Dr. Caballero is a Senior Economist at the IMD World Competitiveness Center. His research interests focus on the sources of competitiveness with emphasis on the competitiveness of enterprises. He is particularly interested in behaviors and processes that strengthen the competitiveness of firms. Dr. Caballero has conducted research at the IMD Global Board Center, the International Institute for Corporate Governance (Yale School of Management) and the National Bureau of Economic Research (NBER, US). In addition, he has acted as an academic advisor to the World Justice Project in the development of the Rule of Law Index. He has also worked as a consultant for the European Union Support Program for Central American Integration, the Private Sector Advisory Department at the World Bank, the International Investment Corporation (World Bank), and the Inter-American Development Bank.
Dr. Caballero has taught at the University of Warwick (UK) and the University of the West of England (Bristol, UK). He holds a PhD (Politics and International Studies) from the University of Warwick and an MA (Social Science: Government) from Harvard University.
21The sample covered by the IMD Talent Report includes the same 61 countries assessed by the IMD World Competitiveness Ranking. IMD World Talent Report 2015, IMD World Competitiveness Center, Lausanne. Available from: http://www.imd.org/wcc/news-talent-report/
22Diener, E. & Suh, E., 1997. Measuring quality of life: Economic, social, and subjective indicators. Social Indicators Research, 40(1-2), p. 189–216
23https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/285220/Tier1investmentRoute.pdf [accessed 08 Feb 2016
The Importance of Due Diligence in the Context of Investment Migration Programs
Damien Martinez
Thomson Reuters
Paris/France
Several countries around the world offer economic citizenship or immigrant investor programs to attract global investors. In return for an investment into the country, the investor receives citizenship and a passport. Investment may be indirect investment, which generally requires naturalization by a period of residence; or through a direct program involving a donation to charities, investment in real estate or business. Each program has mandatory conditions that must be satisfied before citizenship is granted, but these vary by country. In some countries, the investor has no obligation beyond the investment. It is critical that countries clearly understand the background and verify the good character of the applicant, as well as confirming that the source of funds invested is not from money laundering, drug or human trafficking, or other criminal activities.
Countries that offer these programs hope to benefit by stimulating their economies through the capital invested as well as through the deployment of the skills and experience of the immigrant investors. Different programs have different degrees of state involvement in the investment. Certain countries may require the investor to make a capital contribution to the state. This is the case in Dominica, Antigua and Barbuda, and St. Kitts and Nevis. The investment can be in the form of a donation to the state (Dominica, and Antigua and Barbuda) or to a state charity (St. Kitts and Nevis). The country may require the investor to make an investment in the economy. From a due diligence perspective, the nature of the investment determines the degree of involvement by the state.
Regardless of the level of state involvement in the funds once received, there is a significant reputational risk for the country if it later becomes known that these funds have not been legally obtained. If thorough due diligence on applicants is not conducted, this not only puts the country’s international reputation at risk, but there may be consequences for all citizens, such as visa restrictions applied to all nationals by other countries. This also risks the future viability of the immigrant investor program should the country become less attractive to legitimate investors. Political fallout can also be severe.
The motivations for investors seeking economic citizenship can be grouped into four general categories: the need to survive for political or national refugees from countries affected by civil war, natural disasters, famines or similar events; the desire to travel to access business and other opportunities; the ability for individuals to enjoy full civil rights, such as voting, buying property and the right to work and / or benefit from a more favorable tax regime; and the desire of criminals (suspected or confirmed) to escape justice. By the establishment of a robust due diligence process, states welcoming new citizens must verify initial motivations behind the choice of a new passport. In any case the new citizenship may be granted for the wrong reasons. Our era of transparency doesn’t forgive unnecessary risks, especially when it comes to citizenship and sovereignty, hence the extreme importance of conducting due diligence processes when examining a file.
In reality, an investor’s motivation can be a combination of two or more factors. The categories themselves are strongly interdependent and difficult to differentiate. It is critical that immigrant investor program administrators conduct sufficient due diligence on applicants to ensure that their motivations and source of funds are clearly understood. This is a key step in differentiating between a political refugee, a person seeking legitimate tax benefits, and a terrorist or money launderer. Clearly, each category has different implications for the country. The risk of harboring undesirable immigrant investors has led to a proliferation of treaties on international cooperation as well as extradition agreements.
If a country inadvertently grants citizenship to terrorists, money launderers or other criminals, the reputational damage it is likely to suffer will decrease its attractiveness to other law-abiding investors, damaging the prospects of their immigrant investor program. There is a reputational risk to a country if it is shown later to be ignorant of the source of any money invested into it via an immigrant program. Stimulating a country’s economy with the proceeds of crime is never a good idea. The country also runs the risk of being accused by other countries of harboring criminals. Corruption risk is also likely to increase should criminals identify that country as a good prospect for second citizenship. Government officials involved in the immigrant investment program are likely to be targeted with bribes.
Countries may also face consequences from international institutions such as the United Nations (UN) or the Financial Action Task Force (FATF), if evidence of due diligence or other such information is requested and the country cannot provide it. Such actions could have serious political, reputational and financial consequences for the country. There is also a continual increase in regulatory requirements, many of which affect citizens outside the countries enacting them. FATCA (the Foreign Accounts Tax Compliance Act), for example, requires individuals to report their offshore financial accounts, and obliges foreign financial institutions to report to the US Internal Revenue Service (IRS) regarding their American clients. With the increase in regulations, countries need to ensure that where they have an obligation to ensure compliance, they do so. At the same time, increased regulation means an increase in people and entities that fall foul of these regulations, and who must be flagged as non-compliant or recalcitrant.
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