Strategically 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 challengesThe 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 statesHowever 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,

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Stamping out corruptionCorporate 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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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 enforcementOver 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 businessThe 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

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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

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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 partiesAn 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 partnersJoint 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 hospitalityThis 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 trainingWhile 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.

ProgressDespite 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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