By Natalie Ritchie
First published on the Global Anticorruption Blog
In 1984, the government of the small Caribbean island state of Saint Kitts and Nevis had a bright idea for attracting foreign capital: the country would grant permanent resident status to any foreign national who invested a sufficient amount in the country. The idea caught on, and now dozens of countries around the world — including not only small island states, but also major developed economies like the US and UK — have so-called “golden visa” programmes.
Such programmes have proven especially attractive during times of economic hardship, as demonstrated by their spread across Europe in the wake of the 2008 recession. These European programmes are especially notable, as getting a visa in one country in the Schengen visa zone provides access to the other 25 as well. Some states — including EU members Austria, Bulgaria, Cyprus, and Malta — even offer investors outright citizenship, rather than simply residency status, in exchange for sufficiently large investments. And owing to pre-existing visa waiver agreements, these “golden passports” may allow access to other countries as well. Those with Maltese passports, for example, can travel to the US visa-free.
Golden visa programmes are controversial
According to a recent Transparency International (TI)-Global Witness report, in the last decade alone, countries offering golden visas have “sold” (that is, traded for investment) more than 6 000 passports and nearly 100 000 residency permits. Yet these policies have always been controversial, and are becoming more so. Canada terminated its golden visa programme in 2014 (though it continues in Quebec). In June 2018, the Trump Administration demanded that Congress either terminate or reform the US investor visa programme. And the UK abruptly announced it would suspend its programme on 6 December, although it reversed course six days later.
Part of the reason for the growing disillusionment with golden visa programmes is that their supposed economic benefits haven’t lived up to expectations. Rather than stimulate economic growth and job creation, the investments used to qualify for golden visas are often passive, such as government bonds or real estate. In Portugal, for example, 95% of total investment has been in real estate — 6 141 investments compared to just 12 in employment creation. Real estate investments not only offer limited benefits, but may also distort housing markets. In the US, investments have been, in the words of US Senator Chuck Grassley, funneled towards “big moneyed Manhattan interests” rather than “direct investment to rural and high unemployment areas.” Hungary even managed to lose money on its programme — $221-million — as it offered investors discounted bonds that were then fully repaid after five years with an additional 2% interest.
Facilitating and stimulating corruption
But the bigger problem with golden visa programmes is their potential to both facilitate and stimulate corruption and money laundering. This problem, which was highlighted both by the TI-Global Witness report mentioned above, as well as another report from the European Commission, takes several forms.
First, golden visa and golden passport programmes provide safe havens for the corrupt and other criminal actors. For example, Russian oligarchs like Oleg Deripaska (who has close ties to Vladimir Putin and employed Paul Manafort) have sought refuge in the UK and Cyprus. Montenegro, currently seeking EU membership, granted citizenship to Thailand’s former prime minister, Thaskin Shinawatra, who has been convicted of corruption offences and is wanted in his home country, and to former Palestinian security minister Mohammed Dahlan, charged with embezzling $18-million.
While some countries, including Cyprus and Montenegro, do not permit those with criminal records or subject to a criminal investigation to avail themselves of the programme, enforcement of such requirements is evidently imperfect, and in some countries, such as Malta, the government has discretion to waive the exclusion of criminals in “special circumstances.” Relatedly, golden passport programmes may provide foreign nationals refuge from sanctions: Russian oligarchs can conveniently become Maltese oligarchs to whom the sanctions against Russia do not apply.
Second, not only can foreign nationals escape prosecution, but they can also use their golden visas (or passports) to launder their illicit wealth. Governments themselves rarely investigate the sources of applicants’ money, instead counting on banks to perform due diligence. The EU’s Fifth Anti-Money Laundering Directive requires banks to consider golden visa applicants to be “high risk,” but banks must rely on voluntary disclosure of the client that he or she applied for one of these visa/passport programmes — governments will not disclose applicants’ names.
As a result, applicants can be passed through without ever being fully and properly screened. They may then use ill-gotten wealth to fund the investments in the country that grants them a visa or passport. They may also move money to the new country of residence/citizenship in order to shield their assets from seizure.
Third, golden visa programmes not only facilitate money laundering and evasion of prosecution, but also lead to corruption in the programmes themselves. Public officials take bribes to register properties as having been bought for the minimum investment to obtain a visa when they were actually bought for much less. Bribes are also frequently paid to expedite the actual visa applications.
And these concerns about bribery in golden visa/passport programmes are not hypothetical. For example, aides to Malta’s prime minister have been accused of funnelling application fees and kickbacks from Russian applicants to the prime minister’s private coffers through companies registered in Panama and the British Virgin Islands.
No good argument for golden passports
The programmes also open the door to conflicts of interest. Hungary’s golden visa programme was shut down in 2017 after the exposure of a scheme in which applicants invested not in government bonds, but instead in offshore intermediaries linked to the country’s political elite. In the US, Nicole Kushner Meyer, Jared Kushner’s sister, appeared to be using her brother’s position in the White House to drum up investment in the family business when she promoted the US golden visa programme (the EB-5 investor visa) to potential Chinese investors. Without greater transparency and audits in the programs, these sorts of corruption will continue unchecked.
While investor visa programmes don’t necessarily need to be terminated outright, the corruption and money laundering risks are sufficiently serious to warrant substantial reforms. Applicants should be properly vetted and the sources of their income independently verified by the government, rather than by the banks. Furthermore, the benefits offered to applicants should be limited to residency, not citizenship. While there may be plausible justification for golden visas under some circumstances, there is no good argument for golden passports.
And the processes as a whole need to be more transparent, so those misusing the programmes can be more easily held accountable. An additional challenge here is the tendency toward a “race to the bottom” in which countries vie to attract investors by lowering their due diligence standards. This is particularly true in the EU, as member states are essentially offering a shared asset. For reforms to be truly effective, countries may need to coordinate practices for due diligence and transparency.
UK started well, then backtracked
The UK might be on the right track. As noted above, the UK announced a decision to suspend its golden visa programme while a series of reforms were enacted, but then quickly reversed course, leaving the programme in place. The fate of the proposed reforms is not clear. However, if enacted, they would make the programme both more effective economically and less susceptible to corruption. The UK already does not permit real estate investments to qualify towards meeting the minimum investment threshold under the programme, but proposed rules would also prevent investors from buying government bonds, instead requiring qualifying investments to be made in “active and trading UK companies” and projects that provide “clear economic benefit to the UK,” for example by supporting small and medium-sized businesses.
Additional changes would require that golden visa applicants provide independent audits of all business and financial interests and prove control of their funds for the last two years. For those countries that determine that the benefits of golden visa programmes are high enough to justify the risks, the UK’s reforms suggest practical ways those risks could be mitigated.