E.g., 12/08/2022
E.g., 12/08/2022
Rollback of 'Golden Passports' Shows Their Elusive Shine

Rollback of 'Golden Passports' Shows Their Elusive Shine

A man presents cash inside a passport

A man presents cash inside a passport. (Photo: iStock.com/nito100)

Little more than a month after Russian forces invaded Ukraine in early 2022, Bulgaria, Cyprus, and Malta began to heed the call of the European Union’s institutions advocating the abolition of “golden passports” by cracking down on Russian oligarchs, who were among the key beneficiaries. Formally known as citizenship by investment (CBI) programs, these schemes enable individuals to become citizens of a country by means of an economic contribution, often without any other substantive conditions such as residency periods, local language knowledge, or civic tests.

These programs have been a heated topic in the European Union ever since October 2013, when Malta decided to offer its passport in exchange for investment in the country’s economy. Its Individual Investor Program ran between February 2014 and September 2020, and that November the country introduced a new route for investors to receive citizenship after three years of residence, which could be reduced to one year on the basis of providing “exceptional services.” The pushback from EU institutions against these schemes has been driven by three main concerns: that national citizenship is a gateway to rights such as free movement across the bloc, that these programs often lead to corruption of public officials, and that investors do not have a genuine connection with their new country. In late September, the European Commission referred Malta to the Court of Justice of the European Union, claiming its program was incompatible with the concept of EU citizenship and violated the Treaty on European Union.  

Previously, these concerns did not substantively resonate with Bulgaria, Cyprus, and Malta, but security unease amidst the war in Ukraine did. Bulgaria and Cyprus have since discontinued their CBI programs; Malta has fully abolished it for Russian and Belarussian citizens. On top of that, authorities of Cyprus and Malta have already initiated several withdrawals of investment-based passports previously granted to sanctioned Russians and Belarusians supportive of the war in Ukraine; at this writing, Bulgarian authorities were reviewing the beneficiaries of their CBI program to see if any were under sanction.

CBI programs are a part of a much broader phenomenon of investor migration, which also includes the more widespread “golden visas,” or residence by investment (RBI) programs. These kinds of schemes enable investors to gain residency rights in a country by purchasing a house, as is the case in Greece, Portugal, and Spain; making a financial investment, as in Canada, Ireland, and the United Kingdom; or creating a certain number of jobs, as required under the American EB-5 visa.

Unlike the RBI programs, which frequently require investors to effectively migrate to the destination country, CBI documents are often used only for international mobility or as insurance. So why are they so controversial?

This article discusses the history of citizenship by investment, the main beneficiaries of CBI programs, the benefits and criticisms associated with them, and what the future might have in store for these programs.

Are “Golden Passports” a Novelty?

Investment-based citizenship is often perceived as a new phenomenon. Yet obtaining legal status through wealth is not a historical novelty. Romans, too, offered citizenship to men who could afford it, provided they also met other requirements such as residence, ethnicity, and military service. Things have changed since. Nowadays, a financial contribution is all that is needed to secure the passport of a country running a CBI program. The amount can be as low as USD 100,000, as in the Commonwealth of Dominica. It can be as high as 3 million euros, as was required in Cyprus in 2014 and 2015 to address consequences of the 2013 international bailout from the financial crisis.

What has caused this development, where is it possible to obtain citizenship in exchange for an investment, donation to the government, or real estate purchase, and why?

The first modern-day CBI programs emerged in islands in the Caribbean and the Pacific, shortly after they became independent from large colonial powers. The process of decolonization took a particular toll on these microstates. As a result of their small size, unfavorable climate and terrain, or remote geographic location, these new nations were faced with major economic adversities, often threatening their survival as sovereign states. These conditions stimulated the sale of passports in the Marshall Islands, Nauru, Samoa, Tonga, and Vanuatu in the 1980s and the 1990s. Such practices were often done informally by public officials, who would provide investors with passports short of full citizenship. For instance, people who leased land in uninhabited parts of Tonga would receive a Tongan Protected Person Passport (TPPP). This document did not give holders the right to enter the country or live in it but rather served as a travel document.

The first official CBI program was established by Saint Christopher and Nevis in 1984. In the years that followed, the island state introduced legislation that enabled the grant of citizenship for those who invested in real estate or donated to special funds. One such fund was aimed at diversification of the workforce previously employed in the country’s now nonexistent sugar industry. In the two decades that followed, citizenship by investment was an oddity, confined mostly to tropical islands. It was an issue that attracted hardly any public attention.

The scene changed substantively with the 2008 global financial crisis, which drew a number of countries towards alternative mechanisms for raising revenue, including the development of three main investment migration routes. More than 140 states have general provisions in their existing citizenship laws to naturalize individuals who contribute to their national interest, such as artists, athletes, scientists, and investors. A few other countries such as Bulgaria, Cyprus, Malta, Moldova, Montenegro, and Turkey developed CBI schemes similar to those in the Caribbean and Pacific states. And a majority of the world’s countries opened routes for investors—coupled with tax relief—to become residents, with the possibility of obtaining citizenship after a number of years and subject to meeting language, civics, and other requirements.

Discretionary provisions in citizenship legislation, CBI, and RBI programs have often been conflated, despite having distinct roots, objectives, and target beneficiaries, and despite raising different concerns in the context of good governance (such as corruption and money laundering) or the economy (such as skyrocketing real estate prices).

The Growth of a Citizenship Industry

Lack of understanding of the different ways in which CBI and RBI schemes operate has, in part, been caused by the growing market for investor citizenship and residence. Over the past two decades, this market has given birth to and raised a citizenship industry composed of companies that act as intermediaries between states operating these programs and individuals seeking to benefit from them. This industry includes large multinational companies such as Arton Capital, CS Global, and Henley and Partners, which often provide a wide range of services to states including designing and marketing the new program or running it through a concession. These companies may also offer their services to individuals to assist with the application, manage funds, or lease and purchase property. The industry has also branched out through specialized firms such as BDO, Exiger, and Thomson Reuters, which are engaged in due diligence of applicants, or Astons and JM, which manage real estate purchases. The industry’s final component is local law firms and agents, which facilitate investor applications through their knowledge of the language and the local context.

Citizens used to be unaware of the growth of this industry. That is until they read an in-flight magazine in which companies acting as intermediaries advertised specific programs and their own services, or passed through the Zurich Airport where until recently the passport of Malta was displayed in a shop window next to a luxury watch retailer. The industry is no longer unknown, due to a combination of factors including new marketing strategies and engagement of intermediary firms with the media. There has also been a growing public interest in the profile of beneficiaries, corruption scandals, and public protests associated with these programs.

A Connection to Mobility and Life Opportunities for a Select Few

As the international order became reconstituted after World War II, the governance of cross-country mobility became highly diversified. With the growth of global interconnectedness, possessing a particular passport determined the number of countries one could access, the countries in which one could settle, and where one could do business. Passports became connected with mobility and life prospects—both highly unequal around the world and both very much dependent on one’s birth. The increasing tolerance of dual nationality since the 1960s also enabled individuals to acquire additional passports without losing that of their country of origin, as had previously been the case.

Those obtaining citizenship by investment are, however, a tiny minority compared to the total pool of people who become citizens of a foreign country. This is nearly always the case in countries that grant citizenship to investors on grounds of national interest, where numbers are capped (for example Estonia limits these to ten applications annually) or where parliamentary approval is required, as in Bulgaria and Latvia.

The exact numbers of people who obtain citizenship through official CBI programs in most cases are not in the public domain. The majority of countries have no reporting obligations and public authorities are often slow or unwilling to provide the information. The background study for a 2019 European Commission report revealed that 12 applications were approved in Bulgaria in 2017 and at least 738 were approved in Malta from the program’s launch in 2014 until 2017. While no information on the number of applications in Cyprus was available in the report, a subsequent Al Jazeera investigation discovered that between 2007 and 2020 Cyprus granted citizenship in 6,779 instances to investors, mainly of Russian origin. In September 2020, Malta’s authorities confirmed that program reached its 1,800 approved applications cap; the more recent program is capped at 400 certificates annually and 1,500 overall, however there is no information on how many have been granted so far.

Numbers of those who obtained a passport from countries outside the European Union are even more difficult to ascertain. Grenada and Antigua and Barbuda reported 303 and 330 applications respectively in 2017; in 2018, the government of St. Kitts and Nevis reported that, since the opening of the program in 1984, a total of 16,544 investor citizenships had been granted. After lowering the investment threshold to USD 250,000 in 2017, by September 2021 Turkey had granted 7,242 passports to foreign investors, mostly of Iranian, Yemeni, Afghan, and Iraqi origin.

Whose Passport Is “Golden”?

Different passports come with different opportunities. Being born a U.S. citizen or a citizen of an EU country comes with substantively more personal and travel freedom than, for instance, being born as a Kosovan or Congolese citizen. This fact sets the financial parameters of the global market for investor citizenship and has a major impact on the structure of beneficiaries.

Unsurprisingly, “price tags” on passports of Bulgaria, Cyprus, and Malta were substantively higher than those of the Caribbean and Pacific countries, or of Moldova, Montenegro, and Turkey. The program running in Malta between 2014 and 2020 entailed an overall investment in the range of 1.15 million euros, and the one introduced in 2020 refers to an unspecified direct investment. Cyprus, which required investments between 2 million and 3 million euros between 2014 and 2022, had the scheme with the highest contribution. These two CBI programs directly offered rights of EU citizenship, such as free movement across the European Union. Passports of Cyprus and Malta also grant visa-free access to 176 and 183 countries, respectively, slightly more than the 173 accessible to holders of a passport from Bulgaria, where the recently terminated CBI program required an investment in the range of 500,000 euros.  

The combination of the type of investment required and mobility rights attached to citizenship determined who would be interested in and able to become a CBI program beneficiary. For instance, the Cypriot program has had a disproportionate number of Russian applicants, in part because in 2014-15 it provided a special route for individuals who had lost more than 3 million euros due to a levy on foreign deposits imposed as a result of the economic bailout. Turkey’s program largely attracts investors from the Middle East, for whom the mobility rights attached to the Turkish passport are much higher than those of their countries of origin. As of September 2022, a Turkish passport provided visa-free access to 110 countries worldwide, while those of Afghanistan, Iraq, Syria, and Yemen offered access to fewer than 35 countries each.

Beyond mobility rights linked to different passports, there are a series of other motivations that wealthy individuals may have in obtaining citizenship by investment. First, additional passports might offer a Plan B for escaping political and economic instability.

Second, most CBI programs are coupled with preferential tax regimes, which may be an important motivation for individuals with very high incomes. This potentially exempts them from paying taxes in jurisdictions in which they are not physically present or of which they are not citizens. For instance, St. Kitts and Nevis, with no personal income tax and low value-added tax (VAT), has become an attractive destination for wealthy Americans seeking to renounce their U.S. citizenship.

Third, for the rich from poor countries, a passport from a nation in the so-called Global North is also a status symbol that differentiates them from less affluent conationals. Speaking to Bloomberg News in July 2018, the chairman of one of the intermediary companies involved in the citizenship industry noted, “If you have a yacht and two airplanes, the next thing to get is a Maltese passport. It’s the latest status symbol. We’ve had clients who simply like to collect a few.”

Finally, obtaining a passport through a CBI program may serve some less noble purposes. In 2010, the former Prime Minister of Thailand, Thaksin Shinawatra, who had faced corruption charges in his native country, was able to avoid extradition by having obtained a passport from Montenegro. Indian diamond mogul Mehul Choksi, charged with embezzlement in India, sought shelter in 2018 in Antigua and Barbuda, a country where he had previously become a citizen by investment. Russian oligarchs close to President Vladimir Putin, as well as Ukrainian rent-seeking billionaires have gained protection on EU soil by acquiring Cypriot and Maltese passports.

The Dark Side of CBI Programs

The box of questions surrounding CBI and RBI programs is yet to be fully prized open. So far, there have been no systematic studies of the economic impact of these programs, which would highlight potentially beneficial aspects such as job creation or construction of roads, hospitals, and other infrastructure projects. However, a 2015 report of the International Monetary Fund (IMF) highlighted that funds from investor citizenship in recent years have come to account for substantive portions of gross domestic product (GDP) in some small island states. Recent IMF studies point out that, between 2012 and 2021, as much as 30 percent of the GDP of St. Kitts and Nevis and the Commonwealth of Dominica came from investments from CBI programs. In 2020, revenue from Vanuatu’s CBI program amounted to 42 percent of the national budget, raising questions of potential overdependence on CBI.

Yet balancing economic benefits and potential dependency is not the most contentious aspect of these programs. While many have questioned whether it is just to exchange passports for investment, greater concerns have emerged when CBI programs interfere with good governance, resulting in corruption of public officials, scandals, money laundering, or tampering with elections. These have been a rule rather than an exception in every single existing investor citizenship program.

For instance, since 2017, citizens of the Commonwealth of Dominica have been protesting the country’s CBI program, which international observers such as Freedom House also regard as controversial. The protests were sparked by the country’s opposition, which demanded the prime minister resign because of corruption linked to construction fraud involving CBI beneficiaries from Iran and China. Initially focusing on domestic issues raised by the CBI program, the protests gained an international dimension when concerns emerged over how the program helped the growth of Chinese and Iranian influence in the Caribbean islands, and the potential adverse effects of such influence on Dominica’s relationship with the United States.

In the same vein, the program in Malta had been connected not only to abuse of power by public officials whose family members had a stake in CBI services, but also to the October 2017 assassination of Maltese investigative journalist Daphne Caruana Galizia. Prior to her death, Caruana Galizia had been investigating connections between high-ranking government officials involved in investor citizenship and payments from the government of Azerbaijan. The scandal that unfolded around the murder investigation eventually led to the resignation of Maltese Prime Minister Joseph Muscat. These and many other instances of institutional corruption, including allegations that the citizenship industry used the political strategy firm Cambridge Analytica to influence elections to create a favorable environment for introducing CBI programs in places such as Malta and St. Kitts, have sparked substantive international criticism of investor citizenship.

The Organization for Economic Cooperation and Development (OECD), Transparency International, and Global Witness are among the organizations that have highlighted the potentially contentious aspects of CBI programs. The European Commission and the European Parliament have been particularly active in seeking to phase out programs in Bulgaria, Cyprus, and Malta. Given that CBI programs in the European Union are connected to the rights of European citizenship—including free movement—any citizen of Malta has the right to settle in any of the 27 EU Member States. For this reason, even though granting citizenship is the sole prerogative of sovereign states, the citizenship regimes within the European Union are interconnected and can obligate other Member States.

EU institutions have continuously voiced concerns over whether the bloc’s citizenship should be for sale and have raised questions over the potentially adverse effects of CBI programs run by Member States. The 2019 European Commission report on investor citizenship and residence schemes highlighted some of the effects and their implications across the bloc. A year later, the European Commission took legal action against Cyprus and Malta on the basis that CBI programs are not “neutral with regard to other Member States and the EU as a whole,” and that individuals obtaining passports in such a way have no “genuine connection” to the country of which they are becoming citizens. While Cyprus has terminated its scheme, Malta is as of this writing facing a process at the Court of Justice of the European Union for continuing to apply its 2020 scheme, which the European Commission finds to be incompatible with the concept of “Union citizenship” and the principle of “sincere cooperation,” both of which are enshrined in treaties governing the bloc.

The Future of “Golden Passports”

The future of CBI programs will depend on how countries decide to respond to a range of global events and dynamics.

Issues such as major natural disasters linked to climate change or global security concerns could amplify demand on CBI programs due to individuals’ need to have a Plan B. The same issues might equally reduce the number of countries offering such programs due to fears of foreign influence increasingly associated with these schemes. These two trends are perhaps not even mutually exclusive. But they will influence the market for investor citizenship going forward.

As countries become more selective as to whom they want as citizens and under what conditions, they may decide that beneficiaries of CBI programs have a risky background and stop offering such passports. Alternatively, as intermediary industries become more powerful due to growing demand, they might be able to exercise political and economic influence on some countries to keep running their CBI programs, or on others to open new ones.

The most likely scenario is that of Cyprus or Malta, where CBI schemes have transformed into residence by investment programs or grants of citizenship based on exceptional service with unspecified contributions. These may be different legal routes but raise similar issues. Governments looking to address such concerns might ensure that these residence permits and any subsequent grant of citizenship be accompanied by mandatory physical presence and socialization requirements that require the holder to relocate to the destination state and actually live there. The question is whether the shine of such golden visas will be as elusive as that of golden passports.

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