International critics fail to stem growing CBI industry

The concept of citizenship by investment (CBI) – allowing wealthy individuals fast track to a second citizenship and passport in return for investment into real estate or a donation into a government fund – is becoming increasingly attractive as a gateway for non-EU citizens to access Europe.

Freedom of movement within the EU, especially in the wake of the UK’s contentious Brexit referendum, is now central to the attraction and marketability of the schemes.

The thorny European question has been a key factor in boosting the industry’s success, according to most commentators on the issue. “People in the UK and Europe have become much more aware of dual citizenship post-Brexit,” confirms Micha-Rose Emmett, CEO of CS Global Partners, specialising in residency, citizenship, immigration and foreign investment law.

“Freedom of movement is becoming a key factor at a time when immigration policies are getting more restrictive around the world,” says Shelby du Pasquier, head of the banking and financial services practice at Geneva lawyers Lenz & Staehelin, one of Switzerland’s leading experts in tax and wealth management. “It is not surprising there is so much interest from Russia and Asia.”

CBI programmes, he believes, also offer an “alternative” back-up plan for nationals of jurisdictions threatened by political turmoil or instability. “Many of the people affected by these threats are looking for an additional citizenship as a precautionary measure in case the situation should worsen in their country of origin,” says Mr du Pasquier.

But they have also become an important source of revenue and often a lifeline for the sponsoring countries, many of them Caribbean jurisdictions that have been subjected to natural disasters such as tropical storms, and smaller European island nations which suffered in the financial crisis. “For these sponsoring countries, CBI programmes are a welcome source of revenues and a pole of attraction of high net worth individuals and entrepreneurs who may in turn contribute to the development of the country,” adds Mr du Pasquier. “Given their success, these types of programmes are unlikely to be stopped or curtailed in the near future.”

Dominica, which has performed well in the CBI Index, is an excellent example of how such a scheme can be used to rebuild after the twin disasters of Hurricane Maria and Tropical Storm Erika devastated the island’s infrastructure.

The country’s list of economic challenges is not one for the faint-hearted. The Post Disaster Needs Assessment following Hurricane Maria identified total damage valued at $930m and losses of $380m. The sum of these two measures was equivalent to more than twice the GDP generated in 2016. The housing sector suffered the greatest damage, calculated at more than $350m, with 44 per cent of buildings experiencing either major structural damage or being totally destroyed.

Many of the country’s “rehabilitation projects” are funded with resources from the Citizenship by Investment Programme. In fact, during 2017, the entire capital budget of $222.9m was financed with CBI funds. CBI is directly funding housing and hotel developments, plus tourism and agriculture projects. Payouts to householders of $34m and a government initiative to build 5,000 homes will likely be financed by CBI receipts.

All funds received by the government of Dominica and the nature of their use are disclosed to parliament and subject to audit. The names of all applicants approved under the CBI system are also published in the Dominica Official Gazette, a government bulletin available for a $50 annual subscription.

Vocal critics

But despite this economically vital work, like other Caribbean governments, which are increasingly co-operating under the regional CARICOM umbrella to co-ordinate their CBI initiatives, Dominica detects some international hostility to its programme.

“The main challenges to us are the continued misrepresentations of the CBI Programme,” says the country’s financial secretary Rosamund Edwards. These critics, she says, “do not realise the tangible benefits to our small countries in meeting our development objectives and in achieving international benchmarks such as the sustainable development goals committed by all of our countries at the UN.”

Although CBI programmes are generally available to citizens across the world, including Russia, the Middle East and China, it is often these jurisdictions that many clients come from. Representatives of some Caribbean jurisdictions report spending more than half of their time in Hong Kong and China, which they describe as “the most lucrative market” for CBI.

Ms Edwards sees opportunities for the possibility of not only broadening source markets, but also using openings provided by second citizenships to facilitate the expansion of business opportunities.

Residents of oil rich countries in particular are expected to subscribe for more second citizenships. “Residents of the Middle East are becoming more interested in these citizenship programmes in light of political instability at home,” confirms Natacha Onawelho-Loren, head of Legal, Trust and Fiduciary at the Salamanca Group in Geneva. Global families will continue to search for security, she believes, with political and economic stability across many regions accelerating this trend.

She points to Malta and Cyprus having particularly attractive programmes, as they offer EU citizenship as part of their package, with property ownership demonstrating a “durable link” to a host country through commitment to the local economy.

Broadly, due diligence processes are improving, believes Ms Emmett at CS Global Partners, with Caribbean countries running perhaps the more robust programmes, because their economies are more likely to depend on CBI income. 

There is however some controversy in the Caribbean, as well as in other jurisdictions, about whether due diligence is as strong as it could be. There is an undoubted initiative from CARICOM to curb organised crime across the Caribbean region through its Implementation Agency for Crime and Security (IMPACS), which also provides recommendations on which applicants to accept or reject for CBI programmes of individual countries, alongside advice from specialist international due diligence firms.

There have been rumblings from IMPACS that their recommendations are not always followed, as some countries will prioritise economic development and recovery over security.

Regulators insist they follow the recommendations to make sure only the highest quality applicants are accepted. Law firms suggest that additional due diligence, carried out by private experts like Exeger or Thomson Reuters, casts a wider net over applicants to Caribbean centres.

Keeping out “untoward characters” must always be a number one priority and challenge for promoters and regulators, believes Ms Emmett at CS Global Partners.

She is also expecting countries offering second citizenships to continue broadening their reach. “A lot of new markets are opening up as people are getting to understand what CBI is about. There is more interest now from Latin America, the Middle East and Africa. It’s not just about China anymore.”

One major concern is a “race to the bottom” among Caribbean countries engaged in “wholesale discounting of application and donation or investment fees,” says Christopher Ashby, chairman of Chanson D’argent Ltd, a Grenada-based property developer specialising in CBI projects.

 “Though in many cases, there is an obvious business rationale for increasing the throughput of applications, the probability of the due diligence process being compromised increases exponentially with this practice.”