Foreign businesses that are run illegally by expats with the connivance of Saudi nationals are estimated to be worth an astonishing SR236 billion, according to research conducted by Ayman Fadil, dean of the Faculty of Economics and Administration at King Abdulaziz University.
His findings, reported Thursday in this newspaper, make startling reading, not simply because of the amount of money involved but also because it is all too apparent that these so-called “cover-up” businesses, probably numbering many thousands, have managed to drive a coach and horses through the supervisory structures that are supposed to be cracking down on them.
It stands to reason that “cover-up” businesses, by their very nature, will seek to avoid the financial obligations involved in licenses and permits, to say nothing of the payment of any taxes. There is thus an unknown, but very likely considerable loss in revenues to the state. And since they are operating outside the law, they will also seek to flout all other codes such as those dealing with health and safety or the proper care and treatment of their employees. Indeed, it does not require a genius to assume that these “cover-up” businesses are responsible for a significant amount of the illegal employment in the Kingdom, which the current crackdown is seeking to end.
Since 2004, foreigners, with the exception of citizens from the GCC, who are given the same treatment as Saudis, have required a license if they wished to engage in business. Yet the research from King Abdulaziz University shows that in 2011, 291 “cover-up” businesses were reported and 64 cases were passed on for prosecution.
The report revealed that the majority of the illegal businesses were in the contracting and construction sector, followed by trades and professions, food and consumer goods and general trading.
The immediate reaction, not simply of legitimate Saudi businesses but of properly licensed foreign investors operating here in the Kingdom, is that the law should be enforced. Firm action should be taken against all those expats and their covert Saudi backers, who have flouted the regulations. It can with justice be asked why should legitimate foreign investors go to the trouble and expense of following the rules, when others are able to flout them completely, with little danger of sanction? Laws that are broken with impunity and which are not then enforced, very quickly become bad laws.
Yet there is another issue that the authorities and indeed all business people operating in Saudi Arabia would do well to consider. That SR236 billion represents a significant chunk of economic activity. That it is illegal does not negate the fact that within the overall economy, even without paying proper taxes and dues, it makes an important contribution to the overall wealth of the nation.
There can be no doubting that there must be a clamp down on this iceberg of unregulated business. The issue that will need to be addressed is precisely how this action is taken. We saw, when the drive against illegal workers began, how suddenly some stores and eateries were forced to close or limit their hours, because their staff, knowing that their papers were not in order, were no longer prepared to come in to work. That caused considerable disruption, especially as the holy month of Ramadan was approaching and with it a surge in shopping.
The trick will surely be to bring illegal business within the proper regulatory framework rather than force them to close. Fadil is surely pointing in the right direction when he suggests that a special agency be formed to target businesses run by expatriates, under the cover of a Saudi citizen, and then take action against them. However his thinking is not that that action should be punitive, but rather designed to encourage and assist “cover-up” businesses to go legit. To this end, he recommends that there should be a simplification of the measures relating to the establishment and management of foreign investment.
While this is sensible, it should not be forgotten that there have already been a number of moves by the government to make it easier for foreign investors to enter the Saudi market. This has been done, not only because of the Kingdom’s market liberalization obligations as part of its membership of the World Trade Organization, but also because it is recognized that for the successful growth of a nonoil economy, outside capital and expertise are essential. Therefore a crackdown on “cover-up” businesses needs to enforce the law but must also appreciate the value that these illegal operations already contribute, albeit obliquely, to the Saudi economy.
What to do about ‘cover-up’ businesses
