Saudi crack down on businesses run by foreigners

Saudi small grocery store

The government of Saudi Arabia is cracking down on illegal “cover-up” businesses which are nominally registered to Saudi Arabian owners but in practice, owned and operated by foreigners.

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.

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.

Many of the roughly 9 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.

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 jail term.

However, 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

The real cause for the illegitimate businesses is widespread corruption. This is bad for the country and the economy. Some Saudis are creaming these businesses, doing no work themselves, and at the same time it is more difficult for Saudis to start a new business because they can’t work as cheap as the illegal businesses.
It would be good for the country to fix this problem. Hopefully this will end up in foreign businesses being legitimized, and make an end to the illegal sponsor system.


Read more: voa news



15 Responses

  1. “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.

    I’m a little confused how employing more people is a bad thing, but I’m guessing they are all foreign workers which is why the Saudis have a problem with it. If there were more Saudi workers than needed, I’m sure the authorities wouldn’t complain.

    It seems they need to crack down on the Saudis who allow people to open these businesses in their names. If they didn’t allow it, then the operations couldn’t exist to begin with, right?

  2. I was thinking the same thing Susanne and then came to the same conclusion about foreign workers being employed. Still and all whoever is employed has to spend money in Saudi and that’s not a bad thing. You’re right about the need to crack down on the Saudis who are profiting from these businesses rather than the foreigners. I think the KSA running scared because of the possibility of a decline in oil production and not using their heads. Cutting themselves off like they seem to be trying to do is not going to help them in the scheme of things.

  3. They could employ more local women….

  4. I think the good thing about this is that it is likely to help make the businesses in question more likely to go through legal (rather than illegal) pathways as far as hiring immigrants. Hopefully, this is just the first step of many to improve working conditions there for the low-paid immigrants and prevent other illegal and/or inhumane practices such as abuse, human trafficking, etc.

    As for it helping locals obtain jobs, while this may be true for some Saudis, I expect that the reason the immigrants had these jobs in the first place was that none of the locals wanted them. I think it will end up hurting the economy, at least at first.

    I know it’s not the same, but it reminds me of when Americans complain about illegals taking “their jobs” but when it comes down to it most Americans aren’t willing to work as hard for a moderate amount of pay in industries/services that involve intensive manual labor (i.e. construction, farming, etc.) So now, there are special visas for migrant workers in the US because when it came down to it, none of the Americans wanted those jobs; what they wanted was to be paid more for less work. I expect a similar trend in KSA.

  5. Saudi Arabia to intensify crackdown on illegal workers? What, no amnesty? I cannot believe that Saudi Arabia has reverted to the use of common sense! Barack, plz take cliff notes :)-

    Maybe King Abdullah can send his labor minister to come over and help us with our borders. Oh, wait, on second thought we don’t have a problem because we’re going to give all our illegal aliens amnesty and citizenship. Never mind ….

  6. You are funny AA. LOL!!!

  7. @Moe Bandy,
    I really think that in order for the US to minimize illegal immigrants, the immigration system needs to be changed in order to allow faster immigration times (after the appropriate background check(s) which should not take nearly as long as they do now), relax work visa requirements for Canadian and Mexican citizens (as a reciprocal agreement similar to the one between Canada and Mexico), and make it easier with more clearly defined regulations for educated and multi-lingual professionals to immigrate here. There should also be faster processing times for refugees. If your life is in danger, it shouldn’t take 5 years for the refugee status to be approved; it should only take long enough for the background check and other necessary paperwork to go through. When these issues are fixed, I believe illegal immigration will be less of a problem for the US.

    It will be interesting to watch the KSA immigration system evolve over the next decade, that’s for sure.

  8. Saudi Arabia’s actions to open job opportunities for their own people is very urgent and admirable. However, driving away the millions of hard working expats working at low salary will greatly affect the Saudi economy later on.

    It will affect through low productivity and low consumption. And when we add up those two cardinal factors associated with the economic growth, in the long run, the economic loss to the country would be highly staggering. Like the similar effect of austerity measures taken by the EU.

  9. It seems to me that when the official data give a 12% unemployment rate, they have somehow forgotten, or overlooked, a certain x-chromosome type of citizen in that percentage?

  10. Saudi King is always one step ahead of everyone else with good ideas; especially emancipation of women. But implementation of his excellent ideas has been rather difficult, because of the sabotage by muftis and sheiks. Hopefully, his recent initiative of punishing these front companies and shutting them down will bear fruition.

    Now we in the US should follow this prime example of King Abdullah on how to deal with illegal immigrants. Our justice dept should start jailing the owners/CEO’s of those that hire illegals. Whether they knowingly do it or not. Jail those sob’s directly responsible and the problem goes away ….. our Congress ain’t listening. Implement a plan like King Abdullah’s, and poof, the illegal immigrant problem will disappear! Don’t reward them for breaking our laws and illegally entering our nation!

    BTW, didn’t Saudi Arabia get the memo that the word “illegal immigrants” is now a no-no word; the politically correct word is “undocumented workers” :)-

  11. The Ministry of Labour can disclose to the public:

    1- the Saudi sponsors’ names,

    2- and how many people each of those sponsors are currently sponsoring.

    As the article said: “The real cause for the illegitimate businesses is widespread corruption”. And transparency is an effective solution for corruption.

  12. Imagine if we in the US were just as strict……

  13. This is very sad,

    most people know that small businesses are the back bone of any economy, the crack down here is actually on the Saudi small business owner.

    it starts with impossible requirement issued by each government entity from labor office, passport office, chamber of commerce and the rest of them, each live in there own realm.

    as a small business owner let say a restaurant we are asked to have Saudi workers, from WHERE i’m going to find the Saudi worker? to work as a server, cashier, driver or onion cutter that’s the jobs that the restaurant offer, we are asked to register Saudi workers PAY GOSI, LABOR office and the list keep going and going.

    a friend owns a barber shop asked to hire Saudi, my question to do WHAT?! its not like there are plenty of Saudi hairdressers who could not find a job!!!

    even if i found someone, how much would i pay him in my tiny restaurant income? SR2000 or SR3000, the Saudi mentality would rather stay at home and get SR2000 from the government.

    the restaurant workers get SR1000 to SR1200, a specilaist might get up to SR2500 to SR3000, plus RENT, PLUS ALL GOVERNEMNT PAPER WORKS, PLUS ALL UTILITY SERVICES.

    no one has a clue of what the small business owners go through,

    and for a fact if it wasn’t for thous expats working hard on the small businesses we would be lost with out them, from the person that clans our streets to the Doctor in the hospital.

    and then see how they deal with big corporations, AHHHHH don’t let me get started on that.

    this would only be good news if WE the Saudi People start actually working, which i don’t see in the near future or far.

    I have worked as a waiter in a hotel I was look down as if I committed a crime.

  14. i just hope i didnt go off topic, but he crack down is hurting small business owners

  15. saudimajix, you were completely on-topic! And thank you very much for sharing your viewpoint on this matter. It’s great to get the view and information from somebody in SA.

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