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Why Should States Conduct AML Due Diligence For CBI/RBI Investment Schemes?

Don't Allow Citizenship-by-Investment Schemes Facilitate Money Laundering in Your Country

CBI/RBI Insights

How the Concept of Citizenship-by-Investment First Emerge?

Throughout the course of human civilization, the process of naturalization has remained relatively flexible. The idea of granting citizenship or residence permits in exchange for cash dates back to roughly two thousand years ago, when Roman citizenship was purchased by the wealthy elite in the newly conquered territories. This helped to integrate the super-rich colonial subjects and loyalize them immediately into the Roman empire. Getting Roman citizenship in ancient times meant unrestricted travel within the empire (equivalent to the modern-day Schengen visa), immunity against death sentence or torture (except in the case of treason), and the exclusive right to vote.

Fast forward to 18th and 19th-century England, many Italian, German, and German-Russian merchants were granted citizenship by the Victorian British Empire, not for residence, but solely for economic purposes.

In recent history, the Caribbean islands of Saint Kitts and Nevis pioneered in introducing ‘immigrant investor program’ in 1984. Following Saint Kitts and Nevis's lead, the United States in 1990 introduced its EB-5 visa for citizenship-by-investment (CBI) and residency-by-investment (RBI) schemes.

This age-old practice of granting citizenship by investment is strikingly similar to what is happening all across the world right now. Various countries are now experimenting with migration-related and investment-related schemes to draw in talented entrepreneurs and skilled migrants.

Why Countries Launch CBI/RBI Investment Schemes?

In the ancient world, offering citizenship for cash was used as a foreign policy tactic to recruit political allies in conquered territories. Take for example ancient Rome, the naturalization of non-Romans aided the Romanization of foreign powerful political figures and their integration into the empire.

In the modern world, countries offer Citizenship by Investment (CBI) programs to boost economic growth and accelerate international competitiveness. These government-administered programs allow the transnational class of super-rich to bypass the regular migration process and obtain citizenship for significant financial investment in the host country. As for the host country, these investment schemes have proven to manifest massive economic benefits such as infrastructure development, job creation, and fiscal stability.

Economic Growth

Governments around the world are employing citizenship-by-investment (CBI) and residency-by-investment (RBI) schemes to infuse foreign capital into their economies. Fiscal contributions by foreign investors in the form of purchasing government bonds, real estate, and investment in local businesses lead to a substantial boost in the host nation’s economy which helps fund their critical infrastructure projects, makes up for the budgetary deficits of the host country and provides fiscal support for their public services. 

Economic Diversification

Relying on a single industry for major national income such as oil or tourism makes a nation economically vulnerable to unstable market fluctuations. Investment programs like citizenship-by-investment (CBI) and residency-by-investment (RBI) provide a safe avenue of
economic diversification by drawing in investments for multiple sectors. Diversification of the economy makes a country more resilient to unexpected shocks.

Risks Associated With RBI/CBI Investment Schemes

Investment Schemes like economic citizenship & residency programs may spur economic growth. However, from the anti-money laundering viewpoint, wealthy elite from third-world countries may have unethical reasons to invest in RBI/CBI schemes.

In many cases, the transnational class of super-rich with criminal history try to hide the sources of their ill-gained money and get away with their financial crimes such as embezzlement of state funds, corruption, human trafficking, bribery, terrorist financing, corporate frauds, drugs trafficking and beyond. Therefore, there are many risks associated with investment schemes like economic citizenship & residency programs.

1. Risk of Money Laundering

Investment schemes like RBI/CBI could attract criminals and the corrupt from all across the globe to exploit the lack of transparency, insufficient due diligence, and inefficient control mechanisms in CBI/RBI schemes which helps them successfully hide their source of money gained from illegal sources like drug trafficking, corruption, bribery, etc.

In April 2022, the Financial Action Task Force (FATF) along with the Organisation for Economic Co-operation and Development (OECD) inspected risks of financial crimes, in particular, money laundering that comes with investment schemes such as Citizenship-by-Investment (CBI) or Residence-by-Investment (RBI).

FATF President T. Raja Kumar stated, “Granting citizenship and residency to wealthy investors through 'golden' passport and visa programs can potentially lead to economic growth. But they can and are being exploited by criminals and the corrupt, who want to launder their money hide their identity and assets, or carry out further crimes. This report calls on governments operating these programs to implement a variety of safeguards to ensure these programs are administered in a risk-sensitive way,”

2. Risk of Conflict of Interest & Corruption

It has been revealed that the national authorities who evaluate applications for citizenship through investment abuse their broad discretionary powers, favoring short-term advantages over gradual, long-term effects. Legislators' frequent consideration of their own interests when creating CBI/RBI investment plans is another reason for criticism.

It turns out that candidates for investment schemes like the Golden Passport and Golden Visa programs have business dealings or financial interests with politicians, their families, or their close acquaintances.

3. Risk of Tax Evasion

Investment schemes like Citizenship-by-Residence tend to undermine the automatic exchange of tax information between the tax authorities. Wealthy persons may obtain citizenship via CBI/RBI investment schemes in a foreign jurisdiction where they do not conduct their business activities, allowing them to avoid reporting financial information to their home country's tax authorities. This is how CBI schemes enable tax evasion by the filthy rich.

Case Study 1

Failure of Cypriot Investment Program

The meteoric rise and the sudden failure of the Cypriot Investment Program (CIP) demonstrate how such investment schemes are exploited by the transnational class of super-rich money launderers. In the early years, the program had a massive sucess as it attracted €6bn in real estate development right when the country’s nominal GDP was €24– 25 billion per year. This program allowed the foreign nationals to invest €2 million into real estate and infrastructure projects to obtain Cypriot citizenship.

In 2019, in response to criticism from academic, political, and media spheres, the Cypriot government focused on strengthening country’s anti-money laundering (AML) measures. However, the reform came too late.

In 2020, a journalistic probe uncovered secret government records exposing how foreign politically exposed persons (PEPs) and their families were granted citizenship without proper due diligence. Resultantly, an independent committee was formed to review application files and identify cases where criteria and procedures were not followed. At the same time, the Cypriot citizenship legislation lacked any procedure for withdrawing citizenship awarded under the CIP, which exposed was another of program’s shortcomings.

The CIP faced its ultimate blow in late 2020, before the independent committee's probe was completed. Undercover reporters from a prominent international news network approached politicians, attorneys, and real estate brokers in Cyprus to help apply for a fictitious character with a criminal past from the People's Republic of China. During the sting operation, videos captured the President and a member of the Cypriot House of Representatives offering their assistance to speed up the process. Despite popular uproar, both legislators have resigned from their positions, denying any misconduct.

Despite their resignations, the Cypriot Investment Program (CIP) was suspended as of November 1, 2020 due to widespread public outrage. Real estate developers and other companies who benefited from funding in the last decade continued to express their support for reviving the program.

Now the question arises whether the CIP scandal was a government enabled money laundering, or a deliberate blindness, or a case of inadequate AML measures. Whatever is the case, it is clear that the anti-money laundering precautions had been improperly put into place. Politicians, financial intermediaries, and real estate developers might have also purposefully withheld information from themselves that could have exposed them to criminal or civil penalties. Properly crafted and strictly enforced measures would have avoided cases of CIP abuse and, in the end, avoided the program's suspension under these unsettling conditions.

Case Study 2

UAE’s CBI/RBI Scheme

UAE is a peculiar example that overcame its AML compliance loopholes and got itself removed from the FATF grey list. Recently on February 23, 2024, the FATF removed UAE from its dirty money ‘grey list’ as UAE has been actively addressing shortcomings noted by the global anti-money laundering watchdog and took additional measures that were suggested into place to strengthen its legislative and regulatory frameworks related to anti-money laundering (AML) and countering the financing of terrorism (CFT).

The June 2023 Enhanced Follow-Up Report (or "EFUR") published by the FATF, UAE showed serious dedication in successfully addressing the AML issues during its two years of being on the grey list and made noteworthy developments, especially in terms of compliance with FATF Recommendations 1, 19, and 29 by

  • Imposing substantial penalties
  • Conducting thorough inspections
  • Utilizing its authority to seize assets

To improve oversight and efficacy, the UAE established a Specialised Federal Prosecution Unit to combat money laundering and the funding of terrorism..

In March 2023, the Ministry of Economy reported the imposition of fines totaling AED 22.6 million on 29 designated non-financial businesses or professions (DNFBPs) for non-compliance, showcasing the effectiveness of regulatory oversight. Amendments to the Penal Code, the introduction of a framework governing virtual assets (Law No. 4 of 2022 Regulating Virtual Assets), and related statutes ensured alignment with international standards.

Some of noteworthy actions include the seizure of assets exceeding AED 925 million between November 2022 and February 2023, along with fines surpassing AED 115 million in Q1 2023.

Way Forward: Enhancing AML Compliance For CBI/RBI Programs

Despite the Cypriot Investment Program (CIP) suspension, the demand for golden passports and golden visas from wealthy investors has not decreased. It is hardly unexpected that other countries are filling the void. These jurisdictions include not only EU Member States but also EU candidate nations like Montenegro, whose investment plan allows for visa-free entry into the Schengen travel area. If RBI/CBI programs in EU member states are not completely discontinued due to their inherent flaws, then the EU must adopt a uniform and thorough strategy for regulating and overseeing these initiatives.

The FATF's legal guidelines are a suitable countermeasure to the risks of money laundering posed by CBI/RBI programs. However, as investment migration and national RBI/CBI schemes affect the world as a whole, therefore, countries must enact additional shared regulations and protections. As per FATF guidelines, a comprehensive risk-based evaluation of the RBI/CBI schemes should serve as the foundation for the new financial norms.

Countries must make sure that they don’t turn into a "haven" for illicit proceeds and that citizens of third-world countries who pose as thoughtful investors are not granted citizenship by coordinating effective due diligence, safeguards for transparency and accountability, and mechanisms for supervision and sanctions.

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