Saudi Arabia: Business implications of the purge

Saudi police units gathered under the cover of darkness, before launching a series of raids and arrests across the kingdom.


Executive summary

  • Local agents could find their personal networks dismantled overnight
  • Businesses must navigate politicised anti-corruption enforcement
  • Additional compliance obligations will burden company resources

Introduction

Over the weekend of 5-6 November, Saudi police units gathered under the cover of darkness, before launching a series of raids and arrests across the kingdom. The targeted individuals were high-net-worth, politically connected and in some cases members of the house of al-Saud, the country’s royal family. The law enforcement operation was masterminded by Crown Prince Muhammad bin Salman, the country’s effective head of government, who had created a new anti-corruption committee mere hours before.

The raids have urgent commercial implications for businesses operating in Saudi Arabia. Most foreign contractors in the kingdom use local Arab consultants, agents or fixers to win and retain business. These middlemen rely on their own personal networks to navigate Saudi Arabia’s opaque public-sector procurement process on behalf of their principal. In many cases the purge is likely to have disrupted the networks of patronage that allow these intermediaries to function.

Procurement

The defence sector is likely to be particularly affected. The removal of Miteb bin Abdullah and Abdullah Al Sultan, who were until yesterday head of the Saudi national guard and commander of the royal navy respectively, fundamentally reshapes the procurement landscape. Their arrest on anti-corruption grounds leaves the national guard and royal navy’s entire middle and senior leadership at risk of a similar fate. Officers loyal to bin Salman are likely to be rapidly promoted to fill key positions, given that the Saudi security apparatus is highly politicised and not meritocratic.

This will present businesses with sales partners in Saudi Arabia with both risks and opportunities. The sudden removal of so many influential people will shatter the personal networks of local agents and consultants, and the companies who commission them risk being blindsided by their sudden loss of influence. Conversely, for companies seeking to exploit the disruption, now is a lucrative opportunity to exploit the disruption faced by market incumbents.

The defence sector is likely to be particularly affected.

Managers should contact their local agents as soon as possible to clarify the extent to which their contacts risk being ousted, but they should recognise that information flow could be distorted or restricted either by the Saudi government or by their in-country partners, who have a strong incentive to downplay any loss of influence on their own part. Nevertheless, it is imperative such contact should be established quickly, as the loss or marginalisation of local agents will compromise commercial bidding, tendering and contract-negotiation. A2 can utilise its on-the-ground network of associates to investigate the validity of such information, in order to reassure businesses they are fully aware of any potentially disruptive developments.

At the same time, managers must ensure that in the scramble to re-establish procurement ties, ethical and legal obligations surrounding the due diligence of business partners are not overlooked, as this would put companies at grave risk of penalties from Western extraterritorial anti-corruption legislation. This includes the U.K. Bribery and Corruption Act as well as the U.S. Foreign and Corrupt Practices Act. Companies could also be investigated by Saudi regulators under anti-corruption laws, particularly as the current anti-corruption drive gives wide political cover for officials to take action against businesses, should they so choose.

Compliance

This will affect operational budgets, as companies will have to undertake new compliance and due diligence reports on such individuals before being able to resume commercial operations. International media attention on Saudi Arabia heightens the risk of inappropriate commercial relationships with politically exposed persons being exposed.

A2 notes that due diligence is particularly complex in Saudi Arabia, where business structures are often opaque and Western norms of publishing relevant corporate information do not necessarily apply. Although this risk is somewhat mitigated by the fact that Saudi Arabia is not under U.N. or U.S. sanctions, A2 reminds companies that failure to conduct proper due diligence could leave them open to legal and reputational penalties, and that efforts to maintain secrecy around them are ever more at risk from data leaks such as the Panama and Paradise Papers.

A2 notes that compliance is particularly important in the current climate of Western popular suspicion towards arms and aerospace sales to Saudi Arabia, a conservative Muslim monarchy. Saudi Arabia’s more muscular foreign policy of the last several years, which has ranged from deploying troops to Yemen to confronting Iranian attempts at establishing regional hegemony to blockading Qatar, has triggered intense criticism from activists, NGOs and journalists in Europe and the United States. As such, neglecting compliance could expose companies to protests, hostile political attention and boycotts in the Western world.

Seizure

The Saudi government has already indicated it is willing to expropriate assets from anyone detained under the crackdown. Although this will primarily affect arrestees’ personal property – such as luxury cars and homes – commercial assets could also be affected.

A2 notes that the Saudi government will likely be hesitant about seizing control of high-profile assets based abroad, and that the expropriation of assets abroad would be a lengthy process that would very likely be repeatedly legally challenged by the defending party.

However, initial indications from Saudi officials suggest that the government regards the expropriation of assets as within its rights. This will shake investor confidence in Saudi Arabia, given the political motivations behind the police operations and the low likelihood of a fair judicial process.

Businesses operating assets owned by any of the detained individuals could be at risk, particularly when said assets are based in Saudi Arabian territory. Managers should immediately consider whether expropriation would render continued business operations unviable.

Strategic implications

While royal officials have framed the arrests as part of a major anti-corruption drive, A2 assesses it is primarily a dramatic move by the crown prince to consolidate and centralise political power, in order to move forward with his ‘Vision 2030’ scheme, an ambitious and multifaceted programme for economic diversification away from oil. The arrests have removed multiple alternative centres of power, and A2 notes that those detained were primarily (albeit not exclusively) from the more traditionalist element of Saudi society.

The political ramifications of the raids will be significant, as it is the surest sign yet that the crown prince is abandoning the traditional model of elite-level consensus governance for a more centralised system. However, A2 notes that commercial implications are of immediate operational concern to business. In particular, the impact on procurement, compliance and expropriation risk.

Mitigation actions

In a business culture dominated by the elite and opaque practices by Western standards, it can be difficult to gain a true picture of operations in Saudi Arabia. Allan & Associates is a risk management consultancy that specialises in intelligence provision. Whether this is a subscription to A2 Global, our online monitoring service, due diligence provision, or bespoke investigations, Allan & Associates will help clients look behind the veil. Our consulting teams, supported by expert analysts, can deploy globally in order to provide clients with world-class intelligence and security support.

Founded over 10 years ago in Hong Kong, Allan & Associates now has offices throughout Asia Pacific as well as London and Washington, DC. We are well placed to supply businesses with a complete picture of global politics, security and trade.

Please contact us for a discreet conversation on your business’s particular needs.

Charlie Hiller, Head of Sales

informationservices@allan-assoc.com

+44207 523 5393

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