Military Tenders and Procurement in Saudi Arabia: Guidelines for the Payment of Commissions, Success Fees, and Agency Fees

Military Tenders and Procurement in Saudi Arabia: Guidelines for the Payment of Commissions, Success Fees, and Agency Fees

 Concerning bribery, focus is on laws with international reach (the US Foreign Corrupt Practices Act, the UK's Bribery Act 2010), local laws are often overlooked. One is a Saudi Council of Ministers Resolution on the defense industry. One can run afoul of these restrictions on payment of commissions to third parties, while complying with the FCPA or Bribery Act. This article proposes methods to ensure compliance with all of these laws.

Excerpt:

I. Overview on the Use of Agents in Saudi Arabia

The use of agents or intermediaries in procuring government contracts in Saudi Arabia is quite prevalent. Foreign companies typically hire local agents that use their knowledge of the local economy to assist in winning contracts in exchange for commissions that range from anywhere between .2% to 20% of the value of contracts procured.

Saudi Arabia's Government Tenders and Procurement Law, enacted by Royal Decree no. M/58, dated 4/9/1427 Hijri (H.), corresponding to 27/9/2006 Gregorian (G.) does not prohibit such practice, though Article 71 does require that all contracts be signed and executed by the principle that is to carry out a project, not by any agent. However, other laws and resolutions provide further restrictions specific to military contracts.

II. Restriction on Agents for Sales of Armaments and Military Equipment

A. Overview

Under Article 47(a) of the Procurement Law, direct purchase from manufacturers of weapons, military equipment and their spare parts is exempt from the Procurement Law. Rather than the Procurement Law, the lesser known Council of Ministers Resolution No. 1275, dated 12/9/1395 H., corresponding to 18/9/1975 (Resolution 1275), which remains in force, governs sales of armaments and military equipment. Resolution 1275 provides that no company that has concluded a contract with the Saudi Arabian government for the supply of armaments or military equipment may pay any sum as commission to any intermediary, sales agent, representative, or broker, regardless of whether the contract has been concluded between the foreign entity and the Saudi Arabian government directly or via a third-party State.

The above rule is an important exception to the general permissibility of the use of agents hired under a commission basis. Whereas foreign companies may generally pay local agents a commission for procuring contracts with the Saudi government, such commissions are strictly prohibited for contracts for the sale of military equipment or armaments.

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