IDEffective Insolvency and Creditor Rights Systems
A state within the Middle East and North Africa (MENA) region, Saudi Arabia exhibits similar shortcomings in its insolvency regime as its neighbor states. According to the Working Group on Corporate Governance 2007 report, these shortcomings include inadequacies in both the legislative and institutional frameworks for insolvency; a need to better balance creditor and debtor interests; the lack of a formal, professional class of insolvency practitioners to serve as trustees or advisors in insolvency procedures; and the need to create out-of-court alternatives for resolution of insolvency issues, including rescue and restructuring. Hawkamah (with the participation of the World Bank, the Organization for Economic Cooperation and Development (OECD), and INSOL International) conducted a survey of the region, which was based on the Principles and Guidelines for Effective Insolvency and Creditor Rights Systems developed by the World Bank. The survey concluded that the primary shortcomings of the insolvency and creditor rights systems in the MENA region can be summarized as an overall failure to comply with international best practice, insufficiencies in the areas of enforcement and legislation, inadequate regulation of insolvency practitioners, antiquated legislation, and the persistence of stigma attached to insolvency. According to the survey, Saudi Arabia achieved a score of 85 out of 155, which is below the OECD average of 124 and the MENA average of 88. Nevertheless, Saudi Arabia is a signatory of the Hawkamah Declaration on Insolvency and Creditor-Rights Systems for the Middle East and North Africa, which calls upon signatories to acknowledge that sound insolvency and creditor rights systems are important to regional capital markets and private sector development and to modernize such systems so that they comport with international best practices and standards, including the World Bank’s Principles and Guidelines for Effective Insolvency and Creditor Rights Systems.
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IIInternational Financial Reporting Standards
The development and reviewing of accounting standards in Saudi Arabia is the responsibility of the Accounting Standards Committee of the Saudi Organization for Certified Public Accountants (SOCPA). According to Dr. O. Almotairy’s presentation at the 2004 Second Middle East and North African Forum on Corporate Governance, by the end of 2003, there were 20 Statements of Financial Accounting Standards in effect which covered most business transactions and events relevant to public companies in Saudi Arabia. The 2009 action plan prepared by the SOCPA for the International Federation of Accountants (IFAC) states that the SOCPA has indicated that the convergence of national standards with IFRSs is its objective. The SOCPA, in the action plan, highlights ongoing efforts to identify hindrances to the convergence process, as well as in identifying opportunities to further enable the implementation of IFRSs. Despite this, there does not seem to be publicly available information on the compliance of existing Saudi accounting standards with individual International Financial Reporting Standards (IFRSs). According to a 2009 report by PricewaterhouseCoopers, all banks are required to apply IFRSs. Insurance companies may be subjected to similar requirements in the future. Listed companies are not permitted to use IFRSs, according to the Deloitte IAS Plus website.
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IDPrinciples of Corporate Governance
In February 2009, the World Bank released its Report on the Observance of Standards and Codes (ROSC) on Corporate Governance in Saudi Arabia. The evaluation assesses Saudi Arabia’s implementation of the individual Principles of Corporate Governance issued by the Organization for Economic Cooperation and Development. According to the ROSC, the corporate governance laws, regulations, and institutions that have been put in place “generally reflect international good practice.” In the wake of the market correction of 2006, market regulators recognized the need for better corporate governance via legal and institutional reforms and passed a Corporate Governance Regulation (CGR) for listed companies strengthening the supervisory functions across the financial sector. The CGR was passed by the Capital Market Authority (CMA), which was established in 2003 and has investigative and enforcement powers in regulating the securities exchange, better known as the Tadawul. The 2009 ROSC, however observes that implementation of corporate governance best practices by companies is still in its early stages, and makes a number of recommendations which would enable Saudi Arabia to bring their framework closer in line with international standards. These recommendations include adjustments to the CGR, better enforcement, and measures to turn the “law on the books” into practice. The World Bank report notes that the CMA is in the process of implementing a three-phased approach to improving corporate governance practices in Saudi Arabia. Phase one was completed with the publishing of the CGR and phase two, which is currently in progress, aims to educate market participants on its application. The third phase will comprise revisions to the CGR, with a possibility of making compliance with some or all of the regulation mandatory.
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IIInternational Standards on Auditing
The Saudi Organization for Certified Public Accountants (SOCPA), established in 1992, is responsible, among other tasks, for reviewing, developing and approving auditing standards in Saudi Arabia. As indicated in the 2009 action plan prepared by the SOCPA for the International Federation of Accountants (IFAC), the SOCPA declares the convergence of national standards with ISAs as one of its objectives. The SOCPA compares national pronouncements with international requirements such as ISAs and U.S. auditing standards, with a view to reduce differences where possible. The 2010 IFAC report points out that relevant ISAs are generally accepted in matters not covered by the auditing standards or professional views issued by the SOCPA. The action plan further indicates that there have been ongoing efforts aimed at the full adoption of the IFAC Code of Ethics. Currently, the SOCPA Code of Ethics is based on a combination of the pre-2004 version of the IFAC Code of Ethics and other national ethic codes. Despite information above, there is insufficient information publicly available as to the actual steps undertaken to achieve convergence of Saudi auditing standards with International Standards on Auditing.
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IDAnti-Money Laundering/Combating Terrorist Financing Standard
The IMF's 2006 Financial System Stability Assessment states that, according to a Financial Action Task Force (FATF) assessment conducted in February 2004, Saudi Arabia was compliant or largely compliant with most of the FATF's 40+8 Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT). However, this assessment was based on the FATF's old methodology which was subsequently revised in 2004. A 2009 report by the U.S. Department of State (DoS) concludes that the framework of Saudi Arabia's anti-money laundering regime meets FATF recommendations for combating money laundering and financing of terrorism. However, the DoS report does not specifically address Saudi Arabia's compliance level with each of the FATF recommendations. The FATF and U.S. DoS reports list key areas where Saudi Arabia's AML/CFT regime could be enhanced. Firstly, the terrorist financing offense lacks a clear definition to ensure that it is an offense if the funds are intended for terrorist use. Secondly, the status quo is such that access by the Saudi financial intelligence unit to information from financial institutions is unnecessarily restricted by requirements to go through the Saudi Arabian Monetary Agency, which slows and hinders AML/CFT investigations. Lastly, according to the U.S. DoS report, Saudi authorities currently over-rely on suspicious transaction reports to generate money laundering investigations. Despite the information provided in the 2006 IMF and the 2009 U.S. DoS reports, neither of these reports actually address Saudi Arabia's compliance with the revised FATF recommendations. A 2008-2009 Annual Report by the FATF, however, lists Saudi Arabia as one of the jurisdictions that has committed to implement the FATF's 40+9 recommendations.
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FCCore Principles for Systemically Important Payment Systems
The IMF's 2006 FSSA on the Saudi Arabian Riyal Inter-bank Express (SARIE) system states that SARIE observes the applicable core principles for systemically important payment systems (CPSIPS) as promulgated by the Committee on Payment and Settlement Systems (CPSS). In addition, the FSSA concludes that all four responsibilities of the central bank are observed. Despite this rather strong statement from the IMF, the 2006 FSSA does not provide a detailed assessment of Saudi Arabia's compliance with each of the CPSIPS. All inter-bank payment transfers in Saudi Arabia are processed through SARIE, which is operated and regulated by the central bank - the Saudi Arabian Monetary Agency (SAMA). The other payment and settlement systems operating in Saudi Arabia include the Automated Clearing Houses, an electronic cheque clearing system, the Saudi Payments Network, which links all automated teller machines and Electronic Funds Transfer Point of Sale terminals, the Electronic Securities System, and the electronic Bill Presentment & Payment system. The Bank for International Settlements' 2003 Red Book notes that the risk management strategy designed by SAMA for SARIE provides a rigorous and comprehensive mechanism for controlling risks. Also, the FSSA points out that, to improve the efficiency of inter-bank payments in SARIE, banks have access to SAMA-provided intraday credits (claims on the central bank), which are fully collateralized by government debt instruments. However, the FSSA highlights several areas where SAMA could improve the effectiveness, accountability and transparency of its governance arrangements vis-à-vis SARIE. For example, due to the growing status of SARIE, the FSSA recommends that SAMA adopt a strengthened governance framework, namely the establishment of a formalized board of governance with ultimate responsibility for defining and implementing payment system policy. As of March 2010, however, these proposed changes had not been implemented.
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