Basis for OECD “High-Risk” List for CRS Unclear

Tax evasion has been in the limelight since the Panama Papers Scandal made headlines in 2015, resulting in mounting pressure on governments and organisations to tackle financial crimes and offshore secrecy.

The Organisation for Economic Co-operation and Development (OECD), which developed the Common Reporting Standard (CRS) for the automatic exchange of tax information in 2014, is one organisation that has been honing its activities towards combating such misconduct, and, in 2018, it turned its attention to citizenship and residence by investment (often abbreviated to CBI and RBI respectively). After issuing a consultation document in February, on 16 October it released a list of 21 countries whose immigrant investor schemes “potentially pose a high-risk to the integrity of CRS.”

The release triggered sensationalist responses in the media, with many describing the list as a “blacklist.” Yet, in a statement dated 17 October and made in response to such “press coverage,” the OECD underlined that “the sole objective of the [list] is to provide Financial Institutions with the right tools to identify account holders that may misuse RBI/CBI schemes to circumvent the [CRS] and carry out enhanced CRS due diligence procedures, where appropriate.” OECD officials were also quoted by Barbados’ Ministry of International Business and Industry and the Bahamas’ Ministry of Finance as stating that the characterisation of the list as a ‘blacklist’ was “completely inaccurate.”

Now a well-known tax haven, Panama features prominently on the OECD’s list, with its Friendly Nations Visa, Panama Economic Solvency Visa, and Panama Reforestation Investor Visa identified as problematic. Panama’s three visas are among the world’s most affordable, costing applicants less than US$100,000.

The United Arab Emirates (UAE) is also on the list with its Residence by Investment Programme. The UAE’s ‘Investor Visa’ is also relatively low-cost, particularly when the applicant chooses to establish a new company, or invest in a pre-existing company, in the UAE. A more expensive real estate option also exists.

Monaco, famed for its residence scheme, featured on the list on 16 October, but was removed one day later because it “provided additional information with respect to its residence and migration requirements confirming that information on relevant applicants is exchanged with all existing jurisdictions of residence.” The OECD said that “[o]n this basis, [Monaco’s] residence and immigration requirements [did] not give rise to particular risks to the integrity of the CRS […].”

Europe continues to be represented on the list – despite Monaco’s removal – with island-nations Cyprus and Malta, both of which have citizenship and residence by investment options for foreigners. Several other island-nations are also listed, including the Seychelles, Vanuatu, and a number of Caribbean nations.

The OECD says that it is enough for a country to “give access to a low personal income tax rate on offshore financial assets” and “not require an individual to spend a significant amount of time in [the country]” to be a potential risk to CRS. This, it later explains, rests on the fact that a person may declare tax residence in his or her country of citizenship or residence by investment without truly residing in that country. Specifically, the OECD points to “a certificate of residence, ID card, or passport” as documentation that may be used to falsely demonstrate tax residence.

Monaco’s example, however, makes it clear that the exchange of information on the applicant with all existing jurisdictions of residence is enough to cure the risk. The timing of Monaco’s removal from the list also illustrates that the OECD had not been able to make a correct initial determination on the nature of at least one of the citizenship and residence programmes under review.

The OECD’s concerns turn largely on the use of government-issued documentation to circumvent the CRS. However, while it may be argued that some documentation issued to economic residents could be used to create confusion with respect to persons’ tax residence, the same argument would not hold with respect to documentation issued to economic citizens.

Citizenship by investment is a legal process through which a person can obtain citizenship in return for a contribution to a country, commonly in the form of a one-time donation to a fund, a real estate purchase, or a business venture. As opposed to residence by investment jurisdictions, citizenship by investment jurisdictions generally do not require the applicant to live in the country for a set period. Rather, citizenship is usually obtained directly upon the applicant completing submission requirements and passing all vetting procedures. Citizenship by investment procedures culminate with the issuance of a naturalisation or registration certificate. This document confirms a person’s citizenship alone. It does not speak to that person’s residence or tax residence. Economic citizens can use their naturalisation or registration certificate to apply for a passport. The passport certifies the economic citizen’s identity and his or her status as a citizen, and authorises foreign travel. It provides no information on the citizen’s residence or tax residence.

The Commonwealth of Dominica, a small island-nation in the Caribbean, is one of the countries that features on the OECD’s list because of its 25-year-old Citizenship by Investment Programme. Dominica has no residence by investment programme, and the Dominican Government supplies no document to its economic citizens other than a ‘Certificate of Naturalisation,’ by virtue of which the economic citizen can then apply for a passport. To obtain a document certifying tax residence in Dominica, an economic citizen would need to spend more than 180 days a year in the country, thereby truly becoming a Dominican tax resident.

It is baffling, therefore, that citizenship by investment jurisdictions such as Dominica should be singled out as “potentially high-risk.” Other such jurisdictions include Dominica’s Caribbean neighbours St Kitts and Nevis (which does not have an active residence by investment programme) and St Lucia. Antigua and Barbuda has both citizenship and residence by investment programmes, and Grenada issues residence cards to economic citizens upon the making of an additional payment.

This is even more perplexing given the extensive applicant due diligence for which many citizenship by investment programmes, particularly in the Caribbean, are renowned. Here, due diligence spans a first evaluation on the part of government-approved agents, without whom an application cannot be submitted, and who are liable to losing their licence in case of a failure to properly assess applicants.

It then includes screening by ‘Citizenship by Investment Unit’ staff highly trained in document review, anti-money laundering, and terrorist financing. It further mandates the use of third-party, independent expert due diligence firms that perform checks both online and on-the-ground, and whose work is paid for via a hefty due diligence fee (generally around US$7,500 for a main applicant). Lastly, both regional and international organisations, such as Interpol, are consulted to ensure applicants are not on wanted, sanctions, or similar, lists. It is not by chance that the processing times for citizenship by investment take on average three months (as compared to the handful of weeks, or even days, it takes to process a residence visa). The 2018 ‘Citizenship by Investment Index,’ published by the Financial Times’ Professional Wealth Management Magazine, ranked 13 countries offering citizenship by investment on the basis of seven attributes, including due diligence. Antigua and Barbuda, Dominica, Malta, and St Kitts and Nevis all received the maximum scores available in this section.

A brief comparison of the documents required by the United Arab Emirates – a residence by investment jurisdiction – and those required by St Lucia – a citizenship by investment jurisdiction – is enough to shed light on the latter’s far more stringent due diligence. The UAE demands that applicants present a passport copy, photographs, a CV, and a police clearance certificate. St Lucia asks for all of these, and further demands birth, marriage, and divorce certificates, driving licences and national identity cards, military or name change records, education and residence history, other visas or passports held, bank statements, and professional references.

Finally, it is important to note that many of these jurisdictions have committed to the spontaneous exchange of information under the CRS, and, in so doing, have diminished their appeal to any person wishing to circumvent CRS processes.

Even with respect to residence by investment programmes only, it is disconcerting that some nations should be branded as “high risk” over others. Some commentators have taken to twitter to criticise what is seen as an unfair decision grounded on a country’s influence on world affairs. Turks and Caicos-based author and economics specialist, Gilbert NMO Morris, said “the OECD is showing its bias again; attacking passport investment in small developing nations, leaving the vast EB-5 Visa initiative in [the] US unmentioned for fear it would effect [sic] their budget!”

Another residence by investment programme that was not included in the OECD’s list is the United Kingdom’s Tier 1 Investor Visa, which allows foreign nationals to obtain residence for an investment of £2 million. A comparatively high tax burden is imposed on residents of the United Kingdom than, say, on residents of Vanuatu. Yet the United Kingdom has a non-domiciled residents scheme that allows foreign nationals who live in the United Kingdom but retain their foreign domicile to declare their taxes on ‘remittance basis,’ allowing them to manage their business and wealth abroad and pay either no or little tax in the United Kingdom. Economic residents who claim non-domiciled resident tax status can, on a par with economic residents of other countries that give “access to a low personal income tax rate on offshore financial assets,” seek to partake in practices that jeopardise the integrity of CRS.

Overall, the approach that the OECD has taken in determining its list of “high-risk” countries leaves the basis on which these countries have been judged unclear, with questions arising as to why some programmes (particularly citizenship by investment ones) were included, while others were exempted.