A Better Way to Sell Citizenship

Smart steps can be taken to rid citizenship-by-investment programs of security risks.

Last October, the Caribbean island nation of St. Lucia announced it would launch a citizenship-by-investment program, or CIP. Individuals with at least $3 million in assets can now obtain St. Lucia citizenship by investing $200,000 in a sovereign fund, $300,000 in real estate or $500,000 in government bonds. St. Lucia thus joins a growing number of countries looking to attract capital through programs that cater to high-net worth individuals seeking mobility, including access to visa-free travel, economic stability and better quality of life. The programs are central to the concept of “global citizenship”—an intriguing but vague marketing term that refers to a growing cadre of wealthy multiple passport holders who move easily across borders and tax jurisdictions.

This trend started in 1984 when, in a bid to spur foreign investment, St. Kitts and Nevis became the world’s first country to allow foreign investors to obtain citizenship. Canada subsequently launched a residence-by-investment program in 1986, which attracted thousands of investors before it was closed last year. Others have since followed suit, including such economic heavyweights as the United States in 1990 and the United Kingdom in 1994. Seven countries, mostly small states such as Antigua and Barbuda, Dominica, and Grenada now offer citizenship, and dozens offer residency, in exchange for high-level investment.

CIP programs remain a niche phenomenon for the super rich but may occasionally become subject to exploitation, creating security challenges that threaten to outweigh some of the benefits they seek to bestow.

In May 2014 the U.S. Department of Treasury’s Financial Crimes Enforcement Network (or FINCEN) issued an advisory that certain foreign individuals were abusing the St. Kitts citizenship-by-investment program for the purpose of illicit financial activity. FINCEN did not name anyone, but in 2014 Treasury’s Office of Foreign Asset Controls repeatedly sanctioned Iranian nationals who held St. Kitts passports. Eventually, St. Kitts had to recall 16,000 passports. As a result, all St. Kitts citizens lost their visa-free access to Canada, and the country’s risk ratings and reputation took a hit.

None of this should be surprising: The rise of CIPs does not only appeal to the honestly affluent. The possibility to acquire, legally, a foreign passport must be a dream comes true for those involved in international money laundering and potentially illicit finance.

Thus, St. Lucia’s announcement occurs in a shifting environment of economic and security norms. How can the island country avoid becoming a loophole for tax evasion, money laundering, sanctions evasion and terror finance?

The answer to this challenge depends on St. Lucia’s willingness to adopt stringent due-diligence standards for vetting its applications. But it also requires that stakeholders in the vetting process—banks, governments and service providers—uphold the same standards across the supply chain, including stronger verification on the provenance of funds. Equally, governments must be able and willing to share information to ensure that their programs do not succumb to abuse by becoming a convenient cover for illicit activities. They must not yield to the temptation—driven by the prospect of a steady flow of applications and their resulting funds—of fast-tracking candidates without looking too deep into their pockets and their past record. Much like the requirements now incumbent upon commercial banks to prohibit payments to individuals, entities and regimes sanctioned by the United States, EU and UN, financial institutions must exercise caution to ensure they are not facilitators of illicit finance.

Citizenship-investment-programs are a vital source of GDP for countries contending with fragile, undiversified economies, and with them the potential for mass out-migration. The steady flow of investment in exchange for passports is a way to offset some of this risk and comes with little apparent consequence: most new citizens invest into their new country’s economy but never set foot there. But citizenship—a privilege traditionally bestowed through birth, kinship and residence—has implied a bond of loyalty involving obligations as well as rights. By contrast, CIPs have turned passports into something closer to a commodity with no residence requirements, no civic duties and little reputational hazard.