house. ‘If we are stepping into a technology field where we do not have the experience and background, we like to involve outside counsel that can help us better understand that technology. I try to find specialists and patent attorneys with specific expertise in business models and technical standards that are different to our traditional business model,’ he explains.

When it comes to IP strategy, businesses typically feel that this is best served by an internal person and/or team. In this instance, only 20% of survey participants look to external counsel for guidance on IP strategy, though this issue does become more complicated as businesses grow internationally. Reinders says that running the strategy in-house makes absolute sense because he and other team members have easy access to and regular communication with the management board and the R&D department. He admits though that this approach has its limitations: ‘It might be different if we were a multinational company that was ten times the size. If you were so big in size that you had to organise invention harvesting in local branches of the company, it might then make sense to completely outsource the patent work.’

Even for smaller companies, Maike Weber, head of legal at Native Instruments, says that external advisers can contribute a great deal to a business’s strategy: ‘We would always discuss the overall IP strategy with external experts, because they have experience of other companies and understand how other companies of this size operate. Their experience can help us to be better.’

Identifying the right external counsel

Our survey highlights common factors in how businesses choose their legal advisers. Not surprisingly, businesses have a primary emphasis on getting the best IP expertise from their external counsel. Priorities for choosing advisers also include appropriate pricing structures, and quick responses and feedback. Of less importance is a dedicated account manager and of least importance is the availability of budgeting tools and cloud-based software solutions. Our independent interviews suggested these tools and software solutions are becoming increasingly important, but interviewees in particular highlighted the importance of outside counsel understanding how their businesses operated, the technologies and structures that drive them, and the industry that they compete in.

Beyond this, the head of legal international at a Munich-based technology company says that he looks for especially high levels of pragmatism and commercialism in his legal advisers: ‘I definitely require external counsel to be in-house counsel-like and operate in a way that we operate as a legal team. They don’t have to give us the 100% answer on everything if it takes ages to get it done when all we wanted was an educated guess on exposure to a certain issue. If someone is able to give us a 95% accurate answer quickly and tell me that there is still some residual risk that needs to be checked, that clearly helps. I don’t want them to spend hours on a certain issue that I explained at the beginning was not so important.’

Equally, a senior legal counsel for IP matters at a leading Germany-based clothing company says that legal advisers must be cognizant of a company’s appetite for litigation and whether the potential commercial advantages will warrant the time, resource and monetary cost of pursuing a dispute. ‘The most important characteristic is a pragmatic approach,’ she explains. ‘We don’t want to be forced into claims that don’t make sense or where we have no chance to defend them. We are cost-sensitive and it needs to be the best solution from a monetary point of view.’

Paying for legal services

For all the talk of alternative fee arrangements over the last decade, the vast majority of law firms around the world are still wedded to the billable hour. It does provide transparency and convenience for both firm and client, though it is not necessarily the most efficient means of charging for legal services. There is of course the administrative time that goes into tracking hourly costs; there is then the reluctance among clients to pick up the phone when a query arises in case the clock starts ticking. The billable hour is not always conducive to regular contact and effective collaboration, and that is why clients continue to look for alternative arrangements. Our survey indicates that businesses have a preference for fixed fees, even if there is some flexibility around them. Fifty-five percent of respondents reveal that they pay external law firms on a flat-fee basis. An in-house counsel from a German firm explains the reasons why the billable hour is falling out of favour and where he feels firms can be more creative around fees: ‘I do not care for the hourly rate. It is something that is transparent and makes a law firm comparable to the next firm, but I am more concerned about the efficiency of the lawyer and how they handle the matter. I’m interested in smart models; it would be interesting to have a monthly base rate that covers the ten-to-15-minute calls that we have every now and then, rather than always starting the clock on an hourly basis.’

Reinders has similar sentiments, though he recognises that clients should not impose too much of a financial burden on the legal advisers as this can be counterproductive in fostering fruitful relationships and inspiring quality service delivery: ‘A fixed fee definitely helps as it is more predictable for our controllers and the people responsible for our budget. I really like fixed fees, but because I have worked as an outside counsel I recognise that it can cause constraints. I’m very happy to agree fixed fees, but recognise that we should not put all the cost pressure on the IP firm.’

Creative approaches to billing should always be at the forefront of a law firm’s considerations, especially as clients have faced increasing pressure to cut costs and stick to budgets. Robert Fichter, chair of the board of directors at Dennemeyer & Associates, says that one way of increasing predictability is to fix currency conversion rates, which he recognises can be a particular challenge given today’s uncertain geopolitical and economic climate: ‘As managing IP rights all over the world involves currency issues, it is a common desire to fix conversion rates for a certain period of time.’

Connecting through technology

While much interaction with outside legal advisers continues to be via phone and email, there is a growing demand for technology to facilitate more integrated relationships and collaboration. Our individual interviews suggest that a high degree of communication remains through traditional methods, but our survey indicates that the landscape is changing. Fifty-five percent of respondents say their legal advisers provide a cloud-hosted IP software solution to help clients track progress and ensure that matters move forward more efficiently.

Seventy-four percent of survey participants indicate that cloud-hosted software helps to improve connectivity and promotes efficiency in budgeting, exchanging data and other work. Fichter says: ‘Communicating by email is the most convenient way to implement, but as we all know, it is also a very cumbersome and time-consuming method.’ He believes that shared portals ‘allow easy sharing of documents among all involved parties’ and ‘the direct upload of documents and related bibliographic information’. Moreover, he indicates that an IP management system ‘directly increases efficiency on both the outsourcing party’s and outsourcing partner’s ends’ and believes that the transfer of emails can be radically reduced, especially when follow-ups and requests for confirmation of receipt of emails can be eliminated.

For businesses, this can be hugely important, with 82% of respondents suggesting that cloud-hosted solutions provided by their legal advisers had saved them money, including freeing them from having to purchase the tools themselves. Speaking to The Legal 500 Deutschland, a senior in-house lawyer says that cloud hosted software can enable a business and its external legal adviser to work concurrently on a shared document, to monitor progress from both sides and be able to access key files at all times: ‘That would make life much easier as every single request can be time consuming, where you ask for an update on a particular template, and the partner goes to the associate who has to invest time in providing a response and the partner then forwards the response to me. The administrative time is very high. I would like to use cloud tools or other tools that help me understand where a matter stands, what the external adviser needs, and what is pending from them and pending from us.’

Despite the increasing prevalence of these tools as part of a law firm’s offering to clients, 70% of survey participants indicated they had acquired their own software systems, in part because they still required their own internal tools and often work with a range of external advisers. Popular systems used by respondents include those provided by WiNPAT, DIAMS iQ, Computer Packages, PatOrg and Ipendo.

One senior in-house lawyer at a German automotive industry company says that he does not have high expectations of his external counsel to provide cloud-hosted software programs, because it would unlikely be compatible with the business’s own e-filing system.

The relationship between a business and a law firm is becoming increasingly complicated due to the greater expectations from clients and the technology solutions that are coming onto the market. Businesses continue to grapple with the choice between building sizeable in-house IP teams and the recognition that external law firms can provide a broader suite of expertise, resources and economies of scale. To make the relationship between client and firm more fertile, external legal advisers will have to work harder to understand their clients’ business priorities, to provide more flexible and creative fee structures, and to make their day-to-day communications and collaborations tighter and more effective.

Chris Crowe

 

Data summary and overview

The vast majority of respondents (83%) outsource at least some of their IP requirements to a law firm. Expertise in IP is of course an expectation, as is appropriate pricing structures and responsive feedback. Over half pay a flat fee, rather than an hourly rate.

Over half are provided with a cloud hosted IP software solution by their law firm. Benefits can include increased efficiency and cost savings, although they may still have to buy IP software themselves.

Over 80% of respondents said that their companies do business in more than one EU company or outside of the EU. Dedicated in-house roles are the most common way of coping with IP requirements in different countries.

Many companies use their IP to their advantage, whether it is to enable co-operation, for marketing purposes, making it an attractive target for M&A, to help obtain funding or quantifying the value of the company itself.

IP incentivisation mainly takes the form of fostering an innovative culture and environment, although half offer financial incentives. Companies provide induction training and other training sessions to ensure basic IP knowledge, while some provide workshops for inspiration.

Foreword

High-quality protection of intellectual property (IP) is without doubt among the crucial factors for innovative companies to succeed in today’s competitive markets. In Germany, technology leaders have for a long time recognised the value of safeguarding the innovations within their core products, like cars, industrial machinery, medical devices and all kinds of consumer goods. In the wake of the all-embracing digitisation of virtually any classic industry, and the increasing need to distinguish products from the competition through software and ICT-based added services, strong IP protection is becoming even more important – particularly as completely new players enter the market to stake their claim, now or in the very near future.

In the search for IP management best practices, it is worthwhile looking at the German Mittelstand, in particular the vast amount of hidden champion companies, ie medium-to-large businesses, which are not part of the Fortune 500 but nevertheless global technology leaders in their respective industry niches. How do they protect, manage and use their IP? And what are the best practices that can be learned from them to maximise the value of IP? BARDEHLE PAGENBERG collaborated with The Legal 500 to find out.

This report, which consolidates the results of a survey of 105 in-house counsel and one-to-one interviews with industry patent managers, aims at drawing the big picture of the issues faced by technology innovators when it comes to IP protection today and in the near future. The findings of the study were discussed at an event jointly organised by The Legal 500 and BARDEHLE PAGENBERG, where various IP managers from innovative German companies shared their experiences and insights, which are combined in this report.

It turns out that an overarching theme is the growing complexity in-house IP managers are faced with – a complexity which comes in different dimensions. Building and maintaining IP portfolios is inherently complex from a strategic point of view, since they can be used both as a sword and a shield:

• • • On the one hand, IP rights can be used to proactively keep competitors out of the market, either by means of the mere presence of the roadblocks that these rights represent or by the proprietor actively enforcing its rights against infringers.
    • On the other hand, IP rights are also useful for obtaining leverage against others’ IP, such as by enabling counter-suing and cross-licensing potential.
    • But IP rights are also business assets that increase the company’s valuation and can generate revenue in their own right through out-licensing.
    • Lastly, and sometimes least considered, strong IP rights can also safeguard the proprietor’s rights in co-operations and partnerships in joint development, production and distribution scenarios.

What’s more, setting up a successful in-house IP department is also difficult from an organisational perspective, as the department has to interface with various different stakeholders: engineers and researchers (ie the creators of the IP), management and sales, as well as external counsel, to name just a few.

Further hurdles lay in wait throughout the lifecycle of IP rights. Regarding the initial creation of IP, the experts agreed that it is paramount for an IP department to strike the balance between: (a) fostering a culture of innovation and putting suitable incentives in place so that innovations are reported bottom-up out of the R&D departments; and (b) aligning the protection activities with the strategic business objectives of the company, ie in a top-down fashion.

Then, on the way to obtaining protection during IP prosecution, the experts point to finding the right interface between in-house IP managers and outside counsel that combines the strengths of both. Only in-house IP managers can ensure that the IP rights pursued are properly aligned with the business strategy and product roadmap of the company, while the in-depth expertise of outside counsel in IP law can hardly be attained by in-house personnel.

The strengths of in-house and outside counsel should also be aligned for the exploitation of IP rights. Every successful in-house department should have processes in place to actively manage the IP portfolio, eg by reviewing its coverage along the way as new products are developed and technology evolves, as well as keeping the budgets reasonable by regularly pruning obsolete IP rights, thereby making room for renewing the portfolio. On the other hand, in-house counsel are well advised to take advantage of the expertise of outside counsel when it comes to enforcing the IP, not only as a final measure in court, but also to take a strategic approach in the handling of IP conflicts.

BARDEHLE PAGENBERG’s IP practitioners are constantly striving to provide the best possible match for in-house IP departments to allow them to tackle the complexities outlined above. We pride ourselves on having a culture where our patent attorneys and attorneys-at-law collaborate at eye level, which has been part of the very DNA of our firm since its establishment. In particular, thanks to this synergistic setup our patent attorneys are able to feed back their expertise gained in high-stakes IP litigation into the prosecution process, which allows them to obtain strong IP rights that are not only legally valid but also enforceable and can be monetised at a later date.

Driving revenues from intellectual property

The Legal 500 asks top IP professionals in Germany about their approaches to protecting and monetising intellectual property

Hiroshi Ueda, an engineer at Japanese camera company Minolta, which later merged with Konica to form Konica Minolta, invented a selfie stick back in the early 1980s. In an era before smartphones and trim digital cameras, the idea failed to get commercial traction and the patent lapsed in 2003.

Now the selfie stick is a must have gadget for many a tourist and with a bit of long-game foresight Ueda’s invention could have made him extremely wealthy. Today, with innovation and technology driving global economic growth, the idea of protecting innovations and ideas is even more vital. ‘You never know what you have in your hands. It could be potential gold in months or years,’ comments Kai Mielke, manager legal affairs at Konica Minolta Business Solutions Deutschland.

There is also a reason why the likes of Apple and Samsung seem to be in a constant struggle to assert their respective positions in the market through intellectual property (IP) litigation.

Mielke believes that many businesses that want to be at the forefront of the new digital economy, must put innovation and IP protection at the heart of their corporate strategies: ‘It is a sign of the times. This is why we have set up five new business relations centres to come up with new products and ideas, and this is legally reflected in copyrights and designs, not just patents.’

Bolstering the brand and value of the company

In the new economy, IP is a key contributor to the stability and success of businesses that want to get ahead. For major companies such as Apple, IP preserves and enhances its value. In our survey, a high proportion of companies state that IP has a key bearing on the value of the business itself, opening up opportunities for M&A and for investment, and keeping investors and shareholders happy. A sizeable 86% of survey participants say IP has a role in quantifying the value of the company and 59% believe it has a role in making it an attractive target for M&A.

Christian Reinders, chief IP counsel at Dräxlmaier Group, the automotive component supplier, says: ‘There has been a dramatic shift in the industry, especially with the entry of new non-automotive competitors, and automotive companies have to find their way to deal with new technologies and new business models. Therefore, IP is having a much greater impact on the automotive sector and you need to be very well prepared with patent strategies, and maybe by also contributing to technical standards, and focus more on the usage of patent data and patent landscapes.’

René Schneider, senior IP counsel Europe at Cognizant and former head of legal at Huawei Technologies’ European research centre, also recognises the growing importance of IP in the current economic climate, suggesting that trade and investment laws are often failing to protect businesses: ‘IP is again an increasing area of focus to successfully tackle the complex challenges caused by increasing global competition and disruptive digitalisation in the 4th industry revolution. Trade wars, unbalanced market entry conditions across the world, fierce competition by new players, new technologies and business models pose various risks for companies. Securing innovation and assets through IP is one essential aspect for continuous commercial success.’
The influence of IP on the global economy became even more apparent in June when US President Donald Trump slapped 25% tariffs on a range of Chinese goods. At the heart of this aggressive move is the belief that China snares IP by demanding that foreign businesses enter local partnerships or joint ventures if they want to enter the Chinese market.

Management support and internal collaboration

There is a growing recognition that innovation and associated IP protection is a way to get ahead of competitors. Yet it has not always been an easy sell to the internal workforce. IP departments have long operated as a support function, helping to ensure that ideas and inventions are protected. But now they are inching their way to the heart of corporate strategy and German businesses are working hard to shift internal attitudes towards IP. André Körtgen, general counsel at THALES Deutschland, the company that designs and builds electrical systems for the aerospace, defence, transportation and security markets, says: ‘We need to make people aware that protection is as important as generating the idea in the first place. We have to create a culture of awareness like with compliance. It is not enough to say that it is very dangerous. We need to meet with colleagues in their daily lives and give them examples of what has gone wrong in the past. If you leave the house, you lock the door.’

To truly exploit a business’s IP assets, survey respondents suggest that greater internal collaboration is required, along with unhindered support from boards and management. Jörg Dreyhsig, global head of litigation and opposition in the IP department at Fresenius Medical Care, says there is a growing emphasis on internal collaboration within the business to ensure that IP is part of the strategic decision-making process: ‘We are embedded very close to the development team. Our global IP department is part of the Global R&D organisation and we report to the board member responsible for Global R&D.’

While in the past IP departments would often operate as a distinct group, the value of these teams is getting additional recognition.

Management and boards should be more attuned to the value of IP, though many have already recognised its importance as disruptors come into the market. Seventy-two percent of respondents say IP strategy is part of the company’s corporate strategic planning.

Reinders sees a number of reasons why IP departments are playing a more pivotal role at the centre of businesses: ‘Compared to the good old days, where patent prosecution was the main responsibility of an IP department in the automotive sector, nowadays the resources of the IP department need to be allocated to a variety of topics in addition to the traditional responsibility, such as developing different patent strategies for different technical fields, competitor analysis and benchmarking, finding adequate corporation partners, licensees, licensors, patent pools or patent portfolio valuations. As mentioned, the use of patent data is becoming more and more important for R&D and sales departments, but sometimes colleagues of these departments do not have an in-depth knowledge regarding IP or how to interpret patent data.’ An impressive 68% of survey respondents provide training sessions to heighten basic IP knowledge and awareness in their R&D teams and a further 58% deliver induction training for new staff members.

Building M&A and investment opportunities

Having IP considerations at the heart of the business delivers countless benefits, according to our experts. In the consumer products industry, digital economy and numerous other sectors, IP is one of the primary considerations for investors and for companies that are engaged in M&A. IP has value and it has an increasing role in investor relations, in the same way that diversity, compliance and anti-corruption is now at the top of investors’ priorities. Dreyhsig comments: ‘When you look for investors then I think they always ask how the business model is supported by IP. Where you have IP that is expiring next year, you know that may make a huge difference.’

Maike Weber, head of the legal department at Native Instruments, adds: ‘A lot of businesses are not aware of the opportunities. If you want to find an investor, then a long list of patents can impress. If you watch out to make sure that your IP is protected, then it can be a good foundation for your company.’

Schneider sees a similar picture, but recognises that in some industries the time taken to secure IP protection is just too long: ‘IP does drive M&A and investment. IP protected innovation and knowhow increases the likelihood of being an M&A target or receiving investment from other companies or venture capital. In the extremely fast-paced IT industry, however, new technology and promising new business models are the main driver of investments and M&A activities. Nowadays companies must bring new technologies and business models to market faster than ever before and before any IP protection can be granted. Therefore it is essential to seek IP protection before going to market.’

Strategic approaches to filing and renewing IP

There is no denying that having an effective IP strategy requires a great deal of time and resource. Filing and renewing IP is not necessarily a straightforward process, but 73% of survey respondents do have a defined strategy for building and renewing their IP portfolios. Martin Fröhlich, GC and head of M&A at Krüger, the German food production company, sums up the extent of the challenge to the business: ‘We are investing more into the management of IP, whether trade marks or patent, where we are looking to scale European and global business. It requires specialists for research on patent and trade mark registrations. It requires a lot of expertise.’

Many businesses are becoming more sophisticated in how they register and protect their IP, while keeping a close focus on IP registered by competitors and others in the market. Schneider believes that many businesses lack a long-term vision and strategy for their IP assets: ‘Companies must have a clear, holistic and long-term IP application and renewal strategy. IP-related decisions should not be based on short-term needs, current impacts or views. Licensing models and strategies need to be constantly reviewed, adapted and must provide freedom and flexibility to try new approaches. Often large organisations seem not to be flexible enough.’

Assessing the wider market
Sometimes though in fast-moving industries such as the digital economy, assessing others’ IP assets is not top of the agenda. Some experts believe that too much focus on IP protection, and the assessment of competitors’ IP, causes companies to handicap themselves. Being agile and innovative enables businesses to bring their product to the market first, to get a head-start on competitors. In this instance, a fixation on the IP landscape can be a hindrance. Dreyhsig comments: ‘I cannot imagine that manufacturers of mobile phones who decide to launch a new device would have the time to make a risk assessment of all possible IP out there. That would end up with years of legal assessment and then the market would progress to the next level without them.’

Most businesses though would take some form of action to test the market and identify possible infringements. Sixty-six percent of survey respondents perform periodic searches via search engines to try to identify similar products and a further 56% monitor competitors’ patent applications. Half of survey participants even carry out test purchases of competitor products to detect potential IP infringements. Monitoring the market is tough though, according to Weber, who believes that significant internal resources are needed to effectively analyse the landscape. ‘You need to have the in-house resources to monitor competitors’ IP,’ she says. ‘If you bring in someone from the outside to monitor competitors, they won’t have knowledge of the industry, the company strategy and be able to evaluate what competitors are doing. To do this internally you need well-paid people with the right resources to do that. It could be that this won’t be seen as a priority.’

Reinders believes that a general level of IP proactivity can serve a company extremely well, especially when it does not come at the expense of ingenuity and a pioneering spirit. Protecting IP assets is a well-developed field though with 42% of respondents to our survey considering themselves to be ‘aggressive’ in the market with regards to IP infringement. Businesses are generally well prepared to take action against rivals with 76% having a defined escalation plan to approach competitors that infringe IP rights.

There is a value to analysing competitors’ IP to identify commercial opportunities, but it is time and resource intensive and smaller businesses are at a natural disadvantage. A sizeable 69% of survey respondents have a strategy for generating IP to obtain freedom to operate. A further 63% of respondents have used patent mapping technologies to get an understanding of the IP environment. Beyond that, businesses struggle to identify market opportunities by assessing competitors’ IP. Only 36% of survey respondents often watch competitors’ IP to identify new market opportunities.

Dreyhsig says that approaches can depend on a business’s financial position and resources: ‘If you have a strong patent position and then you see your first competitor challenging this by bringing a similar product to the market, then you can recognise and assess IP infringements very quickly. In more complex situations where IP infringements do not manifest themselves so clearly it may become necessary for companies to spend more time and efforts on product analysis, but they may not have the R&D capacity to do that. The extra headcount to perform such kinds of investigations is a kind of luxury that many companies can’t afford.’

Entering joint ventures and partnerships

Luxury or not, many businesses will enter joint ventures and partnerships during their lifetimes and they will have to safeguard their respective IP assets and those that are created during the collaboration. IP is a key asset when entering these relationships with 85% of our survey respondents indicating that they use IP to enable co-operation and strategic partnerships.
Partnerships and joint ventures can be very attractive for multinational businesses that want to enter new markets, but there are a multitude of instances where they have shared IP and not gained the market access that they hoped for.

Enercon, the German wind turbine manufacturer, lost its Indian subsidiary and its patents in India, after a dispute with a local partner. Enercon’s experience in a developing economy, such as India, is far from isolated.

Eighty-four percent of our survey participants use a contractual model with a written agreement to cover IP generated in joint business, engineering and development projects with other entities.

Dreyhsig says that businesses should pay real attention to IP protection as they enter partnerships and joint ventures: ‘In co-operations it is crucial from the beginning that you are clear on which partner owns which IP and in particular the future IP. If it is clearly defined from the beginning, in a fair and transparent way, then it is easier to work with that plan and all can benefit from it. You don’t want to have any surprises.’

Weber believes that protecting IP created as part of a partnership can be incredibly complex: ‘It is difficult to create respective contracts to cover joint venture projects. Often the contracts will say that whatever I brought in belongs to me. For inventions that come as part of the collaboration it is more difficult. You might say that two-thirds belongs to you, but what does two-thirds look like?’

In any case, sometimes businesses can get stuck on the detail and lose opportunities to get ahead of competitors. ‘With lengthy negotiations over months to achieve best potential IP conditions companies risk losing the novelty of inventions and market opportunities,’ Schneider comments. ‘Being first into the market might be worth much more than being second but having the better licensing conditions.’

Generating income through licensing

Licensing is an increasing priority for businesses that want to generate real income from their IP assets. IBM is a classic example of a long-established company that now has a major emphasis on licensing out its IP. Other technology giants such as Qualcomm also earn significant revenues from licensing their IP.

Getting access to others’ IP is becoming an increasing phenomenon too with the greater advent of patent pools. An impressive 73% of survey respondents have a defined strategy to license out their IP.

Last year, BMW became the first vehicle manufacturer to take a license with Avanci, the patent licensing platform for Internet of Things products.

BMW’s move illustrates the greater importance of IP as traditional businesses seek to adopt cutting-edge technologies that keep them at the forefront of their markets. Well-defined strategies to accessing, developing and protecting IP could make the difference between business growth or decline.

Chris Crowe

 

Does IP play any role for your company in each of the following?

Is the IP strategy part of your company’s corporate strategic planning?

Who is in charge of IP strategy (management, inside IP department, outside counsel…)?

Does your company have a defined strategy for building/renewing its IP portfolio (generating its own IP, acquiring IP rights, licensing in, etc)?

Does your company have any measures in place to help identify possible infringements of its IP?

Which of the following does your company do to identify possible infringement of its IP?

How does your company ensure basic IP knowledge and awareness in its R&D and product development teams?

Is there a defined escalation plan for how to approach competitors who infringe your company’s IP rights?

Which of these would your company typically use?

Does your company have a defined strategy that allows you to license out your IP?

Does your company have a strategy for generating IP to obtain freedom
to operate?

Does your company use its IP to enable co-operation and strategic partnerships?

How does your company ensure ownership of IP generated in joint business, engineering and development projects with other entities?

The IP forum: Creating profitable IP strategies

In addition to the research undertaken by The Legal 500 by way of the interviews with the intellectual property (IP) professionals already mentioned in the report, The Legal 500 also organised an IP forum in co-operation with IP boutique BARDEHLE PAGENBERG. The Legal 500 Intellectual Property Forum in Munich welcomed a range of in-house counsel and a representative from the European Patent Academy to discuss, together with two attorneys from BARDEHLE PAGENBERG, what it means to create profitable IP strategies. The two-panel structure of the forum allowed for an in-depth discussion of patent portfolio-building strategies and patent portfolio management and exploitation.

The first panel focused on the role of the IP department in extracting inventions from R&D departments. While our in-house panellists experienced different set-ups on account of their different company sizes, the message was uniform and clear: it is crucial to be as close to innovation as possible. For Jörg Dreyhsig, vice president and global head of litigation and opposition – global IP at Fresenius Medical Care, this means that IP is part of the R&D organisation, which ensures a continuous IP presence for maintaining IP awareness – ‘rather than waiting for invention disclosures to arrive, pulling and supporting them when considered valuable, pro-actively together with inventors’. The closeness between IP and R&D extends to preferably being located in the same building or the same floor. While Fresenius Medical Care also has a dedicated IP strategy team, Dr Deborah Schmauß, patent engineer at Efficient Energy, as a one-women patent department may not have the same resources, but also sees an advantage in more easily being able to develop close relationships with the inventors in a smaller company, from attending monthly developers’ meetings to a chat over coffee in the company kitchen or watching football together.

While creating an atmosphere of encouraging inventions, as Schmauß puts it, it is paramount to ‘make the processes transparent for engineers’. Schmauß, Dreyhsig and Thomas Bereuter from the European Patent Academy, all agree on the need for avoiding the perception of IP silos by using clear language and less legal terminology or, in the case of Schmauß, developing and providing an easy-to-access and easy-to-use invention disclosure form. As Bereuter puts it, ‘innovation is a team sport’, so you have to ‘remove barriers, create transparent processes and not allow silo thinking’. Bastian Best, patent attorney and partner at BARDEHLE PAGENBERG, gives the example of a swimming pool manufacturer where the assembly workers were the best inventors and the real challenge for IP lay in communicating with them, breaking the cultural divide between the suited IP attorneys and the workers.

On the question of how to foster an atmosphere of innovation, whether via financial or non-financial incentives, while a few hands rose in the audience to show that their companies offered financial incentives to boost innovation, the general consensus appeared to be that non-financial recognition for inventions may be more important. As Dreyhsig points out, financial incentives could even be counterproductive – ‘in a global company different local laws have to be respected which can lead to local and varying remuneration schemes’. He also sees non-financial incentives as an add-on and a lack thereof not a likely cause for a missing culture of innovation. However, Bereuter feels more strongly that ‘two magic words are recognition and reward’ with ideas, such as ‘running “Inventor Days” as a reward system to celebrate inventors and give them the stage’. A good example is Qualcomm’s interactive patent wall, which visualises the tens of thousands of the company’s inventions, giving striking recognition to their inventors in the lobby of the main building. The wall is covered in tiles with each frame showing a copy of the patent certificate.

Moving beyond the role of the IP department, our panellists also discussed the interface between in-house and outside counsel. As Dreyhsig puts it, ‘doing everything in-house makes your work less flexible to respond to other IP challenges’, so it makes sense for some matters to be dealt with by attorneys in law firms. According to Dreyhsig, ‘oppositions and litigation are better handled by outside counsel because of a higher level of legal knowhow and higher capacity constraints caused short-term by these proceedings’. Schmauß adds that when bringing in outside counsel ‘one major advantage is their neutrality and the great experience they have gained through many cases with other clients’.

Lastly, on the subject of cost control, covering questions such as the territorial coverage of patents and the conscious reduction of the portfolio over time, the prioritisation process is still driven by the individual expertise of both of our in-house panellists, although at Fresenius an internal index has been proposed (but remains in testing). In terms of the territorial coverage, considerations include the target market size, the patent impact and the complexity of the product – the more sophisticated and thus the more expensive the development of a product, the less country coverage is needed to effectively achieve global coverage. As Dreyhsig comments: ‘Look at markets and don’t go everywhere. For more complex products, go to fewer key countries.’ He further advises against decisions on each annuity payment for each patent each year and advocates a single meeting per year where all decisions on annuity payments are made together with all non-IP decision makers – ‘one cross-departmental meeting per year can save millions in half a day of decisions on patents’.

The second panel focused on what to do with existing patents, both in regard to a company’s own patents and in regard to competitors’ patents.

Starting from a discussion about the need to review an existing patent portfolio, the panel went on to examine more broadly how patent portfolios could best be managed and developed. Christian Reinders, chief IP counsel at automotive component supplier Dräxlmeier Group, considers the review of the company’s existing patent portfolio a core task of an in-house IP counsel as the dropping of existing patents is one way to free up resources for new patent applications. The difficulties in this evaluation lie especially in the potentially changing circumstances between the filing of a patent application and the granting of a patent, such as changes in a company’s own research and development or changes in the market, especially regarding new products from competitors. A possible solution, according to Reinders, is to cover alternatives, variations and potential embodiments in the patent claims, focusing strongly on the quality of patent applications and invention disclosures, thereby broadening the patent coverage. Additionally, Reinders recommends a continuous comparison between the patent application as filed and the current versions of development of the invention covered in the patent application. A constant monitoring of patent coverage during the examination process is deemed less efficient by Reinders, but he does recommend comparing the assumptions made when filing the patent application to the current product in order to find out how big the gap is between the assumptions made and the developments since seen in the market. A key part of this ongoing patent portfolio evaluation consists in implementing a knowledge-based data system to ensure that all departments contribute their information on a patent to the system.

Bereuter and André Körtgen, vice president legal and contracts at THALES Group Deutschland, both agreed with the general necessity to regularly screen patent portfolios for potentially unnecessary patents, though Körtgen warned that the adoption of an overly aggressive approach when reviewing a patent portfolio risks causing problems not only for collaborations with other market players, but also in regard to responding to customers’ needs as too aggressive a patent cull might end up forcing a company to find compromises with suppliers in order not to lose market share.

A portfolio management approach that would require a certain percentage of the patent portfolio to cover a certain percentage of the profit was rejected by both Reinders and Körtgen as too rigid.

The debate continued with the different ways to monitor the market, looking out for possible patent infringements and new inventions from competitors. In regard to competitors’ patents, Körtgen asserted that THALES Group Deutschland is not currently using its patent portfolio as a tool to create revenues and the company adopts a defensive rather than an aggressive attitude. Dräxlmeier, as an automotive component supplier, still relies strongly on licensing, though Reinders expects to see a rise in litigation as the intersection between the automotive and technology sectors continues to grow.

The methods of discovering patent infringements vary, ranging from including the sales force of a company in the infringement watch in addition to in-house legal departments and inventors, as suggested by Johannes Heselberger, co-head of patent litigation at BARDEHLE PAGENBERG, to relying on benchmark departments which analyse competing products and feed the results to the research and development departments.

Finally, on the question of the proximity between in-house counsel and R&D departments, Reinders recommended only giving feedback to R&D departments in relation to specific technical questions in addition to sending patent publications to engineers and discussing freedom to operate (FTO) reports directly with engineers, including always at least one patent attorney and one key engineer in an FTO meeting, allowing both departments a fruitful exchange about the market situation and the technology involved in the research.

In summary, the importance of IP for a company requires not only close links between the legal department and the company innovators, but also a smooth co-operation with out-house counsel. Regardless of the size and structure of a company, the panellists emphasised the importance of supporting and rewarding the inventors in charge of developing new products. Depending on the set-up of a company and the sectors it operates in, portfolio management strategies, and infringement prosecution strategies in particular, vary significantly, though the panellists agreed on the necessity to leverage IP rights in order to defend or grow market share.

anna.baubock@legalease.co.uk

dana.ferchland@legalease.co.uk