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The IBA’s response to the situation in Ukraine
In December 2018, the UK Government announced it would be suspending its ‘tier 1’ visa scheme until new rules are finalised in 2019. The scheme, often referred to as the ‘golden visa’, allowed visitors to stay in the country for 40 months if they invested more than £2m in the United Kingdom’s economy.
Under proposed reforms, applicants will have to provide comprehensive audits of their financial and business interests and show they have had control of at least £2m of the amount being invested for at least two years. Investments in government bonds will no longer count; applicants will have to show they are investing in active and trading UK companies.
Although it subsequently emerged that the suspension had not in fact been implemented, leading to some confusion, moves such as this reflect widespread concerns that ‘golden visa’ or ‘golden passport’ schemes are vulnerable to abuse by money launderers. A number of jurisdictions offer such programmes, known more formally as citizenship by investment or residence by investment schemes. They allow foreigners to obtain citizenship or residence rights – either temporary or permanent – in a country on the basis of local investments or against a flat fee.
‘Such programmes are big business,’ says a new report compiled jointly by anti-corruption organisations Transparency International and Global Witness. Around €25bn in foreign direct investment has flowed into the European Union through these schemes over the last ten years, the groups claim.
‘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, a senior campaigner at Global Witness. Golden visa schemes offer a safe haven from authorities who might be looking to seize stolen assets, and the freedom to travel without raising suspicion.
‘Given these inherent risks, these schemes must have the highest standards of due diligence checks, so that countries know who they are welcoming in and where their money came from,’ she adds. ‘Unfortunately, that is not what we are seeing.’
Leah Ambler Co-Chair, IBA Anti-Corruption Committee
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. Two Ukrainian businessmen who were granted citizenship by Cyprus are alleged to have extracted €4.8bn from a bank they founded together in Ukraine.
Bulgaria, Greece, Hungary, Latvia, Lithuania and Portugal have also been singled out as examples of EU Member States who have assigned a significant number of citizenships to wealthy Africans, Chinese, Russians and Turks in exchange for investment in recent years.
‘The EU has an old and unsolved problem with reference to external and internal controls,’ says Filippo Ferri, a partner with Italian law firm Cagnola & Associati and Publications Officer of the IBA Business Crime Committee. ‘The EU uses a minimal level of controls. For business purposes, this makes complete sense, but it has not been balanced with juridical tools that can prevent unlawful behaviour. The EU needs a “safety controls union”, which is still totally missing.’
The European Parliament’s Special Committee on Financial Crimes and Tax Evasion released a draft report in November 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.
Leah Ambler, Co-Chair of the IBA Anti-Corruption Committee, says completely phasing them out might simply lead investors to take advantage of similar schemes outside the EU. A better solution would be to tighten up the rules. ‘When an investment is being made, governments need to make sure there are adequate controls to make sure that it is not coming from an illicit source,’ she says. ‘They need to carry out due diligence on the individuals or companies seeking to obtain citizenship residency in the way that banks and companies are supposed to do on business partners.’
This problem is obviously not confined to the EU. A recent Organisation for Economic Co-operation and Development (OECD) report focusing on how golden visa schemes can be used to avoid tax highlighted ‘high risk’ programmes in jurisdictions such as The Bahamas, Bahrain, Colombia, Malaysia, Panama, Qatar, Seychelles, the United Arab Emirates and Vanuatu.
However, the need for action seems more urgent in Europe. This is primarily because once an individual has citizenship in one EU country, it opens up all kinds of markets and benefits in the 27 other Member States as well. The European Commission has indicated it will complete a study of citizenship schemes before the end of the year. EU justice commissioner Vera Jourova has described the schemes as ‘problematic’ and ‘unfair’ and said that while Brussels has no power to ban them, it can at least oblige Member States to be careful.
The OECD report said there was 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.
‘The authorities tend to identify a solution that consists of a higher level of police control, but such an approach is limited,’ says Ferri. ‘First, we need trust between different countries and their agencies. When we have trust, then we can have real cooperation. When we have cooperation, then we can have real control. If any of this is missing, I fear that any initiatives will be just “formal” and not really effective.’