Comment | FATF/OECD 'Misuse of CBI and RBI programmes' report

My summary & comments on the joint report by the Financial Action Task Force (FATF) and OECD, which gathers ideas and recommendations regarding the risks associated with Citizenship and Residence by Investment (CBI/RBI).

The key risk identified is money laundering, with a corollary of other financial crimes such as generation of illicit funds, unregulated money transmission and virtual assets. Examples listed:

? Establishing legal persons in jurisdictions with weak financial transparency and governance

? Investors moving themselves and family members to a different jurisdiction, which can enable evasion of arrest and complicate investigations

? Justifying large cross-border capital flows

? Misrepresentation of corporate risk - setting up a business away from their home jurisdiction, which would have granted a different corporate risk profile when subject to due diligence

The other key area of risk is integrity, especially in its declinations of corruption and tax transparency.

? Identity laundering - acquiring a new travel document, perhaps even changing names, which can be used to obfuscate the person's original identity

? Misrepresentation of security risk - acquiring a new passport to face less scrutiny by border officials

? Corrupt public officials - demanding or profiting from bribes, either monetary or as undue advantages

? Conflict of interest

? Hiding assets offshore and escaping reporting standards

A lot of actors are involved in the CBI/RBI supply chain, which means that a lot of things can go wrong. Typically, marketing agents first recruit prospective investors for these programmes. Investors might engage with financial institutions and accountants for advice on investment choices and the financial elements of the programme - at this stage, the capacity of the local banking sector and supervisory system may or may not weed out financially risky investors. Investors might then liaise with immigration agents, who pre-screen them and submit their documents over to the relevant CBI/RBI issuing country (subject to payment of commission fees). Investors might also rely on concierge firms, who arrange packages of services associated with the acquiring of a new citizenship - think private schooling for their children, property purchases and new business incorporation services. At this point (that is, after submission of their CBI/RBI application), specialised due diligence firms like the one I work at - Harod - are contracted to conduct identity and corporate background checks. Due diligence reports are sent directly to the residence/passport-issuing country's investment unit, who has the ultimate say on which investors eventually become residents or citizens of the country.

Of course, given my academic background, I cannot help but see the whole industry through the lens of trust. All these links are supposed to create a generalised sense of trust in the CBI/RBI chain - but clearly, the mere existence of this biting FATF/OECD report is a testament to a perceived lack of trustworthiness in the collective effectiveness of all industry actors.

The subcategory of risk I found the most interesting (and hardest to prevent) is premeditated financial crime. According to the report, illicit actors may obtain a visa or citizenship through investment programmes as an insurance policy before committing crimes or before these offences are discovered. In light of this potential risk, the only effective measure is ongoing monitoring of RBI/CBI recipients across multiple jurisdictions. This, however, begged the question - what is the actual number of approved RBI/CBI applicants that end up being confirmed as criminals? I searched and searched and could not find an answer. Approximate figures are provided in relation to Cyprus' schemes in Kristin Surak's book "The Golden Passport", where it is mentioned that a retrospective audit carried out by the Cypriot government in 2019 found nine red-flag applications, for a total of 26 citizenships granted out of more than 5000. A year later, when Al Jazeera released "The Cyprus Papers" in 2020, the names of 2500 people who had naturalised through Cyprus' CBI programme were leaked, but local investigations found that only 1.7% of the naturalisers fell afoul of the rules. In light of this (limited) data, the report could have specified more clearly that there are at least some effective mechanisms of control in the industry. The only anecdotal data provided in this report is a collection of case studies without proper citation, as already highlighted on Investment Migration Insider.

Hence, I reckon that the biggest challenge to the industry's trustworthiness is actually the lack of transparency in data sharing. To increase accountability, countries running CBI schemes and CBI industry actors should share statistical information on applicants and their demographics, number of applications approved, size and type of investment and information about the use of investors' funds - all points extensively advocated for in this FATF/OECD report.

Finally, a point only touched upon briefly in the report but very dear to me is the employment of language-informed search tools and protocols when performing due diligence. We don't have granular statistics on the nationality of CBI applicants, but we know that they cluster in three areas: China, Russia, and the Middle East (COMPAS Working Paper No. 159). If the investigators do not speak Mandarin/Russian/Arabic/Persian, or if the effectiveness of due diligence tools has not been tested or is not being complemented by speakers of these foreign languages, the integrity of due diligence could be impacted. This is because the application documents provided by investors are typically closely associated with and presented in the language of their jurisdiction of origin - language-agnostic tools function well if paired with human investigators who are aware of the linguistic, administrative and legal nuances of the target jurisdiction. Even better, investigators from diverse backgrounds (financial professionals, law enforcement, caseworkers, linguists) should all join forces and reach where the other one cannot.

Hope you found this summary & comment insightful, and do read the full report for more specific examples of crimes and misconduct associated with investment migration!