The European Parliament Votes to Ban Such Programs, with Immediate Effect as to all Russian Applicants
On March 9, the European Parliament (“Parliament”) voted overwhelmingly to limit citizenship-by-investment (“CBI”) programs in the European Union. The vote, formally adopting a report by Sophie Int’ Veld, a Dutch Member of Parliament (“MEP”), calls on the European Commission (“Commission”) to enact legislation to phase out CBI programs and establish strict regulations governing residence-by-investment (“RBI”) programs.
Consistent with sweeping sanctions levied against Russia and affiliated entities and individuals in the wake of that country’s invasion of Ukraine, the Parliament is additionally calling for an immediate end to the processing of all Russian applicants of CBI/RBI programs. The Parliament is also calling for EU members to “reassess” all approved applications from Russian citizens from the past few years to ensure that “no Russian individual with financial, business or other links to the Putin regime retains his or her citizenship and residency rights.”
As we will discuss, the risks for countries implementing CBI/RBI programs are significant, not least of which is the potential facilitation of corruption and money laundering. As the Parliament noted in its report, these risks often cannot be properly assessed due to a lack of transparency and are not sufficiently managed, resulting in weak vetting and a lack of due diligence.
CBI/RBI Programs: Inherent Benefits and AML Risks
As with any ordinary luxury item, wealthy individuals can purchase citizenship and residency rights. CBI/RBI programs provide an avenue through which, in exchange for a financial contribution to the host country, wealthy individuals are offered citizenship or legal residency. The specifics of these programs varies across jurisdictions, but most involve an initial investment, in the public or private sector or in real estate, combined with fees and an amount to cover due diligence costs. For example, Dominica, a small nation in the Caribbean, offers citizenship through payment to the government’s Economic Diversification Fund of $100,000 for an individual or $200,000 for a family of four, or through an investment in real estate valued at a minimum of $200,000. European CBI/RBI programs implemented in Austria, Bulgaria, Cyprus and Malta represent the higher end of the market. According to a report from Transparency International, the average cost of citizenship for these nations is about $1 million.
Potential benefits of CBI/RBI programs are manifold. Permanent residence allows successful applicants of programs implemented by EU states and the Caribbean nations of Saint Kitts and Nevis, Grenada, Dominica, Saint Lucia, and Antigua and Barbuda to freely enter the EU Schengen Area (a bloc of 26 countries that have officially abolished all passport and other border controls at their mutual borders) and the U.K., without having to apply for a visa or undergo any additional screening by authorities in the EU. A grant of citizenship confers even more rights and privileges, in particular the right to obtain a national passport. Unlike residency, citizenship has no time limitations, is valid for life, and is inheritable; it is revoked only in rare and exceptional cases.
There are more than 100 nations that offer some form of CBI/RBI program, according to data from the Organisation for Economic Co-operation and Development (“OECD”). A number of these programs are relatively new: for example, about half of the OECD countries have implemented programs since the 2008 financial crisis. The reason is simple: as discussed, CBI/RBI programs can generate substantial revenues, particularly for small island nations like Cyprus and Malta. Transparency International estimates that Cyprus has raised more than $5 billion since 2013, while Malta has realized about nearly $1 billion since 2014.
As noted, CBI/RBI programs can present corruption and money laundering risks. Indeed, one of the most famous fugitives in the world, Jho Low – the Malaysian banker allegedly behind the massive 1MDB scandal, now sought by the U.S. (and multiple other countries) for various crimes, including money laundering – acquired Cypriot citizenship despite background checks raising several red flags.
Notably in 2020, Cyprus announced its decision to terminate its CBI program, in part, due to findings by an independent government commission finding that “safeguards and proper legal guidance were absent, as were adequate checks, even according to the existing laws and regulations.” Using a secondary residency or citizenship may also complicate due diligence efforts or the enforcement of sanctions, as they may not trigger sanctions alerts or the enhanced scrutiny sometimes applied to citizens of certain countries.
It thus stands to reason that the risks inherent in CBI/RBI programs arise from the structure of these programs themselves. No matter the host country, the key criterion of eligibility is a pre-defined financial contribution that takes place once with, arguably, no requirement of a meaningful or long-term nexus between the investor and the host country. Moreover, countries with CBI/RBI programs have likely been tempted by the prospect of fast economic gains, and have not always taken into appropriate consideration the associated risks. For example, an investigation into CBI programs by the Daphne Caruana Galizia Foundation and other media organizations found that CBI applicants received Maltese citizenship after spending just days in the EU state, and that some investors met the one-year residence requirement by renting empty properties.
Russian Invasion Renews Call to End the Purchase of Citizenship
Members of the Parliament have been calling for the termination of CBI programs since 2014, but the issue is gaining renewed focus in light of the Russian oligarch’s penchant for such programs. For decades, CBI programs have attracted Russia’s wealthy citizens, purchasing passports through real estate investments that are often secondary to the passports themselves. In January, Portugal opened an investigation into Roman Abramovich, the current owner of the Chelsea Football Club and a one-time Kremlin official, reportedly close to Putin, and his successful bid to become a Portuguese citizen (the probe was reportedly triggered amid criticism that the law offering naturalization to descendants of Sephardic Jews was being misused by oligarchs).
Separately, Irina Abramovich, the ex-wife of Roman Abramovich, was implicated in a report published in The Guardian, in connection with her application for Maltese citizenship (it was reported that Ms. Abramovich was one of 851 Russians to seek Maltese citizenship under a program facilitated by a consultancy firm, according to a leak of the firm’s data). While most countries with CBI/RBI programs do not disclose grants of citizenship or residency, the data suggests that CBI/RBI programs have proven most popular with Russian nationals. For example, one study determined that in Cyprus, 19.6 percent of the people naturalized in 2018 were Russian, and in Malta, Russians constituted the third-most common nationals to naturalize in 2018.
On February 26, the European Commission, France, Germany, Italy, the United Kingdom, Canada and the United States committed to “limit the sale of citizenship… that let wealthy Russians connected to the Russian government become citizens . . . of our countries and gain access to our financial systems.” In the press release issued by the Parliament regarding its vote of March 9, Vladimír Bilčík, MEP for Slovakia, stated, “We must ban the sale of EU passports and stop the flow of Russia’s dirty money into the EU.” In ‘t Veld, the MEP who serves as rapporteur on the issue, similarly stated that CBI programs “only serve to provide a back door into the EU for shady individuals who cannot enter in broad daylight. It is time we closed that door, so that Russian oligarchs and other persons with dirty money stay out.”
To that end, the Parliament has adopted six proposals for the Commission to incorporate in formal legislation. Certain of these include:
- EU-wide “gradual phasing out” of CBI programs by 2025.
- Comprehensive regulation covering all RBI schemes in the EU, including the establishment and verification of minimum physical presence requirements.
- The addition of “public authorities engaged in processing applications under RBI schemes” to the list of obliged entities under anti-money laundering and countering the financing of terrorism laws.
- An assessment of a non-EU country’s CBI schemes as “a factor when deciding on the third countries whose nationals are exempt from visa requirements.”
Although there is good reason to welcome the Parliament’s renewed effort to curtail the purchase of citizenship or residency, the outcome is far from certain. In addition to procedural hurdles the Parliament’s proposals are likely to encounter, potential other problems abound, not least of which is the impact such measures are likely to have on nations relying on CBI/RBI programs as a vital source of revenue. “Is it unfair to ask Malta to scrap the scheme? I don’t know. Is it fair for Malta, or other countries, to create that risk to the EU? I don’t think so. It’s very difficult for small countries whose revenue streams depend on this . . . I understand it is painful but it is not fair to European citizens, and Ukrainians at this point,” In ‘t Veld, said in a press conference. In any case, it is unclear what impact, if any, the measure will have on CBI/RBI programs implemented in other countries, namely the East Caribbean nations of Saint Kitts and Nevis, Grenada, Dominica, St Lucia, and Antigua and Barbuda, and the likelihood that Russian applicants no longer welcome in the EU will look to these nations for reprieve.