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Saudi Arabia’s Corruption Crackdown: Long Overdue

 5 min read / 

Thomas Friedman’s provocative New York Times interview with Saudi crown prince Mohammed bin Salman may present a simplistic view of events in the Kingdom, but it does make some very important point about the arrests of more than 200 members of the nation’s elite last month. Most of those detained are now slated for release, but Saudi Arabia’s battle to rein in corruption is far from over.

Both inside and outside Saudi Arabia, it’s an open secret that graft permeates the upper echelons of Saudi society. What had not been common knowledge is the sheer scale. According to Saudi Arabia’s public prosecutor, Sheikh Saud al-Mojeb, at least $100bn “has been misused through systematic corruption and embezzlement over several decades”. The U.S. National Bureau of Economic Research estimated an even higher figure – $300bn, or fully 55% of the country’s GDP.

The sudden desire to crack down on systematic graft has hardly come from nowhere. Some outside observers see political motives at work, but drastic moves are necessary to break with the corrupt status quo of Saudi business culture and prepare a nation built on petrol for a post-oil future.

Wading Through Wasta

That cultural shift cannot come soon enough. The guiding principle of wasta (the Arabc world’s version of “it’s not what you know, it’s who you know’”) has helped Saudi elites accrue power and wealth unchecked. As the blogger Secret Dubai once put it, wasta is “the magical lubricant that smooths the way to jobs, promotions, university places and much else in business and government”. It’s an incredibly convenient leg up for those with access and a painful, frustrating barrier to the many young Saudis asked to pursue careers without it.

Frustration with that system helps explain why the crackdown is so popular with the general public. Saudi businesses have plenty of complaints against powerful royals who confiscate land or inveigle their way into business deals.

While the sons of the elite have prime pickings for jobs, young Saudis face a jobs crisis – fully 42% of Saudi youth could be unemployed by 2030. News stories about members of the royal family flaunting their £1.5m fleet of sports cars in Knightsbridge hardly ease this underlying economic trepidation.

Unfortunately, the need to scratch the right person’s back often puts Western businesses in a tight spot as well. Wasta makes doing business in Saudi Arabia a tricky ethical tightrope. American and British firms often struggle not to fall foul of their own legislation, namely the US Foreign Corrupt Practices Act and the UK Bribery Act.

Choosing to Play with Fire

In more than one case, major companies have tried to walk this tightrope and failed. Barclays, for example, found itself at the centre of a US Department of Justice probe in 2013 when it was alleged that the bank had paid illicit fees to the very same Prince Turki bin Abdullah who took London by storm with his collection of golden supercars. Turki, of course, has now found himself in a very different “gilded cage” while under arrest at Riyadh’s Ritz-Carlton.

Barclays also landed itself in hot water because of an alleged sweetheart deal with the Saudi government. More specifically, Barclays is accused of making a covert deal to abandon its pursuit of billions of dollars in lease payments on military compounds built by the property company (and Barclays client) Jadawel, allegedly in exchange for a banking licence to operate in the country.

The collapse of the Jadawel leasing agreement impacted not only the company but also a consortium of American, British, German, and Japanese banks.

Jadawel’s owner, the Saudi businessman and philanthropist Sheikh Mohamed Bin Issa Al Jaber, has pursued damages against the bank in New York courts. Earlier this year, he described the case to the Financial Times in terms many Saudis would empathise with:

“I want to set a precedent. If somebody works hard, nobody should step in and try and destroy what he has created over many years and through a lot of hard work.”

Such informal ways of doing business mean a broker’s wasta can be vastly overstated or entirely fraudulent. Last year, the Irish firm Panda Waste was scammed out of €350,000 by a Saudi-based lawyer who seems to have overstated his influence over the royal family in order to be paid a significant sum and then disappear.

Paradigm Shift

Why have Western companies participated in this system, in which the kingdom’s self-styled power brokers syphon off between 10% and 25% of the value of government contracts? Two simple reasons: big profits and political stability.

The end of the oil era, however, is in sight. Saudi Arabia’s new leaders understand outside capital will no longer give their market the benefit of the doubt unless a more transparent, rule-based system is put into place. That paradigm shift is vital for making the ambitions of Mohammed bin Salman’s Vision 2030 a reality.

Certainly, the appetite for doing business in Saudi Arabia is still there. In May, Japan’s Softbank and Riyadh jointly announced the creation of the world’s biggest tech fund, raising $93bn. China and the Saudis also concluded a number of deals worth $70bn brokered between the two countries in August. Recent rumours indicate the Chinese had tabled an offer to buy 5% of Saudi’s state-owned oil company, Aramco.

Excising corruption wouldn’t just plug a very real drain on the Saudi economy and make doing business in the country more straightforward; it would also help reform Saudi business culture. What you know, rather than who you know, ultimately needs to take primacy. Saudi’s ruling class can lead by example, abandoning the conspicuous consumption symbolized by Turki bin Abdullah’s gold Lamborghinis and instead using their influence to support structural change.

Conclusion

In this, they could learn a valuable lesson from Jadawel’s Al Jaber. Through his foundation, the Saudi businessman stands as an important advocate of civil society initiatives. To spearhead a true cultural shift, many other Saudi royals and business leaders would do well to follow his lead.

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