The purge of Saudi Arabia’s HNW business elite appears to be drawing to a close, but investors who plan to benefit from ambitious economic plans and reforms in Saudi Arabia should tread cautiously.

In late January, Saudi Arabian authorities announced the release of the remaining senior royalty and businessmen under house arrest at the Ritz-Carlton Hotel in Riyadh. The move signalled the end to the corruption crackdown begun last November by Crown Prince Mohammed bin Salman (“MbS”), who ordered the detainment of numerous prominent figures, including princes, ministers and business figures. The men who were arrested, including Twitter and Lyft investor Prince Alwaleed bin Talal and a former head of the National Guard (and, once upon a time, a contender for the throne) Prince Mutaib bin Abdullah, faced allegations of corruption and demands to hand over substantial portions of their assets to avoid prosecution. The move was a clear indication by the young prince that he intends to break with the traditional Saudi system, whereby economic and political influence is divided between different branches of the Al Saud royal family, and vest unprecedented powers in himself and his allies.

The purge has underlined the need to consider the risks of offering private banking services in the Saudi market carefully. It came as MbS’s plans to transform the Saudi economy were attracting substantial international interest. Chief among these plans are the US$500 billion ‘megacity’ on the Red Sea coast, the launch of a parallel capital market for foreign investors, the initial public offering of the state-owned oil giant Aramco and a recently announced cyber-security strategy for the kingdom. These projects, and others, present great potential profit for investors, but also significant risk due to their dependence on patronage by the current royal leadership. It is therefore crucial that financial institutions and corporations interested in these opportunities develop a coherent approach to conducting due diligence in the region, not only as part of regulatory compliance and reputational management, but as a generally sound business practice.

The paramount issue to address from an anti-corruption perspective is the link between senior members of the Saudi royal family and the kingdom’s business sector. The standards for such ties in that jurisdiction differ from international standards. It is not uncommon, for example, for a senior prince to hold interests in a private company operating in a sector under his purview as a minister or government official. This practice, which in a certain political context can be acceptable, could serve as grounds for politically-motivated allegations of abuse of power if there were to be a shift in power between competing factions of the royal family. Events since the rise of MbS have demonstrated the potential consequences of such a shift.

Because of these unstable circumstances and the potential for abuse of power, in-depth 'due diligence' before striking up a business relationship in the Kingdom of Saudi Arabia is essential. In many jurisdictions a wealth management firm can derive reasonable comfort through the use of online screening software and online research. Jurisdictions such as Saudi Arabia, however, require an extra layer of caution and therefore greater scrutiny from on-the-ground, local enquiries. For example, it is important for a private bank to identify and understand undisclosed links between Saudi royalty and the HNW people with whom it is thinking of striking up relationships. If it does uncover such ties, it must endeavour to understand the particular faction of the royal family with whom the potential customer is affiliated and whether the success of his enterprise - if he has one in Saudia Arabia - relies on his royal patrons. An understanding of the degree of independence of that company’s board of directors and the professionalism of its management board — whether they are considered technocrats or political appointees – is also essential.  

'Best practices' for 'due diligence' in Saudi Arabia include two major components: comprehensive searches of publicly available information, including local and regional Arabic sources; and human intelligence or 'humint.' One should search public records in Saudi Arabia with an understanding of potential bias in the local media, which often presents an antiseptic and perfectly respectable image for people whom the royal rulers favour. Since media coverage and other public records in the Middle East are often both inconsistent and unreliable, the gathering of human intelligence through trusted and knowledgeable local sources is therefore a crucial element in any 'due diligence' in the country. Such investigative enquiries will often provide crucial information that is not visible or available in the public domain. Private banks would be wise not to enter this environment blindly.