A recent sanctions alert by the Treasury singled out citizenship by investment schemes as a concern, potentially in the context of a recent FATF report on the matter. finews.asia looks at the implications.
Until the last week in November, the risks around citizenship by investment schemes seemed to be unspoken, percolating in the background. But now the Financial Action Task Force (FATF) has spoken on the matter, and the cat is out.
Governments may have also started to spring into action. As an example, a press release on Monday issued by the US Treasury’s Office of Foreign Assets Control, better known as OFAC in many quarters, announced sanctions against two former Afghan government officials while prominently highlighting so-called CBI or citizenship by investment schemes as a key risk.
«While many CBI applicants may engage with these programs for legitimate reasons, corrupt actors often abuse CBI programs and their benefits (such as passports) to hide assets, facilitate illicit cross-border activity, and access previously inaccessible areas of the international financial system. These actions can undercut anti-money laundering and countering the financing of terrorism (AML/CFT) regimes,» the Treasury indicated.
Recent Alerts
Given the emphasis placed on the subject, which did not appear to be reflected in recent sanctions alerts, finews.asia queried the Treasury, asking whether the step was linked to the 23 November 2023 FATF report, although a response has not yet been forthcoming.
finews.asia, and its sister websites, finews.com and finews.ch (German only) have frequently reported on citizenship by investment schemes as they are seen as key tools for wealthy individuals, most recently as a way of guaranteeing their mobility and that of their families in the post-pandemic world.
That also makes them a matter of high interest for wealth managers when providing family office services and the like to their core ultra-high net worth client base.
Very Clear Implications
The FATF’s report, soberly titled «Misuse of Citizenship and Residency by Investment Programs», didn’t mince words.
Authored jointly with the Organization for Economic Co-operation and Development (OECD), and using the same acronyms that the US authorities employed, they characterized CBI programs as «particularly vulnerable».
According to them, they give illicit actors «more mobility» and the ability to open bank accounts and establish shell companies in multiple jurisdictions, while disguising their identities from financial institutions with new identification documents.
Moving Illicit Funds
«Both CBI and RBI programs can provide the criminally wealthy with a range of opportunities, such as the ability to place assets and family members overseas to prevent or hinder asset recovery efforts, explain suspicious high-value transactions, and enable the movement of significant sums of illicit funds across borders,» the report indicates.
Moreover, the report pointed out that another key risk was the complexity and international nature of such schemes, including the «high level» of involvement by intermediaries in design and development and the multiple government agencies that need to participate.
«Programs appearing vulnerable to criminal abuse may lead to suspension of visa-free travel to third countries and undermine business and international relations,» the FATF added.
Breaking New Ground
These risks are nothing new, even if they are now more emphatically delineated by a mainline intergovernmental organization.
Where the report breaks new ground is in listing out a list of mitigation measures to ensure the solidity of CBI/RBI schemes.
Although they are currently outlined as proposals, these potentially have a significant impact on the banking industry, and wealth management, when it comes to evaluating clients in the context of such schemes.
New Control Framework
Among the measures they recommend are adding a multi-layered due diligence process by both the private and public sector, one that includes paying closer heed to sources of funds and wealth, how funds are transferred and the finances of «accompanying family members».
They also maintain that ongoing monitoring is crucial to prevent abuse while keeping a sharp eye on programs that allow for private sector investments, given the heightened fraud risks they have, particularly those that encourage property development.
The report also sketched out the role that financial institutions play in such schemes, something that ultimately sounds like an entirely new control framework in the making.
Facilitator and Investigator
The FATF points out that banks play a critical role as a gatekeeper as they are frequently at the point where funds are initially received, which means they are both facilitators and investigators of «further qualifying» investments.
«Requirements for applicants to open accounts with a regulated financial institution in the issuing country engages an additional set of independent onboarding due diligence and financial crime obligations beyond the checks carried out by the country operating the program,» the report indicates.
Given that, they can refuse to accept funds or onboard scheme applicants. But their importance is also a «critical point of vulnerability» should they fail to be effective or negligent.
Heavy Reliance
Moreover, other gatekeepers may also rely too heavily on the due diligence undertaken by financial institutions. «Authorities should ensure that multiple lines of defense do not all come to rely, in practice, on a single point of failure,» the FATF writes.
On the other hand, the report does indicate that properly managed CBI/RBI programs can benefit both host countries and individuals. By extension, that also means banks.
However, if the US sanctions alert earlier this week is anything to go by, it might be wise for banks to get ahead of the curve and consider – if they have not already – how to implement formal frameworks and ongoing monitoring processes related to such schemes.
