Saudi Arabia

Saudi Arabia Corruption Report

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Snapshot

Saudi_Arabia_250x165.pngCompanies operating or planning to invest in Saudi Arabia face a high risk of corruption. Abuse of power, nepotism and the use of middlemen (wasta) to do business are particularly common. There is an overlap between business and politics, and the latter is generally based on patronage systems. The Combating Bribery Law and the Civil Service Law criminalize various forms of corruption, including active and passive bribery (baksheesh) and abuse of functions, but the government enforces these laws selectively. No law regulates conflicts of interest, and some officials engage in corruption with impunity. The royal family and social elite heavily influence the oil and petrochemicals sectors. Gifts are regulated under Saudi law, but facilitation payments are not addressed.

February 2016
GAN Integrity

Judicial System

There is a moderate risk of corruption in Saudi Arabia's judiciary. Two judicial authorities in Saudi Arabia deal with corruption matters: the Grievance Board and the General Courts. Judicial corruption has been mainly identified in issues relating to land registration and land disputes (BTI 2014). While the law provides for independent judges, the judiciary is sometimes subject to influence (HRR 2014). It coordinates with executive authorities and the king is the final arbiter (HRR 2014). The risk of corruption is lower than in many other MENA countries (BTI 2014).

Saudi Arabia does not yet have a transparent, comprehensive legal framework in place to resolve commercial disputes in accordance with international standards (ICS 2015). In several cases, disputes have caused various problems for foreign investors such as having their access to exit blocked and forcing them to remain in Saudi Arabia against their will (ICS 2015). In cases of alleged fraud, foreign investors may also be jailed to prevent their departure from the country while awaiting police investigation or trial (ICS 2015). Businesses perceive the courts to be inefficient and slow in settling disputes and challenging the legality of government actions and regulations (GCR 2015-2016), and judicial professionalism is limited in technical areas of commercial law (BTI 2014). Enforcing a contract takes on average 545 days (DB 2016). 

Saudi Arabia has ratified the New York Convention of 1958 and is a member of the International Centre for the Settlement of Investment Disputes (ICSID).

Police

The Saudi police force carries a low risk of corruption. Companies are confident in the reliability of Saudi police forces to protect them from crime and to uphold law and order (GCR 2015-2016). There are no reports available on the tendency among Saudi police officers to specifically target the private sector and solicit bribes from companies. Companies should note that, aside from the civil police, the Commission for the Promotion of Virtue and Prevention of Vice (CPVPV, often referred to as the “religious police”) has the authority to monitor social behavior and enforce morality (HRR 2014). In 2013, some employees of the CPVPV were fired for abusing their functions and engaging in corruption (HRR 2014).

Public Services

Corruption in Saudi Arabia's public services is a moderate risk for companies. At the same time, an increasing number of Saudi public officials are being convicted for accepting bribes, resulting in a decrease in administrative corruption (BTI 2014)Nevertheless, there is a lack of public accountability of bureaucrats as there are few requirements for disclosure, the consultative assembly (Majlis al-Shura) is hesitant to investigate irregularities, and the press is tame when reporting on corruption (BTI 2014). There are several reports of corruption, fraud and embezzlement in the health sector, especially in hospitals (ArabNews, Apr. 2014; Aug. 2015; Oct. 2015). In 2015, six health employees were sentenced for fraud and embezzlement and received prison sentences between three and ten years (ArabNews, July 2015)

Compared to other public services, the risk of encountering corruption when obtaining public utilities is lower (GCR 2015-2016). While it is easy and quick to obtain an electricity connection or a construction permit, starting a business is a lengthy process (DB 2016). When establishing a business, companies should take note of the one-stop shop office at the Ministry of Commerce and IndustryRegulations are often opaque and cumbersome, but bureaucratic hurdles can be overcome with persistence (ICS 2015). All foreign investment projects in Saudi Arabia must initially obtain a license from the Saudi Arabian General Investment Authority (SAGIA), whose website includes information for investors on investment opportunities, the cost of doing business and laws and regulations (ICS 2015).

Land Administration

Saudi Arabia's land administration carries a moderate risk of corruption. The construction industry is ranked as the most corrupt industry in Arab countries: Problematic issues include the development of unsuitable land, favoritism in awarding public tenders, procurement of substandard construction material, unlawful subcontracted projects, neglecting inspection operations and bribery of officials and employees (Arab News, Sept. 2013). Business executives generally find their property rights to be well protected (GCR 2015-2016). Registering property takes only six days, and associated costs are low (DB 2016). In 2015, Saudi Arabia introduced a new computerized system at the land registry, making property registration much faster (DB 2016).  

In 2014, the director of the urban planning department at the Eastern Province municipality was sentenced to ten years in prison for accepting 6.3 million riyals (USD 1.7 million) in bribes and kickbacks in exchange for the municipality approving acquisition and rezoning plots of land (HRR 2014Arab News, Sept. 2014).

Tax Administration

There is a very low risk of corruption in the Saudi Arabian tax administration. Companies report that irregular payments or bribes in relation to annual tax payments are very uncommon (GCR 2015-2016). Saudi investors are exempt from taxes but pay a religious tax (zakat) of 2.5 percent (ICS 2015). Saudi Arabia is one of the easiest and cheapest places in the world to prepare, file and pay taxes (DB 2016). 

Customs Administration

There is a very low risk of corruption in Saudi Arabia's customs administration. The border administration is transparent, and irregular payments in relation to imports and exports rarely occur (GETR 2014GCR 2015-2016). However, custom procedures are quite burdensome (GETR 2014), and the time and costs of dealing with imports and exports are higher than elsewhere in the region (DB 2016). Through large investments in the country's e-Government Program, Yesser, Saudi Arabia has reduced barriers to trade by clarifying investment rules and regulations online and by offering online services.

Public Procurement

Saudi Arabia's procurement sector carries a moderate risk of corruption; defense and security procurement is particularly corruption-prone (BTI 2014). Defense spending accounts for 30 percent of the government's budgetary allocations, but it lacks transparency and often exceeds such budgeted figures (TI: GDACI, Oct. 2015). Procurement does not appear to be based on a clearly defined national defense and security strategy (TI: GDACI, Oct. 2015). At the same time, businesses demonstrate a moderate degree of trust in government officials to make decisions objectively and to not favor well-connected companies or individuals when deciding on policies and contracts (GCR 2015-2016). Ministers and other senior government officials appointed by royal decree are prohibited from being involved in business activities with their ministry or organization while employed there (ICS 2015). Investors are advised to exert caution when bidding on public tenders in Saudi Arabia and are recommended to use a specialized procurement due diligence tool.

A well-known corruption case in Saudi procurement involves the British defense company BAE Systems and Saudi government officials. The case revealed false accounting in the contract made between BAE and Saudi officials as well as substantial unofficial payments received by a senior Saudi official from BAE. For more information on the case, see theGuardian's collection of BAE-Saudi-related articles or watch this Frontline documentary

Natural Resources

Corruption and a lack of transparency are problems in the Saudi Arabian natural resource sector, making it a high risk sector for businesses. Even though Saudi Arabia is dependent on its resources, reporting requirements in the oil, gas and mining industries are inadequate (NRGI 2013). High-level or political corruption within the Saudi natural resources sector sometimes occurs, and Saudi Arabian oil income has reportedly led to increased opportunities for public officials' rent-seeking (CatC 2012). Foreign companies’ participation in oil extraction is restricted to the Neutral Zone gas reserves (NRGI 2013). State-owned oil company Saudi Aramco has exclusive control of Saudi Arabia’s oil and is the world’s largest and most coveted and secretive oil company (Economist, Jan. 2016a).

Legislation

Saudi Arabia has a comprehensive legal framework to address corruption, yet the authorities’ efforts to curb corruption are modest. Saudi Arabian corruption laws are not uniformly enforced, and punishments are selective. The main anti-corruption laws are the Combating Bribery Law and Civil Service Law, which cover public-to-public and public-to-private bribery but not private-to-private bribery. The laws criminalize abuse of authority and office for personal interest, active and passive bribery, and bribery through intermediaries. Gifts and hospitality are also criminalized, depending on their intent; modest levels of hospitality are not objectionable (Baker & McKenzie, 2015). Read a summary of the Law for Combating Bribery here. Violations can result in prison sentences up to 10 years and fines of up to SRA 1 million. The briber can be excused if he or she reports the crime to the Minsitry of the Interior before its discovery (Al Tamimi: DBiSA, 2016). Saudi Arabia's Monetary Agency has guidelines for detecting money laundering activities and enacted an Anti-Money Laundering Law; a person found guilty of money laundering can be sentenced to up to 10 years in prison and/or receive a fine of up to SAR 5 million, and illegal funds are confiscated. Facilitation payments are not addressed in Saudi Arabia's legal framework. The Basic Law of Governance stipulates that all state assets and agencies are subject to audits to ensure the proper performance and to allow the investigation in administrative and financial mismanagement, but audits are not available to the public (CatC 2012). Corporate Governance Regulations provide for the independence of company board members as well as transparency and rules on disclosure. The Government Tenders and Procurement Law regulates public procurement and requires the publication of tenders and electronic tendering. The Anti-Concealment Law also addresses fair competition. Public officials are not subject to financial disclosure laws, and no laws provide public access to government information.

The country has ratified the United Nations Convention against Corruption (UNCAC).

Civil Society

There are many strong restrictions on civic freedoms such as freedom of assembly, expression and religion, as well as a lack of equal rights for women that hinder civil society development (HRR 2014). The Saudi Constitution does not provide for freedoms of the press or speech, and the government monitors and restricts public expressions of opinion (HRR 2014). Saudi Arabia's Basic Law of Governance describes the role of media as educative, unifying, and supporting government agendas, but the country does not have a freedom of information law (FotP 2015). Thus, Saudi media falls short of providing an accurate picture of the pervasiveness of corruption in the country. Several major media outlets are owned by members of the royal family, and individuals are not permitted to publically criticize the royal family (FitW 2015). The government seldom interferes overtly, as most media outlets practice self-censorship (FotP, 2015). Journalists face many obstacles when trying to cover news (FotP 2015). Government corruption has mostly been discussed online, but internet freedom in Saudi Arabia is limited: All online newspapers and bloggers are required to obtain a special license from the Ministry of Culture and Information (FotP 2015). The media environment in Saudi Arabia is considered "not free" (FotP 2015).

Saudi officials frequently refuse to register political or human rights groups, which leaves members subject to prosecution for “setting up an unregistered organization” (HRW, 2015). With no laws for association rights, Saudi citizens are left with no legal avenue to set up non-charity, non-governmental organizations (HRW, 2015). Accordingly, there are no formal, civil anti-corruption organizations. 

Sources

Topics: Middle East & North Africa