The 2021 CBI Index: EU CBI - due diligence and lessons learnt

A multi-layered due diligence system is an essential element of any successful citizenship by investment (CBI) programme, as it combines internal government checks with research by specialist third-party due diligence firms, and assessments by regional and international bodies. Failures in due diligence harm the reputation of a host country and its programme, and often have widespread consequences for the entire industry.

Due diligence concerns linked to European CBI programmes, for example, have led to tensions between CBI nations and the European Commission (EC). In a January 2019 report, the EC highlighted concerns related to the security, money laundering, tax evasion and corruption risks it believed these programmes posed. In October 2020, it commenced infringement procedures against Cyprus and Malta for granting economic citizenship to individuals without a ‘genuine link’ to the two countries, and again referenced the risks that it deemed “inherent in such schemes.”

Programme responses

Cyprus

Having made several attempts to improve its due diligence over the years, including by implementing a ban on ‘high-risk persons’ in 2019 and announcing new regulations tied to
anti-money laundering legislation in June 2020, years of lax vetting procedures have come back to bite Cyprus.

In August 2020, an investigative series by Al Jazeera revealed that Cyprus had granted citizenship to more than 50
high-risk or politically exposed persons since the Programme’s inception. Further, in October 2020, Al Jazeera published a video report, recorded one year prior, that seemingly evidenced the readiness of certain government officials and registered service providers to help applicants obtain citizenship in contravention of the Programme’s rules.

This revelation, coupled with the EC’s move to open infringement proceedings, ultimately led to the abolition of the Cyprus Investment Programme in February 2021. It is worth noting that despite this, the EC issued a reasoned opinion against Cyprus in June 2021, noting that although Cyprus is no longer accepting new applications, it has continued to process pending applications and that the matter may be escalated to the European Court of Justice.

Malta

Like Cyprus, Malta has also ended its longstanding CBI programme, the ‘Individual Investor Programme’, in the second half of 2020. However, unlike Cyprus, the Programme was closed because it had reached its prescribed application cap, and not because of mounting due diligence scandals. Indeed, in November 2020, Malta launched a wholly new CBI policy, enshrined in the Granting of Citizenship for Exceptional Services Regulations.

The policy aims at clarifying the ‘genuine link’ between applicants and Malta, requiring them to reside in Malta for either 36 months or 12 months (depending on the investment made), show physical presence in Malta, and build ‘connecting factors’. It also takes steps to improve due diligence, requiring applicant clearance from two external due diligence providers.

A June 2021 letter of formal notice from the EC concerning Malta’s latest policy only raised matters connected to the ‘genuine link.’

Bulgaria

EU scrutiny does not seem to have deterred Bulgaria’s parliament from approving several amendments to Bulgaria’s Citizenship Act in in February 2021, confirming that the Bulgarian Immigrant Investor Programme was alive and ready for remodelling.

Traditionally one of Europe’s less popular CBI destinations, it will be interesting to observe whether the changes lead to an increase in applications in the coming year. With no external component to its vetting procedures, Bulgaria would nonetheless do well to tighten its due diligence procedures and avoid the same pitfalls Cyprus was unable to address in time.

Montenegro

In March 2021, Montenegro announced that its short-lived CBI programme would be wound down by 31 December 2021 — the Programme ostensibly causing a barrier to Montenegro’s EU accession. It should be noted, however, that Montenegro’s decision may equally be tied to low uptake, with only 131 applications received, instead of the 2000 envisioned by the government.