CBI schemes can prove passport to stability in an uncertain world

The sense of geopolitical instability fuelled by the UK’s vote to leave the European Union and the subsequent election of Donald Trump as US president has only added to interest in Citizenship by Investment (CBI) schemes. These fast-track routes to citizenship and second passports, in return for major employment-creating investments in tourism, agriculture and infrastructure, are offered by a variety of countries in the Caribbean, Europe and Asia.

While CBI schemes have created a huge amount of interest in the wealth planning community, looking to add tools to their armoury, and among wealthy families searching for a range of potential jurisdictions in which to house their families and domicile their assets, they have also attracted controversy. 

Their supporters say CBI schemes help to make people more mobile, allowing those escaping persecution and harsh political regimes a greater number of options. Their detractors say they are aimed primarily at Russian, Chinese and Middle Eastern tycoons who have acquired assets in questionable circumstances and are looking to escape justice by re-establishing their businesses elsewhere.

In reality, most oligarchs, magnates and other politically exposed wealthy people know that they can easily fall out of favour with their government. At one moment they can be perceived to be legitimate and are revered as entrepreneurs and wealth creators, and at another they are portrayed as an “enemy of the people”. Many of these business people therefore have a plan B, involving a second citizenship for themselves and their families, in exchange for making substantial investments in their new host countries.

Safety and security

“CBI, more than ever is coming into its time,” says Micha-Rose Emmett, CEO of CS Global Partners, specialising in citizenship, residence, immigration and foreign investment law. 

“Today, especially since Trump and Brexit, everybody is wondering where they belong, how they fit in and how this will affect the future of their children,” with safety and security the main priorities for those looking to expand the number of jurisdictions they can potentially settle in. She says that while few Syrians thought about emigrating in 2011, today, most would consider the option of a second home country, if they were allowed access to it.

“Some applicants derive from war-torn countries, or jurisdictions that are unable to provide them with basic freedom, and a second citizenship allows such persons to seek a better life,” suggests Emmanuel Nanthan, ambassador and head of the Citizenship By Investment Unit in the Commonwealth of Dominica, which launched its programme in 1993. 

But CBI does not have to be the basis of a wealth management strategy, as it is often touted in countries such as China and Russia, where it is the main service discussed at the proliferation of wealth management conferences. The wealth planning process should look at family finances, business goals including cross-border expansion and tax liabilities, with the CBI option potentially able to feed into some family goals. 

“Some clients want to start with the goal of relocation of citizenship,” says Ms Emmett. “But it should be just one factor, a piece in a puzzle for wealthy families, not necessarily the foundation of their strategy.”

For many clients, the attraction of establishing a new country of residence can be a strong one. In our new world of tax transparency, tax optimisation has become less of a question of moving assets to a low tax jurisdiction and more about structuring assets in the most efficient tax residence, suggests Shelby du Pasquier, head of the banking and financial services practice at Geneva lawyers Lenz & Staehelin and one of Switzerland’s leading experts in tax and financial services. 

While EU nationals benefit from freedom to establish residency in the European Union and Switzerland, non-EU nationals have less options and many seek access to CBI schemes.

“This leads nationals from those countries to seek a jurisdiction within the EU that would allow them to secure a passport through an expedited process,” says Mr du Pasquier. Such a move can also be triggered by fear of future tax law changes.

Nationals from countries experiencing political or military instability have been interested, for the last few decades, in acquiring second passports to facilitate timely emigration, he says, with Chinese and Middle Eastern nationals historically seeking Canadian sanctuary. But the main driver of securing second citizenships today is tax, he believes, with Cyprus and Malta proving among the most popular jurisdictions for both EU and non-EU nationals. Some Caribbean centres, he says, offer quicker and cheaper CBI solutions.

But the practicalities of some schemes can be questionable, he says. New “homes” can prove ineffectual if the new nationals do not actually move to the host countries. “In my view, it is generally the actual residency in the appropriate politically stable, financially affluent country, offering an appropriate tax environment that offers the best protection, rather than another citizenship,” says Mr du Pasquier. 

“Although the latter opens access to the former. One should also keep in mind the complication of travelling with certain of these exotic passports that will often require visas.” 

This view is echoed by some host nations, where officials say applicants must be aware of the number of visa-free countries that they have access to, plus tax advantages and the level of political stability and long-term tenure of a passport.

Due to current instability, Ms Emmett believes everybody should be looking at “diversification of nationalities”. Some people, she says, have the luxury of ancestry in their search for an alternative home country to the one they grew up in, while others have a “range of options and price levels to help them diversify”.

Everyone wins

Although the schemes are transactional and not meritocratic, offering citizenship generally to those who can afford to move, they “add value to both client and country,” believes Ms Emmett, with those applicants benefiting from illicit money flows quickly shown the exit door. 

Many countries use international due diligence agencies to trace the origins of funds and assets and establish legitimacy, with jurisdictions in the Caribbean generally having the “highest level of vetting of applicants. They could teach Israel, the UK and US a few things about vetting.”

The earliest CBI scheme came from St Kitts and Nevis during the 1980s, while Canada pioneered Investor Visas during the 1990s. Both proved popular with Chinese and Vietnamese investors looking for a North American exit. More recently, Dominica in the Caribbean and Malta in the Mediterranean, which has been offering CBI since January 2014, have also provided schemes seen as high quality, high service offerings by practitioners. 

“This is a service which aims to give peace of mind to high calibre individuals,” says Jonathan Cardona, CEO of Identity Malta, which manages the country’s Individual Investor Programme, commenting that CBI works best when linked with a well-regulated financial services centre. Among competitors, he says, Malta “offers the best programme as it is highly regulated, recognised by the European Commission and offers best practice in the field on a global level”.

CBI, which contributes approximately Ä120m ($135m) each year to the Maltese economy, has however brought some discord to the tiny Mediterranean country. Malta’s prime minister Joseph Muscat recently secured a second term amid corruption allegations, linked to the island’s CBI scheme. 

“One supposed deal involved alleged kickbacks from Malta’s controversial, but lucrative, ‘cash for passports’ policy, which grants passports to non-EU nationals if they donate money to a government fund or buy local property,” reported the Financial Times newspaper, owned by the same parent company as PWM.

Cost differentials are large. Among those jurisdictions carrying out the most intense due diligence, Malta, offering the lure of EU membership for wealthy investors, requires a particularly high Ä1.2m ($1.35m) outlay, compared to $250,000 in St Kitts and Nevis and $100,000 for Dominica. 

As many smaller countries realise their natural resources are diminishing, they are looking to find alternative means of supporting and building their economies, creating opportunities for direct foreign investments, says Les Khan, CEO of the Citizenship by Investment Unit for the Government of St Kitts and Nevis. 

“The key is to have robust regulations and proper due diligence and vetting procedures so as not to allow individuals of ill repute to be able to get through,” he adds, stressing the importance of a sound financial system, with policies and regulations in place to ensure opportunities for money laundering and terrorist financing are not created. 

Most applicants come from China, the Middle East and Russia. The current government administration has strengthened the due diligence process “to ensure that undesirables are kept out of the programme”. All applicants are scanned through sanction lists and Interpol for any “red flags”.

His country’s CBI programme was established in 1984, with a strategy to attract direct foreign investment to support an economy previously dependant on the sugar industry. The plan was to help boost a fledgling tourist industry, by investing in infrastructure and supporting social programmes.

Applicants, he says, should be keenly aware of the economic opportunities and stability related to their chosen host nation, drawing attention to the beaches, growing real estate market and tourist attractions of St Kitts and Nevis. Tourism, especially medical tourism, is one of the islands’ ‘pillars of growth’, also comprising renewable energy and agriculture.

“The clients need to know they are getting a citizenship that is of value in a stable economic and political environment,” says Mr Kahn.

Dominica’s scheme offers citizenship in return for “significant contribution” to the economy, either through donation to the Economic Diversification Fund, or purchase of “extensively vetted, pre-approved real estate”, which creates jobs in the construction industry.  CBI money is also being used to reconstruct island capital Roseau’s West Bridge, develop drainage systems and build affordable housing for locals. 

Construction of eco-friendly resorts is another key strategy, fuelling the island’s tourist industry by increasing visitor numbers. Luxury international hotels including the Hilton, the Marriott and the Kempinski have been attracted by the programme.

Following Tropical Storm Erika, which caused damage worth almost $500m, Dominica’s government released $100m of CBI funds to rebuild damaged homes, buildings, roads and bridges. Other CBI recipients include the geothermal energy project, involving construction of a power plant aimed at reducing energy costs. 

Funds from the Economic Diversification Fund are used to sponsor training programmes to reduce unemployment among young Dominicans. Due diligence checks include vetting at regional CARICOM level in addition to Dominican government procedures. Officials in Dominica talk about a “joint effort” among Caribbean countries to maintain regional security, integrity and reputation. 

Competitive edge

Cyprus, also acting as a gateway to the EU, is becoming more competitive, requiring an investment of Ä15m prior to 2014, now down to Ä2m. Grenada is also popular as citizens can then preferentially apply for US residence through the US E2 Visa scheme. A lack of certainty can dissuade applicants looking to countries such as Austria, where each new millionaire citizen making strategic investments must be approved by parliament, therefore requiring lobbying of individual politicians. 

Commenting on schemes she has experienced from her client base, Natacha Onawelho-Loren, head of Legal, Trust and Fiduciary at the Salamanca Group in Geneva says: 

“Malta has strict vetting rules. The process seems arduous at first but local law firms are at hand to help you navigate the system. Cyprus, with its investors’ programme, seems to offer a clear path to citizenship, once the KYC hurdle is gone through.”

The trend to second citizenship can only increase, she believes, as “having more than one passport is already a fact of life for an increasing number of individuals and not only for the ultra -wealthy”.

Legal practitioners expect many UK residents to seek to obtain an additional passport with advantages of EU membership after Brexit, including visa-free travel across the bloc and the right to settle and work in any member state. More countries are also expected to offer residency to the wealthy on favourable terms, Portugal and Italy joining the club. 

“The trend will accelerate to attract those with capital, in need of stability or simply not wishing to be subjected to the whims of their own government,” says Ms Onawelho-Loren, while also helping revive economies during tough times.

Indeed dual citizenship, say its facilitators, is well on the path to becoming the norm. “Obtaining a second or third citizenship does not necessarily change one’s identity, but rather it broadens the opportunities available to a person, whether it be venturing into another market or calling a new place home,” says Mr Nanthan at the Commonwealth of Dominica. 

“Second citizenship is the the key to freedom of movement, and in some cases, security for oneself and one’s family. It serves as a platform for becoming a global citizen.”