What is commercial concealment: its types and penalties under Saudi law?

Commercial concealment is among the phenomena that are contrary to ethics and the law, as it poses a direct threat to the integrity of the investment environment and weakens fair competition in commercial markets around the world.

The anti-commercial concealment system was issued in the Kingdom of Saudi Arabia with the aim of protecting consumer rights and uncovering illegal commercial practices that aim to achieve profits through devious means. Below, we will highlight the dimensions of this phenomenon, its causes, its effects on the national economy, and how to protect yourself from it.

Abdulaziz bin Yasser Al-Anzi Law Firm

What is commercial concealment?

Commercial concealment is an illegal procedure that enables a non-Saudi person to conduct a commercial or professional activity in the Kingdom of Saudi Arabia, in violation of the applicable regulations and rules, by using the name, license or commercial registration of a Saudi person or a foreign investor.

Both the person being concealed (the non-Saudi person) and the person concealing (the Saudi person or the foreign investor) are considered participants in this crime, which violates the law and exposes its perpetrators to legal penalties because of the threat it poses to the national economy and the distortion of fair competition in the market.

Reasons for the spread of the phenomenon of commercial concealment

It is essential to understand the underlying reasons for the spread of various types of commercial concealment. This enables us to control events, solve problems, and avoid mistakes, thus moving from merely observing phenomena to interacting with them effectively. The following is a detailed explanation of the most important reasons that contribute to the spread of the phenomenon of commercial concealment in Saudi Arabia:

1. The profit motive makes some traders exceed the limits of legitimate competition and resort to illegal practices such as commercial concealment in order to achieve illegitimate financial gains by misleading consumers about the nature and characteristics of the products and services offered, which harms their interests and undermines the principle of fair competition in the market.

2. Intense competition in commercial markets provides a strong incentive for companies or traders to resort to illegal practices in order to maintain their market share and profitability. These companies may resort to unethical means to undermine competitors, including pretending to be national companies or exploiting loopholes in regulations and laws.

3. Misinterpretation of commercial laws and regulations is one of the reasons that drives some traders to practice commercial concealment, by distorting or hiding information about their products, believing that this is in accordance with the applicable legal frameworks.

4. Likewise, some companies exploit loopholes in market control systems to engage in commercial concealment, as these loopholes create a favorable environment for the spread of these illegal practices.

5. Some companies, under intense competition, may feel great pressure to launch new products quickly or improve their services, and this pressure may push them to make reckless decisions such as concealing some information in order to outperform competitors.

Types of commercial concealment

Commercial concealment takes many forms, as those involved resort to various tricks to circumvent applicable laws and regulations. Among the most prominent of these forms are:

1. Renting a commercial registration

This is when a Saudi citizen rents out his commercial registration to a non-Saudi person, so that the foreigner takes over the management and operation of the commercial establishment in full, in exchange for the Saudi receiving a periodic sum of money.

2. Controlling bank accounts

This involves the foreigner gaining complete control over the Saudi citizen's business accounts, including conducting withdrawals, deposits, and financial transfers, without any actual intervention from the owner.commercial register Saudi.

3. Handling the establishment's documents

This is achieved through the foreigner's possession of important business establishment documents such asContractsThe Saudi signed these documents in general without reviewing their details.

4. sham partnership

One example of this is when a Saudi citizen enters into a company with a foreigner who is not entitled to invest in the Kingdom, where the Saudi's role is merely nominal, while the foreigner controls the management and operation of the facility.

5. Profit transfer

This is done by depositing the profits of the business establishment into bank accounts belonging to the foreigner, instead of the establishment’s registered accounts, with the aim of concealing the true ownership of the profits.

6.  Disposing of profits

The foreigner distributes the profits of the business establishment without having the legal right to do so, indicating that he is the real beneficiary of the profits.

7. Using the commercial register in other operations

Where the foreigner uses the Saudi commercial registration in other commercial operations such as brokerage or intermediary, without having a license to do so.

Elements of the crime of commercial concealment

As we mentioned previously, commercial concealment is an economic fraud in which a Saudi identity is used as a front for a business activity owned and operated by a foreigner. These practices harm fair competition, lead to an unfair distribution of wealth, and undermine efforts to diversify the Saudi economy.

The elements of the crime of commercial concealment consist of two main elements: the material element and the moral element. The following is an explanation of each:

physical aspectIt is a deliberate act by the “cover-up” that involves enabling a non-Saudi person to engage in a prohibited business activity, by exploiting documents, licenses, or commercial records belonging to the cover-up.

The fulfillment of the material element requires the presence of three essential components:

1. Enabling, which is the positive action that leads to enabling the "covered-up person" to engage in commercial activity.

2. The foreigner may conduct business based on this empowerment.

3. Lack of the necessary license to practice this activity.

As for the moral element, it is represented by the general criminal intent, which requires the perpetrator to be aware that his action constitutes the crime of commercial concealment and to be willing to commit it.

How can commercial concealment be legally proven?

Proving the crime of commercial concealment requires strong and tangible evidence due to the nature of this type of crime, which is often carried out in secret and sophisticated ways. The Saudi judiciary undertakes the task of investigating these crimes, and relies in proving them on a set of evidence and indications that can be summarized as follows:

1. One of the parties confesses to committing the crime of commercial concealment.

2. Eyewitness testimony regarding facts indicating commercial concealment.

3. The absence of a sound accounting system, including the lack of regular invoices and accurate account records.

4. The absence of the registered Saudi owner from his establishment for long periods without logical justification.

5. The foreign person being "covered up" makes decisions and manages all aspects of the business activity.

6. The revenue generated does not match the size of the business activity and the size of the investments.

7. The existence of a document that grants the foreigner broad powers in managing the business activity, including signing contracts and making decisions.

8. The foreigner’s refusal to subscribe to social insurance and the General Authority for Zakat, which are legal obligations for everyone working in the Kingdom.

9. Failure to open a bank account in the name of the business activity, and the foreigner using his personal account for financial transactions.

10. The foreigner's signature on most contracts, checks and bonds related to the business activity.

We note above the variety of evidence that can be relied upon to prove commercial concealment, while the competent judicial authorities undertake the task of evaluating this evidence, taking into account the legal standards in force in the Kingdom.

Penalties for commercial concealment in Saudi Arabia

Saudi law stipulates a penalty for commercial concealment for the first time, which is imprisonment for a period not exceeding five years, or a fine not exceeding 5 million riyals, or both penalties together, with the seizure and confiscation of illicit funds.

There are also consequential penalties that include dissolving the establishment through which the crime was committed, canceling the commercial registration, revoking licenses, prohibiting the practice of commercial activity, and deporting the person being concealed from the Kingdom.

When determining the penalty, the judge takes into account a set of factors, the most important of which are: the size of the business activity that was concealed, the financial return that was achieved, the duration of this activity, and the negative effects that this crime caused on the national economy.

Do you suspect commercial fraud in your business? Don't let this threaten the stability of your business; we offer you Abdulaziz bin Yasser Al-Anzi Law FirmLegal services in the field of combating commercial concealment under the supervision of a select group of expert lawyers who possess the necessary experience and knowledge to help you prove concealment crimes, provide the necessary consultations and follow up with you in all legal procedures.

Contact usTo book a suitable appointment and best meet your legal requirements in accordance with approved local and international standards.