Compliance in the Immigrant Investor Industry

From Cambridge University Press publication “Citizenship and Residence Sales-Rethinking the Boundaries of Belonging” - Dimitry Kochenov and Kristin Surak

Authors: Mark Corrado & Kim Marsh

Introduction

In July 2019, the Moldovan government suspended its citizenship by investment program (CBI) pending a review. Shortly before, the European Union’s (EU) Commission for European Neighbourhood Policy and Enlargement Negotiations produced a report with negative findings about the program, and suggested that, if unreformed, the program could hurt Moldova’s chances of joining the EU.  Neighbourhood Commissioner Johannes Hahn explained that Moldova “is very proactively advertising Moldovan citizenship, for instance in the [Persian] Gulf region for economic reasons,” and stated further that the EU did not have "any evidence of who is getting Moldovan citizenship" (RFE 2018).  The report followed a cautionary signal sent earlier by the EU Parliament when it froze a financial aid package of €100 million and passed a resolution asserting that Moldova had become a “state captured by oligarchic interest (Jozwiak 2018).”  The European Commission has issued similar policy concerns with CBI programs and residency by investment programs (RBI) in member states such as in Bulgaria, Cyprus and Malta (EU Comm 2019). Historically, CBI programs have been contentious in large, wealthy liberal democracies, such as Canada, as well as small island states that obtained a significant proportion of their GDP through the programs. Most recently in the fall of 2019, a Canadian provincial government, Quebec, announced that it would place a moratorium on its CBI program until the summer of 2020 (Quebec 2019). This controversial program was suspended not long after a scathing undercover reporting investigation by the Canadian Broadcasting Corporation.

Effective customer due diligence (CDD) and the degree to which these programs are compliant with international norms for anti-money laundering (AML) and counter-terrorist financing (CTF) are central to the EU and G20 concerns regarding the efficacy of CBI and RBI programs. The current internationally accepted norms for CDD originated with the Group of Seven (G7) and the formation of the Financial Action Task Force (FATF) in 1989. FATF is now widely accepted as the inter-governmental body whose objective is to “set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system” (FATF 2019). CDD is ubiquitous among the operations of financial institutions and occurs routinely whenever they enter into a basic business relationship with an individual or corporate entity. CDD typically involves verifying the customer’s identity, citizenship and residency, the beneficial ownership of their assets and corporations, and their source of wealth and funds, as well as the generating a risk profile and maintaining a documentary history of customer transactions.  

Most extant CBI and RBI programs have CDD protocols that are compliant in varying degrees with the FATF recommendations. However, as this chapter will show: (1) most such CDD programs are inadequate; and, (2) CBI and RBI programs require an enhanced due diligence regime (EDD).

According to FATF, the issues of residence and high-risk jurisdictions are priority investigative challenges in determining customer risk. Because typical CBI and RBI participants are not resident in the country where they have invested in citizenship or residence, they acquire a higher customer risk profile, particularly for money laundering and terrorist financing. This higher risk profile triggers a requirement for enhanced due diligence (EDD) of the customer. This protocol includes: more thorough gathering of information confirming identity; conclusion of open source background checks; generation of an intelligence report and reference checks; enhancing the understanding of beneficial ownership; and a verification of source of funds and wealth (FATF 2014, 18). 

Similar to other categories of migration, CBI program and RBI program applicants frequently originate from countries where both human/civil freedoms are restricted and less rigorous AML and CFT regimes exist. However, there are three key distinctions between CBI/RBI migration and other forms of migration. First, many CBI and RBI migrants, in fact, do not choose to not reside in the country of their new citizenship but instead maintain their residency in the country of origin. This enables them to maintain their original businesses and social ties while enabling them to expand their network ties into countries because of the new visa access privileges. Second, although CBI and RBI applicants typically are middle class or high net worth individuals (HNWI), they frequently reside in politically and economically unstable countries and, consequently, they seek a stable alternative country to both secure and often expand their businesses. Third, and most importantly, a relatively high percentage of HNWIs are also politically exposed persons (PEP) (1). As will be discussed in this chapter, countries with CBI and RBI programs that do not adequately address the issue of PEP risk have been subjected, not unexpectedly, to the criticism that they are facilitating foreign corruption including illegal political influenced campaigns.

Most critically for this chapter, there is neither a common standard of due diligence nor an oversight body such as the FATF for CBI and RBI programs. As will be elaborated further, the current state of CBI and RBI customer due diligence presents not only serious issues and risks but also substantial opportunities for economic growth. The current FATF-led regime involving AML and CFT evolved over decades. Arguably, this regime was accelerated by major events such as the September 11, 2001 terrorist attacks, which brought a sense of urgency to all forms of international cooperation obviously focused on enhancing counter terrorism polices.  While there is no similar consensus on reforming CBI and RBI due diligence, this policy issue nonetheless is a major and persistent concern among several major countries such as Canada and the United States within the G20, as well as key EU member states, such as Germany and France. Such reforms though are particularly worrisome among non-G20 nations, especially those that undertook serious steps to improve their CDD regimes yet still face the threat of exclusion from economically critical international trade networks and visa treaties. However, it will be argued that the same CDD problems that impact smaller nations are equally apparent among G20 CBI and RBI programs.  The chapter also will present case studies of the investment migration programs in Canada and Saint Kitts and Nevis (SKN), two countries with the oldest and largest investment migration programs. Finally, it will also examine the latest EU reports on members states’ CBI and RBI programs, as well as discuss both the related key issues identified and specified reforms. 

Saint Kitts and Nevis: Small States in a Bigger Game

In 1984, a year after receiving independence from the United Kingdom, SKN passed the Saint Christopher and Nevis Citizenship Act (2).  It offered citizenship in exchange for a substantial investment in the country.  In contrast to schemes introduced by Pacific Islands, such as the Tongan Protected Person Passport program, SKN leveraged its status as an offshore financial centre (OFC) to promote its program.  However, it remained small until the early 2000s when its economic mainstay sugar industry had both a disastrous harvest and World Trade Organization (WTO) imposed limits on state subsidies. To facilitate expansion into new economic sectors, the SKN government created the Sugar Industry Diversification Fund (SIDF) to facilitate foreign investment through CBI.  In 2009, the EU granted SKN citizens a visa waiver for short stays of (up to three months), which substantially boosted interest in the CBI offering (EU 2009).  While 592 passports were issued between 1984 and 2009, 9591 CBI passports were issued between 2009 and 2015, a tenfold increase (Times Caribbean 2016).

The macroeconomic impact of SKN’s CBI has been considerable: CBI-related government receipts accounted for less than 1% of GDP in 2008 to 13% in 2013 while its continuing fiscal deficit was replaced by a 12% budget surplus. Even more dramatic, nearly half (45 percent) of SKN’s GDP was derived from CBI-related deposits and SIDF assets (IMF, 2015). Importantly, the construction and real estate sectors, which had been in recession, experienced a CBI investment driven economic boom. 

By 2011, the SKN government sought to safeguard its growing CBI program through a series of security and due diligence regulations.  These included the formation of a Citizenship by Investment Unit (CIU) to process applications and a formal due diligence protocol.  The latter involved background checks into whether an applicant: (a) has provided false information on an application form; (b) has a criminal record; (c) is the subject of a criminal investigation; (d) is a potential national security risk; (e) is involved with in any activity likely to cause disrepute to the Federation of St. Christopher and Nevis; or, (f) has been denied an entry visa by a country where  SKN citizens have visa free entry (Official Gazette 2011, 6).

These mandatory background checks marked the emergence of a formal due diligence regime. However, the growth of the program continued to outstrip the institutional capacity of the small CIU to undertake fully the required assessments.  These deficiencies became evident in 2014 when the Financial Crimes Enforcement Network (FINCEN) of the US Department of Treasury issued an advisory against SKN’s CBI program concerning the risk of PEPs as well as the naturalization of individuals who had committed financial crimes, or evaded sanctions.  Previously in 2013, then SKN Prime Minister Prime Minister Denzil Douglas publicly stated that Iranian nationals were banned from participating in the CBI program.  However, FINCEN declared that: 

Despite this public assurance…Iranian nationals continue to obtain passports issued through the [CBI] program. As a result of these lax controls, illicit actors, including individuals intending to use the secondary citizenship to evade sanctions, can obtain an SKN passport with relative ease (FINCEN 2014, 1).

The FINCEN advisory was complicated further by international related incidents. Notably, in 2013, Iranian PEP and businessman, Alizera Moghadam, attempted to enter Canada on a SKN diplomatic passport under the false pretence of a meeting with the former Canadian Prime Minister Stephen Harper.  When interrogated by immigration officials, he admitted he had obtained his SKN diplomatic passport for $1 million USD (Star 2014). As a result, Canada revoked automatic visa-free entry to the country for SKN citizens.   

In 2014, these events led then Prime Minister Douglas to engage IPSA International, a major international risk advisory firm, to conduct a comprehensive review of the of SKN’s CBI program with a focus on an AML and CTF. IPSA provided a risk-based approach to case management to standardize SKN’s due diligence process.  To ensure quality control throughout the CBI application vetting process within the Citizenship by Investment Unit (CIU), IPSA recommended that the assessment procedures include a matrix instrument. The latter is based on best practices derived from international financial crime investigator, the FATF 40 recommendations (FATF 2003), EDD guidelines, and know-your-customer or KYC principles for banks (BIS 2001). Regarding CBI due diligence, the FATF recommendations were grouped under risk domains: reputational risk; the customer profile risk (e.g. if the client is a PEP); legal risks; the customer’s source of wealth; legal and adverse media exposure; jurisdictional risk or the prevalence of financial crime; and, security in the customers country of origin (Chekwe 2018, 85-90).  During this re-evaluation, SKN’s CIU too was reorganized. New management was hired as were experts in financial crime investigation, due diligence, and the insurance industry. 

After the 2016 election, the new prime minister, Timothy Harris, approved IPSA’s twenty recommendations and implementation plans regarding governance, risk mitigation and compliance.  In 2017, the SKN legislature strengthened its CBI regulations by passing a CBI Escrow Bill, which established the Financial Services Regulatory Commission as the oversight agency for CBI escrow accounts and their agents (Caribbean PR 2017). 

Although SKN’s CBI program underwent a series of due diligence reforms, it still faced reputational risks. In May 2019, two Members of European Parliament (MEP) and prominent critics of CBI programs, Ana Gomes from Portugal and Marietje Schaake from the Netherlands, urged the termination of SKN’s visa-free access to the Schengen area in the European Union: 

As you know, the EU Commission is very concerned about golden visa programs in the EU from Malta, Cyprus and various other Member States. And the European Parliament has called for the termination of this dangerous and schemes to the EU security and financial integrity. This raises even greater concern that non-EU countries, such as St. Kitts and Nevis, have visa- free travel and bypass sanctions, allowing undesirable individuals from entering the European Union and misusing it for money laundering and other criminal purposes.

We urge you to consider terminating the visa free status program with St. Kitts and Nevis unless their authorities can provide full confidence that individuals, such as Mr. Pavlov, are not slipping through the cracks, allowing them access to the European Union (Ana Gomes 2019).

The MEPs were primarily concerned about the case involving the sanctioned Russian national, Sergei Pavlov, who attempted to acquire but did not receive citizenship in Saint Kitts. They also cited the examples of Low Taek Jho (a.k.a Jho Low), an accused in the 1Malaysia Development Berhad  (1MDB) sovereign wealth scandal in Malaysia, and Iranian-born Ali Sadr Hasheminejad.  Both individuals acquired citizenship in Saint Kitts 2011. Notably, the crimes they were accused of occurred after they naturalized, which will be discussed in greater detail later regarding two high-profile EU (Malta and Cyprus) CBI/RBI related scandals  

Prior to Hasheminejad’s criminal record, his CBI application should have raised risk flags given his dual nationality, banking, and corporate ties to Iran.  Basic open source and secure source information inquiries would have identified Hasheminejad’s father as a sanctioned individual. He was the founder of the US sanctioned Iranian private bank, Eghtesad Novin Bank, and founder/chairman of the Stratus Holding Group, one of the biggest construction conglomerates in Iran (France24 2018). Iran was and continues to be sanctioned by the US Treasury Department’s Office of Foreign Assets Control (OFAC). In other words, Haseminejad’s should have been considered high-risk because the source of his wealth plausibly was linked to money laundering and sanctions evasion through his personal, corporate and immediately family links to Iran’s banking and industrial sector. 

The Saint Kitts case illustrates the challenges that small states typically encounter in developing CBI programs. Most importantly, once such programs attract sizeable numbers of applicants, transparent, sophisticated, and detailed due diligence procedures based on international standards are required. Without these protocols, small states are at increased risk of approving controversial or criminal individuals and, consequently, threatening the continuation of CBI programs that attract essential revenue. Nonetheless, formal due diligence procedures cannot guarantee that CBI applicants, once naturalized, will not commit crimes. Somewhat unfairly, notorious cases invariably subject small states to facile negative stereotyping and potential harmful official reactions from more powerful states or economic unions. 

Canada: Big State Advantages 

While CBI programs are more common in micro-states, RBI programs can be existing in larger and wealthier countries. These programs can be traced to Canada’s pioneering 1986 Federal Immigrant Investor Program (FIIP).  Initially, only an investment of $150,000 was required.  Practically, the FIIP came into force with the introduction of regulations in 1993 (Cohen 2017). 

From its inception the FIIP program and similar entrepreneurial immigration programs have been experienced high-profile cases of basic due diligence failures. For example, in 1992, Lee Chau-ping (a.k.a the “Ice Queen”) entered the Canadian entrepreneur immigration program by pledging to invest $170,000 to build a fast-food chicken restaurant in La Ronge, Saskatchewan. However, she chose instead to purchase an $800,000 luxury home in Vancouver. The Ice Queen would later be accused of running the largest crystal methamphetamine syndicate in the world. Former superintendent of the Royal Hong Kong Police, Sandy Boucher, testified to the Canadian Standing Committee on Security and Defence that Lee had received a residence visa in Canada despite being known to both Hong Kong police and Canadian police.  Describing the FIIP, Boucher stated to the senators:

You can imagine my surprise that she was given landed immigrant status… The days of Lee Chau-ping are long gone... But the problem is different now. Look at how many millionaires there are in China, and the outflow of capital and people. Now, we aren’t facing a small exodus of select criminals - we’re talking about a tidal wave of people and understanding where their wealth came from is not easy…So there is bad money and bad people in there, even though the significant portion is probably quite legal. We’re not trying to tar everyone with the same brush. But the process by which they get vetted is not perfect (Young 2017). 

Despite above instances of due diligence failures, the program was expanded; in the initial decade and half of the 2000s, an average of 2375 applications for investor residents were approved annually (Canada 2016, 8). Moreover, in 2010, the criteria had increased to a net worth of $1.6 million and an investment of $800,000, which took the form of an interest-free loan granted for five years to the province where the applicant planned to reside (Canada 2010).  

Ironically, the FIIP was cancelled in 2014, not as a result of due diligence failures but mainly for not fulfilling its economic objectives.  As the Canadian government explained:

For decades, it has significantly undervalued Canadian permanent residence, providing a pathway to Canadian citizenship in exchange for a guaranteed loan that is significantly less than our peer countries require. There is also little evidence that immigrant investors as a class are maintaining ties to Canada or making a positive economic contribution to the country. Overall, immigrant investors report employment and investment income below Canadian averages and pay significantly lower taxes over a lifetime than other categories of economic immigrants (Canada 2014, 80). 

The government replaced the IIP with the Immigrant Investor Venture Capital (IIVC) program in the same year. The IIVC specifically targeted wealthy individuals with a minimum net worth of $10 million (CAD) who also were required to invest $2 million into a government-approved venture capital approved fund for 15 years. This program also stipulated that stringent due diligence checks to ensure that the invested money was lawfully obtained. A mandated competency in one of the country’s official languages as well as one-year Canadian post-secondary certification were also required. Individuals with a net worth of $50 million were exempted from these additional requirements.  Still, immigration industry executives asserted that these new requirements – and the language and education expectations in particular -- restricted the marketability of the program (Financial Post 2015).  Not unexpectedly, the IIVC attracted few applicants. 

Though the FIIP was replaced, Canada’s federal system enabled the Quebec immigrant Investment Program (QIIP) version of the FIIP to continue (3.).  The program, however, aroused considerable media and political controversy within Quebec and nationally. Originally, the program was established to increase immigration to Quebec and to stimulate it’s then persistently moribund economy. Yet, despite the requirement that applicants must intend to reside in Quebec, the overwhelming majority of QIIP Chinese immigrants relocated to the English-speaking provinces. Between 1986 and 2016, nearly 60,000 people gained residence through the QIIP, however nearly 28,000 were living in British Columbia and 22,000 in Ontario. Only 6,050 remained in Quebec (Global 2018). 

Arguably, the sharp increase in applications through the QIIP, overwhelmingly from the Peoples Republic of China (PRC), likely resulted from individuals wanting to evade stringent capital outflow restrictions set by China’s State Administration of Foreign Exchange (SAFE). Not uncommonly, an unknown number of immigrants resorted to underground organized money laundering networks. It was estimated in 2018 that $46.7 billion dollars was laundered in Canada with $7.4 billion in British Columbia alone. The net effect of this illicit capital flow was a property price increase of 7.5% (Maclean’s 2019). The majority of the capital outflow to Canada from the PRC was facilitated by the underground banking network based in Hong Kong – a key gateway circumventing the capital controls China imposes on the outflow of wealth. The underground banks that facilitate the transfer of capital outside China might also work with organized crime networks based in Asia and North America. Casinos operating primarily in Macao and Vancouver are a key vehicle for this money laundering exchange (German 2018 35-36).

This “Vancouver Model” of laundering money through casinos and real estate is not limited to Canada since similar Chinese transnational crime networks are in Europe and Australia (Langdale 2017). In response, successive British Columbia governments, including notably the government led by the left of centre New Democratic Party, introduced a series of targeted taxes and regulations especially directed at absentee home owners. For example, under the new Land Ownership Transparency Act the government will establish a registry of the beneficial owners of real estate, which will be online and searchable by the public (British Columbia 2019). 

In 2016, a joint-investigation by ISPA International and Canada’s Postmedia uncovered further linkages between investment migrants to Canada, real estate, fraud and money laundering in several real estate deals worth over $500 million and funded by investment migrants. The Kevin Sun case illustrates further due diligence failures. A former hairdresser from Jilin Province in northern China, Sun arrived in Canada through Montreal and then moved to Vancouver.  Shortly after becoming a permanent resident, he created the Sun Capital real estate company.  His story appeared to follow the prototype of a rags-to-riches immigration tale.  However, before emigrating, Sun experienced a stunningly rapid rise from cutting hair to heading an enormous conglomerate, the Jilin Heng Enterprise Group (JHEG). This unusual massive and immediate wealth did not raise raised risk flags for Canadian officials. Critically, Sun’s JHEG included several state-owned companies involving a wide array of industries from semi-conductors to pharmaceuticals. Sun too was a representative for the National People’s Congress for Jilin City (Cooper 2016). Oddly, Sun’s Qilin land company had five different names. Equally important, his abrupt departure from China coincided with an audit of Industrial Commercial Bank that alleged that JHEG received $500 million in fraudulent loans from this bank. In Canada, he established Sun Commercial, which immediately engaged in a number of dubious real estate transactions, financed by an elaborate web of 14 different investment companies. In 2008, the Royal Canadian Mounted Police (RCMP) investigated a 94-acre farm owned by Sun as a possible methamphetamine and marijuana production center. IPSA and Postmedia interviewed a Sun associate who claimed that “In Vancouver, it is not just Keven [Sun]…[t]here is hundreds of people similar to him” (Province 2016).  

According to IPSA, the Sun case is illustrative of larger phenomenon:

The modus operandi outlined in this case is similar to some of the operations that are using the Canadian real estate market to launder money… This situation begs many questions including, what happened to the visa vetting process, banking compliance, public company scrutiny and regulators of all sorts (Province 2016).

Even in Canada, where state capacity to carry out due diligence checks is substantial, the history of the CBI/RBI program reveals that it has been lax. By 2018, these due diligence issues became politically contentious especially after the state-owned Radio Canada’s investigative program Enquête interviewed a number of current and former Quebec civil servants about the QIIP. One former immigration officer stated, “It's a program that has lots of gaps, that permits people with dubious or even illicit business to launder money through the program and to buy themselves citizenship inexpensively" (CBC 2018).  This program further revealed that, even when applicants were flagged as risky, senior QIIP officials pressured workers to approve the applicants nonetheless in order to meet annual financial targets. In addition, officials reviewing applicants with suspicious wealth sources were instructed to be lenient because other forms of corruption (e.g. organized crime in the construction industry) were not uncommon and, therefore, implicitly tolerated in Quebec.  Staffing levels were also inadequate for the volume of applicants.  In particular, the Hong Kong immigration office, which accepted an average of 1,900 applicants plus family members, was continuously understaffed. Excessive caseloads lead to 60-to-70-hour work weeks for reviewers, resulting in high burn-out levels and persistent quality control issues.  Several of the most prestigious immigration consultants that assisted applicants with submitting their files apparently facilitated repeated patterns of deception over their clients’ employment status and source of wealth.  For example, an external audit revealed that 65% of applications contained forged documentation (CBC 2018).

In the spring of 2019, the newly elected francophone nationalist Quebec government began investigating the above issues, and immediately introduced CBI application quotas.  A maximum 1900 applications could be approved annually, with a maximum of 1235 from China (Quebec Immigration Rules 2019). In the fall of 2019, the Quebec government imposed a moratorium on all new applications.   

Comparison of SKN and Canadian Case Studies

CBI and RBI programs in both Canada and SKN increased government revenue and simulated overall foreign capital investment.  Yet criticisms of individual cases of tax evasion, money laundering and negative social impact of associated property price inflation appear overwhelmingly justified.  Notably, however, SKN’s CDD improved substantially since 2014 while CDD in Canada’s appeared to have stalled. As noted above, Canada suspended visa free access for SKN nationals in 2014 due to the insufficient CDD of its CBI program. Yet Canada, and the Quebec government, in particular, did not draw upon SKN reforms regarding adequate funding, realistic workloads, and independent oversight of CDD resources. In effect, SKN, a resource limited micro-state, implemented a more effective CDD protocol in part by working with independent companies and coordinating with nearby national governments and cooperative institutions such as the Caribbean Region the Citizenship by Investment Programme Association (CIPA). 

Still, CDD program related geopolitics matter for large countries too. For example, the diplomatic crisis between the United States and China over the arrest and deportation hearings in Canada of Huawei CFO Meng Wanzhou illustrates how politically sensitive these programs can become (SCMP 2018). Meng and her husband own several real estate properties in Vancouver, and though Meng was on a tourist visa in Canada at the time of her arrest, she had held permanent residency from 2001 to 2009. She was detained and arraigned in criminal court by Canadian authorities in response to a deportation request by the US. In response, the PRC government arrested and indefinitely detained two Canadian nationals and suspended all meat imports from Canada, a major export commodity.  G20 countries such as Canada too are not immune to international pressure from major regional powers like the US regarding the need for increased CDD of PEPs.

Three due diligence key themes are evident in the above discussion of SKN’s and Canada’s CBI and RBI programs. First, there is a need for openly available performance data.  For example, it is important that authorities examine how many Canadian and SKN cases were considered high risk and ultimately rejected versus historical benchmarks. One benchmark related indicator would be if a country accepted a disproportionate number of high-risk applicants in a year, then an audit should be initiated. Second, as will be discussed in the following section, sharing aggregate due diligence performance metrics among countries will facilitate basic comparisons of CBI and RBI programs. Third, it is important to share comparative data on high-risk applicants in order to inhibit applicants from “shopping” among countries to find the least rigorous due diligence regime. 

The European Union Parliamentary Report and the Organization of Economic Cooperation and Development Due Diligence Recommendations

From 2017 to 2019 the EU vigorously investigated and reported on CBI and RBI schemes of its member states. One catalyst for the EU’s intensifying interest was the high-profile murder of the Maltese investigative journalist Daphne Caruana Galizia. According to the Organized Crime and Corruption Reporting Project (OCCRP), Galizia had “been digging for months into the island’s hugely profitable “passports for sale” program” (OCCRP 2018).  Galizia had been a vocal critic of corruption involving the Pilatus Bank and senior levels of the Maltese government. Pilatus Bank, owned and chaired by Iranian and SKN national Ali Sadr Hasheminejad, received an operational licence from Malta Financial (FIAU) Intelligence Analysis Unit. Leaked Maltese FIAU reports revealed that there were serious concerns with both money laundering compliance at Pilatus and alleged corruption involving illegal kickbacks from the sale of Maltese passports. A 2017 EU fact-finding mission called for the rule of law to be applied and demanded that Malta “make it clear who has purchased a Maltese passport and all the rights that come with it… (EU Parliament 2017 29).” In January of 2020, the Maltese prime minister, Joseph Muscat, resigned during a constitutional and political crisis brought on by his perceived role in the murder of the investigative journalist as well as a corrupt CBI scheme (Guardian 2020).

Since Galizia’s murder, the Daphne Project was formed by a consortium of international news agency pledged to continue investigating government corruption and, especially, regarding CBI programs. In October 2019, Reuters, a Daphne Project participant, revealed that the Cypriot government had approved dozens of passports to PEPs.  These included close members of the authoritarian Cambodian Prime Minister Hun Sen’s faction who held overseas assets worth tens of millions of dollars. Eight of Hun Sen’s family members and political acolytes, including Cambodia’s police chief and its finance minister, were among these PEPs (Reuters 2019). Moreover, Politis, a Cypriot newspaper, reported that international fugitive Jho Low had obtained a Cypriot passport just a few months after the 1Malaysia Development Berhrard (1MDB) scandal became public (4.). An internal Cypriot investigation led to the stripping of 26 passports associated with the CBI program. Cypriot interior minister, Constantinos Petrides found that:

“If there were nine investment cases, concerning 26 people, among 4,000 applications, it is logical that some would be problematic when controls weren’t strict… There were mistakes – it was a mistake not to have criteria, for instance, for high-risk persons” (Guardian 2019).

While Cypriot authorities claim that their CBI program has increased its layers of due diligence from one to five since 2013, it is unclear why basic due diligence, such as a criminal records check, was not followed in 2015 when Jho Low was awarded a passport. Moreover, it is unclear whether they have since adopted a risk-based approach to assessing highly politically exposed persons.  

In 2018, in the wake of the Galizia scandal, it is not surprising that the EU released a report that found systemic flaws in CBI and RBI programs concerning: inadequate or incomplete due diligence; conflicts of interest; money laundering; tax transparency and fairness; PEPs; and, the broader political and economic consequences of the programs.  Following this report, the European Parliament's Special Committee on Financial Crimes, Tax Evasion and Tax Avoidance (TAX3) called for phasing out investment migration programs: 

“the potential economic benefits of CBI and RBI schemes do not offset the serious money laundering and tax evasion risks they present; [the TAX3] calls on Member States to phase out all existing CBI or RBI schemes as soon as possible; stresses that, in the meantime, Member States should properly ensure that enhanced CDD on applicants for citizenship or residence through these schemes is duly carried out, as required by AMLD5; calls on the Commission to monitor rigorously and continuously the proper implementation and application of CDD within the framework of CBI and RBI schemes until they are repealed in each Member State (TAX3 2018)”

The TAX3 report was followed by another EU report in 2019 which raised the concern that CBI and RBI programs pose a direct challenge to the security of the EU and its plans to institute a Security Union. This Security Union was to be based on rigorous security checks of individuals through shared databases such as the Schengen Information System (SIS), Visa Information System (VIS), and the Eurodac system (biometrics third country nationals. The 2019 EU report suggested that “Practices regarding investor citizenship and residence schemes can undermine these efforts by allowing third-country nationals to avoid some of these checks.” (EU 2019, 10). The study revealed that countries did not share common standard operating security procedures. Several “grey areas” existed where applications could be submitted even if they did not meet basic security requirements. For example, in 2008, the Russian billionaire Sergei Adoniov obtained a CBI Bulgarian passport even though he had received a criminal conviction for money laundering in the United States in 1998 (Novinite 2019). 

Cumulatively, these EU reports amounted to a controversially broad critique of CBI and RBI and their perceived negative impact on the legal, social, economic and political integrity of the EU. 

Various EU law instruments and recommendations are germane to this chapter’s themes of improving due diligence, combatting tax evasion, increasing transparency, and improving governance.  Arguably, the most important change introduced involved the EU’s Fifth Anti-Money Laundering Directive (5.), which included CBI and RBI programs under the mandatory requirement for EDD for relationships or transactions with high-risk third countries (EU Directive 2018).  Each of these themes will be elaborated below.

Due Diligence 

Similar to the SKN’s response to its CDD crisis in 2014, Malta reacted to EU concerns by embarking on a robust reform of its CBI program.  This focused on a “4 Tier Due Diligence” check system including:

  1. standard KYC checks;

  2. criminal background checks in multiple closed source police databases;

  3. documentation validation checks and open source due diligence checks on the applicant and their family;

  4. checks for PEPs and sanctioned individuals and companies on the applicant and their family as well as significant business associates.

This 4 Tier system ultimately depends on a risk-based approach where the suitability of the applicant is both quantitively and qualitatively assessed. Each decision includes information collection by the Individual Investor Programme (IIP) due diligence team that forwards all supporting documentation and findings to the Minister responsible for Citizenship. The latter then further reviews the findings with the IIP team before making a definitive decision (Malta 2020). In effect, accountability for due diligence failures ultimately rests with the Minister. Obviously as with any CDD, Malta’s CDD regime remains subject to problematic case assessments, yet, it is more rigorous than most EU CBI and RBI schemes, as well as conventional immigration programs. Arguably, Malta’s CDD system is a benchmark that can be used to conduct periodic audits and compliance reports on all EU CBI and RBI programs. Such regular audits of national CDD programs are crucial to the EU’s and FATF’s process of evaluating AML and CFT national compliance.   

 

Combatting Tax Evasion

On 19 July 2013 the Organisation for Economic Development and Cooperation (OECD) published its Action Plan on Base Erosion and Profit Shifting (‘BEPS Action Plan’) to address tax evasion through major changes to existing international tax rules. In response, the EU passed the Anti-Tax Avoidance Directive (ATAD I & II "ATAD"), which formed part of a larger anti-tax avoidance package (EU Directive 2016). ATAD, for example, immediately affected Ireland and Luxembourg; accordingly, significant changes to their national tax regimes were made.

In 2018, the OECD directly linked the issue of tax avoidance to a number of “high-risk” CBI and RBI schemes operating in offshore financial centres, which enabled individuals to obscure their financial assets and “misrepresent an individual’s jurisdiction(s) of tax residence.” The OECD listed the following jurisdictions as potentially posing a high-risk to the integrity of the Common Reporting System designed to share tax and financial information on multi-national corporations and entities: 

Antigua and Barbuda, Malta, Bahamas, Qatar, Bahrain, Saint Kitts and Nevis

Barbados, Saint Lucia, Cyprus, Seychelles, Dominica, Turks and Caicos Islands

Grenada, United Arab Emirates, Malaysia, Vanuatu (OECD CBI/RBI)

In response, the OECD further recommended the automatic exchange of information among financial institutions in their new “Model Mandatory Disclosure Rules for Common Reporting Standard Avoidance Arrangements and Opaque Offshore Structures” (OECD 2018). It remains unclear about further legal instrument steps the EU might take to address the issue of tax avoidance through CBI/RBI programs. 

Increasing Transparency 

The EU also found cases where applicants allegedly “shopped” for the weakest security checks (EU 2019, 12). Transparency International scathingly referred to this trend as a “race to the bottom” i.e. member states are encouraged to “to weaken their due diligence and integrity requirements in order to make their programmes more attractive and competitive on the market” (Transparency International 2018, p20). An EU common protocol for due diligence could both establish a transparency standard for CBI and RBI, and provide publicly available and aggregated performance data. The EU noted that this data could include:

  • The number of main applications and their dependants received (by country of origin);

  • The number of citizenship and residencies granted (by country of origin);

  • The intermediaries involved in the process and their role;

  • The amount of revenues earned;

  • Statistics on the total number of accounts and the total account balance of account holders who appear not to be relevant for tax purposes in that jurisdiction, e.g. because they do not have to file tax returns in that jurisdiction (EPRS 2018 50)


Malta, for example, provides annual IIP reports on its website, which includes performance data on the number of vetted applications. From October 2017 and June 2018, 281 applications were vetted: 227 were approved; 44 were rejected; and 10 were withdrawn (Malta 2018). The performance rates were 80.1% approved, 15.6% rejected, and 3.6% withdrawn. 

Among the FATF 40 recommendations, national cooperation is critical to financial intelligence and information. European Financial Intelligence Units (FIU) regularly share intelligence and due diligence data with national and international counterparts through systems such as the FIU.net. A similar form of coordination should be introduced among CBI and RBI FIU as well as third party due diligence agencies. In effect, applicants who are flagged as high risk and rejected in one CBI or RBI program should be included in FIU.net type searchable system. 

To a certain extent, the EU could build upon the reforms initiated in the Caribbean under CIPA in 2014. These set basic standards for due diligence and training, and provide a forum to address “shopping” problems. CIPA works with the regional initiatives to facilitate criminal history searches and it maintains a database of applicants, including rejected ones. Ironically, it was pressure from the OECD and EU that caused the enhancement of due diligence screening and information-sharing standards and processes in the Caribbean superior to those in several European states.  

Governance and accountability 

The EU also has noted conflicts of interest between governments and the private sector agencies tasked with regulating and overseeing CBI and RBI programs on the one hand while simultaneously promoting and profiting from them on the other. In 2019, the EU asserted the need for a separate regulatory agency such as the Maltese Office of the Regulator for Individual Investor Programme (ORiip) to avoid these inherent conflicts of interest. The latter are widely acknowledged in the finance industry where numerous independent regulatory agencies routinely exist. For example, in the USA, the Federal Deposit Insurance Cooperation (FDIC) oversees the banking sector and the Securities Exchange Commission (SEC) regulates securities markets. Recently in British Columbia, serious role conflicts were identified involving a government agency, the Gaming Police and Enforcement Branch, tasked with both regulation and oversight while simultaneously being tasked with advising government on revenue and profit generation for the multibillion-dollar British Columbia Lotto Corporation. This conflicting role between regulatory oversight and revenue generation further facilitated billions of dollars of illegal and often foreign/immigrant/organized crime proceeds of crime being laundered through BC’s gaming industry (German, 2018).

 

Beyond the EU’s findings 

The EU approach to CBI and RBI programs has engendered criticism. Global Witness, an anti-corruption NGO, for example, opined that it was not adequately proscriptive (Rankin 2019). While the EU did acknowledge the need for enhanced due diligence (EDD), it did not establish a standard or explain what constitutes EDD.  Most critically in establishing effective protocols, EDD is not simply a checklist procedure.  Instead, a comprehensive process requiring substantial human resources and information sharing infrastructure investment are imperatives. FATF’s AML risk-based approached, which focuses on human judgement guided by professional standards and training, as well as information sharing systems, risk matrices, and other instruments is directly applicable to CBI and RBI programs. In addition, the latter could adopt the financial sector’s training, professionalization, and standardization model. For example, training and qualification as a Certified Anti Money Laundering Specialist (CAMS) are now commonly required to work in a dedicated FIU. 

A dedicated Citizenship Investment Unit (CIU) similar to those found in SKN and Malta is required rather than just a banking based FIU. In other words, a more effective CBI based EDD requires information and assessments beyond correspondent banking relationship to the overall risk-factors including high-risk jurisdiction of origins, sanction evasion, and PEP status. CIUs can benefit considerably by personnel with a broader regional socio-political-economic contextual understanding, including geographic areas expertise, of risks involved in correspondence banking with third-party foreign banks. Modalities of money laundering, sanctions evasion and other financial crimes often vary based on distinctive and, not uncommonly, subtle geographic/cultural factors. Importantly, area experts are necessary to assess the risk of an applicant being a sanctions evader, money launderer or someone who is seeking a passport that does not carry the stigma associated with war torn or social conflict countries of origin. 

As the Canadian and SKN experiences demonstrated, inadequately staffed and trained CIUs are unable to process even a limited number of applications before CDD standards suffer. A proportion of CBI revenue reinvested in CIUs could assist line staff to resist pressure from senior officials and politicians to quickly process files without increasing staffing level. In addition, EU reports suggested that this needed autonomy can be enhanced by simply publishing annual disaggregated performance metrics on the number of CBI/RBI applicants approved and rejected per annum (EU 2019, 21). Finally, government officials, industry agents and due diligence agencies’ s staff need mandatory certification and training in due diligence screening and standards on a regular basis. This certification process could be established and regulated by intergovernmental agencies as well private sector organizations such as the Investor Migration Council (IMC) (6.).

Migration industry proponents asserted that the EU should be reproached for perpetuating an alarmist and inaccurately exaggerated view of CBI and RBI programs caused by the relatively few notorious cases and the above related array of criticisms. A broader perspective is needed based on comparisons to other migration risk types (Kochenov 2019). Importantly from a national security perspective, for example, the migration of individuals from organized crime and terrorist groups poses a far greater risk than do wealthy investors.


Conclusion 

The SKN and Canadian case studies, as well as the EUs exhaustive inquiry into CBI and RBI programs, all suggest that CDD regimes need to be expanded to ensure the perpetuation CBI and RBI programs, which typically have benefited both immigrants and the host countries especially small states.  Extensive media coverage of corruption in Canada and SKN, as well as in Malta, Cyprus, Bulgaria and Moldova, have influenced public trust in key political, financial and criminal justice institutions. For small and economically vulnerable nations, the consequences of problematic CBI or RBI programs can be substantial: loss of visa-free access, financial aid, and key sources of revenue, as well as access to trade in powerful economic blocs such as the EU and North America.  Encouragingly, though, investment migration programs to date have followed a path traced first by AML and anti-terrorism financing initiatives i.e. gradually improving their enhanced due diligence assessment and screening of applicants.  The question remains, however, whether this transformation path will occur soon enough.

Mark Corrado & Kim Marsh

Footnotes
1. The EU defines PEPs as “natural persons who are or have been entrusted with prominent public functions and the immediate family members, or individuals known to be close associates, of such persons.” (EU 2005)

2. St. Kitts and Nevis is pseudonymously referred to in the 1983 Federation of Saint Kitts and Nevis Constitutional Order as Saint Christopher and Nevis. 

3. According to the 1991 Canada-Quebec Accord, which recognized Quebec’s unique francophone cultural status within Canada, Quebec has retained greater control over immigration policies (Canada, 1991). The provincially based Quebec Immigrant Investor Program requires applicants to have a net worth of $2 million (CAD) and must have a passive government guaranteed investment of $1.2 million over a five-year-term (Quebec Investor Program 2019).

4. The 1MDB scandal involved defeated Malaysian Prime Minister, Najib Razak, who was with criminal breach of trust, money laundering and abuse of power involving up to 4.5 billion US dollars of diverted foreign investments in an elaborately complex scheme, which included Jho Low in a central role.

5.  Crucially, in May 2018, the 5th Directive amended the earlier Directive (EU) 2015/849 “on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing”  expanded the list of customer due diligence ‘higher-risk’ factors to be considered by authorities and financial intelligence units (FIU). Regarding this amendment, a higher-risk customer could now be considered as someone who “is a third country national who applies for residence rights or citizenship in the Member State in exchange of capital transfers, purchase of property or government bonds, or investment in corporate entities in that Member State” (EU Directive 2018, 72). This 5th Directive also introduced other anti-money laundering instruments designed to: increase transparency on corporate beneficial ownership; grant greater FIU access to bank accounts; and facilitate more intelligence sharing with FIUs from different countries and banks.

6.  The IMC was established in 2014 and is headquartered in Geneva, Switzerland. It is the worldwide association for investor migration and citizenship-by-investment units. One of the main objectives of the IMC is to assist with regulating the industry, while being the global voice (https://investmentmigration.org/). 

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