(Forbes) -- The Cyprus Investment Program – or, in the words of some cynics and critics, the ‘Citizenship for Sale Program’ – has once again come under scrutiny, as a result of a new report published by Transparency International and Global Witness.
Titled European Getaway - Inside the Murky World of Golden Visas, the report posed the provocative question: Have Europe’s doors been opened to the criminal and corrupt via some of its members’ so-called ‘golden visas’ schemes?
As a European country that offers this kind of investment program, Cyprus starred as one of the report’s protagonists.
The southern EU member state was in a very bad financial position when it applied for bail-out help from international institutions in 2013, and was forced to impose a bail-in on depositors for amounts over €100,000 ($115,730). Prospects for the small Mediterranean island were gloomy. The European Commission (EC) and the International Monetary Fund (IMF) projected that recession levels could reach as high as 12% of the country’s Gross Domestic Product (GDP), which stood at around €17 billion ($19.6 billion) at the time. The newly elected government of President Nicos Anastasiades had to come up with some new ideas in order to impede the fulfillment of the abovementioned forecasts.
One of the cabinet’s first decisions was to introduce the Scheme for Naturalization of Non-Cypriot Investors by Exception. Through the scheme, a foreigner could acquire Cypriot citizenship in exchange for investing €2.5 million ($2.9 million) in various sectors of the country’s economy. The scheme was a huge success and helped to prevent the levels of recession from surpassing 5% of the GDP.
It also served as a great boost for the real estate sector, since most of those interested in acquiring Cypriot citizenship preferred to invest in real estate assets. The majority of investors would thus buy a luxurious residence in excess of €2.5 million ($2.9 million), the minimum amount of investment required for someone to be eligible for the scheme (today, the minimum investment is €2 million or $2.3 million).
In response to this demand, there was a huge increase in real estate development, particularly along the seafront of the coastal city of Limassol, where more than 30 high-rise buildings are in the process of being developed or obtaining the necessary licenses.
Despite ostensible positive outcomes of the scheme, this new model of business propagated some negative results as well. For one, it caused a sharp increase in the price of real estate assets in the areas where these luxurious buildings where being developed. Also, the ways in which specialists and intermediaries were promoting the scheme caused a state of frenzy: it was being promoted as an opportunity for someone to obtain an EU passport. It didn’t take long for outraged reactions to spark. Abroad, other EU member states opined that passports opening the doors to the EU shouldn’t be for sale. At home in Cyprus, academics and professionals argued that this was not a sustainable way for development and that it would create more problems than benefits in the mid- to long-term.
Controlling the anarchy
It wasn’t until last May that the government decided to take action and bolster the status of the scheme via several ameliorative measures. For starters, the scheme was renamed as the Cyprus Investment Program; a much better title with more positive connotations communication-wise.
Furthermore, a Registry of Service Providers was created: prospective investors must engage the services of one of the registered service providers to be able to submit an application, thus better controlling how and who applies for the scheme. Members of the registry are required to apply strict due diligence practices in relation to client acceptance. Moreover, a Committee for Supervision and Control was put in place with the objective of exercising quality control on said local providers servicing prospective investors.
In order to ensure even stricter checks, the committee will use enhanced due diligence services from specialized organizations tasked with examining every applicant for the program. And a prerequisite for the program is for the applicant to have a bank account with a Cypriot bank, which means that he or she will have to go through the bank’s strict and stringent Know Your Customers (KYC) procedures.
The report by Transparency International and Global Witness estimates that Spain, Cyprus, Portugal and the UK are the top earners from such programs, each receiving annually, on average, €976 million ($1.1 billion), €914 million ($1 billion), €670 million ($775 million) and €498 million ($576 million), respectively. It is noted that – in relative terms – the figures for small economies like Cyprus and Malta are especially impressive. Through the sale of citizenship, Cyprus has raised €4.8 billion ($5.5 billion) since 2013, while Malta has reaped about €718 million ($831 million) in foreign direct investment since 2014. It is estimated that approximately 3,300 people have been granted citizenship through the Cypriot program since 2013. A recent decision taken by Cyprus’ Council of Ministers has capped the maximum number of citizenships granted to investors at 700 per year.
Locking the doors?
The EC – under the direction of the Commissioner for Justice, Consumers and Gender Equality, Věra Jourová – is getting ready to impose strict rules for such schemes.
The commissioner talked to the Financial Times last August, explaining: “We have no power to ban such a practice (grant of citizenship) but we have an obligation to put high requirements on the member states to be careful. They are granting citizenship for the whole of Europe.”
Europe’s worries derive mostly from the threat of money laundering through these schemes: during the same interview, Commissioner Jourová also alluded to worries about the origins of the wealth of some Russian applicants seeking Maltese citizenship.
EU Consumer Commissioner Vera Jourova talks to journalists during a news conference at the European Commission headquarters in Brussels, Thursday, Sept. 20, 2018. (AP Photo/Francisco Seco)
The Commissioner recently visited Cyprus and – as was expected –the country’s investment program was one of the major topics of discussion.
According to sources present at the meetings, the Commissioner asked whether a decision has ever been made so far to revoke a citizenship grant acquired under the program. Officials replied posing a question of their own. Was the Commissioner aware – sources say they asked – of any person whose passport should be revoked? The Commissioner had no name to give in reply.
Anticipation is mounting as to what will be the next steps of the EC, and the question lingers: Will the EC’s impending strict measures signal the end of a very profitable albeit dubious program?