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May 12, 2016
Seen from the outside, with its relative political and economic stability, generally favourable rankings as an investment destination, and a reputation for luxury, the UAE is seems attractive place to do business. But, from the inside, the picture is quite a bit more complicated.
You should realise that the system in the UAE, to a great extent, is rigged. That doesn't mean you can't succeed business-wise, but you have to be wary and understand the potential pitfalls, because things are done very differently there than most Western businesspeople are used to. Without good advice, you can find yourself suddenly entangled in a civil, or even a criminal case, stranded and bankrupt, through no fault of your own.
From our experience, a lot of the problems our clients have faced stem from the sponsorship system in the UAE. Most businesses require a local "partner" to be licensed. This "partner" is usually not involved in the business at all; he or she just gets a payment for signing on as a local, and often receives a share from the profits. For many people, this works out fine. Emiratis can earn a sizeable income just from signing their names on partnership contracts, and they leave the active partner alone to handle the business. But, as a legal partner, of course, they have access to business accounts, and ultimately, majority control over the company; that's pretty risky when they have no real investment in the company's success. As a "silent" partner, the local sponsor leaves the running of the business to you, that means it is you, not the local, who holds an actual position in the company, making you legally liable while the local remains immune. The local has all the rights of a partner, and none of the liability. Some unscrupulous Emiratis may view the partnership, and the company itself, as little more than a disposable source of quick cash, even if that leaves you in jail.
The prisons in UAE are full of businessmen jailed for bounced cheques and debt defaults because their local partners misappropriated company funds and left them to take the fall. And here you have another highly risky element of doing business in the Emirates; the scourge of post-dated cheques.
There is, of course, the well-known ‘bounced cheque’ issue in the UAE where, for example, major banks and suppliers demand customers furnish them with blank cheques to be held as “security”. If a foreigner defaults on a monthly payment for any, even legitimate, reasons, the bank may write in the cheque the full amount of the debt knowing that the cheque will bounce, and then present it. Since writing a cheque that bounces is a criminal offence in the UAE, we are finding foreigners are being sentenced for up to 3 years in jail for each cheque It is not uncommon for a company account to have insufficient funds when a payment comes due, because the local partner has made withdrawals without his foreign partner's knowledge.
Because a local sponsor is usually the key to obtaining a license or a visa, and can often, in fact, take possession of your passport, the Emirati partner is in a very powerful and largely unaccountable position over anyone he or she sponsors.
We have advised and resolved situations for people in these exact situations. Where possible, we try to avoid courtroom resolutions that can leave people feeling like they´ve lost again.
If you are thinking about working in the UAE or starting a business there, remember, you are entering a very different environment, and dealing with a culture you may not be familiar with, and laws you do not know. It is strongly recommended to seek expert advice before embarking on such a step.
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