Legal implications of the banking alliance in Iraq

The Legal Implications of Banking Alliances in Iraq

In light of the rapid transformations currently witnessed by the banking sector in Iraq, coupled with the increasing intensity of competition on both local and international levels, banking alliances have emerged as a vital strategic tool.

These alliances are designed to enhance competitiveness and expand the scope of banking services. However, the impact of these alliances is not limited solely to economic and administrative aspects; it extends to include significant legal implications that affect:

The nature of the relationship between the alliance parties.
The extent of the parties' independence.
The mutual obligations arising from the alliance.
The establishment of liability for members or parties in the event of a breach of those obligations.

The International Dimension and Conflict of Laws

On another note, the legal relationship arising from the alliance may take on an international character when the parties hold different nationalities. This raises issues regarding the conflict of legal jurisdiction (both legislative and judicial).

Consequently, this necessitates a thorough legal study when proceeding to establish banking alliances to address these complexities effectively.

Obligations and Confidentiality in Banking Alliances

When initiating the establishment of a banking alliance, a set of obligations falls upon the allied parties. Foremost among these is the obligation to maintain the confidentiality of information.

The Scope of Confidentiality

This obligation applies to information received during all stages, including:

Negotiation.
Conclusion of the contract.
Execution of the contract.
Even after the termination of the contract.

Legal Exceptions to Confidentiality:

The only exception to this rule is when there is information that must be disclosed pursuant to the laws in force in the Republic of Iraq. The purpose of such disclosure must be to prevent:

A potential breach of public order.
The occurrence of a crime.

The Evolution of Competition: From Hostility to Cooperation

The allied parties are also committed to strict cooperation among themselves. Competition within a banking alliance no longer takes its traditional form; rather, it has shifted to a modern pattern that combines cooperation and competition simultaneously.

The Concept of "Coopetition"

This modern pattern is known as "Coopetition" (Competitive Cooperation). Banking institutions have transitioned from relying on developing their resources through external growth—represented by mergers, purchases, and acquisitions—to adopting new methods based on cooperation with other institutions, whether they are competitors or non-competitors.

A Shift in Strategic Vision:

This transformation reflects a change in how banks view the banking industry:

It is no longer understood as a "zero-sum game" (achieving a gain for one party at the expense of another).
It is now viewed as a means to achieve mutual benefits for all parties involved.

Collaborative Competition

As a result, the nature of competition within the framework of banking alliances has witnessed a transformation from traditional, hostile competition to cooperative competition.

This implies partnerships between one or more banking institutions to execute specific projects. The ultimate goal is to enhance the ability to face competitors within the scope of the banking industry and financial markets by leveraging the exchange of experiences and the development of skills across multiple fields.

The Legal Nature of the Banking Alliance

From a legal perspective, a banking alliance is considered a contractual agreement. This concept has been enshrined in numerous legal texts, most notably in the provisions of Article (9) and Article (12) of the Competition and Anti-Monopoly Law No. 14 of 2010. These articles explicitly mention the term "agreements," which legally signifies contracts.

Classification of the Alliance Contract

The banking alliance contract possesses several distinct legal characteristics that define its nature and the relationship between the parties involved:

Consensual Contract: It is based fundamentally on mutual agreement, understanding, and consent between the parties.
Time-Based Contract (Continuous): Time is an essential element in this contract, serving as the standard by which the subject matter of the contract is measured.
Cooperative Relationship: It establishes a bilateral or multilateral cooperative relationship based on trust and the convergence of goals between the allied parties.
Legal Independence: Despite the alliance, each party retains its full legal independence.

The Role of Personal Consideration and Obligations

The banking alliance is classified as a contract Intuitu Personae (based on personal consideration), relying heavily on the trust existing between its parties.

Key features regarding obligations include:

Bilateral Binding Force: The contract creates reciprocal obligations for the allied parties.
Core Obligations: The primary duties are the obligation to cooperate and the obligation of non-competition during the contract period.
Commutative Nature: It is a commutative contract where the contracting party receives a counterpart for what they give, even if the benefits are sometimes moral rather than material.

Certainty and Scope of the Contract

The nature of the banking alliance contract can vary regarding the certainty of performance and the complexity of its subject matter.

Definite vs. Aleatory Contracts

Definite Contract: The alliance may be a definite contract when the extent of the obligations required from the allied parties is certain at the time of conclusion. In this scenario, each ally can immediately estimate the amount they will receive and the amount they will give.
Aleatory Contract: Conversely, it may be an aleatory contract when the extent of the obligations of one of the parties depends on an uncertain event or an event unknown at the time of its occurrence, such as profit sharing after the conclusion of the contract.

Simple vs. Composite Contracts

Simple Contract: The alliance can be a simple contract addressing a single legal operation, such as a technological alliance aimed solely at transferring technology to the bank.
Mixed or Composite Contract: It becomes a mixed contract when it involves numerous legal operations, each of which would typically be covered by a separate special contract. This occurs when the subject matter of the alliance is manifold, including:
1. Cooperation.
2. Transfer of expertise and skills.
3. Transfer of technical and technological know-how.
4. Establishment of a project.

The Legal Basis of the Banking Alliance

Regarding the legal basis of the banking alliance, we find that the Partnership Agreement constitutes the safest foundation for such alliances.

The Concept of Partnership in Banking

A partnership is defined as:

"A long or medium-term cooperation agreement between two or more legally independent institutions—whether competitors or non-competitors—that may compete in the future, aiming to achieve joint profits."

Another definition describes it as:

"An agreement between two or more companies enabling them to work cooperatively toward common or compatible goals, involving a degree of control, responsibility, joint investment of resources, and the sharing of mutual risks and benefits."

Key Legal Characteristic:

Since the concept of partnership aims for cooperation between the contracting institutions without any merger or consolidation between them, this implies:

Each party maintains its own legal personality.
Each party retains its independence.
The goal is to achieve mutual interests.

Therefore, the legal nature of the banking alliance is characterized as a Partnership Agreement.

Regulatory Framework and Governing Laws in Iraq

The banking alliance is a banking legal system whose rules are organized under a partnership contract, whether this alliance is between banking financial institutions or includes members from non-banking financial institutions.

However, banking alliances are subject to the general rules stipulated in the following Iraqi laws:

Civil Code No. 40 of 1951 (as amended).
Trade Law No. 30 of 1984 (as amended).
Companies Law No. 21 of 1997 (as amended).
Iraqi Banking Law No. 94 of 2004.

The Role of Regulatory Compliance

These laws determine how alliances are formed and the legal effects resulting from them, including:

The rights and obligations of each party.
Responsibilities in the event of a breach of obligations.
Mechanisms for resolving disputes that may arise during the execution of the alliance.

The legal method chosen by the bank to organize its relationship with alliance partners varies according to the nature of the contracts, relationships, and the banking activity itself. Additionally, the legal and regulatory framework is influenced by the relationship between the alliance and its operating environment, particularly regarding competition laws.

Preventive Justice

Studying the legal framework of the banking alliance contributes to enabling the bank to achieve the highest standards of legal compliance through what is known as "Preventive Justice"

This represents a legal safety valve for both the alliance and the bank, encompassing:

Examining legal processes.
Evaluating compliance with laws.
Drafting policies and procedures.
Activating alliance protection measures to safeguard the bank's rights and assets against potential risks.

Types of Liability in Banking Alliances

In the context of a banking alliance, different types of liability may arise depending on the nature of the breach and the parties affected.

1. Civil Contractual Liability

Civil liability may arise when one of the allied parties fails to fulfill their obligation, resulting in damage to the allied party. This necessitates the application of Contractual Liability—once its elements are met—to compensate for this breach of obligations

2. Tort Liability (Non-Contractual)

Sometimes, the damage may extend to affect persons other than the allied parties as a result of an error by its members.

In this case, Tort Liability emerges—once its elements are met—to compensate the injured party for:

Material Damages
Moral Damages

3. Criminal Liability

In certain cases, the effects of the damage may exceed individuals to affect society in general, and commercial markets and active institutions in particular.

This is especially critical if the breach results from a violation of competition and anti-monopoly rules, which may lead to the establishment of Criminal Liability for the allied parties.

Key Research Conclusions

Based on the research conducted, we can extract the most critical conclusions regarding banking alliances as follows:

Historical and Conceptual Framework

Historical Origins: The concept of the Banking Alliance was originally innovated by the US Federal Reserve Board (FRB), with its beginnings dating back to 1913.
Definition and Independence: A banking alliance represents a form of cooperation between a group of banks. Its primary aim is to coordinate efforts and exchange expertise and resources, without these banks losing their legal independence.

Legal Status and Characterization in Iraq

Legislative Position: The Iraqi legislator has not explicitly regulated the issue of banking alliances. However, there is an implicit reference to it within the Competition and Anti-Monopoly Law No. 14 of 2010.
Legal Nature & Basis:
- From the perspective of legal nature, a banking alliance is a contractual agreement concluded between a group of banks.
- Regarding its legal characterization, it falls under the category of Innominate Contracts (contracts not specifically named in the civil code).
- Its fundamental legal basis is the Partnership Contract.

Strategic Objectives and Market Impact

Synergy and Coopetition: One of the most prominent results of a banking alliance is the achievement of Synergy and Competitive Cooperation (Coopetition) among the parties.
Commercial Integration: The alliance aims to replace traditional competition with commercial integration within the financial or non-financial market.
Multi-purpose Scope: These alliances serve various purposes, which may relate to:
- Pricing strategies.
- Services provided.
- Market sharing.
- Other cooperative objectives.

Regulatory Controls and Scope of Application

Expansion of Scope: There is a necessity to expand the scope of the banking alliance regarding the parties involved. It should not be reduced merely to alliances between banks, or between banks and financial institutions, but should encompass a broader range of entities.
Anti-Monopoly Thresholds: It is strictly prohibited to establish alliances that control 50% or more of the market share with the intent of monopoly and preventing competition.

Competition vs. Benefits

Impact on Competition: Banking alliances do not necessarily lead to undermining competition or creating monopolies.
Strategic Benefits: In many cases, these alliances yield numerous benefits, such as:
- Risk Distribution.
- Coverage of Emergency Needs.

Navigating the complex regulations of the financial sector requires a specialized partner. If you are looking for a trusted law firm in Iraq to handle your banking agreements, contact Osama Tuma for Legal Services and Advisory today for expert guidance and comprehensive legal protection.