Health Warning: The contents of this article are based on publicly available resources, which are subject to change. Some of these resources were only available as unofficial English translations of official materials published in Arabic. No legal or tax advice is provided in this article or on The Flaw Blog. All hyperlinks provided have been checked as of the date of publication.
Introduction
The Middle East is a huge market for financial services with many sovereign wealth funds, local banks and other large players on the buy-side looking to purchase financial services provided by global banks and investment firms – especially on a cross-border basis. The region is geographically and culturally diverse with various countries. Each country has a unique legal and regulatory regime governing financial services. However, there are some common regulatory themes that run throughout the region.
In this article, we will mainly consider a sub-set of the Middle East that comprises The Cooperation Council for the Arab States of the Gulf also known as the Gulf Cooperation Council (GCC). The GCC is a trade bloc, which has six members: The Kingdom of Bahrain, the State of Kuwait, the Sultanate of Oman, the State of Qatar, the Kingdom of Saudi Arabia (KSA), and the United Arab Emirates (UAE). It was set up in 1981 and is headquartered in Riyadh, KSA.
In this article we look at the typical issues to consider before marketing and providing cross-border financial services to clients located in this GCC region. When we say “cross-border” we mean that services are actually performed in and provided from a country location outside the client location. Typically, the relevant financial services are provided from global financial centres like London, New York or Paris and the clients would be entities domiciled in GCC countries (e.g., the UAE).
We will look at the following topics with respect to the GCC:
- Licensing of Financial Services;
- Cross-Border Measures;
- Reverse Solicitation;
- Exemptions to Licensing Requirements;
- Regulation in the DIFC, ADGM and QFC;
- Kingdom of Saudi Arabia (KSA);
- Travel for Business;
- Final Thoughts; and
- Regulatory Sources.
Licensing of Financial Services
In general, carrying out financial services activities (e.g., banking or trading securities) in or form a country in the GCC would require a regulatory licence from the local banking or securities (i.e., markets) regulator. In addition, local business licences may be needed for carrying on any business on the ground in the relevant GCC country. What if local law in a GCC country is silent in relation to cross-border financial services, as is often the case? In cross-border scenarios, all activities take place overseas and the only nexus with the relevant GCC country is that the client is domiciled there (e.g., trading in US Dollar-denominated securities listed in New York for a UAE-domiciled client as opposed to trading in locally-listed UAE securities denominated in UAE Dirhams).
It follows that if care is taken that all activities take place overseas (i.e., not in or from the relevant GCC country) and there is no other nexus apart from client domicile, then it may be possible to make the case that cross-border financial services could be provided to clients in the relevant GCC country without triggering local licensing requirements. Examples of such cross-border considerations are discussed in the ‘Cross-Border Measures’ section below. This discussion may not apply in relation to the Kingdom of Saudi Arabia (KSA), which operates a different regulatory regime (see ‘Kingdom of Saudi Arabia (KSA)’ below).
Note: It is always worth considering obtaining the relevant local licences if the volume and frequency of the activities in country are such that local regulators would expect an overseas financial services provider to operate with such licences. Although tax issues are not covered in this article, it is worth mentioning that there could be a tax permanent establishment risk if carrying out business activities in a country even without an otherwise taxable presence such as a branch or subsidiary.
Cross-Border Measures
Although a jurisdiction-by-jurisdiction assessment is required, here are 10 examples of measures that an overseas financial services provider could take so as to reduce the risk of activities taking place in or from the relevant GCC countries:
- Local Presence: There shouldn’t be any physical or legal presence (e.g., an office) in the relevant country.
- Websites: Websites and social media shouldn’t contain marketing aimed at clients in the relevant country including using local language.
- Travel: Trips by representatives to meet with clients in country should be limited to social visits without discussing specific services.
- Meetings: Meetings in a relevant country should be by client invitation only and be infrequent.
- Clients: Clients should have been introduced overseas or themselves requested a meeting (see ‘Reverse Solicitation’ below).
- Client Types: Clients should preferably be sophisticated or high net worth investors. Providing such investors with services is more likely to be exempted.
- Marketing: No promotional activities (e.g., cold calls, roadshows) should be carried out or service-related materials given out while in country.
- Information: Specific information relating to services should be provided strictly on a cross-border basis.
- Contracts: Contracts related to services provided should be executed overseas and not be governed by the local law of the relevant country.
- Payments: Payments or forms related to cross-border services provided shouldn’t be accepted inside the relevant country.
Note: the above examples are broad measures and specific advice would be needed in relation to proposed activities in any particular country. Some of the measures discussed may be permitted on the basis of a market practice tolerated by local regulators, which position could change without notice. These measures may not be as relevant in the Kingdom of Saudi Arabia (KSA), where a different regime applies (see ‘Kingdom of Saudi Arabia (KSA)’ below).
Reverse Solicitation
What if a prospective client approaches an overseas financial services provider? This is the basis of the reverse solicitation (reverse enquiry) concept. Services provided pursuant to reverse solicitation may be permitted in the GCC without triggering local licensing requirements because such services would likely be seen as requested of and provided by an overseas financial services provider outside the relevant GCC country where all activities take place overseas (e.g., in New York or London). For reverse solicitation to be available, there must be an own exclusive initiative by the client to approach the overseas financial services provider with no prior marketing by the overseas financial services provider in the relevant GCC country. Enquiries or meeting invites from the client should be documented to evidence the client’s initiative.
Exemptions to Licensing Requirements
Various GCC countries operate regimes where there are exemptions from licensing, registration or other local requirements for financial services activity if certain conditions are met. Exemptions may be available at law, pursuant to regulatory guidance or based on market practice and informal positions taken by regulators (so-called ‘tolerated practice’). Some examples of potential exemptions (non-exhaustive) are discussed below. If an exemption is available and any conditions met, it provides a specific basis to rely on, or, at least, additional comfort.
Note: all exemptions discussed are subject to change over time and legal advice would need to be taken regarding their availability at a particular point of time or given a particular set of circumstances.
- UAE Professional Investors Regime (including High Net Worth). Under the UAE Securities and Commodities Authority (SCA) Board of Directors’ Decision No. 13/RM) of 2021 (text not available) (also referred to as the SCA Rulebook), there are exemptions for the financial promotion of securities made without a UAE licence to “Professional Investors”, which include high net worth individuals (HNWIs) and various other categories of investors including government bodies, regulated firms, listed companies, and family offices. HNWIs include those with a net worth more than 4 million UAE Dirhams ($1.1 million).
- UAE Exempt Professional Investors (Funds). The SCA has provided official guidance on the marketing of foreign investment funds in the UAE (mainland). This includes various exemptions from registration and local requirements for certain types of clients (e.g., Exempt Professional Investors – government institutions, agencies, or companies wholly owned by the government). In addition, Reverse Solicitation is specifically listed as an available exemption in the above guidance.
- Qatar Collaboration Exemption. Although not a formal exemption, it is possible for overseas financial services providers to provide financial services to clients in Qatar using the licence permissions of locally-licenced institutions they collaborate with.
- Bahrain Reverse Solicitation. Based on an interpretation of applicable regulation, provided there was a reverse solicitation from a client, the Central Bank of Bahrain (CBB) may continue to tolerate overseas financial entities providing financial services on a cross-border basis into Bahrain without a licence or commercial registration requirement.
- KSA CMA Resolution (Saudi Five). Under a resolution by the Capital Market Authority (CMA) dated 19/05/1434H (corresponding to 31/03/2013G) (understandably, the text is not widely available but it is referred to in this material), overseas financial service providers are permitted to provide securities-related services without a local licence to the following KSA bodies: (a) the Ministry of Finance Public Investment Fund (PIF); (b) the Saudi Central Bank (SAMA); (c) the General Organization of Social Insurance (GOSI); (d) the Public Pension Agency (PPA); and (e) the Saudi Arabian Investment Company (Sanabil Investments). These bodies are sometimes also referred to as the “Saudi Five”.
- KSA Reverse Solicitation. Under CMA regulatory guidance (FAQs), overseas financial services providers regulated in their home jurisdictions are exempt from KSA licensing requirements in relation to securities transactions when dealing with clients who have initiated contact on a reverse solicitation basis (see ‘Reverse Solicitation’ above) and the client is either an investment company (net assets of at least 10 million Saudi Riyal (SAR)) or a high net worth person whose total investments or net assets exceed SAR 50 million. The relevant transaction must not be for securities issued or listed in the Kingdom of Saudi Arabia (KSA) apart from KSA government bonds.
- KSA Correspondent Banking. Correspondent banking services (i.e., where a bank acts as a middleman to accomplish transactions on behalf of a bank in another country) may be seen as services taking place overseas (e.g., in the USA) by overseas financial services providers for the benefit of KSA-regulated banks. Rules set out by the local regulator (SAMA) suggest that such overseas correspondent banking services for KSA-regulated banks may therefore be permissible without overseas financial services providers obtaining local licences in the KSA. Interestingly, the following resource from the KSA government provides lists of correspondent banking relationships held by various KSA-regulated banks.
Regulation in the DIFC, ADGM and QFC
It is worth noting that the UAE includes the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM). These are distinct areas within the cities of Dubai and Abu Dhabi respectively, each with its own separate regulatory regime. They started as inward initiatives aimed at global firms wanting to set up a business presence to trade and carry out activity in the region under a modern regime largely based on international legal and business principles. Similarly, there is the Qatar Financial Centre (QFC) in the city of Doha in Qatar, which operates a separate regulatory regime to mainland Qatar.
When we have discussed the UAE or Qatar in this article, we refer to the rest of the country (i.e., the mainland) apart from these special regulatory areas. Regulatory licences to operate in the DIFC, ADGM or QFC are available and should be considered by global firms providing financial services frequently and having a large client base in the region. Such licences would usually not cover cross-border activity carried out overseas or business activity in other regions (ie., on the mainland) in these countries. However, under a Fund Passporting Regime, qualifying domestic UAE mutual funds can be marketed throughout the DIFC, ADGM or mainland UAE without obtaining multiple licences.
Kingdom of Saudi Arabia (KSA)
A separate, stricter regulatory regime applies in the KSA and the ability to provide services to KSA clients by observing cross-border measures is extremely limited. Banking services provided into the KSA require local licences. There are no formal exemptions although unlicenced overseas financial services providers may have historically provided banking services in the KSA on the basis of a market practice tolerated by the local regulator. In addition, as discussed above, correspondent banking type services could be provided to KSA-regulated banks without obtaining local licences where the activities take place overseas. Securities-related services (even purely cross-border) for KSA clients would trigger a licensing requirement and can only be provided on the basis of applicable exemptions e.g., Saudi Five or to high net worth clients on the basis of reverse solicitation (both as discussed in ‘Exemptions to Licensing Requirements’ above). There may also be various exemptions applying to different types of securities services under the relevant KSA securities legislation.
Travel for Business
As we have discussed, financial services provided by overseas entities in or from countries in the GCC are likely to trigger licensing requirements (including for local business licences or approvals) but activities carried out totally on a cross-border basis may be permissible. It is in this context that business travel to the GCC region should be viewed. Travel to the region may change the position of otherwise permissible cross-border activities. Therefore, any travel should be subject to strict guidelines including a detailed consideration of the Cross-Border Measures discussed above.
Travel by employees or representatives to GCC countries increases the risk that activities by an overseas entity will be viewed as taking place in country and not on a cross-border basis. In addition, travel may eliminate the availability of reverse solicitation (discussed above) and could also create a taxable presence. Infrequent business trips for social visits with clients in country would carry less risk. However, such risks cannot be eliminated because of the risk that carrying out activities on the ground itself carries. It is aways worth noting that since the breach of licensing requirements is likely to be a criminal offence, business travel to the region carries at least a theoretical risk of fines, criminal convictions and imprisonment.
Final Thoughts
The GCC region of the Middle East is a large market with many well-resourced clients who require international financial services. It is therefore not surprising that global banks and investment firms are interested in providing these clients with financial services while observing applicable rules. Care should be taken by these overseas financial services providers to obtain jurisdiction-specific legal advice in respect of proposed activities with clients and any planned business travel to the region. If all activities are to be performed overseas, any relevant cross-border measures should be followed. If activities are likely to trigger licensing requirements, consideration should be given to obtaining licences beforehand or ensuring any relevant exemptions are followed. Where reverse solicitation is available or necessary in order to provide services to clients, there must have been an own exclusive initiative by the client and it must be evidenced. It should be borne in mind that each GCC country has a different regulatory regime and some countries like the Kingdom of Saudi Arabia (KSA) may have a stricter one in place.
Regulatory Sources
The Flaw 