Last week, the OECD and Financial Action Task Force (FATF) released a joint report titled “Misuse of Citizenship and Residency by Investment Programs.”
The 62-page report “examines money laundering and financial crime risks associated with investment migration programs,” among other issues such as corruption, bribery, tax, migration, and more. The report comes as a response to FATF Ministers’ call in April 2022 for greater focus on corruption.
FATF argues that citizenship and residency by investment are a breeding ground for misuse and corruption and that “criminals have exploited a range of vulnerabilities in CBI/RBI programs to perpetrate massive frauds and launder proceeds of crime and corruption reaching into the billions of dollars.”
FATF’s report highlighted the importance of RCBI to a country’s economy and touched on the complex nature of investment migration. It also acknowledged that RCBI programs are utilized correctly by many investors, as “These programs attract an array of clients, many of whom have gained their assets legitimately and have benign intentions.” It did, however, underline that “they can also be abused by criminals who seek to launder and conceal proceeds of crime or commit new offenses, including financial crimes, undermining these programs’ intended objectives.”
The report did mention global mobility as a risk, a matter that the EU Commission continues to emphasize is a security risk of RCBI, but it mostly focused on FATF’s area of expertise: Money laundering and fraud.
FATF argues that RCBI programs have a “range of vulnerabilities” that criminals can exploit to “perpetrate massive frauds and launder proceeds of crime and corruption reaching into the billions of dollars” or “hiding assets in less compliant or effective jurisdictions,” as well as evading arrest and facilitating organized crime.
Some of the possible routes for misusing citizenship or residency gained through investment, according to FATF, are:
- Placing assets and family members overseas to prevent or hinder asset recovery efforts
- Providing explanations for suspicious high-value transactions
- Enabling the movement of significant sums of illicit funds across borders
- Acting as a gateway to different financial systems
- The likely lesser scrutiny that comes with being a domestic (as opposed to foreign) actor within their new financial system
FATF also deems providing “new citizens or residents with access they might not have enjoyed by virtue of their original citizenship or country of origin” is a risk on its own. It also considers RBI to carry the same risks as CBI, albeit on a “slower basis.”
The report breaks down “Threat Actors” within the RCBI sphere into three main parts:
- Criminal Actors: Illicit actors may seek to launder illicit funds through an RCBI program as a means to obtain their citizenship or residency status.
- Investment Migration Ecosystem Participants: Service providers such as wealth managers, accountants, immigration agents, marketing agents, and property developers
- Corrupt Public Officials: Public officials operating in jurisdictions offering RCBI programs with inadequate program integrity or governance provisions.
The report dives deep into the workings of the investment migration industry and highlights all the possible gaps for corruption, pitting them against standard OECD anti-money laundering and criminal activity regulations. However, it is worth noting that the wording of the report is speculative, with the use of words such as “may lead to” or “can potentially” heavily used throughout.
FATF also uses “case studies” to drive home its points. The idea, while solid, falls short due to lackluster citation (FATF mentions the country of the case study as the source). Hence, verifying the authenticity of these case studies can be difficult.
This case study is a prime example:
“Box 3.1. CASE STUDY: Use of CBI to Purchase Foreign Real Estate The price paid by foreign investors to purchase real estate property for the purpose of obtaining the Cypriot nationality was well above their estimated market values. This higher price paid was in line with the provisions of the citizenship by investment program. The funds were transferred from a foreign bank account to the local developer’s account. Subsequently, it was observed that the developer (seller) would return part of the funds to a foreign bank account, back to the foreign investor. Therefore, the foreign investor had in fact invested a lower amount than required under the CBI program. Source: Cyprus“
Even case studies with more details are not easily found on the web. For instance, this case study regarding money laundering under the EB5 program has dates, amounts, and a more comprehensive story, but a quick web search does not yield an immediate result:
“Box 3.6. CASE STUDY: Laundering Funds Involving Defrauded Investors In November 2017, an attorney pleaded guilty to federal fraud and money laundering charges for participating in a multi-faceted scheme that collected more than USD 50 million from foreign investors seeking “Green Cards” through the EB-5 visa program. The attorney admitted that she exploited the EB-5 visa program, which provides lawful permanent residence – commonly known as a “Green Card” – to foreign nationals who invest at least USD 500,000 in a domestic business that creates 10 new American jobs.
The Attorney admitted that much of the money collected by the investment company from the primarily Chinese investors was either stolen by the conspirators or refunded to the foreign nationals. This undermined one of the basic principles of the EB-5 program because the money was not actually invested in the United States, nor did it lead to the creation of 10 new American full-time jobs, as required under the program.
The attorney further admitted that she fraudulently used hundreds of thousands of dollars in EB-5 investor funds to purchase homes in her name, including residential properties worth nearly USD 1 million each.
Source: United States“
Suggested Corrective Actions: Comprehensive Or Exaggerated?
FATF ends its report with seventeen pages of suggested corrective and preventive measures it believes RCBI programs should adopt to comply with AML and criminal activity regulations.
While comprehensive, it seemingly appears that FATF did not consider the elevated fees, processing time, or resources required to implement these changes and whether they would render RCBI programs unprofitable or undesirable to the non-criminal applicant. It even suggests prolonged monitoring of successful CBI applicants, tagging their passports with a CBI mark, and more, not taking into consideration whether these measures would align with a particular nation’s constitutional rights.
The suggested measures are too long to list here, but I have compiled a summary of the more pertinent ones:
Mitigation Measures to Address Money Laundering and Financial Crime
- A holistic approach to combating corruption and promoting integrity in RCBI programs.
- National funds managing CBI inflows should have clear accountability frameworks.
- Publicly disclose information on RCBI programs, including approved applications, applicant names, and revenues earned.
Measures Addressing Responsibility and Oversight
- Encourage delegating responsibility for passport issuance to a specific department or agency.
- Establish oversight agencies to supervise all parties involved in the application process.
- Designate a specialist government agency for the day-to-day operation of investment migration programs.
- Issue documents based on original and true name and place of birth to reduce the risk of identity laundering.
- Limit the number of qualifying applicants to focus on quality over quantity and ensure thorough background checks.
- Implement bans on aggressive/inappropriate marketing and time-limited discount investment offers.
- Establish firewalls between case decision-makers and immigration representatives/marketing agents to prevent corruption and conflicts of interest.
- Encourage jurisdictions to monitor CBI passports to prevent misuse by various criminal actors.
- Conduct periodic reviews of medium and high-risk applicants at least every three years, including due diligence.
- Ensure documents collected during Customer Due Diligence (CDD) remain up-to-date by reviewing existing records, particularly for higher-risk customers.
- Implement risk-based due diligence, recognizing that preventive measures may not always identify those planning criminal activities.
- Designate a review process for Suspicious Transaction Reports (STRs) with CBI tags and monitor trends for program-specific risks.
- Review approved applicant names annually against international law enforcement cooperation systems, Interpol, and international sanctions lists.
- Conduct regular checks against global sanctions registers for all active beneficiaries of investment visas or passports.
- Issuing jurisdictions could mark CBI passports as acquired through investment, facilitating regulated entities in identifying them.
An Evident Lack Of Experience, Or Possibly An Agenda
Throughout the report, FATF suggests corrective measures that are already in place in most RBI and nearly all CBI programs.
This oversight could have resulted from lackluster research or inexperience within the investment migration realm. It could also be a tool for brevity; FATF may not wish to list measures for every single program and thus just suggests everything it has and leaves it to the powers that be to decide which ones are needed for each program.
However, it could be a result of something more sinister.
By lumping all RCBI programs together, the report can highlight numerous gaps and measures that only apply to certain programs, and they could well be low-volume, undesirable ones.
Doing so could give the reader the subconscious impression that all RCBI programs are breeding grounds for corruption and misuse and that none of them operate according to high standards.
This may mean there is an agenda behind the report, one that aligns with the EU Commission’s well-known antipathy toward everything related to investment migration.
FATF suggests various measures that are already in place within the most popular CBI programs, such as:
- Use regulatory powers to permanently remove individuals and agents from participation in RCBI programs.
- Conduct cross-checks against law enforcement, intelligence, and immigration systems for adverse information.
- Set reasonable target times for application processing to allow for thorough background checks.
- License or register agents, ensuring compliance with AML/CFT requirements and professional standards.
- Conducting multi-layered due diligence checks
- Conducting in-person interviews
- Implement legal/regulatory measures for competent authorities to take corrective action when illicit actors gain access to citizenship or residency.
- Evaluate key risk factors such as applicant origin, professional background, PEP status, exposure to high-risk individuals, and source of wealth.
- Consider a range of penalties, including deactivation, revocation, and recall, for false or misleading statements.
There are more examples of existing measures that the report lists, and by talking about RCBI in general, it can merge the issues of any given program into the report and list the gaps or suggested corrective action without specifying the program.
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