This alert discusses hot topics and enforcement trends that we know are making an impact across the Middle East region in 2024, with a focus on Compliance (Anti-Bribery and Corruption, Anti-Money Laundering, Sanctions, Data Protection), Foreign Direct Investments, Competition, Employment and ESG.
1. Greater Emphasis on Preventing Bribery and Corruption and Enforcement across the Region
The last two years saw an increase of enforcement activity in the anti-corruption and anti-bribery space in the UAE and KSA. Notable examples of enforcement activity include the arrests of the Gupta brothers, with the UAE acting on an international arrest warrant for various corruption-related charges in South Africa, and the Abu Dhabi Criminal Court convictions of 79 people on charges of fraud and money laundering for an online scam convincing victims to 'invest' in securities.
We expect this increased enforcement trend to continue this year. The UAE recently signed international judicial cooperation agreements with Denmark, Italy, the Netherlands, Russia, and the USA to facilitate international cooperation on corruption-related issues.
Saudi Arabia's Oversight and Anti-Corruption Authority also investigated 341 corruption suspects from a number of government ministries. 146 individuals were temporarily taken into custody.
As many Middle East countries continue to be perceived as high-risk jurisdictions for corruption, companies should continue to review their policies and the effectiveness of their compliance programs, with a particular focus on risks arising from the use of third parties such as vendors, suppliers, distributors, and local agents.
2. Heightened UAE Focus on Anti-Money Laundering (AML)
New anti-money laundering and targeted financial sanction (TFS) obligations have been put in place, requiring affirmative action to comply, including ongoing screening and reporting to relevant government authorities.
In 2022, the Financial Action Task Force (FATF), an international organization dedicated to combatting money laundering, put the UAE on its "grey list" due to "strategic deficiencies" in the UAE's efforts to combat money laundering and terrorist financing. In response, the UAE undertook significant efforts on AML enforcement. Notable examples include:
- The suspension of 50 companies for failing to register with the government's anti-AML system.
- Issuing collective fines to financial institutions and real estate companies totaling more than AED 199mn(USD 54mn).
The UAE announced the creation of new federal prosecution divisions specialized in economic crimes and money laundering. In December 2023, the UAE also issued a new law on the Regulation of the Accounting and Auditing Profession (Federal Decree-Law No. 41/2023). which is aimed at enhancing audit standards and contains explicit AML reporting regulations.
Over the past year, the FATF acknowledged that the UAE had introduced substantial compliance measures and made progress in facilitating AML investigations and increasing prosecutions. The FATF removed the UAE from the grey list on 23 February 2024.
Increased levels of enforcement are likely to continue in 2024. Companies operating in the UAE should review their policies, systems, and controls in the context of their business and customer risk to ensure compliance with the AML/TFS obligations.
3. Increased Attention on Export Controls/Sanctions in the UAE and KSA
Following Russia's invasion of Ukraine in 2022, neither the UAE nor KSA formally implemented sanctions against Russia. In fact, the UAE has even increased its bilateral trade with Russia. However:
- We are aware that UAE banks have in practice applied Russia sanctions to UAE transactions nevertheless.
- UAE companies are also becoming increasingly concerned about reputational risks in transactions involving Russian counterparties, regardless of whether or not Russia sanctions apply.
Companies will continue to have to carefully handle any relationships with Russia. For example, the UAE central bank in March 2023 announced that it would revoke the license of a Russian bank in Abu Dhabi in the context of the associated sanctions risk. This occurred only a few months after the license was originally granted.
In November 2023, the US Treasury Department sanctioned three UAE-based shipowners for allegedly exporting Russian oil priced above the agreed G7 price cap. Other western officials have also voiced unease over the possibility of the UAE being used to trans-ship dual-use goods to Russia. The UAE subsequently enforced stricter checks and banking requirements on Russian companies.
The U.S., EU, and UK also implemented a substantial set of new sanctions against Russia in May and June 2024, including broad new measures intended to counter the practice of entities outside of the U.S. and Europe engaging in activities to circumvent U.S. or European sanctions or export controls by facilitating dealings involving restricted Russian oil and oil products, or the indirect transfers of restricted goods, software and technology to Russia.
Companies operating in the UAE should be increasingly attentive to transactions with Russian counterparties (including non-Russian entities that are owned or controlled by parties connected with Russia) or business activities involving Russia, or Belarus, more broadly (as Belarus is also subject to substantial U.S. and European sanctions measures). That would include transactions involving a flow of funds through bank accounts in the UAE and KSA or transactions involving corporate vehicles or other UAE touchpoints, as well as transactions involving goods, software, or technology of U.S. or European origin, even where there is no evident nexus to the US, UK, or EU. They will need to keep striking a delicate balance between their involvement in business activities concerning Russia or Belarus, or parties affiliated with those jurisdictions, and their exposure to Western sanctions.
4. Significant Growth in Competition Filings Activity in the UAE and KSA
Based on the trends over the past year, we expect an increase in competition regulation and enforcement in for the remainder of 2024.
Filing activity once again increased in KSA in 2023 and that trend is expected to continue in 2024. In November 2023, the General Authority for Competition ("GAC") adjusted the jurisdictional thresholds seeking to clarify when filings are triggered. However, although the GAC confirmed that foreign-to-foreign transactions are subject to a local effects test, that test can be met by the buyer’s revenue alone. As such, transactions where the target has no Saudi revenues or other activities can still trigger filing obligations. As a result, a larger number of global transactions are likely to meet the revised Saudi merger thresholds, even if the target of the transaction has no domestic activities.
On the enforcement side, the GAC is actively looking at various sectors to uncover competition law violations. An example of significant enforcement action came in the form of a collective fine of SR140mn (USD 37mn) for 14 cement companies that were colluding to raise prices. In February 2024, the GAC issued fines against two companies amounting to SR 800k (USD 213k) in relation to a failure to file a notifiable transaction.
The UAE also unveiled a new competition law (Federal Decree-Law No. 36/2023), which entered into force on 28 December 2023. The new law has extraterritorial effect, removes prior sectoral exemptions, and will establish new filing thresholds based on market share and revenue. The relevant filing thresholds will be introduced by a set of implementing regulations which are due to be published later this year.
In light of increased competition activity, companies in the Middle East should be more attentive to regional competition issues, in particular in the transactional space. We have recently seen a number of joint ventures in the region that can trigger filings in jurisdictions with little or no nexus with the joint venture, such as the EU or China. Undertaking multijurisdictional competition filing assessments in connection with local or regional joint ventures should remain best practice going forward.
5. New Regional Data Privacy and Cybersecurity Laws
There has been a range of legislative and regulatory developments in data privacy and artificial intelligence in the region:
- Saudi Arabia issued its amended Personal Data Protection Law ("PDPL") and attendant implementing regulations. Companies and other data processors have to ensure they comply with the PDPL by 14 September 2024.
- The creation of the UAE Data Office and the implementing regulations to the UAE’s data protection law are both expected in 2024.
- Qatar‘s data protection authority is actively reviewing and approving permits to process sensitive data.
- Oman's new data protection law came into effect on 13 February 2023.
- Both UAE and KSA are trying to lead on AI in the region, and have published AI guides. The UAE published 100 Practical Applications and Use Cases of Generative AI, while the KSA unveiled its Generative AI Guidelines and AI Ethics Principles after public consultation.
Against this backdrop, companies in the Middle East should review their privacy and cybersecurity policies and processes to ensure compliance and preparedness as regional activity in this area of law increases.
6. Enhanced Local Content and Other Employment Requirements in the UAE and KSA
Emiratisation has been extended to companies with 20 to 49 employees, who will have to hire at least one UAE citizen by 2024 and another by 2025. These new rules apply to companies across 14 sectors, including education, construction, education, and health care. While companies in free zones are currently exempt, they are still encouraged to participate in the scheme.
In November 2023, the UAE's Ministry of Human Resources and Emiratisation referred 113 companies to public prosecution for allegedly appointing Emirati citizens in fictitious Emiratisation posts and/or for circumventing Emiratisation targets. In addition, the Ministry has also fined some of these companies for not meeting the annual Emiratisation target growth rate. Since 2022, more than 1300 companies have been fined for attempting to circumvent Emiratisation targets.
Saudization (Nitaqat) similarly continues apace. The quotas for the minimum number of Saudis a private company has to employ have increased in 2023 and 2024. The exact percentages vary and depend on the size of the company, the sector, and the specific role in question. In March 2024, the Kingdom further declared that certain foreign investors and other non-Saudi citizens, such as Gulf citizens and children of Saudi women, would be treated akin to Saudi nationals under the Nitaqat program.
KSA has also announced exemptions to other localization policies. Some companies will now be able to operate in the country and be involved in government procurement without having their regional headquarters in KSA. The exemption applies to companies with foreign operations not exceeding SR1mn (USD 266k) and to those competing for government contracts without any other bidders.
The stepped-up enforcement and increased quotas indicate that both the UAE and KSA will continue to vigorously promote their localization agendas going forward.
7. New FDI Opportunities in Saudi Arabia and the UAE
Foreign investment opportunities are rapidly expanding in UAE and KSA, a trend that is expected to accelerate:
- In the UAE, loosening foreign investment restrictions yielded increased formations of companies with majority foreign investments, with approvals from local authorities being in practice granted beyond the strict scope of activities that were officially opened to foreign investments.
- In Saudi, there are greater opportunities for SMEs and larger players to enter KSA in industries of important national interest and importance, including entertainment, hospitality, tourism, pharmaceuticals, biotechnology, renewables, agro-tech, and water. The rate and scale of economic growth in KSA indicates that the Kingdom plans to provide numerous incentives and opportunities for companies that would want to relocate their operations to Saudi Arabia. The uncertainty around which activities permit 100% foreign ownership has abated.
Over the last few years, the UAE attracted record-breaking amounts of FDI, accounting for over 50% of total FDI into the GCC.
In 2023, the UAE established a new Federal Ministry of Investment to build on this success by promoting its infrastructure and improving its investment environment. The Ministry is currently devising a national investment strategy which will likely be unveiled later this year.
Companies wanting to enter the UAE and/or Saudi market or to reorganize their operations in those countries to take advantage of foreign ownership can do so with growing ease in 2024.
8. Emergence of ESG and Sustainable Finance
Green finance represents a thus far underutilized opportunity in the UAE and Saudi Arabia.
In light of COP28, the UAE declared 2023 "the Year of Sustainability" and there was accordingly a flurry of activities. The UAE announced that it is developing a national carbon registry that will measure companies’ progress in reducing emissions, and will help set up a carbon credits trading program in the future.
Abu Dhabi Global Market (ADGM) announced the implementation of a sustainable finance framework. This framework set out a harmonised taxonomy across investment products by introducing three new designations - "Green", "Climate Transition", and "Sustainability Linked" - with varying minimum criteria for sustainability.
ADGM further introduced new mandatory ESG disclosure requirements that apply to ADGM-domiciled companies involved in certain activities and having an annual turnover of more than USD 68mn. It also launched its first ESG benchmark index.
The UAE is launching a USD 30bn climate fund in collaboration with Blackrock, TPG, and Brookfield. Separately, a number of UAE banks pledged to mobilize over USD 270bn for sustainable finance purposes by 2030.
Saudi Arabia also has ambitious ESG goals in the finance sector, which will take shape in the coming years.
In June 2024, the Qatar Central Bank launched its own ESG and Sustainability Strategy for the Financial Sector, which aims to manage ESG risks and mobilize capital for sustainable finance.
Whether they are attempting to access finance or looking to invest, companies active in the region should assess and mitigate their own sustainability risks.
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