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There are growing concerns about the practice of handing out passports and visas to wealthy foreigners in return for investment. Yet some claim the risks have been exaggerated.
In January, the European Commission (EC) called for EU Member States to curb the practice of giving foreigners residency or citizenship in return for investment. Several European countries offer such programmes, often referred to as ‘golden visas’ or ‘golden passports’. Such schemes ‘pose risks… including in terms of security, money laundering, corruption, circumvention of EU rules and tax evasion,’ the EC report says.
Heightening these risks are shortcomings in the transparency and governance of such schemes, the EC says. Key information, such as clear statistics on applications received, accepted and rejected, are often missing or incomplete.
There are no mechanisms to ensure cooperation on golden passport schemes (those offering citizenship) – notably on security checks – among the EU Member States that operate them. Brussels says it intends to monitor the steps that Member States take to ensure transparency and good governance in the implementation of the schemes, and will establish a group of experts to deal with issues of transparency, governance and security.
‘Legally residing in the EU and in the Schengen Area comes with rights and privileges that should not be abused,’ said European Commissioner Dimitris Avramopoulos. ‘Member States must at all times fully respect and apply existing obligatory checks and balances – and national investor residence schemes should not be exempt from that.’
These schemes became increasingly attractive to many European countries in the wake of the 2007–2008 global financial crisis. Originally designed for Caribbean countries, they emerged as a way for governments to attract quick investment, often in their property markets. In some cases, the funds go straight into state coffers.
Research from Global Witness and Transparency International suggests the EU’s 28 Member States have secured about €25bn of foreign direct investment through these schemes over the past ten years. Revenues from golden visa schemes globally are estimated to be $13bn a year, about $3bn of which is accounted for by schemes that offer citizenship.
The key concern is that EU passports and residency are being granted to people who should not be receiving them. In September 2018, for example, police in Finland raided a real estate agency at the centre of a suspected €10m money laundering operation controlled by a Russian businessman who reportedly purchased Maltese citizenship. In addition, two Ukrainian businessmen who were granted citizenship by Cyprus turned out to have extracted €4.8bn from a bank they founded together in Ukraine.
Bulgaria, Greece, Hungary, Latvia, Lithuania and Portugal have been singled out as examples of EU Member States that have assigned residency rights to significant numbers of wealthy Africans, Chinese and Russians in exchange for investment in recent years. ‘If you have a lot of money that you acquired through dubious means, securing a new place to call home far away from the place you stole from isn’t just appealing, it’s sensible,’ says Naomi Hirst, Senior Campaigner at Global Witness. These schemes offer a safe haven from authorities who might be looking to seize stolen assets, and the freedom to travel without raising suspicion.
In the words of one Russian lawyer speaking to British author Oliver Bullough: ‘Your money is offshore already and, once you have a new passport, you are effectively offshore yourself, beyond the reach of your home country’s law enforcement.’
Against this backdrop, the Commission has to act. ‘The Commission has finally decided to ensure that its rules are respected,’ says Drago Kos, Chair of the Organisation for Economic Co-operation and Development (OECD) Working Group on Bribery in International Business Transactions. ‘I agree with every word of its report; I just wonder why it hasn’t been done before, since the problem has been known about for years.’
If the Commission had made its position clear sooner, then fewer Member States would have started these schemes in the first place, he says. ‘Still, it is never too late. I only hope that all EU countries will accept the report and start acting according to its conclusions as soon as possible.’
The European Parliament’s Special Committee on Financial Crimes and Tax Evasion released a draft report in November 2018 that called on EU Member States to phase out all such schemes. Their potential economic benefits ‘do not offset the serious money laundering and tax evasion risks they present,’ said the report, which focused in particular on Malta’s Individual Investor Programme (see box: You too can be a European – for a fee!).
Citizenship by investment
Residency by investment
Filippo Ferri, a partner at Italian law firm Cagnola & Associati and Secretary of the IBA Business Crime Committee, agrees with this.
‘The issue at stake is a real problem, both juridical and ethical,’ he says. ‘The goal is clear: we must curb the practice of giving foreigners residency or citizenship in return for investment.’ The practice, if not efficiently and seriously monitored, ‘could become an incredible help for economic crime and criminals,’ Ferri says. ‘If we consider an investment as a form of “remuneration” and if we consider residency/citizenship as the “return”, the practice may be interpreted – even if it is absurd to say – as an illicit agreement. I think we can all honestly state that there are several countries from which any kind of huge investment could at least be suspect.’
Bulgaria, Cyprus and Malta all operate investor citizenship schemes whereby citizenship is granted under less stringent conditions than under ordinary naturalisation regimes, in particular without effective prior residence in the country concerned. ‘Although these are national schemes, they are deliberately marketed and often explicitly advertised as a means of acquiring Union citizenship,’ the Commission’s report notes.
This is a big selling point for foreign investors. ‘Already you have 27 countries without borders, making it very easy to do business within those countries, but also, because the EU is known as a legally regulated area, it has very comfortable agreements with some other parts of the world’s economy,’ says Kos. ‘Companies from the EU are assumed to be exposed to fewer risks than companies from some other parts of the world.’
Another 20, including France, Italy and the UK, offer more limited residency rights in return for investment in property, government bonds or direct contributions to the government budget.
The day before the Commission released its report, the Bulgarian government announced it was suspending its citizenship scheme. The country’s justice ministry is proposing amendments to the Bulgarian Citizenship Act that would scrap the possibility of obtaining citizenship through investing in the country, among other steps to refine the requirements for citizenship.
Under current law, citizenship of Bulgaria may be obtained by an individual who invests a minimum of €500,000 in a year, doubling this in the second year.
Cyprus also introduced changes to its citizenship scheme in 2018. These included the creation of a registry of service providers, such as lawyers, accountants and real estate developers, all of whom have to adhere to a code of conduct. Advertising has been banned and a limit of 700 citizenships per year has been set.
The government has also decided to hire companies to carry out due diligence.
Secretary, IBA Business Crime Committee
Despite these changes, Transparency International and Global Witness believe Brussels needs to do more. ‘The Commission’s report tells us nothing about what Member States actually need to do – now they’ve sounded the alarm, they need to offer solutions,’ says Hirst. ‘It’s now time for Member States to take responsibility for their golden visa schemes and, following Bulgaria’s lead, suspend them until it is clear they are no longer threatening the security of the EU.’
However, the Investment Migration Council (IMC), a body that represents the golden passport and golden visa industry, complained that the Commission’s report ‘does not present or reflect in any manner the fundamental societal and economic benefits that these investment programmes bring. This is not constructive to policymaking or debate formation.’
According to the IMC, these programmes create ‘genuine societal advantage’, not just through increased government revenue, employment creation and enhanced infrastructure spending, but through the generation of new opportunities across all levels of society. ‘The national statistics of Malta, Greece, Latvia, Spain and Portugal reflect the contribution made through foreign direct investment,’ the association says.
One company that has been very active in promoting citizenship and residency through investment is Henley & Partners, based in the UK. ‘While the concerns outlined in the report are understandable, most are unfortunately fundamentally misguided and reflect an inherent lack of understanding of how the investment migration industry actually operates, and of the rigorous due diligence and other know your client processes and protections in place to prevent any abuse or criminal activity,’ the company said.
‘I believe the European Commission is exaggerating and is engaged in scaremongering,’ says Niklas Schmidt, a partner in the Vienna office of Wolf Theiss and Co-Chair of the IBA Private Client Tax Committee. ‘The schemes in question have led to citizenship being handed to a few individuals only and will not destabilise the EU. Also, I believe the European Commission has no legal basis to proceed against Cyprus and Malta, since citizenship is a sovereign issue of the Member States.’
Schmidt also says that ‘the elephant in the room’ is illegal immigration into the EU.
‘We have a migration crisis with tens of thousands of people trying to enter Europe with no documentation,’ he says. ‘This is a more pressing concern than citizenship and residency schemes, which all have due diligence and which ask to see the investor’s details and those of their family members. Investors have to provide reference letters and they have to be able to explain where their funds come from.’
Despite this, there still seem to be many doubts about the industry’s practices. ‘Citizenship and residency by investment schemes would not be a problem if the due diligence and know your customer procedures were applied really thoroughly for the companies that are trying to invest,’ says Kos. ‘Golden passports or residence permits should not be given to investors who are not really moving their HQ and activities to a territory of the EU.’
In addition, holding a national investor permit allows for family reunification rights under the EU’s Family Reunification Directive, provided applicants meet the conditions, the Commission’s report notes. In this context, it is worth mentioning that in most Member States, family members of investors are not subject to enhanced due diligence. This could create security risks.
Golden passport and visa schemes outside the EU have also been attracting attention.
One recent report from the OECD, for example, focused on how such schemes can be used to avoid tax. It highlighted ‘high risk’ programmes in jurisdictions such as the Bahamas, Bahrain, Colombia, Malaysia, Panama, Qatar, Seychelles, the United Arab Emirates and Vanuatu.
The report states there is evidence that golden passport schemes are being used to avoid reporting under the Common Reporting Standard (CRS). The CRS is a way for countries to automatically exchange information about non-residents holding bank accounts and other financial accounts offshore in order to crack down on the use of offshore jurisdictions to facilitate tax evasion. Over 100 jurisdictions have agreed to make annual exchanges of information under the CRS.
Transparency over tax – and action to combat money laundering – involving offshore jurisdictions has been the focus of recent legislative action in the UK. A cross-party group of MPs tabled an amendment to a financial services bill to require UK crown dependencies Guernsey, Jersey and the Isle of Man to introduce public share ownership records by December 2020. However, the government withdrew the bill at a late stage on the grounds that ministers must fully examine the constitutional implications of such a move.
Senior Campaigner, Global Witness
Schmidt feels that the real concern should be at the level of the banks. ‘If someone seeking to open a bank account says they are mainly resident in a place like Saint Kitts and Nevis, for example, but cannot prove they are really living there, this is a red flag and maybe the account should not be opened,’ he says.
Ultimately, the concerns outlined by the OECD are overblown, Schmidt argues.
‘For all these programmes in total, there are just a few hundred applications, and the amount of potential abuses is really limited,’ he says. ‘There are other topics that are more pressing and I don’t think this is really the problem that the OECD is making it out to be.’
In addition, many of the programmes are operating in a context where the government has to be transparent and the rules must be clear in order to avoid a political backlash both at home and abroad. ‘These programmes are not shady affairs in which some politician pockets the proceeds,’ says Schmidt. ‘They normally have rules, procedures and a due diligence process that is vetted by an outside organisation such as the IMC.’
Handing residency or citizenship to dubious characters risks a shutdown of the programme and the loss of all the funds that it might bring in. That, in the eyes of those involved in the golden visa and golden passport industry, is enough of an incentive for countries to keep things clean.
Jonathan Watson is a journalist specialising in European business, legal and regulatory developments. He can be contacted at firstname.lastname@example.org