The Cartels and Leniency Review: Saudi Arabia
Enforcement policies and guidance
The Kingdom of Saudi Arabia is the largest market in the GCC in terms of population and gross domestic product. As part of the growing economy, Saudi Arabia's legal and regulatory framework has evolved to accommodate new needs, and it can be said that doors are now open for many more businesses to enter the market. Saudi Arabia acknowledged that the existence of cartels can be very harmful for consumers, businesses and the economy in general. Saudi Arabia's first competition Law was introduced in 20042 with the aim to control fair competition in the market and for consumer protection. The first Law was replaced in 2019 with the New Law and Regulations3 to develop economy's effectiveness, encourage fair competition, reduce the adversarial effects on the economic and social body, create an appealing competitive environment for investors and especially foreign investors and provide a consistent harmony and balanced progress of economic growth, in addition to giving the private sector the tool to engage in numerous commercial undertakings. The General Authority of Competition (GAC) is responsible for the supervision and implementation of the new regime, with objectives to (1) enhance, protect and encourage the general overall fair competition; (2) closely observe and forbid all competition practices that will disturb the fair competition environment and the Saudi consumers' rights; (3) boost and strengthen the competition and trade market in Saudi Arabia and ensure all commercial practices are supervised, monitored, and regulated; (4) protect small to medium business owners to ensure the consistency of their commercial activity in the market; and (5) increase the flow of the market and trade and yield the market with fairly priced and quality products and commodities.
i New competition law regime
With enforcement of the New Law, the new regime came into existence. While the New Law mostly maintains the approach of the old law and introduced some substantial changes regarding procedural aspects, such as a change in merger notification system, new penalties for obstruction in an investigation, leniency and settlement systems, it has some grey areas and ambiguities to be clarified in due course. Despite these improvements, the most significant problems of the New Law remain undressed, hence there is room for improvement to meet international standards. Post-pandemic, the New Law is expected to incur higher enforcement costs on the enforcement agency and significant compliance costs on the companies, indicating some deterrence for the investment of domestic or foreign companies.
The New Law applies to (1) all entities4 within the country;5 and (2) practices occurring outside the country that have an adverse effect on fair competition within the country, in accordance with the provisions of the Law.6 Therefore, any natural or legal persons or any entity conducting economic activity in the country is within the scope of application of the competition law. The New Law excludes public establishments and state-owned companies that are authorised by the government to provide goods or services from its scope of application. While governmental entities, set up by a royal decree, can benefit from such an exception and will, therefore, avail themselves of the competition law provisions, this exception does not apply to semi-governmental entities that are partially owned by governmental entities.
The exemption system has been one of the most problematic areas of Saudi competition laws. The New Law enlarges the scope of exemption to other practices in addition to agreements. However, a mandatory notification system (which was abandoned by the EU) may decrease efficiencies, prevent firms from making agreements that may be beneficial for the customers and economy and increase compliance costs and workload of GAC. In addition, the approach of the New Law to some important doctrine such as 'market', 'dominance' and 'abuse of dominant position' is quite problematic from an economics perspective and not aligned with established international practices. With the New Law, the risk of false assessment7 is likely to increase, thus a non-dominant firm may be penalised while letting dominant firms get away. In terms of economic concentrations, replacing a market share-based notification threshold with a turnover-based notification threshold is welcomed. Yet, we need to underline that if turnover thresholds are not adjusted carefully, they may cause an excessive number of notifications, imposing unnecessary costs for firms and for competition authorities. Similarly, the definition of economic concentration8 does not make any reference to the 'change of control' hence intra-group restructuring or daily transactions in stock markets will need to be notified, resulting in an unnecessary increase in the workload of GAC and adding to the legal costs and bureaucracy for the firms operating in or serving KSA markets.
ii Key concepts and prohibitions
Wide prohibitions on unfair practices were set out by the provisions of the competition law. The New Law sets a complete list of situations that are considered anticompetitive and includes: (1) setting the price of services and goods, or its production volume or weights; (2) dividing market goods or services on the basis of certain criteria; (3) controlling distribution, manufacture, development, and marketing operations in the market; (4) arranging for, or engaging in, collusive bidding or tendering in public tenders or in other anticompetitive practices; (5) restricting entities from entry into the market and from their right to access goods or services in the market; (6) restricting, partially or totally, the flow of goods and services into or out of the market; and (7) colluding or coordinating in bids or offers in government tenders, auctions, etc., in a manner that interferes with competition.
The New Law removes the distinction between horizontal and vertical relationships between entities and provides that all restrictive practices will be regarded as a violation regardless of the nature of the relationship between the parties involved and whether they are regarded as potential or actual competitors. The removal of these limitations placed many entities under investigation and forced them to reconsider their practices in the Saudi market. It is worth noting, however, that although the law implemented a wider definition of competitive practice and therefore targeted more practices in the country, it has introduced a new Article to allow certain anticompetitive businesses to be conducted in the country only if the businesses succeed in proving (subject to an assessment conducted by a technical committee) that their presence generates and increases the level of quality in certain businesses, creativity and technology.
The Law defines Economic Concentration as '[a]ny act that results in the total or partial transfer of ownership of assets, rights, equity, shares, or obligations of an entity to another, or the joining of two or more administrations in a joint administration, in accordance with the rules and standards set by the Regulations'. Entities seeking to participate in an economic concentration transaction must inform GAC at least 90 days before completion if the total annual sales value of the entities seeking to participate in the economic concentration exceeds the amount determined by the Regulations.9 In response, GAC will issue a resolution either approving, providing conditional approval, or refusing.10 These entities may not complete the procedures of economic concentration except (1) if notified by GAC of the approval in writing; and (2) if 90 days have elapsed from the date of the notice without being notified by GAC in writing of the approval or refusal of the Board.
GAC may, upon examining anticompetitive practices (whether explicitly or implicitly), consider one or more of the following:
- the percentage and market shares of vendors or purchases affected by the practice;
- the time period during which the practice occurred;
- price or volume deviation in the commodity in comparison to the expected levels in the absence of such practice;
- the impact of the practice on the prices, quantities, outputs, quality, diversity, or innovation of commodities compared to the expected levels in the absence of such practice;
- impact on consumer interests;
- impact on freedom of import and export; and
- the extent to which the practice is consistent with the normal competitive behaviour of firms in normal conditions of competition.11
A firm – or group of firms – shall be deemed dominant in a relevant market if it meets either or both of the following criteria:
- a market share of 40 per cent or more of the relevant market. This shall include entities and firms collectively acting with a common will in committing the violation or causing the effect; or
- the ability to influence a relevant market such as controlling prices, production or demand. This shall include entities and (firms collectively acting with a common will in committing the violation or causing the effect).
GAC may, when adopting this criterion, examine one or more of the assessment factors, including: (1) the market share of a firm – or group of firms – and the market shares of competitors; (2) the actual or potential competition in the relevant market; (3) the growth in the supply and demand for the commodity in the relevant market; (4) the obstacles that limit or prevent competitors from entering the market or continuing or increasing their business therein; (5) the bargaining power of the client, including purchasing power; (6) the accessibility of production inputs; and (7) the financial and non-financial resources of the firm and its competitors.12 Entities that are dominant in the market or an important part of it are not allowed to exploit their position to conduct any activities explicitly prohibited by the laws.
Cooperation with other jurisdictions
The first GCC country to issue a competition Law was Saudi Arabia, in 2004. The most recent GCC country to pass a standalone competition Law was Bahrain – in 2018. Saudi Arabia, Qatar, and Kuwait were the first three GCC countries to pass a specific competition Law between 2004 and 2007, following on the heels of this group, by the United Arab Emirates and Oman, respectively in 2012 and 2014. Yet there is no GCC protocol or competition council. Due to the recent expansion of the GCC market, and remarkable foreign investment by international businesses, the enforcement of competition law should become a more common event. Though most international businesses entering the region will be well-acquainted with competition law concepts and have systems and internal processes that align with these, many GCC regional businesses are not used to these concepts, or do not account for competition law enforcement in their day-to-day dealings. As the region's economic landscape changes, and as businesses both move into, and expand out of, the region, competition law will continue to evolve. And possibly quite rapidly, as regional governments and policymakers strive to develop markets that both foreign investors and regional businesses can rely on as openly competitive. Moreover, although the law encourages the companies to implement internal competition policies and train their employees to cooperate with agents of the GAC during investigations, the law is silent as to whether there are any international leniency programmes that may be applicable in Saudi Arabia. As such, currently there is no GCC treaty on the regional enforcement of the competition laws or any leniency programme.
Jurisdictional limitations, affirmative defences and exemptions
i Jurisdictional limitations
The application of the New Law is limited to (1) all Saudi Arabian entities engaged in economic activities; (2) an individual engaged in economic activity whether or not he or she is licensed to do business in the country; (3) all forms of entities and groups when engaged in economic activities; (4) electronic platforms and applications, whether or not they are licensed to practise the activity; and (5) behaviours and practices occurring outside the country when they have impact on domestic competition. It is worth noting that the New Law has introduced a new Article to allow certain anticompetitive businesses to be conducted in the country only if these businesses succeed in proving that their presence generates and increases the level of quality in certain businesses, creativity and technology.
The New Law does not apply to a public establishment or state-owned company if it is solely authorised by the Saudi government to provide goods or services in a particular field. Such an exemption must be granted by a Royal Decree or a resolution of the Council of Ministers authorising the relevant public establishment or state-owned company to be the sole provider of goods or services in a particular field. However, the New Law applies to a state-owned company in fields other than the one in which it is solely authorised by the Saudi government to provide goods or services.
The regulatory authority that governs and enforces the Competition Regulations in Saudi Arabia is the General Authority for Competition (previously known as the Council of Competition). The Authority is led by a governor, Council of Directors and chair for the Council of Directors.
ii Affirmative defences
It is worth noting however that, although the Competition Law implemented a wider definition of competitive practice and, therefore, targeted more practices in the country, it has introduced a new Article to allow certain anticompetitive businesses to be conducted in the country only if the businesses succeeds in proving (subject to an assessment conducted by a technical committee) that its presence generates and improves the level of quality in certain businesses, creativity, and technology. The Board (GAC board of directors) may approve the request of the entity to be exempt from certain provisions of the Law including the general prohibited anticompetition practices, the practices specific to entities in a dominant position and the reporting requirements of an economic concentration activity. In order to gain exemption, it must also be shown that the benefit of the exemption to the consumer should outweigh the effects of restricting the freedom of competition.
Absence of a leniency programme13 guidelines were one of the major grey areas of the old competition law. Therefore, leniency and settlement rules have been introduced under the New Law, and leniency may be requested only by one applicant (i.e., the first entity to apply for leniency) that must proactively provide evidence relating to its partners violating the law. The New Law clarifies that an application for leniency or settlement may be requested before or after a decision to investigate and collect evidence has been issued, but not after a decision has been taken to institute criminal proceedings against the alleged violator. An application for leniency may be requested only before the stage where the decision is taken to the institute of criminal proceedings. If the Board decides to approve an application for leniency or settlement, no proceedings shall be instituted before the committee for the resolution of violations of the New Law against the entity which was granted leniency or settlement. The Board may however take other measures in accordance with the provisions of the New Law. If an entity accepts a settlement, it shall pay the settlement amount determined by the Board, as well as any compensation amount to the affected parties as may be determined by the Board. GAC must notify the applicant of the Board's decision on a leniency or settlement application within a period not exceeding 120 days from the date of the submission of the complete request. The Board may withdraw the settlement decision if the firm fails to provide proof of its commitment to indemnify the aggrieved parties or to implement the conditions, pledges, obligations, etc., as required by the settlement decision.
The New Law-imposed fines not exceeding 5 per cent of annual turnover (capped at 5 million riyals) for violators of certain provisions of the New Law concerning preventing investigators or officers from performing their duties. A fine not exceeding 10 million riyals applies for breaches of provisions of the New Law concerning dominant position, competition arrangements and economic concentration. In addition, a fine not exceeding 2 million riyals for breaches to various provisions of the New Law was introduced. The New Law also gave the authorities the right to increase the fine in certain situations, subject to certain limitations, especially in the situation where the breach is repeated by the violating party.
The application of the New Law to businesses outside the kingdom when anticompetitive effect is produced in the kingdom applies to both goods and services. Its not clear whether the application can also extend to apply to the relationship between the parties and contracts entered into between entities and persons and whose effect is produced directly or indirectly in the kingdom (i.e., contracts with production companies and artists limiting the artists' performance in the market). It will be interesting to know how the courts will look at anticompetitive contracts entered into with artists outside the kingdom that restrict or limit their performance in the kingdom. These practices are recent occurrences and are yet to increase in the GCC market, especially with the recent media and artistic revolution in the kingdom.
'day one' response
Due to the severe penalties for non-cooperation with the investigation officer, it is recommended to be cooperative and provide all information requested by the investigation officer. Where an employee believes, in good faith, there is a violation of applicable competition laws and regulations, he or she should report the matter promptly to management, his or her line manager, the legal department or the compliance officer (if any). Pursuant to the New Law, the law enforcement officer is empowered to: (1) enter and search the premises, offices and branches of firms as well as their affiliated warehouses and storerooms, etc., during normal working hours; (2) access books, records, papers and documents of the firm as well as any hardware, equipment, tools, databases, software or electronic applications, and take copies thereof, whether confidential or not; (3) document the recorded, confiscated, or seized items in minutes to be signed by the law enforcement officer and an affiliate of the firm present at the time of recording the violation (if he or she refuses to sign, his refusal shall be noted it in the minutes); and (d) seek the assistance of competent agencies, when needed and subject to the procedures of the competent authorities, including security agencies, to support them in carrying out the tasks assigned to him or her.
It is recommended that companies form internal competition compliance department to monitor the compliance regularly and implement a compliance programme for the staff. Common aspects of the competition compliance strategy must include:
- policy – an overreaching policy provides commitments, rules and disciplinary measures;
- procedure – adopting a clear framework of business procedures and responsibilities;
- personnel – regularly conduct competition compliance trainings to raise awareness.
Current developments can be seen in the implementation of transparency of procedures by GAC to pursue its role in protecting and promoting fair competition and fighting monopolistic practices to secure a lawful competition. Implementing transparency is one of the most significant developments that will preserve the public rights and protect the rights of aggrieved complainants. A great example was published by the GAC stating that since March 2016, it has received many complaints from citizens and subscribers against beIN Sports for violating the rules of competition in the country. After collecting evidence and conducting the necessary investigations, GAC clearly announced that beIN Sports had abused its dominant position by various monopolistic practices. In the recent case, GAC announced penalties against many entities including 10 million riyals against beIN Sports and the revoking of its licence. beIN Sports was also ordered to return all the gains achieved because of its abuse of its dominant position by forcing customers to subscribe to a package that included non-sports channels as a condition for subscribing to sports channel packages. It had also required subscribers to renew packages for additional periods as a condition of access to other sports tournaments.
In addition, two companies operating in bottling and selling soft drinks industry were fined 10 million riyals each for failing to inform the Competition Authority and obtain their approval before completing an acquisition, in addition to agreeing and coordinating the geographical division of the concluded contract between the two facilities.
A company providing information technology services was also fined 1 million riyals for withholding information and not allowing law enforcement officers to view all records, files and documents and prevent them from carrying out their duties.
1 Belal Hashmi is a partner at Hammad & Al-Mehdar in Saudi Arabia.
2 Royal Decree No. (M/25) dated 22 June 2004.
3 The competition regulations are composed of the three following regulations (the Competition Regulations): (1) New Competition Law promulgated by Royal Decree No. M/75 dated 29/06/1440AH (corresponding to 07/03/2019), which replaced the previous Law No. (M/25) dated 04/05/1425H (corresponding to 21/06/2004 G) and amended by Royal Decree No. (M/24) dated 11/04/1435 H (corresponding to 11/02/2014 G) (the New Law); (2) Implementing Regulation of the Competition Law promulgated by Resolution of Competition Council No.337 dated 25/01/1441H (corresponding to 25/09/2019 G) (the Implementing Regulation); and (3) General Authority for Competition Statute promulgated by the Council of Ministers Resolution No. (55) Dated 20/01/1439 which approved a change in the name of the 'council Competition' to 'General Authority for Competition' (corresponding to the GAC Statute).
4 Entity is defined as '[a]ny natural or corporate person engaged in an economic activity'. This activity includes: business, agricultural, industrial and service activities as well as purchase and sale of goods and services (kindly note that this applies even to those engaged in economic activity without obtaining a licence.
5 Article 3 of the Regulations.
6 Article 3 of the Law.
7 Finding a non-dominant firm in a dominant position or vice versa.
8 According to Article (2) of the Implanting Regulations of the Competition law, Economic Concentration is defined as: 'any act resulting in full or partial transfer of ownership rights or usufruct of an entity's properties, rights, stocks, shares or obligations to another entity that puts an entity or a group of entities in a position of domination of an entity or a group of entities, by way of merger, takeover, acquisition, or combining two or more managements into one joint management or any other means which leads to having a market share of 40 per cent of the total sales of a commodity in the market'.
9 Article 7 of the Law.
10 Article 10 of the Law.
11 Article 11 of the Regulations.
12 Article 10 of the Regulations.
13 Leniency has been defined as an application whereby – if accepted by the Board – criminal proceedings shall not be initiated before the Committee, in a specified case, against the violating firm if the firm hands over evidence that reveals, or could reveal, its partners in committing the violation, as prescribed by the Regulations, and approved by the Board.