The recent publishing of the Cyprus Papers by Al Jazeera has once again raised concerns that the investment migration industry could potentially be leveraged by convicted criminals and money launderers to obtain residency and citizenship outside normal channels. To outside observers, these headlines are further evidence that Citizenship and Residency-by-Investment (RCBI) programmes may be vulnerable to abuse and that certain governments may lack the oversight, or will, to implement sufficient controls to prevent criminal elements from benefiting from their programmes. Due diligence has been high on the agenda for the RCBI industry for years, but the lack of consistency and standardisation, especially on the residency side, continues to raise concerns and the related scrutiny from critics.
While many programmes have developed robust due diligence processes at levels appropriate to address money laundering and financial crime risks in the industry, there are many programmes that do little to no due diligence above-and-beyond simple verifications. Given the nature of investment migration, programme administrators should apply “enhanced” due diligence aimed at verifying self-disclosed information as part of the application but also understand sources of wealth, the applicant’s network, and a deep dive into any reputational issues.
What are the six signs that an investment migration programme’s due diligence is not good enough?
#1 – It doesn’t exist: Many programmes, especially the often-criticised residency schemes in Western Europe (i.e. Golden Visas) perform light-touch verifications and criminal checks but there is little tangible evidence any enhanced due diligence is performed. In fact, the European Union’s 5th Anti-Money Laundering Directive specifically designates applicants to RCBI programmes as “higher risk” which requires additional anti-money laundering controls, including the application of enhanced due diligence.
#2 – No one knows what the process entails: While some countries have recently disclosed their approach to due diligence in more detail, most RCBI programmes do not publicly disclose details about their vetting practices, governance or approach to compliance. This lack of transparency will continue to fuel speculation that little-to-no due diligence is undertaken. Greater disclosure of due diligence standards will not only allay criticism but may even discourage bad actors from approaching the industry.
#3 – It’s rushed: Proper due diligence takes time, especially in emerging markets where many applicants originate. While technological advances have facilitated data aggregation and risk assessments, verification of critical components of an RCBI application may still require in-person and on-the-ground checks. Newly established RCBI programmes often look to compete on processing times but rushing the due diligence process could lead to critical misses.
#4 – It relies on others: Increasingly, thought leadership on Know-Your-Customer (KYC) due diligence and the RCBI industry has called for more established on-boarding processes not only for government administrators but also for marketing agents. However, each organization in the application process must conduct a level of due diligence appropriate for their own relationship with a potential customer. Just because an applicant has been able to open a bank account in the jurisdictions where he or she is applying, does not mean that individual does not pose a risk. Bank-level due diligence is unlikely to be as detailed as best practices in RCBI.
#5 – Lacks local knowledge: Enhanced due diligence, particularly in emerging markets, requires research to be conducted in the local language by trained analysts familiar with the cultural and legal nuances of the applicant’s jurisdiction. Different regions pose different financial crime and reputational risks that require local knowledge to thoroughly identify and address.
#6 – Lacks monitoring: Due diligence provides only a “point-in-time” snapshot of the risks associated with an applicant, but risk profiles can change overtime. All RCBI programmes should have mechanisms in place to monitor individuals for changes in risk profile and establish processes to mitigate these risks. If an admitted applicant becomes involved in a financial crime or activities that may threaten the integrity of the RCBI programme, real-time monitoring can act as an early alert system.
As the RCBI industry continues to grow, international scrutiny will inevitably follow. Only programmes with robust, documented and auditable due diligence practices will be able to reassure outside critics their processes will disclose and prevent abuse. In addition to simply including due diligence in their workflows, programmes should increase transparency around their vetting practices and governance. Due diligence is not something that needs to remain a secret – in fact, openness and transparency will only solidify a government’s commitment to running a programme for the legitimate purposes of attracting high-quality foreign investment.
James is Senior Vice President of Exiger Diligence. He is a subject matter expert in anti-money laundering (AML), counter-terrorism funding (CFT), anti-bribery and corruption risk (ABC) assessments, enhanced due diligence (EDD), and politically exposed persons (PEP) screening.