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Due Diligence in the Context of Investment Migration Programs

Damien Martinez

Damien Martinez is the Chief Executive Officer of Facepoint in Paris, France

Several countries around the world offer economic citizenship or investment migration programs to attract global investors. In return for making an investment in the country, the investor receives citizenship and a passport. Investment may be indirect investment, which generally requires naturalization by a period of residence, or through a direct program involving a donation to charities, purchase of real estate, or investment in a business. Each program has mandatory conditions that must be satisfied before citizenship is granted but these vary by country. In some countries, the applicant has no obligation beyond the investment. It is critical that every country clearly understands the background and verifies the good character of its applicants, as well as confirming that the source of funds invested is not from money laundering, drug- or human trafficking, or other criminal activities.

Countries that offer these programs hope to benefit by stimulating their economies through the capital invested, as well as through the deployment of the skills and experience of the program applicants. Different programs have different degrees of state involvement in the investment. Certain countries may require the applicant to make a capital contribution to the state. This is the case in Antigua and Barbuda, Dominica, and St. Kitts and Nevis. The investment can be in the form of a donation to the state (as in Antigua and Barbuda, and Dominica) or to a state charity (as in St. Kitts and Nevis). The country may require the applicant to make an investment in the economy. From a due diligence perspective, the nature of the investment determines the degree of involvement by the state.

Regardless of the level of state involvement in the funds once received, there is a significant reputational risk for the country if it later becomes known that these funds have not been legally obtained. If a thorough due diligence process is not conducted on applicants, this not only puts the country’s international reputation at risk but there may be consequences for all its citizens, such as visa restrictions applied to all its nationals by other countries. This also risks the future viability of the investment migration program should the country become less attractive to legitimate applicants. Political fallout can also be severe.

The motivations for investors seeking economic citizenship can be grouped into four general categories: the need to survive for political or national refugees from countries affected by civil war, natural disasters, famine, or similar events; the desire to travel to access business and other opportunities; the opportunity for individuals to enjoy full civil rights, such as voting, buying property, and the right to work and/or benefit from a more favorable tax regime; and the desire of criminals (suspected or confirmed) to escape justice. By establishing a robust due diligence process, states welcoming new citizens verify applicants’ motivations for acquiring a new passport. In any case, the new citizenship may be granted for the wrong reasons. Our era of transparency does not forgive states taking unnecessary risks, especially when it comes to citizenship and sovereignty, hence the extreme importance of conducting due diligence processes when evaluating an application.

In reality, an investor’s motivation can be a combination of two or more factors. The categories themselves are strongly interdependent and difficult to differentiate. It is critical that investment migration program administrators conduct sufficient due diligence on applicants to ensure that their motivations and sources of funds are clearly understood. This is a key step in differentiating between a political refugee, a person seeking legitimate tax benefits, and a terrorist or money launderer. Clearly, each category has different implications for the country. The risk of harboring undesirable applicants has led to a proliferation of treaties on international cooperation as well as extradition agreements.

If a country inadvertently grants citizenship to terrorists, money launderers, or other criminals, the reputational damage it is likely to suffer will decrease its attractiveness to other law‑abiding investors, damaging the prospects of its investment migration program. There is a reputational risk to a country if it is shown later to be ignorant of the source of any money invested in it via an investment migration program. Stimulating a country’s economy with the proceeds of crime is never a good idea. The country also runs the risk of being accused by other countries of harboring criminals. Corruption risk is also likely to increase should criminals identify that country as a good prospect for second citizenship. Government officials involved in the investment migration program are likely to be targeted with bribes.

Countries may also face consequences from international institutions such as the UN or the Financial Action Task Force if evidence of due diligence or other such information is requested and the country cannot provide it. Such actions could have serious political, reputational, and financial consequences for the country. There is also a continual increase in regulatory requirements, many of which affect citizens outside the countries enacting them. The USA’s Foreign Account Tax Compliance Act, for example, requires individuals to report their offshore financial accounts and obliges foreign financial institutions to report to the USA’s Internal Revenue Service regarding their American clients. With the increase in regulations, countries need to ensure that where they have an obligation to ensure compliance, they do so. At the same time, increased regulation means an increase in people and entities who fall foul of these regulations and must be flagged as non‑compliant or recalcitrant.

A country therefore needs to have strong procedures in place to ensure that it is able both to keep away undesirable investors and ensure that it complies with international regulations and guidelines. It is very clear that countries need to demonstrate their commitment to thoroughly understanding the background, source of funds, and likely intentions of investment migration applicants. At the very least, the procedures should include verification of identity, background checks, and research based on the applicant’s nationality. It is also essential to check international databases and those of other countries to ensure that the subject does not have an undeclared second nationality. The country would also have to check that applicants are not subject to sanctions and establish whether they have a criminal record in another country.

Certain flags indicate the need for enhanced due diligence. While every applicant needs to be carefully screened, there are certain indicators that should lead to a deeper investigation through enhanced due diligence. These include: persons residing in or having funds sourced from countries identified as having inadequate anti‑money laundering standards or representing high risk for crime and corruption, and persons engaged in types of economic or business activities or sectors known to be susceptible to money laundering.

Financial institutions are required to apply due diligence to the process of understanding their customers through Know Your Customer (KYC) obligations. These arise from Organisation for Economic Co‑operation and Development recommendations, country‑specific requirements, and international regulations such as the USA PATRIOT Act. Investment migration program administrators face challenges similar to financial institutions in approving applications quickly and cost effectively, although the consequences of inadvertently approving the wrong applicants are severe. Taking the learning and experiences of KYC can help to transfer best practices to Know Your Immigrants (KYI). Where financial institutions have established effective methods to acquire new customers safely, these could be adapted and enhanced for use in investment migration programs.

Residence and citizenship programs are often seen by countries as a way to attract skills and low‑cost funding and stimulate the local economy. Potential applicants may view these programs as a welcome chance to access many benefits they may not enjoy in their home country, or to escape from unpleasant or dangerous conditions at home. Unfortunately, terrorists, money launderers, and other criminals often try to take advantage of these programs to circumvent travel restrictions, ‘launder’ their reputations, and evade justice. Where this happens, countries run the risk of severe reputational damage, international criticism, and sanctions.

Financial institutions provide a useful precedent for government departments running investment migration programs. By adapting global best practice in KYC into KYI, program administrators can benefit from years of experience and development. By relying on objective country‑risk rankings, aggregated risk intelligence for screening applicants, and enhanced due diligence reports for deeper investigation, government departments can apply best practice KYC principles to immigrant screening while streamlining their processes. This will provide assurance to public servants and citizens alike that applicants are being screened effectively, quickly, and cost efficiently.

Damien Martinez is the Chief Executive Officer of Facepoint and the former director of Government, Risk and Compliance Western Europe at Thomson Reuters. He is the co‑author of the biography Zarqawi — The New Face of Al‑Qaida, which has been translated into eight languages. He is a regular participant at conferences in the fields of terrorism and economic crime and has worked on the topic of diligence in the course of Economic Citizenship programs.

He is the former head of Terrorism Financing Prevention for the Credit Suisse Group. While at Credit Suisse, he served on the Wolfsberg Group, a professional association of 11 leading global banks, which aims to develop financial services industry standards and related products for KYC, anti‑money laundering, and counter‑terrorist financing policies.

Prior to his time at Credit Suisse, he spent several years with the Federal Office of Police of Switzerland working with the Federal Counter‑Terrorism Unit and Serious Crimes, and served as a member of Interpol’s Group of Experts on Terrorism. He participated as an expert on the Counter‑Terrorism Implementation Task Force under the lead of the UN Office on Drugs and Crime. Before this, he worked as a special investigator with the September 11 Class Action, representing more than 20,000 family members affected by the terrorist attacks.

Note: This expert commentary was written in 2015. None of the due diligence prerequisites have changed since then.

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