Changing nature of compliance in the United Arab Emirates

June 3, 2014

An interview with Refki El-Mujtahed, the General Counsel of Arabtec.

When talking about the Middle East and North African countries (MENA), the impression is often one of a very loosely regulated market where even foreign companies find it hard to stick to their head office’s compliance principles. However, it is hard to generalise and focusing on the six countries of the Gulf Cooperation Council (GCC), we see a fast-changing geographical area where compliance has been tightened considerably in past few years.

The six gulf cooperation council countries are:

  • Bahrain
  • Kuwait
  • Oman
  • Qatar
  • Saudi Arabia
  • United Arab Emirates

 

GULF COOPERATION COUNCIL STATES

All six countries are within the top third of the 183 counties featured by Transparency International’s 2011Corruption Perception Index (CPI), with many occupying a much improved position since the index started in 2006.

Qatar, for example, is now 22nd out of 183 countries, up from 32nd out of 163 countries in 2006. Qatar put in effect its new Corporate Governance Code in 2009, thoroughly defining core governance principles and best practices for companies listed in Qatar.

While not every one of the GCC members have been doing equally well in this respect, the awareness for the need of better corporate governance and to comply closer with US and UK standards is there, and the recent economic crisis has done its part to push these countries to move faster in the right direction.

“One of the major reasons for the financial crisis was attributed to poor corporate governance practices applied by public companies. Also, the region has witnessed a rise in the number of corporate scandals which have further dampened foreign investors’ confidence in the region. These events have served as a stark reminder of the importance of implementing sound corporate governance practices, for the MENA region to remain globally competitive, attract more foreign capital, ensure economic sustainability, and reduce corruption,” says the introduction to the Corporate Governance Code of Kuwait that came into effect in April 2010.

Kuwait occupies the 54th position on the CPI, with Saudi Arabia being the last of the GCC countries at the 57th place.

“The corporate governance practices in Kuwait have not kept pace with the growth of Kuwaiti companies and the equity market,” the introduction continues, recognising its negative effect on economic development.

While the economic downturn may have contributed to the urgency, preparations for the new codes in the region have started much earlier. For example the Corporate Governance Code of Bahrain that came into effect in January 2011 was started in 2006, going into public consultation in 2008. Early last year, Saudi Arabia also set up a National Anti-Corruption Commission with the aim of rooting out corruption in the government sector related to operation and maintenance contracts in public work.

 

CHANGING FACTORS IN COMPLIANCE IN THE UAE

Refki El-Mujtahed, General Counsel of Arabtec based in Dubai, also points out that the United Arab Emirates (UAE) legislation has been there since the 1990’s. “The focus of concentration has been turned up since 2008. In the UAE it may have coincided with the financial crisis but it has been in the pipeline.”

 

Regulations. Randa Almomani, The Red Flag Group’s Director of Business Development also based in Dubai, says there are a number of major factors that have led to an improvement in compliance.

“There is legislative support for publicly listed companies,” she says, referring to the UAE’s new Corporate Governance Code which came into effect in April 2010.

The UAE Code requires publicly listed companies to:

  • Appoint more non-executive directors whose role and participation have been increased and duties enhanced according to international standards. The roles of company chairman and chief executive have been divorced and the two positions cannot be occupied by the same person.
  • Have an external auditor who is neutral and independent from the company’s activities and the board to set up an audit and a nomination and remuneration committee.
  • Introduce a code of conduct and a control system to assess risk and ensure the implementation of the new code’s rules.

The role of a compliance officer.

The compliance function has to be overseen by a compliance officer in the company.

“The role of compliance officer is new to the region: in the old world, it was split between legal, financial, human resources and business excellence. Qualified compliance officers are highly sought after,” Ms Almomani says.

 

Awareness of third party partners’ risks. Another important factor is led by multinational, mainly US or European based companies that have started to delegate a considerable part of the local compliance work to their Middle Eastern divisions rather than keeping all control in the head office.

Ms Almomani also notes that political changes in the region have opened up some new markets, such as Iraq, bringing new business opportunities which also come with compliance challenges. It is important to note that some of the new markets do not yet have strong corporate governance structures in place..

Awareness of the risks third parties can bring is also catching on. “Companies are now much more cautious when dealing with third parties. Conducting due diligence on third parties prior to contractual engagement is strongly recommended as part of best practices,” she says.

 

Changing a nature of compliance

Middle Eastern companies are improving in their communication of compliance, spreading compliance awareness within the company and in educating their employees.

Mr El-Mujtahed adds, “The culture of corporate governance has been proactively promoted and developed. The authorities interact with us, when we seek to clarify the regulations, the authorities have the ability to engage us. They are very advanced in that aspect.”

He admits that standards in the region are not at the level of US and European companies, but points out that we are comparing the Middle East with countries that have had corporate governance awareness and implementation imposed on them for considerably longer periods of time.

“Surely standards may appear lower and not as well developed because of the time factor. It should be reviewed again in five years’ time.” he says, adding that the MENA countries are “working flat out” to introduce new legislation; and the next five years see a slew of legislation and guidelines that will come out to address specific areas of corporate governance.

Middle Eastern companies do worry about the effect of corruption on the reputation and branding of the organisation, as well as the share price, quality control and business relations.

But most importantly, research shows that corruption has a very bad effect on employee morale.

Mr El-Mujtahed says that beyond policy and procedures, his company also wants to make sure employees enjoy working in the company and see their future there. “We make sure that employees are happy, and then they will not do something that harms the company. We encourage those employees with longer tenure to take the new hires under their wings to inseminate the culture in them.”

 

Refki El-Mujtahed is the General Counsel of Arabtec.

Randa Almomani is a Director of Business Development at The Red Flag Group.

A note to readers: The views expressed in this article are the authors’ or interviewees’, and are not representing to the companies they are related to.

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