DUE DILIGENCE – THE PATH TO A SUCCESSFUL INVESTMENT IMMIGRATION PROGRAM

DUE DILIGENCE – THE PATH TO A SUCCESSFUL INVESTMENT IMMIGRATION PROGRAM

An investment migration program relies on many factors in order to attract interest and to become a successful one. Such factors are the investment options, minimal thresholds, compliance requirements, advantages of the country, other beneficial economic characteristics. The combination and coherence between all these features makes a program attractive and successful, and vice versa - their absence would put a RBI/CBI to the background. Of all of the listed above, due diligence is one of if not the most critical element in the investment migration programs and industry. It bears the burden of providing the initial access and enjoyment of benefits for all the parties involved. 

The implementation of an enhanced DD ensures informative decision making by the competent authorities. A loose or ineffective DD eventually would allow short term benefits but always for the price of grave negative effects for all involvement parties - authorities, investment related institutions, agents, DD providers. Thus the associated risks of financial crimes, reputational hazards, and security dangers may be unleashed. On the other hand an enhanced DD with extent of available information, its right interpretation and assessment of the related circumstances, allows from here on such risks associated with the operation of a program and its applicants to be prevented or highly mitigated. A multitier strict due diligence and scrutiny ensures the wellbeing of an investment program and its good reputational profile before actor inside and outside the industry as well as the general public.

We at Visa Free Europe, have always considered that accomplishing full and strict compliance is the only successful pattern of servicing our clients and providing the best available product. Being an agent under Bulgarian Investment Immigration program[i], we consider ourselves as the necessary initial sift separating the eligible from the non-eligible applicants, thus providing the program with successful candidates of good profile. This process can be successfully accomplished only thorough an enhanced and objective DD, aimed at identification of risk circumstances and their prevention.

In the beginning of 2020, the Investment Migration Council (IMC), the only association uniting the investment migration industry, in collaboration with Exiger, BDO, Refinitiv and Oxford Analytica issued two reports on the DD in investment migration, namely “Current application and trends” and “Best approach and minimum standard recommendations”. Our company supports the conclusions and recommendations of the documents. Nevertheless, motivated by the subject of matter and the increased interest in the last two years to the industry by the European Commission and Parliament, NGOs and the general public, we would like to provide an additional analysis and perspective on the role of the Due Diligence in the investment migration industry.

WHAT IS DUE DILIGENCE? 

The DD is a system of processes for researching, confirmation and corroboration of information regarding a person of interest. The DD allows identification of the risks associated with such a person and their extent. Its aim is to provide a sound basis for informed decisions on the future relations, public or private, with such a counterparty. The most commonly used instruments are Know-Your-Client procedures and determining the origin of funds. Relations of public (state) essence may also require research on criminal past and eventual criminal activity and connections. Depending on the subject of matter the DD may be obligatory - by virtue of law or voluntary - for the purpose of private commercial relations for example. The obligatory one is regulated by legal acts with formal framework and requirements, specific rights and obligations of the parties required to implement such measures, etc. In this case the law determines the parties which are liable and responsible to carry out such check and the steps and procedures which should be followed. In the other case 

WHAT IS THE IMPORTANCE OF DD FOR THE INVESTMENT MIGRATION INDUSTRY?

In the context of investment migration, DD is applied on different levels of a program’s implementation.  It is - directly by the agents at the point of initial contact with a client, by the competent authorities upon consideration of the applicant’s file, and last but not least by investment facilitation intermediaries. DD in the investment migration is closely related to the main risk associated with this type of migration or business ventures. Such ones are the risk of financial crimes (money laundering, terrorist financing, tax avoidance), national security risks (infiltration of criminal subjects, avoidance of criminal liability), and of course reputational risks (related to the private and public sector, or on international level). Realization of such risks can mirror negative effect on the respective program itself, on a competent authority involved in a process, on the government and even on the state. Thus this critical importance of the DD in the investment migration is formed. 

Each actor, directly or indirectly involved in a process related to a program, should carry out its own due diligence according to the applicable standards in order to at least evaluate/establish the following factors: counterparty’s identity (or UBO, if such one is present), clear origin of funds, associated risks depending on the actor’s role. Only upon enhanced implementation of the required DD processes and interpretation of the obtained results, the risk profile of a particular investor can be assessed. Comparing them to the risk assessment framework and the compliance requirements, shall allow the competent end-authority to establish eligibility of the applicant and take informed decision.

STATE-OF-PLAY.

            Regardless of the type of program, being residence or citizenship by investment, Europe is the leader in the industry. Investors around the world are most interested in the programs of the EU member states like Cyprus, Greece, Malta, Spain and Portugal. Although some countries implement separate DD particularly regarding the program (e.g. Ireland, Malta, Cyprus), others rely on the general check implemented by the executive and security authorities as well as the investment facilitators. 

It should be noted that the current EU AML legislation implements central, national and individual risk assessments, KYC and “origin-of-funds” procedures; PEP identification as well. These measures are obligatory for banks, real estate agents, attorneys, public notaries, investment brokers and facilitators; legal, tax and accounting service providers, etc. This listing shows that all third parties in the private sector involved in the implementation of an investment under a program are subjects to the AML legislation. Thus, even if there isn’t a specific DD for the purpose of an investment program, DD is still backed up to a significant extent.

In addition, in all cases the relevant security checks for criminal past and related criminal activity, are carried out by the national security authorities through national, international and partners’ intelligence databases. 

In the case of EU investment programs, a reasoned conclusion can be made the in all cases, a relevant multitier due diligence is carried out by different parties, in parallel and sequentially, covering most if not all associated risks.

            Nevertheless, investment migration is a worldwide industry. Different countries apply different due diligence procedures. Applicable standards and risk assessments differ as well. Profit/risk appetite of actors involved, incl. government vary also. Thus the industry is subject to immediate threats which without control and adequate opposing force may inflict serious damages. Even negative domino effects are possible. The DD although is the “spear” all parties involved in the investment migration industry need. 

DEVELOPMENT AND IMPROVEMENT.

As the IMC proposes, there should be a principle DD framework applicable for the whole industry. This framework should base on the following points:

·       Minimum DD standards should be accepted and applied equally to RBI and CBI programs, regardless of the type of program.

·       Governments are the leading and responsible force in this process, although other actors should be involved as well.

·       Effective sanctioning mechanisms for non-abiding parties. 

Another key factor worth to be mentioned, and pointed out by the IMC in their reports, is the need of transparency. Regardless of the extent and depth of a due diligence, the lack of transparency in all cases leaves space for presumptions. And such was the case with the study and the following report of the European Parliament and the Commission. What we saw there was, objective lack of transparency and available information about due diligence processes in the member-state. 

Considering the all of the above, a reasoned conclusion can be made, that a unified due diligence framework should be implemented throughout the investment migration industry worldwide. Each separate government should develop its own DD processes and steps. But nevertheless common standards should be applied everywhere. The main aim here is the whole industry through agents on one hand, governments on the other, and due diligence providers on third, together to raise the level of security, scrutiny and initial control for all programs. Such actions are necessary as migration is not a local process. It affects different parties, amends current relations, and grants new rights, established new obligations. The weak points of a program in one country may put in risk public relations on the other side of the globe. Thus negative domino effect may realize and affect the whole industry.

The realization of the due diligence’s critical importance is a fact. All involved parties see it and understand its necessity. Improvements of local character should be encouraged by all means. This will open the path to the establishment of this proposed global framework in order the whole industry and the common good to be protected.

In the next article, We at Visa Free Europe, shall analyze the Due Diligence under the Bulgarian Investment Immigration program and its current compliance with the highest standards in the EU and the industry. 

---

[1] Conditional designation of the direct options for residence and citizenship by investments provided by the Bulgarian legislation;