CBI schemes taking steps to address reputational issues

Covid-19 has proved the catalyst for many trends which private banking teams witness in daily practice. One of these is the use of Citizenship by Investment (CBI) programmes to help global families manage both their structures and expectations.

These sometimes controversial schemes – which typically offer a second citizenship in return for an investment into a country’s infrastructure or tourism facilities – are increasingly seen as part of the solution to the wealth planning needs of global families.

“Very big families are considering relocation to different countries,” according to Anna Brugnoli, co-head of global wealth planning at UBS. These mega-clients “with a multi-jurisdictional exposure”, she reports, are searching for jurisdictions offering safety, a robust health system and practical evidence that their government has effectively managed the twin public health and economic crises.

“What we see is the question of ‘do I have the right citizenship?’” said Ms Brugnoli, during a panel discussion hosted by PWM, discussing trends revealed in the CapGemini World Wealth Report 2020.

This increase in enquiries since the advent of the pandemic is confirmed by leading CBI agents. “Uncertainty always drives the need to diversify one’s risk and secure the future of one’s family,” says Micha Emmett, CEO of CS Global Partners. “So the current global crisis has led investors to explore alternative citizenship and residence options with a focus on healthcare and standard of living.”

The other major agent in the market, Henley & Partners, has registered a global increase of nearly 50 per cent in enquiries from January to April 2020, compared to the same period last year. 

Both players report steady interest from applicants in China, the Middle East, Russia and Eastern Europe, with demand increasing most in tandem with civil rights clampdowns. “Events such as the legislative changes in Hong Kong are also incentivising applications,” says Ms Emmett.

A major growing market for second citizenships is emerging from South Africa and in the western countries of the continent. “West Africa has now very much discovered investment migration, with Nigeria as you would expect in the lead and Ghana very much on the radar,” says Paddy Blewer, H&P’s UK director.  

South Africa, which enjoyed its “breakthrough moment” two years ago, is seeing both its new and established wealth taking on a more global perspective and looking to add citizenships, typically from the Caribbean islands, to facilitate global travel opportunities. 

Badly burned

Although many jurisdictions have profited from this increasing demand, Cyprus and Malta have been badly burned recently, leading to the risk of some industry sectors remaining tainted. CBI has not generally been the source of the scandals, yet is often made  a scapegoat by populist politicians. 

A CBI programme launched in Cyprus, soon after the eastern Mediterranean island’s financial system nearly collapsed in 2013, attracted Russian, Chinese, Cambodian and Malaysian applicants, many of whom were keen to invest in luxury resort developments.

But the authorities in Nicosia were forced to tighten vetting at the end of 2019, partly due to US legal proceedings and sanctions against individuals affected, and began a process to withdraw Cypriot nationality from 26 people who had invested in the CBI scheme.

Malta, another Mediterranean island and recent entrant to the EU, also found itself under the international spotlight, when the assassination of investigative journalist Daphne Caruana Galizia eventually led to the resignation of prime minister Joseph Muscat, following EU pressure.

Despite a building boom linked to its Individual Investor Programme, which has attracted “hundreds of investors” pouring millions into social housing, health centres and hospital upgrades, there is a realisation in Valletta that things have to be done differently. Greater transparency and more dialogue with the EU are seen as key improvements. 

The Malta Individual Investor Programme Agency is in the process of being wound up, with a new unit being formed under the stewardship of Alexander Muscat, parliamentary secretary responsible for Citizenship and Communities. Mr Muscat says he has “liaised with many institutions, including the European Commission, to understand their concerns and how we might address them,” with “new regulations” taking account of these concerns. 

“There are many countries who offer similar opportunities, with far less stringent attention and due diligence processes,” says Mr Muscat. “Therefore, this opportunity may serve to strengthen the reputation of Malta’s financial services, rather than tarnish it.”

The authorities are keen to point out this is a new initiative rather than a strengthening of the previous programme. Action has started against four families granted passports under the previous regime. Two of these have already had their citizenship removed.

Jurisdictions providing citizenship in return for investments must be more proactive in implementing robust measures to improve due diligence processes, says Les Khan, CEO of the St Kitts and Nevis (SKN) Citizenship by Investment Unit. He is the first to admit that the global CBI industry has a “reputational issue”. 

The country whose Unit he heads, which launched its CBI programme in 1984 and today offers visa-free access to 156 countries including the UK and EU member states, is working hard to change the image. SKN is introducing biometric checks for all applicants, as well as checking their details against international law enforcement databases. This process will not stop after citizenship has been granted. 

“Once an applicant is approved, we continue to monitor them through our due diligence partners,” says Mr Khan. “In the case of negative information being received, the person’s passport could be withdrawn and ultimately, the citizenship cancelled.”

Nationals from countries on US and European sanction lists are automatically excluded from the CBI programme, as are citizens of other “countries of concern” including Afghanistan and Iran. Regional co-ordination is also increasing, according to CS Global Partners. Caribbean CBI jurisdictions now send files to CARICOM’s Joint Regional Communication Centre (JRCC), which works with international partners to flag persons on sanctions and other similar lists. Flagged files result in an applicant being rejected. 

Additionally, all Caribbean countries have provisions stating that if a person is rejected for a visa from any country with which the citizenship by investment jurisdiction has a visa-free treaty, then that person cannot obtain economic citizenship. An applicant can ‘cure’ a rejection by reapplying for a visa to that country. A further example can be found in Grenada, where legislation stipulates an applicant denied citizenship by investment in another Caribbean jurisdiction shall not be approved for citizenship in Grenada.

The Caribbean islands are not resting on their laurels, especially when it comes to working with international law enforcement bodies. Their governments understand that the “national interest” today lies in keeping a strong, transparent and clean reputation.

“We recognise that more can be done on this front,” stresses Mr Khan. “We look forward to working with our regional and international counterparts to cement the future success of the CBI industry, which is so crucial to our economies.”

Vital funds

The necessity of this money for island economies is not in doubt. CBI has helped transform SKN’s reliance on sugar cultivation to a more sustainable footing, developing tourism and allowing the country to invest in its national infrastructure. Direct investment has also been channelled into priority areas such as education, health, climate change resilience, infrastructure, and tourism. As a result of government investment in public services including law enforcement, there has been an annual 30 per cent fall in crime.

To accommodate record numbers of tourist arrivals, totalling more than 1m in 2019, EC$13.5m (US$5m) from the CBI Programme has been invested in the new cruise ship dock at Port Zante.

But perhaps the biggest indicator of the industry’s growing maturity is the recognition that it makes more sense for smaller countries to work together rather than compete for the same market. “We need to look in the mirror as an industry, not look at our competitors,” volunteers Emmanuel Nanthan, head of Dominica’s CBI unit. 

He is aware that for property developers in his storm-ravaged nation, CBI is the only viable channel for inward investment. If jurisdictions cannot preserve their integrity, the window for investment will be  limited. 

“These are trying times for the global industry. We should no longer look at what we do as single cells, but what we can do as a collective.”