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.

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