This article examines how businesses proposing to offer investment fund, brokerage, asset management or advisory services in Iraq can identify the regulatory perimeter that applies to them. New financial business models are emerging, including digital investment platforms, managed accounts, collective investment schemes and cross-border brokerage. Each may fall under one or more regulatory regimes, and the applicable regime determines whether a licence is needed, from which authority and on what conditions.
The perimeter question is often more difficult than it appears. A business may describe itself as a technology platform, but if it receives client money and executes trades, it may be carrying on brokerage. A fund established abroad may be marketed to Iraqi investors in a way that brings it within Iraqi rules. An advisory service may cross into portfolio management if it exercises discretion. Identifying the correct perimeter before launch avoids operating without required authorisation.
The Interim Law on Securities Markets, issued as Coalition Provisional Authority Order No. 74 of 2004, established the Iraq Securities Commission with authority over securities markets, brokers and other market participants. The Iraq Securities Commission’s rules and instructions govern licensing of brokers and other intermediaries and may address collective investment. The Banking Law No. 94 of 2004 and the Central Bank of Iraq Law No. 56 of 2004 govern banking activities and certain financial services, and Central Bank regulations govern payment services. The Companies Law No. 21 of 1997, as amended, governs the corporate vehicles used. The Anti-Money Laundering and Counter-Terrorism Financing Law No. 39 of 2015 applies to many financial service providers.
Describing the business model precisely
The perimeter analysis starts with a precise description of what the business will do. Relevant questions include:
- Who are the clients? Retail individuals, institutions or related parties.
- What products are involved? Iraqi listed shares, foreign securities, funds, deposits or other instruments.
- What service is provided? Execution of orders, advice, discretionary management, custody, pooling of funds or distribution.
- Does the business hold client money or assets? Holding client assets usually triggers stricter regulation.
- Where are services performed and marketed? Inside Iraq, from abroad to Iraqi residents or both.
A precise description allows the business to map each activity to the relevant regulatory regime.
Mapping activities to regulators
Different activities may fall under different regulators:
- Brokerage in Iraqi securities. Trading on the Iraq Stock Exchange is conducted through brokers licensed by the Iraq Securities Commission and admitted to the exchange.
- Collective investment. Pooling investor funds for investment may be subject to Iraq Securities Commission rules or other applicable rules for investment funds or investment companies.
- Deposit-taking and lending. Accepting deposits from the public is banking and requires a Central Bank licence.
- Payment services. Transferring funds, operating e-wallets or processing payments may require Central Bank authorisation under the regulations on electronic payment services.
- Advice and portfolio management. Depending on how they are carried out and the instruments involved, these may require Iraq Securities Commission licensing.
Where activities overlap, more than one licence may be needed. Commercial and regulatory advice in Iraq can help map the business model to the relevant regulators.
Considering cross-border services
Foreign firms offering services to Iraqi residents from abroad should consider whether their activities are treated as carried on in Iraq. Factors include active marketing in Iraq, use of local agents, Arabic-language materials targeted at Iraqi investors and acceptance of payments from Iraqi bank accounts. Even where Iraqi licensing is not clearly required, banks processing payments may apply their own checks, and marketing may be restricted.
Choosing the corporate vehicle
Licensed activities usually require a specific type of entity, often an Iraqi company with minimum capital and qualified management. The business should consider whether to establish a local company, partner with an existing licensed firm or operate through an agent. Foreign ownership limits may apply in some sectors. Corporate advice in Iraq can assist with establishing the appropriate vehicle.
Preparing for licensing requirements
Licensing commonly requires minimum capital, fit and proper management, compliance and risk management systems, client asset protection arrangements, record-keeping and reporting. Anti-money laundering obligations require customer due diligence and transaction monitoring. The business should prepare these elements before applying.
Managing the transition from pilot to full operation
Some businesses begin with a pilot or limited launch. Even limited operations may require a licence if they involve regulated activities. Engaging with the regulator about a proposed pilot can clarify whether a licence, a sandbox arrangement or a no-objection is needed. Operating without authorisation, even on a small scale, can create regulatory and reputational risk.
Considering partnerships with licensed firms
Partnering with an existing licensed broker, bank or fund manager can allow a new business to enter the market without obtaining its own licence immediately. The partnership should define which party carries out regulated activities, how clients are onboarded and who bears regulatory responsibility. The licensed partner will need to ensure that the arrangement does not amount to lending its licence to an unlicensed business.
Treating client money and assets carefully
The treatment of client money and assets is often the decisive factor in the perimeter analysis and a central concern for regulators. A business that never touches client funds, with clients paying directly to a licensed broker or bank, faces fewer regulatory requirements than one that collects funds into its own accounts. Once a business holds client money, it must safeguard it, keep it separate from its own funds and be able to return it if the business fails.
Businesses should design their flows of money and assets deliberately:
- Direct payment to licensed entities. Clients pay brokers or custodians directly, and the business never holds client funds.
- Segregated accounts. If the business must hold client money, it keeps it in segregated accounts designated as client accounts, subject to applicable rules.
- Custody arrangements. Securities are held in the client’s name through the Iraq Central Depository or a licensed custodian.
- Reconciliation. Client balances are reconciled frequently against bank and custody records.
Regulators will scrutinise these arrangements closely, because client asset failures cause direct harm to investors and damage confidence in the market.
Illustrative example. A fintech company plans to launch an app allowing Iraqi users to invest small amounts in shares listed on the Iraq Stock Exchange. Its initial plan is to collect funds through its own e-wallet, pool them and execute trades through a broker. The perimeter analysis shows that holding client funds may require Central Bank authorisation, that pooling funds may amount to collective investment and that order execution must be done through a licensed broker. The company restructures so that users open individual accounts with a licensed broker, funds move directly from users’ bank accounts to the broker and the app acts as an interface subject to the broker’s regulatory oversight.
Conclusion & how Etihad Law Firm can help
Investment fund and brokerage models in Iraq must be mapped carefully to the regulatory perimeter. A precise description of the business, mapping to regulators, attention to cross-border issues and preparation for licensing allow new models to launch lawfully.
Etihad Law Firm advises financial service providers, fintech businesses and investors on regulatory perimeter questions and licensing in Iraq. We help clients design models that fit within the appropriate regulatory framework.