News / Economy

Saudi Crackdown on Illegal Firms Threatens Thousands

Saudi authorities say
Saudi authorities say "cover-up" firms perpetuate unemployment for many, such as these laborers in Riyadh, June 18, 2013.
Reuters
Saudi Arabia's years of economic growth have been good to Abu Ahmad, an Egyptian ceramics worker in the city of Medina, who since 1997 has run his own business installing tiles and marble floors in new villas.
 
But after spending 16 years building up his company, the father of four now fears he might lose everything, not for lack of market demand in an economy where high oil revenue is fueling a construction boom, but because he is a foreigner.
 
Around the country, the government is cracking down on illegal "cover-up" businesses which are nominally registered to Saudi Arabian owners but in practice, owned and operated by foreigners.
 
The crackdown has forced some foreigners to leave the country and if it continues, could potentially result in the departure of tens of thousands more, according to businessmen, economists and government officials.
 
"If I can't adjust my status and work for a decent income, I will preferably leave and go back to my country. I know many of my friends who had to leave," said Abu Ahmad, identifying himself by a nickname since he was worried about being targeted by authorities.
 
Regulations

Under Saudi regulations, foreign-owned businesses face a complex licensing process and are tightly controlled. Over the decades, this system has not satisfied the demand for new businesses in a rapidly growing economy.
 
So many of the roughly nine million expatriates in the Saudi Arabia, who account for nearly a third of the population, have gone into business themselves. They enter the country on workers' visas, then set up companies and illegally pay fees to Saudi citizens who act as front men for them.
 
Such firms tend to be small and require little capital, but they are part of the sinews of the economy in many areas, ranging from mechanics' shops to plumbing businesses, restaurants and market stalls.
 
Abu Ahmad said he had used four illegal sponsors during his time in Saudi Arabia, and paid his current sponsor in Riyadh 5,000 riyals [$1,335] every year.
 
Abdulwahab Abu Dahesh, a prominent Saudi economist, said there was no official data on the size of the illegal business sector but he believed cover-up businesses and other unregulated activities might be worth 700 billion riyals a year — or about a quarter of recorded gross domestic product.
 
In the last several months, however, authorities have begun to act against illegal firms as part of a wide crackdown on illicit economic activity by foreigners, which has seen tens of thousands of illegal foreign workers deported so far in 2013.
 
Many Saudis argue the cover-up firms make the economy inefficient, take commercial opportunities from local citizens and effectively deprive them of jobs, since the firms tend to hire lower-cost foreign workers. Unemployment among Saudi citizens last year was 12 percent, according to official data.
 
"Most of the grocery stores and mini-markets we see in Riyadh are formed under cover-up practices. This harms the economy as it employs more than the needed staff — instead of employing two or three you employ six or seven," said Dahesh.
 
"It also leads to crimes and the emergence of customs and traditions that do not match those of our society."
 
Some of the profits of cover-up businesses are sent back to the foreign owners' home countries — a drain which Saudi Arabia can easily afford at a time of high oil prices, but which will become a burden if oil prices fall sharply. Workers' remittances abroad, which include some of these flows, rose 3.7 percent to 107.3 billion riyals last year, central bank data shows.
 
Under a law issued in 2004 but until now not strictly enforced, Saudis and foreigners involved in cover-up businesses face up to two years in jail, a fine of up to 1 million riyals or both. The business is liquidated and the foreign owner is deported after any jail term.
 
Impact

Officials at the ministry of commerce and industry, which is responsible for dealing with cover-up businesses, were not available to comment, and authorities have not revealed how many firms have been closed. Because it can be hard to prove that a nominal Saudi owner is in fact only a front man, it is unlikely that the practice can be entirely stamped out any time soon.
 
So far there is no clear sign that the crackdown is hurting the overall economy, and Labor Minister Adel Fakieh told Reuters last month that he was "not worried at all" by that possibility.
 
If all the cover-up companies reformed themselves to become legal and employed at least one full-time Saudi citizen, that would generate about 350,000 new job opportunities for local people, he estimated.
 
The alternative is for many of the companies to close down and if they do, that will provide opportunities for Saudi entrepreneurs to set up new businesses, he added.
 
Abdullah bin Mahfouz, board member at the Jeddah Chamber of Commerce and Industry, a Saudi businessmen's association, agreed that cover-up companies hurt the economy but suggested that to minimize any dislocation, they be given time to legalize themselves.
 
One option would be to allow the companies to register as legal foreign-owned enterprises within a certain time, he said. Alternatively, the nominal Saudi owners of businesses could be obliged to invest in and run them.
 
Abu Ahmad does not at present see either outcome as a possibility for him, however, so he worries about his future.
 
"The decisions prohibit working for yourself, and if anything happens, it is I who will be fined and jailed — foreigners are always the ones to blame," he said.

You May Like

Obama: Alaskans Feel Signs of Climate Change

They're seeing bigger storm surges as sea ice melts, more wildfires, erosion of glaciers, shorelines More

Katrina Brought Enduring Changes to New Orleans

The city’s recovery is the result of the people and culture the city is famous for, as well as newcomers and start-up industries More

Magical Photo Slides Show Native Americans in Late 1800s

Walter McClintock spent 20 years photographing the Blackfoot Indians and their vanishing culture at the dawn of the modern age More

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Colombians Flee Venezuela as Border Crisis Escalatesi
X
August 27, 2015 2:08 AM
Hundreds of Colombians have fled Venezuela since last week, amid an escalating border crisis between the two countries. Last week, Venezuelan President Nicolas Maduro ordered the closure of a key border crossing after smugglers injured three Venezuelan soldiers and a civilian. The president also ordered the deportation of Colombians who are in Venezuela illegally. Zlatica Hoke reports.
Video

Video Colombians Flee Venezuela as Border Crisis Escalates

Hundreds of Colombians have fled Venezuela since last week, amid an escalating border crisis between the two countries. Last week, Venezuelan President Nicolas Maduro ordered the closure of a key border crossing after smugglers injured three Venezuelan soldiers and a civilian. The president also ordered the deportation of Colombians who are in Venezuela illegally. Zlatica Hoke reports.
Video

Video Is China's Economic Data Accurate?

Some investors say China's wild stock market gyrations have been made worse by worries about the reliability of that nation's economic data. And some critics say the reports can mislead investors by painting an unrealistically-strong picture of the economy. A key China scholar says Beijing is not fudging ((manipulating)) the numbers, but that the economy is evolving quickly from smoke-stack industries to services, and the ways of tracking new economic activity are falling behind the change. V
Video

Video Next to Iran, Climate at Forefront of Obama Agenda

President Barack Obama this week announced new initiatives aimed at making it easier for Americans to access renewable energy sources such as solar and wind. Obama is not slowing down when it comes to pushing through climate change measures, an issue he says is the greatest threat to the country’s national security. VOA correspondent Aru Pande has more from the White House.
Video

Video Shipping Containers Provide Experimental Housing

Housing prices around the San Francisco Bay area are out of reach for many people, so some young entrepreneurs, artists and tech industry workers are creating their own houses using converted shipping containers. But as VOA's Mike O’Sullivan reports from Oakland, the effort requires ingenuity and dealing with restrictive local laws.
Video

Video Arctic Draws International Competition for Oil

A new geopolitical “Great Game” is underway in earth’s northernmost region, the Arctic, where Russia has claimed a large area for resource development and President Barack Obama recently approved Shell Oil Company’s test-drilling project in an area under U.S. control. Greg Flakus reports.
Video

Video Philippine Maritime Police: Chinese Fishermen a Threat to Country’s Security

China and the Philippines both claim maritime rights in the South China Sea.  That includes the right to fish in those waters. Jason Strother reports on how the Philippines is catching Chinese nationals it says are illegal poachers. He has the story from Palawan province.
Video

Video Technique May Eliminate Drill-and-Fill Dental Care

Many people dread visiting dentists because they're afraid of drills. Now, however, a technology developed by a British firm promises to eliminate the need for mechanical cleaning of dental cavities by speeding a natural process of tooth repair. VOA’s George Putic reports.
Video

Video China's Spratly Island Building Said to Light Up the Night 'Like A City'

Southeast Asian countries claim China has illegally seized territory in the Spratly islands. It is especially a concern for a Philippine mayor who says Beijing is occupying parts of his municipality. Jason Strother reports from the capital of Palawan province, Puerto Princesa.
Video

Video Ages-old Ice Reveals Secrets of Climate Change

Ice caps don't just exist at the world's poles. There are also tropical ice caps, and the largest sits atop the Peruvian Andes - but it is melting, quickly, and may be gone within the next 20 years. George Putic reports scientists are now rushing to take samples to get at the valuable information about climate change locked in the ice.
Video

Video French Experiment in Integrating Roma Under Threat

Plans to destroy France’s oldest slum have sparked an outcry on the part of its Roma residents. As Lisa Bryant reports from the Paris suburb of La Courneuve, rights groups argue the community is a fledgling experiment on integrating Roma who are often outcasts in many parts of Europe.
Video

Video Kenyans Turn to Agriculture for Business

Each year Kenyan universities continue to churn out graduates for the job market despite the already existing high rate of unemployment among youth in the country. Some of these young men and women have realized that agriculture can be as rewarding as any other business or job, and they are resorting to agribusiness in large numbers as a way of tackling unemployment. Rael Ombuor reports for VOA.
Video

Video First Women Graduate Elite Army Ranger School

Two women are making history for the U.S. Army by proving they are among the toughest of the tough. VOA's Carla Babb reports from Fort Benning, Georgia as 94 men and those two women rise as graduates of the difficult Ranger school.

VOA Blogs

World Currencies

EUR
USD
0.8874
JPY
USD
120.83
GBP
USD
0.6497
CAD
USD
1.3271
INR
USD
66.162

Rates may not be current.