The European Commission presented a new package of legislative proposals on 20 July to strengthen the EU’s anti-money laundering and countering terrorism financing (AML/CFT) rules, which includes adding “operators involved on behalf of third country nationals in the context of investor residence schemes” to the range of entities defined as ‘Obliged Entities’ and therefore subject to the EU AML/CFT regime.
Sovereign welcomes this proposal for Residency by Investment (RBI) programmes. It will enforce much higher due diligence standards on all parties working in the RBI sector and is largely in line with the recommendations of the Investment Migration Council (IMC), which works to promote best practices within the industry.
Regarding Citizenship by Investment (CBI), however, the proposal states in a footnote: “The Commission considers that investor citizenship schemes, that is, schemes that offer citizenship of a Member State in exchange for pre-determined payments and investments, do not comply with the principle of sincere cooperation (Article 4(3) TEU) and the fundamental status of citizenship of the Union as laid down in the Treaties (Article 20 TFEU). As a consequence, the Commission does not propose to regulate such schemes.”
The IMC, which supports a ‘rule of law-based approach’, believes this position is unacceptable because it is simply restating (almost word for word) the Commission’s argument in ongoing infringement procedures against Cyprus and Malta (which were opened last October) in respect of their CBI schemes rather than reflecting EU law itself.
Cyprus closed its CBI scheme to new applications on 1 November but continued to process pending applications. As a result, the Commission said the concerns set out in its letter of formal notice had not been properly addressed and it was therefore taking the next step in the procedure by issuing a reasoned opinion against Cyprus.
Malta also closed its previous Individual Investor Programme (IIP) last October – having reached the cap of 1,800 applicants – but then established a new scheme at the end of 2020 that restricts citizenship applications only to individuals who first manage to obtain a Maltese residence permit. The Commission decided to issue an additional letter of formal notice in respect of this new scheme.
Both these schemes have attracted a great deal of press coverage, most of it negative. In particular, critics have pointed to a systemic problem in respect of applicants failing to properly fulfil the residency requirements.
Malta reached an agreement with the Commission in 2014 that applicants would be required to have ‘genuine links’ to Malta through the introduction of an effective residence status in Malta prior to naturalisation. No certificate of naturalisation would be issued unless the applicant provided proof that he/she had resided in Malta for a period of at least 12 months immediately preceding the day of issuing of the certificate of naturalisation.
But as the IMC has previously stated: “The concept of ‘genuine link’ that was invoked by the EU is both vague and arbitrary. The European Court of Justice already found in earlier decisions that it is not relevant. It is therefore unlikely that the European Court of Justice would rule in favour in the matter at hand, as this could have very serious secondary consequences, and could open the way for the EU to encroach on the power of granting nationality, which is reserved, in EU Law, for Member States.”
EU law stipulates that matters of residency and citizenship are a sovereign issue and so, within the industry at least, the general belief is that there is no basis for legal action against a member state that offers such programmes.
Whilst I understand that some commentators and politicians do not support CBI schemes, their reasoning is often based on outdated and/or inaccurate information and a fundamental misunderstanding of the difference between ‘legal’ rather than ‘physical’ residency. The requirement to ‘reside’ refers to an applicant’s residency status and not their actual physical presence in a jurisdiction.
In my personal experience, international clients seeking to utilise these programmes are doing so for legitimate reasons; to provide better opportunities for themselves and their families, to enhance their mobility, personal security and quality of life. From a governmental perspective, RBI and RCI schemes are a source of much needed debt-free foreign direct investment and attract people with proven business success and valuable networks who will help to enrich their economies and citizens.
The economic disruption created by the Covid pandemic will only have served to make these programmes even more attractive. Several new countries are considering establishing migration programmes whilst those that already offer them are committing money and resources to update them and implement more robust vetting procedures to ensure that only suitable applicants will be accepted.
As a professional member of the IMC, I work with them to promote best practices within the industry. The consensus within the IMC is that concerns regarding money laundering and corruption need to be addressed through a professional and compliance-based approach and that, eventually, this will be required and expected by both the authorities and clients alike.
The Sovereign Group is strongly in favour of more effective regulation. Many firms currently offering services in this market are highly sales-oriented, with little or no experience of developing and implementing comprehensive due diligence and compliance-based practices.
As the holder of multiple trust and corporate service provider licences around the world, Sovereign has the mindset, expertise and resources to provide compliant residency and citizenship services in a more highly regulated environment. We therefore welcome the European Commission’s proposal but hope that it is soon expanded from RBI to cover CBI as well.