The New Anti-Concealment Law in Saudi Arabia

Jana Mrad Paralegal jana.mrad@bsabh.com

Jean Abboud Senior Associate, Head of Corporate – KSA jean.abboud@bsabh.com

As part of the Saudi Vision 2030, which aims to reduce the Kingdom of Saudi Arabia's (the "Kingdom") dependence on oil, diversify its economy, and attract foreign investment, the Kingdom, has been adopting serious steps towards enhancing the legislative environment through developing new laws and reforming the current legislation.

Among such extensive reforms is the issuance of the new Anti-Fronting Law or Anti-Concealment Law, promulgated under Royal Decree No. M4/1441, Cabinet Decision No. 785/1441, (the "Anti-Concealment Law") which replaced the old Anti-Concealment Law No. M/22 dated 4/5/1425H, followed by its Implementing Regulations, issued under the Ministerial Decision No. 00479/1442, (the "Implementing Regulations").

The Anti-Concealment Law and its Implementing Regulations were issued to further regulate commercial investments and combat commercial concealment in the Kingdom, which was still prevalent in the ever-evolving Saudi Arabian market.

Even after the issuance of the old Anti-Concealment Law, many Saudi nationals continued to allow non-licenced foreign entities and individuals to perform economic activities inside the Kingdom, using the license initially issued to the Saudi locals. Such arrangement has led many foreign entities to illegally operate economic activities in the Kingdom by having a facade of being wholly owned by Saudi nationals, while in reality, the beneficiaries are non-Saudi.

The Anti-Concealment Law and its Implementing Regulations allow violators to correct their status within a certain period; otherwise, they would be subject to fines and penalties as further addressed below.

The Saudi Arabian government has extended this grace period for entities and investors to come forward and correct their status and settle their cases up several times now, and most recently until 16/02/2022G.

What is concealment?

With reference to the Anti-Concealment Law, concealment is defined as "an agreement or arrangement under which a person enables another non-Saudi person to practice an Economic Activity in KSA, not licensed to practice the same using the licence or approval issued for the concealer."

Articles 3 and 4 of the Anti-Concealment Law have classified the actions of concealment based on their nature, whereby some are considered criminal, while others are violations punishable by the Law.

Furthermore, Article 3 of the Anti-Concealment Law states that "Any of the following shall be considered a crime punishable by the Law:

o   A person enabling a non-Saudi to practice, for his own account, an Economic Activity in KSA, not licensed to practice it, including enabling a non-Saudi to use: His name or the licence or approval issued for the same, his commercial register, commercial name.

o   A Non-Saudi practising a commercial activity for his own account in KSA, not licensed to practice it, through the person enabling him.

o   Participating in committing any of the crimes set forth in paragraphs (a) and (b) of this Article. Whoever incites, helps, or advises in the commission of the crime while being aware of the same, shall be considered associate therein, whenever the crime is committed or proceeded based on such incitement, help, or advice.

o   Obstructing or preventing the people charged with implementing the provisions of the Law from performing their duties in any way, including not disclosing information or providing incorrect or misleading information."

In addition, Article 4 of the Anti-Concealment Law states that "Any of the following shall be considered a violation punishable by the Law:

o   Any establishment granting a non-Saudi, in an irregular manner, tools that lead to absolute disposal of the establishment.

o   A Non-Saudi possessing or using, in an irregular manner, tools that lead to absolute disposal of the establishment.

o   The establishment's use, in its transactions related to its Economic Activity, another bank account not belonging to it.

Interpretation of the Anti-Concealment Law

Article 2 of the Implementing Regulation has expanded the definition of the tools which may lead to a total disposition in an entity by including any non-contractual and contractual action that includes the following:

o   the entity revenues being transferred directly or indirectly to the account of the non-Saudi and not the account of the entity,

o   sponsoring the facility or any of its activities,

o   having the power to appoint and dismiss the manager of the entity,

o   possessing commercial papers or contracts signed in blank for the entity, and

o   approving the distribution methods of the profits to the shareholders or partners in the company.

The Anti-Concealment Law grants the Ministry of Commerce the right to monitor and control any violations or crimes committed by entities or individuals performing concealment. The Ministry will monitor the breaches through a committee to be formed under its supervision.

Fighting anti-concealment highly relies on informers and whistle-blowers, who are encouraged to come forward and report any concealment acts to the Ministry or its committee, knowing that their identities will be kept confidential, which further promotes such disclosure. These informers will also be entitled to receive a financial reward not exceeding 30% of the fine collected from the breaches they had informed the Ministry about.

The Anti-Concealment Law also grants public prosecutors the right to investigate anti-concealment crimes and prosecute the violators. Furthermore, as per Article 5 of the Anti-Concealment Law, the Criminal Court has the jurisdiction to look into and rule in anti-concealment crimes.

Penalties

The type of penalty varies depending on (i) the size of the entity which committed the breach, (ii) the period of which the breach continued to take place, (iii) the revenues generated as a result, and (iv) the nature of the breach.

Article 9 of the Anti-Concealment Law states that whoever commits any crime or violation will be punished by imprisonment for a period not exceeding five (5) years and/or a fine not exceeding five million Saudi Riyals (SAR 5,000,000).

In addition to the above penalties, a non-Saudi who is convicted for committing any of the crimes listed in Article 3 of the Anti-Concealment Law shall be deported from the Kingdom.

Furthermore, in certain instances, the Anti-Concealment Law may exempt defaulters who notify the competent authorities about the concealment activities committed prior to their discovery or legal pursuit; these exemptions shall not include Zakat and tax obligations that remain applicable.

How to correct the status

Recently the Ministry of Commerce issued the Regulations for Rectifying the Status of Anti-Concealment Law Violators (the "Regulations").

Articles 2 and 3 of the Regulations stipulates that anyone who practices an economic activity in the Kingdom can submit a request to the Ministry to rectify their status through one of the options granted, will be exempt from the penalties stipulated in the Anti-Concealment Law, and from other penalties resulting from the crime and its proceeds, as well as from paying income tax retroactively.

Moreover, Article 5 of the Regulations clarifies that such exemptions from penalties will not include those arrested for committing a breach as stated in the Anti-Concealment Law before submitting a request to rectify their situation or those referred for prosecution or the competent court before submitting their request.

Article 2 of the Regulations lists the options for rectifying the status of businesses as follows:

1.              establishing a partnership in the enterprise between the Saudi and non-Saudi,

2.              registering the ownership of the enterprise in the name of the non-Saudi,

3.              the Saudi continues to practice the economic activity by adding a new partner (Saudi or licensed foreign investor),

4.              the Saudi disposes of the enterprise by sale, assignment or dissolution according to the regular procedures,

5.              the non-Saudi obtains the Saudi premium residency by virtue of the Premium Residency Law and proceeds to rectify their status by utilising the benefits of the premium residency,

6.              the non-Saudi leaves the Kingdom permanently.

The request to rectify a business' status will be reviewed by the Ministry to verify that it meets the necessary requirements, and applicants will be given a period of 90 days to remedy any perceived failure by the Ministry of Commerce. If the procedure for rectification is still incomplete within the 90 days, the Ministry may grant an additional 180 days to complete the corrective measures.

Additional Grace Period and Way Forward

Recently, a further extension of the grace period has been granted for applying the rectification, allowing some additional time for Saudi and Non-Saudi entities and individuals to consult with their advisors and cure their status. The grace period ends on 16/02/2022; subsequently, violators will be penalised under the Anti-Concealment Law and its Implementing Regulations.

With the Saudi authorities clamping down on concealment and fronting practices, and with the recent implementation of the new e-invoicing starting from December 4, 2021, along with the planned linkage of these e-invoices with the Zakat, Tax and Customs Authority as a second phase, the Saudi authorities will be monitoring businesses even more closely, and investors are encouraged to remedy their situation and adopt the new compliance standards.