CITIZENSHIP BY INVESTMENT PROGRAMMES: FINANCIAL SECRECY OR A TOOL TO ACHIEVING GLOBALIZATION?
Each day approximately 350,000 babies are born worldwide, according to a UNICEF estimate, with the majority of these births taking place in Asian and African countries
Anew-born doesn’t get to choose his/her place of birth — this is one of the things which are beyond one’s control. Yet, when it comes to international travel, individuals are often discriminated against on the basis of their place of birth and/or original nationality, the latter usually determined by the nationalities of the parent(s) or the place of birth.
All nationalities are not equal, and all passports cannot afford the same privileges to their bearers. Some passports afford the convenience of travelling to a great number of countries around the world without the need for a prior visa while other passportholders have to go through the hassle of obtaining a visa before they can make their travel plans, either for business or pleasure.
Despite all the talks of justice, equality and globalization, individuals at international borders are treated not on the basis of their talents but on their nationality which, at birth, is beyond their control.
Let’s study a (real) case of a North African business executive’s family: the gentleman, working for a US corporation, was posted in the States during the early years of his career, where his wife gave birth to their first child — a son — who, by virtue of ius soli, the law of soil as practised in the Americas, became a US citizen.
Some years later, the gentleman moved to his native country as an executive in a large Middle Eastern group and the couple was blessed with their second child — a daughter — who, by virtue of ius sanguinis, the right of blood — a rule practised in the majority of countries around the world — became a citizen of their native country.
The siblings were born to the same parents but the first child, the son, has the liberty to access more than 170 destinations around the world while the second child, the daughter, cannot even visit the nearest European country without first obtaining a visa.
Let’s look at another (real) case: a specialist doctor from an Asian country has to obtain a visa in order to attend a conference in London. This requires him to take a considerable amount of time from his busy practice in order to visit the visa centre of the British High Commission to first submit his visa application along with
his passport and then return to collect it. Meanwhile, his fellow doctors from the socalled first-world countries, albeit having the same qualifications, can simply book a flight to London without going through any visa hassles.
This discrimination, regardless of the reasons behind it, can create a desire for acquiring second citizenship — a citizenship which comes with a wellrespected passport.
Several countries around the world, which do not have huge economies, contemplated the need for designing such foreign direct investment programmes through which bona fide investors could be encouraged to make a significant economic contribution to the host country. In return, the investors would be granted citizenship of that country. The grant of citizenship to foreigners on the basis of significant investment — or extraordinary talent — has been in practice for centuries. The famous Nottebohm case, cited in the International Court of Justice, was the first reported case of Citizenship by Investment. Friedrich Nottebohm, a German national, was naturalized in Liechtenstein in 1939 on the basis of payment to the Commune (the State) of a security sum deposit and payment of annual naturalization tax, subject to the proviso that the payment of these taxes would be set off against ordinary taxes which would become due if the applicant took up residence in Liechtenstein.
St. Kitts and Nevis was, however, the first country in the world to formally regulate the grant of citizenship to foreign investors. Granting citizenship to foreigners upon making an investment is a concept currently practised by ten countries, with two more expected to join them by the end of 2018. Most of the applicants for such programmes originate from Asia, the Middle East, former Soviet Union states and Africa. The passports of most of these countries are not well-regarded, hence the desire of individuals to obtain an alternate citizenship.
Over a period of time, the countries offering Citizenship by Investment have established strong protocols to ensure that persona non grata do not misuse these programmes.
It should also be noted that tax planning — or tax evasion — is rarely a side benefit of these programmes.
The applicants from a Gulf country, for example, do not need any new strategy to avoid taxation because of a very low, and efficient, taxation in their own country. Moreover, individuals who may want to avoid paying taxes on their assets do not even need to opt for a second citizenship as there are extremely tax-efficient vehicles available in different jurisdictions, including in some American states like Delaware, Nevada and Wyoming, which do not require the beneficiary to be a citizen of the host country.
The Financial Secrecy Index 2018 — the world’s most comprehensive assessment of the secrecy of financial centres and the impact of that secrecy on global financial flows — indicates that six out of the top ten FSI 2018 countries are either members of the OECD or their dependencies.
Interestingly, none of the countries operating CBI programmes comes in the top ten countries on the list, while no Caribbean country with a CBI programme comes in even the top 50 jurisdictions listed in this financial secrecy index.
Merely stating that the Citizenship by Investment programmes help individuals in avoiding taxation would be a very farfetched statement.
Opting for robust due diligence standards, many of which are already in place, coupled with a consolidated industry voice is the need of the hour. Most of the programmes are efficiently designed yet the industry does lack a consolidated voice to counter the occasional negative attention, or scrutiny, that these schemes sometimes attract from the global watchdogs, intergovernmental and/or supra-national organisations.
About the Author: Dr. Hussain Farooq is the President of HF Corporation, a citizenship advisory firm. HF Corporation on one side advises high net worth individuals on acquisition of second citizenship and residence by way of Citizenship by Investment, while on the other hand it runs a government advisory practice that liaises with different governments to build up strategies for bolstering foreign direct investment, in their respective countries, through (re)structuring and promotion of such programmes.
Citizenship by Investment is a process whereby wealthy individuals can obtain a second citizenship extremely quickly in exchange for an investment or donation
These so-called “economic citizenships” are largely valuable to four types of people: US citizens who wish to lower their tax obligations to Uncle Sam; emerging world citizens who wish to increase their ability to travel; business owners and investors who are looking for a ‘Plan B’ to hedge against unpredictable conditions back home; people whose nationalities are banned from doing business in certain countries