Is this the death knell for EU “citizenship for cash” schemes?
Europe is increasingly concerned about individual countries granting EU citizenship rights in exchange for investment
It appears it's not just the UK that has concerns over European migration - the EU Commission has its own concerns as well. Vera Jourová, the EU Commissioner for Justice, gave interviews with leading newspapers across Europe in August 2018, sharing the Commission's concerns about the growth in “golden passports” schemes. These schemes allow non-EU nationals to obtain citizenship by investing sums of money into certain EU member states, commonly through real estate development or government bonds.
The Commission is especially concerned by the growth in citizenship passports from Russian nationals, as there are unanswered questions about the source of the funds for the investment.
What are the problems with these schemes?
“Citizenship for cash” schemes have caused growing tensions between member states and the EU Commission. Each state can set its own requirements, but the EU Commission is charged with reviewing and implementing pan-EU policies. The Commission has raised concerns that these schemes are weakening the strength of the Schengen Area, especially when the funds used to purchase citizenships could have their roots in corrupt practices such as money laundering. Each citizen of an EU member state is also an EU citizen; this affords them protections and benefits that are not available to third country nationals in the EU on working or similar visas.
The EU and its member states have been criticised for their response to the refugee crisis. By protecting some individuals and denying others protection they have faced accusations of discrimination based on wealth.
The growth in these schemes has been seen as a response to the financial crisis that dominated global markets and politics in the late 2000s. Countries such as the UK and non-EU states have been running “residency for investment” schemes for a lot longer, but these are less controversial as citizenship is not automatically given after the investment. This may just be semantics, given that in the UK, for example, an investor using one of the schemes can apply for citizenship one year after obtaining indefinite leave to remain. The investor must also have been living in the UK for a significant period of time each year, especially in the year prior to applying for citizenship.
The two countries that have received most criticism for their schemes are Cyprus and Malta. Third country nationals are able to buy citizenship without needing to reside in these jurisdictions. This then gives them access to the rest of the EU, so it is not surprising that the EU Commission has continued to comment negatively on these schemes.
Allegations continue to grow about individuals applying for such schemes and the checks on them and their money to ensure that both the letter and the spirit of such schemes are adhered to. In May 2018, The Guardian reported that Cyprus was hardening its checks after Ukrainian individuals accused of corruption had their applications approved.
These schemes continue to be available and are still favoured by nationals from countries high in the indices of corruption and money laundering.
What is the EU doing about these schemes?
The EU has not done much- so far. The European Parliament's TAX3 sub-committee submitted in November 2018 a draft resolution to phase out both the citizenship and residency schemes. This will inevitably result in increasing tensions between the European institutions and the member states that benefit from such schemes. The European Commission was scheduled to provide recommendations in November 2018, but as yet nothing has been published.
The European Parliamentary Research Service looked into these issues. Its report (published October 2018) suggested some options which are more likely to be palatable to the relevant member states, such as:
- improving fiscal buffers to make states less prone to requiring such investments
- full implementation of the anti-money laundering directives to improve due diligence
- improving transparency to enhance the reputation of such schemes by releasing data relating to these schemes
- governance and accountability changes to prevent firms cashing-in both ways by advising countries on the benefits of schemes, and then advising potential beneficiaries of these schemes as to their operation.
However, the report notes that this would only remove the economic concerns and not others, such as the impact on housing prices and the dilution of EU citizenship. For investors looking to remain in EU countries, it is unlikely that direct action will be taken but pressure will be put on member states to make such schemes more resilient and less susceptible to money laundering.
Where does this leave the UK?
It is of course impossible to write about something that impacts the UK as an EU member without mentioning Brexit. Being a member of the EU currently means that EU citizens can settle in the UK after five years; with the schemes mentioned, an individual can come to the UK within one year of making their investment, and then remain permanently after six years. If the money used to make the investment was criminally obtained, it stands to reason that the money would then flow to the UK and likely be tainted.
With Brexit and the ending of free movement either in the next couple of months, or next 18 months (depending on whether there is a deal), this will no longer be a concern for the UK.
However, the UK has its own schemes that allow individuals to obtain residency rights in the UK with some form of investment. The Migration Advisory Committee believe these schemes provide very little direct benefit to the economy, only by indirect taxation on those spending their money in the UK. The Home Office clearly sees some benefit, as this recommendation was not accepted for the recent Immigration White Paper. The UK requirements for citizenship have a high physical presence threshold, and in any event the discretionary nature of the grant means that the Home Office can deny citizenship if an individual does not meet the “good character” requirement.
Yet with the closing of the EU-based access, we may see growing numbers of applications under the Tier 1 schemes as individuals choose to come directly to the UK rather than through the EU first.
This has not escaped the attention of the Home Office which in December 2018 caused a stir by suspending then un-suspending the Tier 1 (Investor) scheme. Reports stated that there were concerns that the scheme was being abused by those trying to use laundered funds, and that planned reforms were to include auditing of the funds used in the investment. The money laundering and source of wealth concerns set out by the EU have struck a chord with UK officials.
Those advising high net worth individuals will know that the reforms to the Tier 1 scheme are expected in spring this year. We know the high level changes, such as the change from the Entrepreneur to the Innovator scheme, and the auditing requirement of the investor scheme funds, but we await the detail. It seems that the Home Office is – quite rightly, given its concerns and lack of capacity – trying to move a lot of the investigatory work to determine suitability onto those with specialist knowledge and skills, who can then certify an applicant as genuine with a clear source of funds.
We shall have to wait to see whether these changes will make any real difference, or will merely be a gloss that those with easy access to the funds will be able to easily get through.
Long live the “citizenship for cash” scheme
Given the lack of any real momentum in this area we do not expect to see the end of citizenship for cash schemes any time soon. There may be increased restrictions and checks, but the investment will be too valuable. The change to look for is to see whether high net worth individuals will consider the UK on its own outside of the EU as an attractive investment prospect. If London keeps its place as a strong financial centre, and property prices remain as they are or return to this level after an initial fall, the UK may well see more direct applications for Tier 1 schemes.
If this happens, the Home Office, its supporting agencies, financial advisers and banks will need to be ready to protect themselves from dirty money.
Head of Immigration
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