Saudi Arabia’s Vision 2030 will keep compliance officers busy

August 23, 2016

By Emad Al-Kharabsheh, The Red Flag Group®

Saudi Arabia’s Council of Ministers has endorsed a sweeping set of programmes and reforms to be implemented by 2030. But, in addition to luring greater amounts of foreign investment, ‘Vision 2030’ also increases integrity and compliance risks.

In April 2016, Saudi Arabia’s deputy crown prince Mohammad bin Salman Al Saud announced ‘Vision 2030’ to address the country’s heavy dependence on public sector spending and oil revenues. Mohammad bin Salman – the son of King Salman – is aiming to power the future economy of Saudi Arabia by nurturing entrepreneurship and increasing the market share of the private sector from 40 percent to 60 percent.

The Vision 2030 plan

Mohammad bin Salman has outlined many facets to his Vision 2030 plan.

Establishment of a sovereign wealth fund

Saudi Arabia will transform its Public Investment Fund into the largest sovereign wealth fund in the globe, with assets valued at US$2 trillion. The deputy crown price estimated that the new fund will have control of over ten percent of global investment capability and will have around three percent of total global assets under its management.

Aramco IPO

Part of the plan includes offering less than five percent of the state-owned Saudi Arabian Oil Company (Aramco) and most of its companies to investors by listing it on the Saudi Stock Exchange, with a possibility of also listing on another international stock exchange. The exact percentage that will be offered is still to be determined as Aramco’s exact value is not yet known; however, Mohammad bin Salman estimates the oil company’s value to be more than US$2 trillion.

Revenue diversification

Saudi Arabia will aim to increase its non-oil-related revenue from US$43.5 billion to US$267 billion and increase non-oil export products from 16 percent to 50 percent of the GDP by 2030. This will help boost the kingdom to one of the top 15 economies in the world.

Development of a defence industry

Despite Saudi Arabia being the third-largest military buyer in the world in 2015, only two percent of that spend was on local procurement. The new plan is to increase local defence procurement to between 30 and 50 percent of the total annual military purchases by 2030. Such transformation will help Saudi Arabia to create a bigger advanced industrial base and create jobs for its people.

Combatting corruption

The vision also includes a plan to improve transparency and combat corruption in all sectors, and, as Mohammad bin Salman stated in an interview with Saudi television channel Al Arabiya on 25 April, to place Saudi Arabia at ‘the forefront of countries which are combatting corruption and to have the lowest rates of corruption in the world’. Mohammad bin Salman added that neither he nor his father was satisfied with the performance of the Saudi National Anti-Corruption Commission, which is why the Commission’s chairman was replaced in 2015.

What Vision 2030 means for foreign companies

There are many analysts who have expressed their reservations on whether Vision 2030 will ever materialise and be successfully executed. If it is, such reforms could bring huge opportunities for foreign companies investing in or planning to invest in Saudi Arabia.

Ease of foreign ownership

At the beginning of June 2016, the Saudi Government approved changes in its investment law to increase allowed foreign ownership in the wholesale and retail sectors from 75 percent to 100 percent. Foreign companies licensed to own 100 percent in the wholesale and retail industries are required to have SAR30 million (US$7.9 million) in capital, have operations in at least three international markets, and invest at least SAR200 million (US$53 million) in the first five years.

These changes in the investment law will help foreign investors who meet the required criteria to invest directly and without a Saudi partner, allowing international companies to directly control their operations and, most importantly, enforce business ethics without worrying about local partners behaving unethically.

Dow Chemicals was the first company to receive a Saudi trading license with 100 percent ownership, awarded by Mohammad bin Salman during his visit to the United States in June 2016. Saudi Arabia’s Minister of Commerce and Investment also announced that 3M and Pfizer will also be awarded trading licences to operate in the kingdom.

Access to vast unexploited natural resources

Since the unification of the country, Saudi Arabia’s main focus has been oil. However, the country is rich with other natural resources – such as gold, silver, copper, uranium, phosphate, silica and uranium – and, according to the deputy crown prince, less than five percent of these resources have been exploited.

Vision 2030 focuses on utilising these resources and developing related industries to create huge business opportunities for mining companies and machinery manufacturers. At the moment, state-owned Ma’aden is the sole operator in this industry (although it has a joint venture with Alcoa in Ma’aden Aluminium).

Compliance challenges

Higher costs and risks for emphasising business ethics

Usually when international companies deal with a sole distributor in Saudi Arabia, they focus on the distributor’s implementation of their compliance policies and the local distributor is responsible for the third parties they use. However, the new right to full ownership of a trading company in Saudi Arabia means that affected international companies will need to enforce their compliance polices and provide training – not just to their employees but also to several of their third parties, such as customs clearance service providers and goods transportation companies. Therefore, international companies will need to spend more on hiring qualified local compliance officers, training and auditing.

Differences between local and international laws

International companies investing directly may face challenges in complying with Saudi laws and international laws at the same time as there are some conflicts.

For instance, according to Saudi law, obtaining a working visa for foreign employees requires sponsorship from a registered company. Under the kafala (sponsorship) system, foreign employees are not allowed to move to another employer or even leave Saudi Arabia without the permission of their employer. The kafala system has been attacked by many western countries and human rights organisations as it restricts the freedom of the foreign labourer and allows employers to abuse the system. Despite these views, international companies operating in Saudi Arabia are obliged to follow the law if they want to import foreign employees.

Another discrepancy involves business dealings with sanctioned countries such as Sudan. Exports and imports from Sudan are allowed and even encouraged by the Saudi Government. Therefore, if a customer bought products from an international company and then exported them to Sudan, as they are encouraged to do, the company would breach western sanctions.

Lack of compliance culture

There is a lack of understanding and implementation of compliance in Saudi Arabia, even though the Saudi law originated from the Islamic Sharia law, which aims to prevent unethical business activities. This lack of understanding is mainly in companies that are not involved in business partnerships with multinational companies, where the main goal is to make profit by whatever means possible. A clear example we have seen of this is in the pharmaceutical sector, where distributors of multinational (mainly western) companies know and follow the compliance policies of their foreign supplier and even develop their own policies (sometimes with the support of their partners), yet generic pharmaceutical manufacturers and their distributors tend to not have any policies to help their employees conduct business in an ethical way.

Nepotism (wasta)

Nepotism is very common in Saudi Arabia as a way to get business deals or employment. Though Article IV of Saudi Arabia’s 1993 (or 1412 AH) anti-corruption law treats nepotism as bribery, it is one of the challenges faced by both companies and individuals in Saudi Arabia. Nepotism is prevalent in both government and private sectors, but, through huge steps taken by the Saudi Government to allow its services to be performed electronically rather than requiring in-person visits, it has somewhat eased. A great example is the pharmaceutical products licensing system developed by the Saudi Food and Drug Authority. Every company that wants to license its products in the country must provide all necessary documents electronically. The application then goes to an employee who will be free from influence, and the system therefore prevents those with connections from using nepotism to secure their applications or obtaining the licenses without the correct and complete documents.

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