Saudi Arabia issues new Anti-Concealment Law

With an increasing number of foreign investors undertaking business activities in the Kingdom of Saudi Arabia, a new Anti-Concealment Law was recently issued* to regulate all of the commercial arrangements in the growing Saudi market. In this article, we provide an outline of what all businesses operating in Saudi Arabia should consider.

*pursuant to the Royal Decree number M/4 dated 19 August 2020, and Council of Minister's Resolution number 785 (the New Anti-Concealment Law)

Background

The New Anti-Concealment Law was published in the Saudi official Gazette on 27 August 2020, (the Publication Date) which replaced the previous Anti-Concealment Law, issued pursuant to the Royal Decree number M/22 dated 21 June 2004 (the Previous Anti-Concealment Law). The Implementing Regulations of the New Anti-Concealment Law were further published for the public consultation on 24 December 2020 and have been officially published in the Saudi official Gazette on 12 March 2021 (the Implementing Regulations).

The New Anti-Concealment Law came into force within 180 days from the Publication Date and the Implementing Regulations should also be officially effective, revoking:

(a) Regulations which contradict with the New Anti-Concealment Law and its Implementing Regulations; and

(b) The Previous Anti-Concealment Law along with its associated regulations.

Concealment Acts

Under the New Anti-Concealment Law, concealment acts shall include any agreement or arrangement which enables a non-Saudi party (being natural or juristic persons who do not hold the Saudi nationality and are not treated as their holders) and to undertake non-licensed economic activities in Saudi by using the license or the issued approval for the concealing party (the Concealment Acts). Economic activities have wide scope of interpretation to include any service with the aim of generating revenues which typically requires obtaining specific regulatory approvals. 

The New Anti-Concealment Law classifies the concealment acts as crimes or breaches depending on the nature of the commercial arrangement. It is essential to further note, in certain cases, the participation in instigation, assistance and advisory acts (the Services) for committing the Concealment Acts may have the particular provider of the Services being considered as a participant in committing the concealment crime or breach if:

(a) The provider of the Services had the knowledge on the nature of such actions; and 

(b) The relevant Concealment Act(s) took place or persisted due to these provided Services.

In addition, the Implementing Regulations generally provide clarity on the specific regulatory framework and procedures, in analysing the penalized concealment acts (taking into considerations certain good faith conducted concealment breaches), specifying the adopted conditions for appointing the concealment regulatory officers, as well as the guidelines for enforcing the penalties in accordance with the provisions of the New Anti-Concealment Law.

The Implementing Regulations further expand on the scope of the 'controlling means' of an entity to include any contractual or non-contractual arrangement which enables a non-Saudi party to undertake actions as well as enjoy authorities and rights which are reserved to the owners or shareholders of an entity (as the case may be), such as:

• Having the revenues, profits, or the generated returns from the entered contracts by the entity (directly or indirectly) made to the account of the non-Saudi party rather than the entity's relevant account;

• Funding an entity or any of its business activities;

• The authority to appoint or replace the manager of the entity;

• The possession of commercial papers, documents or blank contracts of an entity; and

• Approving the dividends to be distributed between the shareholders along with the method of distribution.  

Penalties under the Anti-Concealment Law

The New Anti-Concealment Law has introduced strict penalties which vary depending on the classification of each Concealment Act. Without prejudice to any other penalties that may be imposed under any other laws, the penalties under the New Anti-Concealment Law should be determined on a case by case basis and include significant fines up to five million Saudi Riyals, imprisonment for five years, prohibition from entering the Saudi market and potential dissolution of the respective entity.

The New Anti-Concealment Law also encourages parties to report Concealment Acts while fully protecting their identities by offering a potential reward of up to 30% of the collected fines. Under the Implementing Regulations, such reward is subject to:

(a) The validity of the reported information to commence the investigation procedures;

(b) Having the issued verdict or resolution brought deemed final;

(c) Not having the reporter of the information being convicted of the subject matter breach or crime; and

(d) The ministry's receipt of the fine from the party convicted with committing the breach or crime.

According to specific conditions, breaching parties may also be exempted or have their fine/penalty reduced if they do come forward reporting the concealment breach or crime. 

In addition, the New Anti-Concealment Law and its Implementing Regulations recognise electronic means as a method for official regulatory notifications and proving the committed concealment crimes or breaches.

Grace Compliance Period

In early March 2021, the Ministry of Commerce has issued the Regulations for Rectifying the Status of Anti-Concealment Law Violators (the Rectification Regulations). The aim of the Rectification Regulations is to encourage individuals who are in breach and/or entities of the Previous Anti-Concealment Law and New Anti-Concealment Law to come forward and undertake the necessary steps to legalise their position in the market without being subject to any applicable regulatory penalties.

The Rectification Regulations provide a grace compliance period from March 2021 and prior to 23 August 2021, along with the following main rectification options:

(a) Partnership in an entity between the Saudi and non-Saudi parties: this shall apply after completing the necessary regulatory requirements in respect of the non-Saudi party authorising its official entry into the entity as a shareholder;

(b) Registration of the particular entity under the ownership of the non-Saudi party: this shall apply following the agreement between the Saudi and non-Saudi parties to transfer the ownership of the entity to the non-Saudi party after the latter's compliance with the regulatory requirements permitting its acquisition of the entity;

(c) The Saudi party's continuity in undertaking its business operation: this shall apply through the entry of a new shareholder (Saudi or licensed foreign investor) in the entity following satisfaction of the regulatory requirements and registration of the same with the Ministry of Commerce;

(d) The dissolution of the entity by the Saudi party: this option shall apply through the sale, assignment or dissolution of the entity in accordance with the regulatory procedures;

(e) Obtaining the premium residency by the non-Saudi party: in accordance with the applicable regulations in this regard and rectifying the position through the utilisation of the provided benefits under the secured premium residency; and

(f) The final exit of the non-Saudi party from the Kingdom: following the submission of an undertaking proving the inexistence of private rights resulting from any transactions entered into within the relevant entity. News of the exit shall be published in any of the approved means of the Ministry of Commerce in order to invite creditors to report their claims (if any) within a period not exceeding 30 days from the date of publication.

(the Rectification Option(s))

The rectification request(s) must be submitted to the Ministry of Commerce for evaluation as follows:

(a) The breaching party must submit a disclosure form, as specified by the Ministry of Commerce, which shall generally include:

• the personal information of the involved parties (along with the contact details);
• the selected Rectification Option;
• the details of the commercial registration (i.e. type of activities, number of branches, duration of providing the relevant business, further details on the related licenses and the receivables to be included in the rectification process);
• rectification agreement between the Saudi and non-Saudi parties (if any);
• if the Saudi party decided to transfer the ownership of the entity to the non-Saudi party, then the details of the non-Saudi party must be disclosed; and
• any other information, as may be requested by the Ministry of Commerce, relating to the business activities, entity or its owner.  

(b) Following the evaluation of the rectification request, the Ministry of Commerce shall notify the relevant parties in order to complete the rectification measures within 90 days of the notification date. The rectification period may be extended at the sole discretion of the Ministry of Commerce and based on practical and acceptable reasons; and

(c) If the parties were not able to complete the necessary rectification measures within the prescribed period(s), then the parties should rectify their position by selecting any of the other Rectification Options within 180 days following the elapse of the required timeframe as outlined under item (b) above.

The offered exemptions and waivers under the Rectification Regulations shall not apply to:

• The convicted parties of a breach and/or crime violating the Previous Anti-Concealment Law or the New Anti-Concealment Law which occurred prior to submitting the rectification request to the Ministry of Commence; and

• The parties who appeared before the Public Prosecution or the competent courts.  

Conclusion

With the New Anti-Concealment Law and its Implementing Regulations entering into effect, along with the issuance of the Rectification Regulations, we advise all entities looking to operate in Saudi Arabia to evaluate their current arrangements and seek the necessary legal advice to ensure their operations are compliant.

For further information, please do not hesitate to contact Alain Sfeir. 

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