EU study calls for improving due diligence and transparency with CBI/RBI schemes

CBI/RBI schemes usually refer to specific ‘policies developed by countries seeking to attract HNW people to become residents or citizens. The European Parliamentary Research Service has published a study on such schemes calling for improved due diligence in strengthening the schemes against tax evasion, AML and proposed some regulatory guidelines for the member states.

The Commission in the study placed a Strong emphasis on

• • Genuine link criteria provided by international law.
  • Integrity of the applicants, background checks and due diligence
  • Transparency of CBI/RBI schemes

Actions taken for Due diligence

The EPRS study has outlined the steps taken to improve background checks by countries offering CBI/RBI schemes. In the context of the allegations and ongoing investigations highlighted above, some Member States have tightened their background checks.

• In May 2018, Cyprus announced tighter vetting procedures and capped the number of passports it will grant to wealthy foreigners each year at 700.88 Under the new rules, applicants will be subjected to a process of enhanced due diligence. International agencies specialised in money laundering will also be deployed to examine requests under a procedure expected to take much longer than the initial three months. The Cyprus government also plans to impose restrictions on estate agents who act as intermediaries in the scheme.89
• In Italy, which introduced its residency scheme very recently, a ‘Nulla osta procedure’ has been put in place.90 In principle, application assessments are carried out by an inter-ministerial committee that includes representatives of the national FIU.91 Applicants need to demonstrate the origin of the financial resources destined for the investment/donation and the absence of criminal convictions and pending charges.92
• In Ireland, potential applicants must demonstrate that they own the funds they plan to invest and that these were legally acquired.93
• In Latvia, as mentioned above, more rigorous checks are applied since 2014. Applicants are screened by the competent authorities.94 More serious concerns about an individual’s background are handled by the security police.
• In response to the various allegations surrounding its CBI scheme, Malta has claimed to apply rigorous checks on the applicants, via 4 Tier due diligence checks.95 Firstly, a standard Know-Your- Customer (KYC) due diligence is carried out by both the Maltese authorities and the Agent through databases such as World-Check. Secondly, a certificate is requested from the police authorities, who check a number of databases (including the Interpol and Europol databases). Thirdly, the authorities check the completeness and correctness of the application and in addition, carry out an online due diligence check and verification of the documents submitted. Fourth, additional checks are carried out in international databases for sanctioned individuals and companies. Searches are conducted on all the members of the family applying for citizenship, their corporate affiliations, any significant one-time transactions, donations, or inheritance, and any significant business partners or very close associates.
• In Portugal, after the allegations of corruption mentioned above, the Inspector-General for Internal Administration (IGAI) delivered an audit report on the investment programme, which mainly criticized the application procedure.96 The scheme was amended to specifically list the documents to be accepted as proof for the execution of the investment. It was also required that the IGAI carry out a yearly audit, the conclusions and recommendations of which are to be presented to a parliamentary commission. Finally, the IGAI required production of a procedural manual for use by the Serviço de Estrangeiros e Fronteiras (SEF) staff.97
• In the UK, changes were introduced in 2014 following consultation and review by the UK’s Migration Advisory Committee.98 These changes included increasing the minimum investment threshold and giving the staff responsible for assessing the source of the investment funding more powers to check compliance and reject applications.99 In addition, applicants are now required to open a UK- regulated bank account for the funds to ensure they are ‘subject to UK due diligence and anti-money laundering checks’ before receiving a visa.

The Commission is expected to publish a report in late November 2018, which will include guidelines for Member States regarding their CBI and RBI schemes.

Future Guidelines

The study concluded that the European Commission may issue the following guidelines to protect the integrity of CBI/RBI schemes

1. Fiscal buffers

Fiscal buffers are essential when  economies are in a typical business cycle. They are even more necessary when our economies are coping with exceptional circumstances. During the financial crisis governments were forced to commit large funds to prevent the financial system from collapsing.

To help mitigate the negative macroeconomic impacts and decrease the external vulnerabilities of the schemes , the Commission could, as part of its European Semester, integrate specific recommendations on prudential regulation related to the pace of inflows to the private sector. The IMF has developed guidelines for building and implementing CBI/RBI schemes fiscal buffers in this respect, including measures on budgetary support and saving accumulation, savings drawdown for stabilisation, for exceptional spending or for large public investment/infrastructure projects.

2. OECD CRS due diligence

The circumvention of the CRS through the abuse of CBI/RBI schemes can be prevented by the correct application of the existing CRS due-diligence procedures.

• The requirement to have a real, permanent physical residence address (and not just a PO box or in-care-of address) for the application of the residence address rule and the necessity to confirm the presence of a real, permanent physical residence through appropriate Documentary Evidence;
• The requirement to instruct Account Holders to include all jurisdictions of tax residence in their self-certification.
• The rule that Financial Institutions cannot rely on a self-certification or Documentary Evidence if they know, or have reason to know, that such self-certification or Documentary Evidence is unreliable, incorrect or incomplete’

3. Due diligence and background checks

In parallel to monitoring Member States’ proper implementation of EU AML provisions, the European Commission could evaluate the efficiency and effectiveness of the Member States’ due-diligence procedures for prospective applicants in the context of their CBI/RBI scheme.

Due-diligence in the context of CBI/RBI schemes should aim to ‘establish the suitability of applicants, ensure the sources of the wealth which will be invested in the scheme originate from legitimate means, and uncover any risk factors which may negatively impact the programme’s integrity

4. Transparency

Better data collection is not only critical to forecast vulnerabilities induced by CBI/RBI schemes: it would also strengthen their reputation and sustainability over the long-term

To facilitate this process, the European Commission could provide some guidance on the transparency standards to be followed by the Member States. This could include making the most relevant information and data they hold publicly available, in at least an annual breakdown of:

• The number of main applications and their dependants received (by country of origin);
• The number of citizenship and residencies granted (by country of origin);
• The intermediaries involved in the process and their role;
• The amount of revenues earned;
• Statistics on the total number of accounts and the total account balance of account holders who appear not to be relevant for tax purposes in that jurisdiction, e.g. because they do not have to file tax returns in that jurisdiction

5. Governance

A clear and accountable governance framework is equally critical to ensuring the viability and reputation of CBI/RBI schemes with governance and accountability framework

• Clear guidance on how private firms operate in the sector of CBI/RBI schemes should be provided
• A structured exchange of information between Member States could be set up.

Read more about the study in europa.eu