Robust due diligence for citizenship by investment in the European Union

(Thursday, 12th July 2018)

by Jonathan Cardona, CEO of the Malta Individual Investor Programme Agency

 

In an ever-changing world, a one which is becoming more volatile both politically and economically, successful individuals seek opportunities to stay ahead. Several strategies are utilised. Some are increasingly resorting to investment migration as a way of improving their way of living or expanding their business interests. Affluent individuals are looking at citizenship by investment (CBI) options as a means of securing their future. This is a subject that attracts a fair share of passionate discussion. Some people accept it, some simply despise the concept of citizenship by investment. All in all, it has put countries offering such programmes into the spotlight, with strong calls from stakeholders for stringent due diligent processes; often the result of misconceptions or lack of knowledge about the industry. The reality is somewhat different; Citizenship-by-Investment Units (CIUs) employ very thorough and unparalleled due diligence systems which are often looked-up to by their peers in the financial services industries. The benefits of the robust due diligence processes adopted by CIUs go beyond the investment migration industry.

In this article, we will try to address three issues, which intertwine with each other. First, how CIUs could be providing an essential service to jurisdictions, through their work in due diligence. Second, how the sharing of information across Citizenship-by-Investment Units could help to combat financial crime, money laundering and financing of terrorism. Thirdly, we will explore how distributed ledger technology (DLT) could be used to achieve such an information sharing platform, which potentially could revolutionise the due diligence process within the CBI industry and beyond.

Why CBI due diligence is a good thing

Professionals within the industry know very well that CIUs conduct very stringent due diligence. The application processing time and documentation required for each application are usually very good indicators of the rigorousness of the due diligence for a particular CBI programme.

These attributes are usually good indicators of the rigorousness of the due diligence for a particular CBI programme. To use an example, Malta conducts what has been termed as the ‘gold-standard’ of due diligence processes in the industry. Our CIU goes to a serious level of detail on a number of aspects of an applicant including identity and verification, business and corporate affiliations, PEP status and sanctions/watch-lists, sources of funds and wealth, reputation and adverse media, legal and regulatory issues and also the impact that an applicant has on their immediate network and society in general.

This level of in-depth analysis is only possible because the Malta CIU has access to the required resources and support to be able to conduct such stringent due diligence, including, the required monetary budget, the human resource, the network of service providers, the techniques and the insight gained through four years of intense scrutiny from a number of bodies, including international media. Like all other operators, the Malta Individual Investor Programme Agency (MIIPA) carries a lot of responsibility on its shoulders to make sure that only reputable individuals are granted passport rights to Malta and the EU for the sake of the other citizens.

This contrasts sharply with the way nearly a million individuals EU wide annually receive citizenship through naturalisation. The scale of such exercise is potentially too large to allow for the same level of due diligence conducted by the Maltese CIU on its applicants. The resources required to conduct the same level of due diligence as the Malta CBI programme, make this undertaking an almost impossible task. Malta, was able to adopt this approach because the number of applications it processes in a year – circa 300 – is but a fraction of what the rest of the 27 member states are processing in terms of non-CBI naturalisations.

This leads to the conclusion that Malta and other CIUs who have adopted a stringent due diligence process are in fact providing a service to the European Union; that of thoroughly screening a small percentage of individuals being naturalised as EU citizens. Arguably, one could state that the reason why such due diligence is required is because CBI applicants carry a high risk. However, this is not a strong enough argument because the risk does not go away if the same individual acquires citizenship through other channels. There is only one way to identify and manage risks posed by non-EU citizens, which is through stringent due diligence; and the best-positioned units to provide this are CIUs.

Sharing of information is also a good thing

What should a CIU do once all of that information about a high-net-worth individual (HNWI), or ultra-high-net-worth individual (UHNWI) is obtained?

If this was an FIU, the obvious answer would be; share the information. This is what the Egmont Group is synonymous with; international co-operation. Sharing of information by FIUs is a great thing to have because it helps member states to collaborate and fight against terrorism and financial crimes. Thus far, sharing of information on rejected applications between CIUs has not yet taken a legal format. Not even sharing of information on who got accepted. Malta is on the front on this matter because it is one of the few countries that publishes a list of individuals who have acquired citizenship, which includes the individuals who acquired citizenship through its CBI programme. There is ample criticism on this practice; some say that this puts those people at risk, others say that the state should provide even more information such as country of origin. Regardless of what should happen, Malta once again stands out by being consistent with the notion that in fighting money laundering and financing of terrorism, sharing information is crucial.

So should CIUs share information about the applicants they are processing? 

With an adequately secure and transparent platform, we believe that the answer is yes. Obviously, the necessary legislation should be in place to ensure that data protection provisions are well taken care of and adhered to.

Distributed Data-As-A-Service (DDaaS) through Blockchain

In October 2017, OCBC Bank, HSBC, Mitsubishi UFJ Financial Group (MUFG) and the Infocomm Media Development Authority (IMDA) issued a joint press release stating that they have developed and tested a KYC blockchain. Estonia has the concept of verified digital identities. This concept should be taken a step further and use Distributed Ledger Technology (DLT) for digital due diligence.

If nations, upload digital versions of documents such as birth certificates, passports, police conducts and medical reports, amongst others, onto a blockchain controlled by the individual, then this would allow that same individual to fully control a portfolio of verified documents, which in an instant could be shared with another entity such as a bank, an insurer, a stockbroker or as in our case, a CIU, to enable a due diligence process to become faster, less cumbersome as potentially, information could be exchanged almost in real time.

In such a scenario, an individual would have control at the micro level, disclosing only information relevant to the CIU, whilst the CIU knowing that the information it is receiving originates directly from the issuing entity, rather than having copies which then need to be certified, and apostilled accordingly. The security that is synonymous with blockchain is also an extremely welcome advantage to this, as opposed to a printed piece of paper, which needs to be stored in some dusty recess for five, seven or even ten years. This is an area which MIIPA plans to spearhead in the near future.

Conclusion

Citizenship by investment programmes are constantly subject to criticism simply because there is always room for improvement. Maybe, this stems from the fact that the modern version of CBI programmes are a relatively new proposition or because certain CIUs need to up their game when it comes to the due diligence conducted on applicants.

Some CIUs – such as Malta – are indeed providing a real, tangible benefit to the EU’s fight against financial crime, money laundering and financing of terrorism. They are thoroughly scrutinising high-risk U/HNWIs who before the inception of CBI, were being naturalised as EU citizens, with little due diligence. Furthermore, we have seen how this service can be improved through the sharing of information across CIUs, using blockchain technology.

 

Jonathan Cardona is the Chief Executive Officer of the Malta Individual Investor Programme Agency (MIIPA). The Programme is designed to attract global high-net-worth individuals to obtain Maltese Citizenship. Jonathan is also an advisor on EU Affairs to the Prime Minister of Malta.

Posted in Articles, Editorial, Guest Content.

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