1. S
trategically located at the interface
of East and West, and with a long
history of dynamic intellectuals
and traders, and more recently, bountiful
petrochemical resources too, the
Middle East has long been a centre for
investment, trade and commerce.
Historical governance challenges
The last 15 years or so has seen dramatic
change across the global regulatory
landscape, with the rise in prominence of
older laws like the Foreign Corrupt Practices
Act in the US, to the introduction of newer
laws such as the UK Bribery Act, along with
various new global anti-money laundering
and governance-related regulation, much of
which come with extra-jurisdictional reach.
From a regulatory perspective
however, the Middle East has historically
lagged behind its western partners
in adopting change. Weak corporate
governance is frequently raised by our
clients as a concern when looking for
regional partners or investment targets.
For the large part, the region struggles
with the conflicting forces of a move to
modernity balanced against the traditions
of the past. Many governments lack true
democratic institutions and accountability,
and are frequently run by small groups
of wealthy families whose influence is
near total. Further, there is often limited
distinction between private and public
interests. For example, many of the large
regional corporate oil and construction
interests are run by members of ruling
families who additionally also hold senior
roles in government, with limited clarity
given to the delineation of their roles and
responsibilities.
In addition, the use of relationships
and influence,, both formal and informal,
are often used to finalise deals and secure
favours, as too is the practice of giving
giving and hospitality.
One region, many states
However while lazy analysts might group
the Middle East into one collective of
closely related, culturally uniform states,
the truth is that the region contains a broad
mixture of countries with widely differing
people traditions, religions, and increasingly,
attitudes towards foreign direct investment
(FDI) and governance.
The UAE, and Dubai in particular, has
seen FDI rise substantially in recent years,
with Q1 data for 2015 revealing that FDI
across the Emirates totalled US$2.18bn
over 115 projects. Dubai accounted for
87% of all inward projects, with 6.17%
year-on-year growth.
Capital market investors have also
looked to the region for new opportunities.
In June 2015, Saudi Arabia opened its
US$530bn stock market to foreign investors,
following a decision by the Saudi cabinet in
2014 to open the markets to FDI.
In Iran, many decades of western
sanctions look set to soon be relaxed,
and inward investment is expected to rise
substantially over the coming years. Large
business delegations from France, Germany,
Italy, and to a lesser extent the UK, have
recently visited Tehran, and it is estimated
that oil projects valued at up to US$185bn
are likley to ultimately go under auction.
However governance challenges
across these individuals states also
varies considerably. In Saudi Arabia,
Action
Integrity
Law
26 TFR SEPTEMBER 2015
REGIONS: MENA
Stamping out corruption
Corporate governance across the Middle East can be patchy, with anti-corruption laws not always
consistently enforced or followed. While notable improvements are underway in many countries,
lenders and investors must rely on thorough due diligence, while being sensitive to local considerations,
says Hugo Williamson
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2. corruption remains a significant problem,
with nepotism, along with the use of
middlemen to do business an ongoing
challenge. While the Combating Bribery law
criminalises some forms of corruption, it
is inconsistently implemented, and there
remains no regulation that limits business-
to-business bribery or conflicts of interest.1
This is notable, as frequent overlap exists
between officials holding both governmental
and corporate positions.
In Qatar, despite controversy over the
recent global FIFA World Cup football
scandal,2
corruption is much more
manageable. The country’s primary money
laundering corruption-related legislation,
Penal Code No. 11/2004, is well enforced
and penalties for non-compliance are high,
while facilitation payments are explicitly
legislated against.
The UAE has some of the strongest
governance systems in the region, and
corruption rarely becomes a major inhibitor
to business. Active and passive bribery
is illegal, and regulations are effectively
enforced. However the judicial system
remains a source of contention, with
widespread concerns of malpractice and
nepotism in the courts. Thus it is advisable
that, where possible, disputes are managed
‘offshore’ in the free zones such as the
Dubai International Finance Centre (DIFC),
where the courts follow English common
law, compared with the civil law practiced in
much of the UAE, which is loosely based on
the Egyptian legal system.
Increased local enforcement
Over the past seven years there have
been more than 30 FCPA enforcements
into corporate malpractice in the region,
an indication of weak local governance
and associated corporate misdemeanours.
However things are changing and regulators
in the six-member Gulf Cooperation
Council are seeking, albeit slowly, to
develop unified standards based on UK
and US regulations. While the prospect
of a European-styled common regulation
platform across the region is a distant
prospect, there have been notable changes.
In Oman, where in 2012 the
government came under criticism
for arresting journalists reporting on
corruption, there has been a recent
corruption crackdown, with several
prominent businessmen and government
officials jailed. In addition, the state oil
company, Petroleum Development Oman
(PDO), has called on nearly 140 contractor
firms that they face being blacklisted if
they fail to comply with the PDO’s anti-
bribery policies.
In Dubai, the DIFC is increasingly
seeking to position itself as the jurisdiction
of choice for investors operating in
the region. The free-zone’s regulator,
the Dubai Financial Services Authority
is looking to widen its powers to
protect investors, but raise governance
requirements in the process. Further in
the Emirates, the UAE Federal National
Council in 2014 passed substantial
legislation intended to further punish
those involved in money laundering and
terrorism financing, placing greater anti-
money laundering requirements on banks.
Notable to this change is the significant
widening of the scope of what is viewed
as a money laundering crime.
Impact on business
The fallout from the global economic
crisis was felt hard in the Middle East by
businesses operating there. And with a
rise in global, as well as local, governance
regulations, the need for “doing it right”
has never been more important, as
the alternative can have considerable
implications. This can be a real challenge
for international investors, as nearly 50%
of Middle Eastern and North African
businesses have no internal anti-corruption
policy, and a 2014 survey for PwC revealed
half its respondents had experienced over
US$100m in losses due to corruption over
the last two years.3
Notably the French pharmaceutical
company Sanofi is investigating possible
illegal payments in its Middle East region,4
and GlaxoSmithKline declared in late 2014
that it was investigating alleged corrupt
payments in the UAE following claims
made by a whistle-blower.5
Many international firms operating in
the region have responded with significant
investments in their local compliance
functions. Banks such as Citigroup,
Standard Chartered and HSBC have
substantially invested in their regional
compliance teams over the last couple of
years, with numbers growing rapidly.6
However, in our experience, this
emphasis on corporate governance is
far from uniformly implemented in the
region, and many international companies
we speak to still indicate that at a local
level, their internal systems, policies and
procedures are far from adequate.
Additionally, multinational clients
frequently confide that managers in their
regional offices often adopt an attitude
that the company’s corporate head office
does not understand “how business is
done” at a local level. Consequently, while
strong guidelines on governance might
exist at a corporate level, they are not
fully adhered to locally. This is particularly
the case when top-down commitment to
compliance at a local level is limited.
Good governance
While there are undoubted challenges to
operating in the Middle East, with some
notable exceptions, the region is not the
Wild West, and with suitable focus given
to governance, most associated problems
can be mitigated.
It is notable too that increasingly,
major regional companies are enhancing
their own governance programmes - either
to support their international investment
efforts, or to help them win business from
27www.tfreview.com
“With suitable focus given
to governance, most
associated problems can
be mitigated”
A Guide to Financial Crime Prevention
GENERAL EDITORS: NEIL CHANTRY, ROSALI PRETORIUS, AND THIERRY SÉNÉCHAL
www.ark-group.com – £50
P26-28_TFR_Vol18_Iss10_Feature.indd 27 9/1/2015 12:11:20 PM

3. 28 TFR SEPTEMBER 2015
REGIONS: MENA
multinational partners. We have received
many enquiries from regional players
looking for support in enhancing their
internal compliance infrastructure, from
developing and executing due diligence
compliance programmes, to installing
suitable AML and regulatory systems.
In our view, managing risks in the
region starts with fully understanding the
local environment, reviewing what internal
governance procedures are in place, and
then assessing how effective they are, and
how they may need to be reinforced or
modified.
Vendors, agents and third parties
An important first element to consider is
when dealing with third-party agents and
intermediaries. The Middle East is not
alone in being a region reliant on the use
of agents to act on a corporation’s behalf
to help win or conduct business. However,
governance pressures are seeing this
practice slow, and many of the companies
we talk to are looking at cutting their
reliance on external agents and associated
third parties. This trend is frequently built
on bitter previous experience, and a desire
to mitigate the threat of uncontrolled
actions damaging the company’s reputation
or legal standing.
Where the use of agents and third
parties can’t be avoided, proportionate
due diligence is essential in providing the
necessary visibility, and where possible,
audit rights should be put in place. One
of our major telecommunications clients
operating in the region recently uncovered
substantial evidence pointing to kickbacks
between key staff and external agents.
However due to a lack of pre-agreed audit
rights, fully investigating the matter and
developing the necessary proof to act,
proved both complex and expensive.
Major investment partners
Joint venture and franchise partners, along
with large M&A or private equity targets,
require an additional level of care that
goes beyond the need for local agents and
third parties. One of our clients formed
a major joint venture relationship with
a regional royal family member, seeking
to leverage new contracts and expanding
regionally. However, beyond handshakes
and multiple dinners, limited due diligence
was conducted. When, two years later,
the royal partner became involved in a
major corruption scandal and a history
of corrupt dealings was leaked to the
media, the client’s historically limited due
diligence and integrity checking became
only too clear, as too did the associated
reputational and regulatory implications.
Given the overlap of politics and
business in the region, thorough integrity
due diligence, often looking at political,
and well as business, risks is essential on
major partners. Strong audit rights are
also essential, and it is often advised that,
where possible, staff are implanted in key
positions to help develop the relationship,
but also to ensure corporate governance
standards are maintained.
Gifts and hospitality
This is a complex issue in the region,
were what might be considered the norm
locally can be seen with an international
eye as lavish. Additionally, in countries
across the region, the giving of gifts and
general hospitality is an essential part of
relationship building. Accordingly, the
issue of locally implementing western
gift and hospitality policies needs to be
handled diplomatically and with respect
to ensure against offence. One possible
solution to receiving high value gifts is
to offer to auction them off, with the
proceeds donated to charity.
Culture and training
While a top-down attitude to governance,
along with suitable and frequent training
is vital to doing business successfully in
the region, imposing strict western cultural
norms can be a challenge. Finding the
correct balance is the key to success, with
compliance and ethical business issues raised
frequently and sensitively with the workforce
or local partner to emphasis the issue, while
not being condescending or insulting.
Although setting the right tone
from the top is essential, the creation
of a sustainable ethical culture is just as
important, and this is where accountability
and responsibility form key cornerstones.
Progress
Despite parts of the Middle East being
in the international press for the wrong
reasons, and with the low price of oil
currently impacting some busieness
acdtivities in many areas; in many areas and
on many indicators, the region is accelerating
forward, making it an ever more essential
jurisdiction to do business in and engage
with. While governance can be a challenge, it
is one that is improving fast, and so as long
and investors operate with open eyes and a
clear focus, the ability to tap into regional
opportunities is substantial.
References
1. A point made by a business anti-
corruption portal at http://bit.ly/1KIjNZ2
2. See http://edition.cnn.com/2015/06/07/
football/fifa-scandal/
3. See http://pwc.to/1I8tga5 on www.pwc.
com
4. See Sanofi’s media statement at http://
bit.ly/1JfIQlY
5. As reported by Reuters, 7 October 2014
at http://reut.rs/1V5qGe8
6. As confirmed by Standard Chartered on
page 18
Figure 1: Overview of the index of perception of corruption 2014
Source: Transparency International
Hugo Williamson is senior managing
director, EMEA at IPSA International,
a root9B Technologies Inc company
specialising in business intelligence,
regulatory risk mitigation and
cybersecurity
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