New Anti-Concealment (Veiling) Provisions Effective
In August 2020, the theKingdomofSaudi Arabia’s Council of Ministers approved the new Anti-Concealment Law, which will be effective as of the last week of January 2021. The new revisions aim to restrict the use of business licenses issued locally but which are used as “veils” for unnamed foreign parties who participate silently (usually in SMEs), and are evidence of the government’s resolve to eliminate the so-called “cover-up economy”. The new provisions impose heavy penalties, including prison sentences of up to five years and fines as much as five million riyals.
The government had earlier established a ministerial committee to combat commercial fraud and to develop solutions to eliminate the practice of veiling in SMEs. The new committee will continue to look into foreign nationals who own businesses registered under the names of Saudi citizens, and there will be advanced levels of coordination among authorities issuing business licenses and manpower visas.
Commercial concealment is defined as enabling a non-Saudi to invest or engage in any commercial activity for the foreigner’s account or to participate with other prohibited party/parties in exercising such activities or those who are prevented to practice business by the Foreign Capital Investment Law or other regulations and instructions. A citizen shall be deemed to be committing an act of concealment if he/she enables a non-Saudi to use the citizen’s name, license or commercial registration. A foreigner is deemed to be committing an act of commercial concealment if he/she has obtained a foreign investment license and has enabled another foreigner to work for his/her account in circumvention of the Foreign Capital Investment Law.
For example, the practice of issuing the unlicensed foreign party a faux-employment contract which includes salary, but where the unlicensed foreign party is in fact the operator of the business and not drawing a salary, may be deemed to be a form of commercial concealment that can enable the foreign party to evade payment of fees imposed by the foreign investment system.
According to Article Three (3) of the new law, the following shall be considered as punishable crimes:
¾ A person permitting a non-Saudi to carry out - for his own account - an economic activity in the Kingdom that he is not authorized to practice, and this includes allowing a non-Saudi to use: his name, license or approval issued to him, his commercial registry and/ or his trade name.
¾ A non-Saudi conducting an economic activity for his own account in the Kingdom, that he is not authorized to practice, through the entity that is locally licensed to do so.
¾ Providing help, encouragement or advice to further the conducting of business in a concealed or “veiled” manner.
¾ Not cooperating with the authorities during the investigation, including not disclosing information or providing incorrect or misleading information.
The new law provides for harsh penalties for offending individuals, without prejudice of any other intensive penalty stipulated for in any other regulations:
¾ Imprisonment for a period not exceeding (five) years and a fine not exceeding (five) million riyals or both, considering the scale of the subject economic activity, its revenues, the duration of the concealment and its larger consequences.
¾ The liquidation of such businesses, revocation of any such misused license and cancellation of its commercial registration.
¾ Preventing the convicted Saudi national from conducting any business for a period of five years and deportation of the foreign party with a lifetime ban on reenteringSaudi Arabia.
¾ Joint Liability to pay any due Zakat, Tax, government fees and any other obligation.
¾ Publishing the names of the parties involved in committing the offense in the Kingdom’s newspapers (at the expense of the offenders).
¾ Confiscate the funds and other assets of the misused business.
The new law stipulates proactive measures designed to prevent the occurrence of cover-up crimes by addressing actions that commonly precede the crime, and protects the identity and data of the whistleblowers who report concealment by not including them in the case file. It also rewards the whistleblower in concealment cases with a reward of up to thirty-percent (30%) of the fine collected pursuant to the final judgment.
The Saudi Data and Artificial Intelligence Authority will build an index to measure the percentage of suspected cases of commercial cover-ups and will update the records based on the data it continues to receive from the authorities. It is hoped that such data will provide additional confidence in the regulation of the Saudi economy.
The law also requires the relevant government agencies that issue licenses to businesses follow up on their validity, and inform the Commerce Ministry of any suspicious practices. Every contract or act whose purpose is to conceal shall be considered void.
The Ministry of Commerce, the Ministry of Municipal and Rural Affairs, the Ministry of Human Resources and Social Development, the Ministry of Environment, Water and Agriculture, the General Authority for Zakat and Income and other competent bodies are responsible for combatting the violations stipulated in the law.
Agents of the competent authorities are empowered to carry out investigations, including searches of any site where the economic activity is practiced, the examination of records, data and documents of suspected establishments, access to surveillance cameras recordings of the facilities, and may request for disclosure the presentation of information related to the activity of the facility from any party or person. The seizure of sites and safes can be authorized if deemed necessary to conducted a proper examination.
The new law gives the relevant authorities the authority to use technology to prove the crimes and violations of the commercial concealment through "electronic evidence" in addition to other methods of proof.
Saudi citizens will also be asked to report suspected fraud via an online portal through the Ministry of Commerce and Investment.
It is hoped that the strong provisions in the new Anti-Commercial Concealment Law will contribute to motivating SMEs to be more transparent, provide greater opportunities for entrepreneurial Saudis to participate in SMEs, and protect consumers against the negative effects of veiling/ cover-ups.
Author: Firoz Mohammed, Khalil Khazindar Law Firm
Disclaimer: Every effort has been made to ensure the accuracy of this publication at the time it was written. It is not intended to provide legal advice or suggest a guaranteed outcome as individual situations will differ and the law may have changed since publication. Readers considering legal action should consult with an experienced lawyer to understand current laws and how they may affect a case. For specific technical or legal advice on the information provided and related topics, please contact the author.