I think maybe Iwao had had an encounter with LAN DI before and on seeing him, he didnt realise he was who he was.
I think Iwao would have rather died than give out any info on the mirrors because he was aware of the consequences, but when ryo got involved, it would have been morally wrong to let ryo die, if Iwao had been killed had ryo not turned up, the the info would be safe inside his head, and maybe thats why he lost, so none of the stuff with the mirror could be unleashed.