Citizenship via Investment Schemes: Risks & Solutions

Facts:
A most recent European Commission report to the European parliament, the Council, the European economic and social committee and the committee of the regions tackled the topic of “Investor Citizenship and Residence Schemes in the European Union”. As per the report, recent years have seen a growing trend in investor citizenship (golden passport) and investor residence (“golden visa”) schemes, which aim to attract investment by granting investors citizenship or residence rights of the country concerned. Such schemes have raised concerns about certain risks related to security, money laundering, tax evasion and corruption.  While some investor residence schemes were initiated in the early 2000s, the financial crisis starting in 2007 led more EU Member States to adopt these schemes, or revive previous ones. This trend has continued over the past 10 years and these schemes exist to date in 20 Member States.  For instance, Bulgaria, Cyprus and Malta introduced in 2005, 2007 and 2013 respectively broader schemes aimed at attracting investment from third-country nationals by facilitating access to their citizenship. These schemes are a new form of naturalisation as they systematically grant citizenship of the Member State concerned, provided the required investment is made and certain criteria fulfilled. The report added that investor citizenship schemes aim to attract investment by offering citizenship in return for a defined amount of money. In Bulgaria, an overall investment of EUR 1 million is requested under its fast-track investor citizenship scheme. In Cyprus, a minimum investment of EUR 2 million is necessary, together with ownership of property in Cyprus. In Malta, a contribution of EUR 650,000 must be paid into a national investment fund, together with an investment of EUR 150,000 and a requirement to own or rent property in Malta. In Cyprus and Malta, additional investments for family members are required. Various investment options can be observed among the three Member States operating investor citizenship schemes: capital investment; investment in immovable property; investment in government bonds; and one-off contributions to the State budget. In addition to the investment requirement, applicants must also pay non-refundable administrative fees as part of the application process. Cyprus and Malta have significantly higher fees than Bulgaria.

Areas of Concern and Risks:

Third-country nationals may invest in an EU Member State for legitimate reasons, but may also be pursuing illegitimate ends, such as:

  1. Evading law enforcement investigation and prosecution in their home country;
  2. Protecting their assets from the related freezing and confiscation measures.
  3. Utilizing illicit funds to obtain a passport.

Hence, investor citizenship and residence schemes create a range of risks for Member States and for the Union as a whole in particular:

  1. Risks to security, including the possibility of infiltration of non-EU organised crime groups.
  2. Risks of money laundering and tax evasion.
  3. Risks related to terrorist financing.
  4. Risks related to corruption including previous involvement in fraudulent practices.
  5. Risks of being directly or indirectly politically exposed.
  6. Risks related to lack of Transparency and proper governance:

Controversial case:

A controversial investment for citizenship scheme was reported in Cyprus on October 17 2019 in relation to the acquisition of Cambodia’s long-time prime minister. Investigations revealed that the once prime minister used his wealth to buy foreign citizenship. It was reported that eight family members or allies including the country’s police chief who has been instrumental in clamping down on dissent in Cambodia, and its finance minister, sought and received Cypriot citizenship in 2016 and 2017. The European Commission warned in a January 2019 report that what it called “golden passports” could help organised crime groups infiltrate Europe and raised the risk of money laundering, corruption and tax evasion. While Cyprus authorities say their processes are transparent, and data laws protect he who gets citizenship, it was understood that the Cypriot government did not respond to questions on the Cambodians before publication of the report. After publication, a government spokesman was reported to say that the citizenship program was absolutely credible and transparent while declining to discuss individual cases and that the information on the Cambodians “will be taken into serious consideration”. Further investigations traced that the prime minister was in power for 30 years and has overseen the murder, torture and jailing of his critics. His family members hold key posts in politics, the military, police, media, and charities, and his eldest son is being groomed to succeed him. His family wield significant control across most of Cambodia’s lucrative industries, with links to major global brands. Some of the domestic companies they are affiliated to have been accused of a litany of abuses, including land grabbing, and violence and intimidation against local populations. His daughter was reported to have the largest number of business holdings of any member of the family, with links to or interests in 22 companies, which have registered share capital of more than USD 66 million, according to filings in Cambodia.

The questions remain on how diligent were the authorities or the obliged entities in examining the applications of the Cambodians? Where there any Enhanced due diligence process conducted to trace any red flags issues associated with these applicants? If yes, were these findings factored in when assessing their case? The above case lies at the heart of the need of enhanced due diligence to be put in place. Mitigating risks and adopting risk based approaches throughout the process of the Citizenship via investment schemes is becoming a necessity rather than just an option.

Solutions

Therefore, Cedar Rose has engineered a bouquet of integrity and investigative due diligence products, which aim at:

  1. Identifying, the source of income / wealth as well as any illicit practices associated with the subject under investigation (Fraud, Bribery, Corruption, etc). This type of investigation helps in understanding the reputation of the subject and in establishing a profile, which would trace any possible reasons for this person to transfer funds or benefit from investor citizenship schemes.

  2. Tracing Ultimate Beneficial Owners (UBO’s) as well as the business and political network of an applicant. This type of investigation will help in tracing and identifying possible concealment of the origins of proceeds, which could be, linked to the layering stage a potential Money laundering scheme.

  3. Identifying the directorship and shareholding of the applicant. This type of investigation will also aim to trace possible concealment of the origins of proceeds (Layering stage) as well to identify possible ownership of these shareholders and directors which would possibly be a result of the reintroduction of laundered funds into the system (Integration stage) via the ownership of assets in the country where they applied for the investor citizenship scheme.

  4. Tracing the business relationships and any possible political exposure for the applicant.
  5. Initiating litigation and criminal checks to understand any possible previous illegal practices.

References:

https://www.globalwitness.org/it/blog/we-dont-care-we-are-still-power/

https://ec.europa.eu/info/sites/info/files/com_2019_12_final_report.pdf

https://cyprus-mail.com/2019/10/17/mp-charalambidou-demands-answers-for-passports-to-cambodian-elite/

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Written by Wassim Antar, Senior Due Diligence Analyst