Are they an option for international financial centers?
Recent moves by the Turks and Caicos Islands (TCI) government to enact legislation to provide for an investor residency program has thrown into the spotlight the issue as to whether or not economic citizenship and residency programs could be an option for IFCs seeking to increase government revenue, lure foreign direct investment and enhance job creation opportunities for their citizens as they deal with the fallout from the pressures of the international community on their financial services sectors.
In this age of automatic exchange of information, which I feel is inevitable for IFCs that are British overseas territories (BOTs) and crown dependencies (CDs), and transparency, IFCs have to find ways to survive and perhaps one such way is to increase the substance, as I expounded in my last article1, within their confines.
One such way to do this is to attract persons who wish to make use of services provided by IFCs to conduct those activities in the IFCs themselves as opposed to just making use of a structure domiciled therein.
In this article, we examine some of the economic citizenship and residency programs which exist in some IFCs, one which is being proposed in Anguilla and make some general comments as to their viability in the face of criticism by some in the international community.
Economic citizenship and residency schemes have been around for many years but in recent times, a number of countries, faced with the ongoing severe economic crisis, have sought to generate economic growth by implementing them whereby they offer investors citizenship or residence in return for economic investment.
These schemes generally target high net worth individuals as these individuals are searching for more tax-effective means to structure their global lures.
Moreover, a second passport adds enhanced travel flexibility which can help overcome the political circumstances that make it difficult for citizens of certain countries to travel abroad since they are subjected to strict visa requirements when entering other countries.
Therefore, in exchange for a route to citizenship or residence, nations can incentivize high net worth individuals and their families to invest in and grow their economies.
Countries that do not offer an expedited route to citizenship usually offer as an alternative an expedited route to permanent residence.
Montserrat permanent residence by investment
Montserrat, a relatively low-key IFC, is a good example of this. There are generally three ways by which an individual can gain permanent residence by investment:-
- Bank Deposit of US$150,000 – Montserrat requires the applicant to deposit a minimum of $150,000 into a term deposit in any commercial bank operating in the jurisdictions. Through this route, economic residence may be gained in a very short time.
- Property investment of at least $150,000 – Another useful route is via the purchase of real estate with a value of at least $150,000 which is situated in Montserrat.
- Securities investment – An additional option in Montserrat is via investment in government securities to the value of at least $150,000.
Investment in a business is not a means by which one can obtain economic residence in Montserrat. The governor in council is, however, empowered to require an applicant to create employment in Montserrat for a specified number of persons within a specified period.
Investment-based permanent residency in the Turks and Caicos Islands (TCI)
As mentioned earlier, TCI has just enacted an investor residency program which entitles successful applicants to a permanent residency certificate. This scheme contemplates that the total number of certificates which can be issued will be restricted by the governor. Such general restriction is yet to be enacted but the interim position is that only 200 permits can be issued within the first 12 months of the program.
The qualifying criteria are:
- a. Investment of not less than $300,000 in actual construction of a new home, or in renovation of a distressed property as a home for the applicant and his or her dependents, on the islands of Grand Turk, Salt Cay, South Caicos, Middle Caicos or North Caicos; or
- b. Investment of not less than $1 million in actual construction of a new home or renovation of a distressed property as a home for the applicant and his or her dependents in any of the other islands.
- Businesses and enterprises
- c. Investment of not less than $750,000 in cash in a business or enterprise in Grand Turk, Salt Cay, South Caicos, Middle Caicos or North Caicos which business generates employment for persons in TCI of which not less than 60 percent are TCI nationals or permanent residents; or
- d. Investment of not less than $1.5 million in cash in a business or enterprise in one of the other islands which business generates employment for persons in TCI of which not less than 60 percent are TCI nationals or permanent residents.
Permanent residence certificates issued in category (a) or (b) do not confer any right to work. Those in category (c) or (d) come with the right to work in the business or enterprise concerned.
Citizenship by investment: St. Kitts/Nevis and Antigua/Barbuda
Antigua and Barbuda and St. Kitts and Nevis are two of the five countries which have provisions in their laws for the grant of citizenship-by-investment. Generally, these programs have been promoted by the independent IFCs as opposed to the BOTs such as TCI. There are generally three ways in which an individual who is over 18 can obtain citizenship by investment in Antigua/Barbuda and/or St. Kitts/Nevis:
- i. Cash contribution
Antigua/Barbuda – a minimum non-refundable contribution of US$250,000 (for a single applicant) to the National Development Fund;
St. Kitts/Nevis – a contribution of at least US$250,000 (for a single applicant) has to be made to the Sugar Industry Diversification Foundation.
- ii. Real estate
Another useful route is via the purchase of real estate with a prescribed value.
Antigua/Barbuda – investment of at least $400,000 into one of the approved real estate projects;
St. Kitts/Nevis – an investment in a designated real estate with a value of at least $400,000 plus government fees has to be made. The real estate cannot be resold in the first five years after the purchase and after that it will not qualify the next buyer for citizenship.
- iii. Business
A third option is via the establishment of a business.
Antigua/Barbuda – investment of a minimum of $1.5 million directly into an eligible business as a sole investor or a joint investment involving at least two persons in an eligible business totaling at least $5 million and each of those persons individually invests at least $400,000. A similar provision does not exist in St. Kitts/Nevis.
Direct revenue generated
In Antigua/Barbuda, each route carries a government processing fee of $50,000 each for the main applicant, spouse and any dependent over 18 and of $25,000 for dependents under 18. Additionally, due diligence fees apply for all applicants, of $7,500 each for the main applicant and spouse, $2,000 for dependents between ages 12 and 17, and $4,000 for dependents between the ages 18 and 25 or over the age of 65.
Similarly, in St. Kitts/Nevis government fees of $50,000 for a single applicant plus $25,000 for each dependent and a $7,500 due diligence fee for the main applicants plus $4,000 per adult applicant are payable.
In TCI, the application fee is $25,000 of which $1,500 is a non-refundable administrative fee. The permanent residency certificate can be endorsed with the names of the spouse and dependants of the holder on payment of an additional fee of $200 per spouse or dependant.
Anguilla’s proposed economic residency program
Anguilla proposed program centers around the fact that a permanent resident who has resided in Anguilla for five years is eligible to apply for naturalization under section 18(1) of the British Nationality Act 1981 as a British Overseas Territories Citizen (BOTC) and to obtain a BOTC passport. Permanent residency by investment therefore opens the door to BOTC status, should applicants one day wish to take such nationality.
It also opens the door to belonger status because section 80(2)(a)(vi) of the Anguilla Constitution Order provides that a person is deemed as belonging to Anguilla if such a person became a BOTC while resident in Anguilla. Like the TCI program, there is also the added bonus of gaining a foothold in the United Kingdom through permanent residence in Anguilla, in that a BOTC is eligible to apply for a United Kingdom/EU passport.
It is being proposed by the financial services private sector that the government of Anguilla issues regulations under section 35 of the Immigration and Passport Act (the Act) to create a formal and efficient process whereby persons can obtain a permanent residence permit in Anguilla based on investment in this island.
A discretionary scheme already exists in that jurisdiction whereby:
- (i) persons who have invested at least US$2.5 million in a business in Anguilla; or
- (ii) retired persons who own property in Anguilla
- are favorably considered for the grant of permits of permanent residence (pursuant to paragraph 3 of the government of Anguilla’s Immigration Policy, 2001). Such a discretionary system exists because section 25 of the Act, which governs the grant of permits of permanent residence, gives the governor a general discretion to grant permanent residence “subject to such conditions as he may think fit.” In 2001, the government of Anguilla adopted an immigration policy to “facilitate claims for residence in Anguilla and to control immigration in the future.” Paragraph 3 of this policy states that the following categories of persons who meet the criterion of good character may be favorably considered under section 25 of the Act:
- a) non-belongers who have been granted work permits for a period of seven (7) or more consecutive years;
- b) children of Work Permit holders who have attended schools in Anguilla for seven (7) or more years and have attained the age of seventeen (17) years;
- c) an investor of at least US$2.5 million in a business in Anguilla;
- d) highly qualified professionals or investors in the legal/financial and other designated services whose expertise is beneficial to Anguilla’s economic development and who have been resident in Anguilla for five years;
- e) retired persons who own property in Anguilla;
- f) non-belongers who have been legally residing in Anguilla for seven or more years;
The private sector has recommended that the qualifying investment routes for permanent residency status by investment should be:-
- (i) a minimum non-refundable contribution of a certain amount to be decided by the government of Anguilla (for a single applicant) to a National Development Fund which is to be established to fund capital projects;
- (ii) the acquisition of real estate situated in Anguilla with a minimum value to be determined by the government of Anguilla; and
- (iii) investment of not less than a certain amount to be decided by the government of Anguilla in cash into an eligible business. As in TCI, certain businesses would be excluded from this provision and would include those which have traditionally been conducted by local persons.
The private sector has also recommended to the government of Anguilla that it establishes a quota (as in the TCI) to restrict the number of permanent residence permits that can be granted under this investment-based scheme and that a set number be issued within the first 12 months of the scheme similar to what was done in TCI.
Finally, industry also recommended that a pre-approval process be established whereby investors wishing to take advance of this scheme can gain assurance in advance as to the granting of his permit of permanent residence by applying in writing to the governor for an undertaking that, on production of satisfactory evidence, that the relevant investment has been made by or before the expiry of the undertaking, the government will, on payment of the prescribed application fee, grant the permit.
This, of course, provided that no such undertaking should be given where the potential investor fails to pay the non-refundable due diligence fee(s) and/or to satisfy the due diligence requirements.
Potential problems with economic citizen and residency schemes
Many critics, including Laura Johnston from the Edmond J. Safra Center for Ethics of Harvard University, argue that these programs, amongst other things, facilitate institutional corruption, damage public trust in citizenship, corrode the institution of citizenship and break the link between residency/attachment to a state and the grant of citizenship.
Some also argue that these programs lead to a differentiation in the treatment of applications for residence/citizenship between non-investors and investors and may be viewed as a class issue due to discrimination based on wealth. Further, David Jessop, managing director of the Caribbean Council, based in London, has recently pointed out that Caribbean countries, which include some IFCs, should be careful in adopting these schemes because of increased scrutiny which they are undergoing by the U.S., Canada and EU, and reputation risks which will follow.
However, others argue that it is hypocritical for these countries to criticize these programs when for years, they themselves had similar regimes. The extent of the hypocrisy can be seen in the fact that many of these countries, such as the U.S. and U.K., have their own schemes designed to attract persons.
For example, the U.K. Tier 1 (investor) program is aimed at attracting investors and entrepreneurs to contribute to the U.K. economy. Under Tier 1, an individual can potentially settle in the U.K. if he or she invests a minimum of £1 million for five years; or £5 million for three years; or £10 million for two years in the U.K. If an investor under Tier 1 invests £10 million or more, he or she is eligible to obtain permanent residence after two years, while an investment of £5 million would lead to permanent residence after three years, instead of the standard five years.
There are no additional qualifying requirements, so the applicant is not required to show business experience, the ability to speak English, or to undergo any interviews (in most cases) or a medical assessment. The applicant and his or her dependents are permitted to be gainfully employed under the Tier 1 program.
Recently, Malta was forced to amend its citizenship regime to require a residency requirement under intense pressure from the EU. It is believed that this will continue to be an issue in years to come if greater scrutiny is placed on these programs.
However, at the same time, the current economic crisis has led to Spain, Portugal, Greece and Cyprus all offering visas to foreigners who buy real estate as a means of addressing their depressed property markets.
Recent media reports have shown that Chinese nationals are at the forefront of taking advantage of these new opportunities and interest is also coming from Russia, the United Arab Emirates and South Africa. Foreign investors who purchase real estate are granted residency rights and in some cases full EU citizenship through minimum payments ranging from around US$340,000 to $680,000.
Portugal has been in the vanguard of these efforts and has been offering these deals for just over a year now and foreigners receive a residency permit when they invest US$500,000 in property. After five years, they can apply for permanent residency and EU citizenship one year later. Portugal is also trading visas to those who inject capital or create jobs in the country which is similar to the U.S. immigrant investor program which requires a minimum investment of $500,000.
The Portuguese visas grant access to the Schengen area, which includes the bulk of EU countries with the noted exception of the U.K., just like those offered in Spain. Government figures show that more than 330 visas were issued in the first 12 months of Portugal’s program raising US$306 million.
Economic citizenship and residency programs have potential to benefit IFCs, especially where residency is a requirement and the persons taking up the opportunities which they present to establish substance in these jurisdictions.
However, to the extent that they are just passports for sale without any requirement for the holder/recipient to spend any time in the particular jurisdiction, they will come under greater scrutiny by the developed countries, many of which are part of the Organization for Economic Cooperation and Development (OECD) which has been relentless in its attacks against IFCs since 1998. These challenges can be overcome, however, by requiring physical residency within the jurisdiction that is offering the program for a specified period of time.
While this may make them less attractive to the wealthy Chinese, Russians and Middle Easterner who are the major beneficiaries of these programs, the residency requirement will lend more credibility to the programs and increase transparency.
Of course, citizens of these IFCs have to be welcoming of these new economic citizens and understand that in this age, IFCs have to show substance and thus demographic changes may result.
IFCs have no choice but to find new business models and ways of doing business and economic citizenship and residency programs, if done properly, could be part of this new way of competing in an increasing competitive global environment faced with moves towards greater transparency and openness.
- Substance over form: How international financial centers can survive in the age of automatic exchange of information and transparency, Carlyle K Rogers, Cayman Financial Review, 1Q 2014, p. 18-20