Investment Migration Council Responds to the Analysis and Guidance Issued by the OECD on Residence-/Citizenship-by-Investment Programmes

Geneva, 23 October 2018

The Investment Migration Council (IMC) understands the motivation behind the OECD’s recent analysis and guidance regarding the purported circumvention of the Common Reporting Standard (CRS) in both residence-by-investment (RBI) and citizenship-by-investment (CBI) programmes.

We entirely agree that individuals should be stopped from using such programmes to avoid accurate CRS reporting or, even worse, to engage in financial crimes, including money laundering or terrorist financing. The IMC as well as the firms and governments that the IMC represents does not support any form of abuse of investment migration.

However, it is important to be clear about four important facts:

1. 1. Scale: Only a very small percentage of residence or citizenship statuses legitimately obtained through RBI or CBI programmes are at issue. For the vast majority of applicants seeking alternative residence or citizenship through these programmes, tax is not in fact an issue, as most applicants either do not in fact change their tax residence or move completely to their new place of residence and then are tax residents there.

1. 2. Within the European Union, the European Economic Area and Switzerland, the freedom of establishment means that any citizen of these European countries can freely move to any other one of these countries and does not have to use any of the RBI or CBI programmes to establish their tax residence The movement of EU citizens actually accounts for a large part of the global movement of individuals for tax purposes. It seems strange not to look at appropriate statistics to assess what proportion of taxpayers subject to CRS are, in fact, under any RBI/CBI programmes.

1. 3. RBI/CBI programmes are only a fraction of the immigration options available to individuals. Most residence permits and citizenships are in fact obtained under options other than investment migration programmes. For example, while in Europe on average about 800 citizenships are granted annually under CBI provisions (mainly in Austria, Cyprus and Malta), the 28 member states of the European Union grant nearly one million citizenships every year for other reasons, including ancestry, residence, special merit, marriage, etc.[1] All of these can be equally used or abused for circumventing CRS, while citizenships obtained through EU CBI programmes account for less than 0.1% of all the citizenships granted in the EU. It would be good to understand what is being done to assess the risk, and to take appropriate measures, with regard to potential CRS abuse under other immigration and citizenship options.

4. Of those nearly one million citizenships granted by the EU each year (and a similar number in North America), among the top non-EU origin countries are many high-risk nationalities, and in far greater numbers than through CBI programmes. These include Pakistan, Ukraine, Algeria, Russia, Nigeria, and Somalia,[2] which pose a much more real danger to the international community in terms of criminal activity in the financial system, including money laundering and terrorist financing, which in our opinion should be the main focus of enhanced due diligence by financial institutions.

The abuse of CRS is contrary to the strategic rationale for and specific design of all RBI and CBI programmes and no doubt should be stopped. The IMC fully supports all efforts to achieve this.

The IMC cannot, however, support the OECD’s apparent solution to the challenge, as the issue is not these programmes per se. Neither RBI nor CBI programmes have a direct connection with tax residence. These are fundamentally different legal concepts. RBI and CBI programmes are designed to facilitate – following a detailed and intensive due diligence process that goes far beyond other forms of granting residence or citizenship rights – the legitimate movement of capital and people, which is essential to the contemporary global economic model. They furthermore enable individuals and families to obtain residence and/or citizenship rights in other, more desirable countries for a variety of reasons. For the most part, these are not tax reasons but instead pertain to mobility, business and life opportunities, schooling for children, and personal security.

We urge the OECD to review and strengthen the CRS due diligence requirements for financial institutions in terms of the tax residence aspects of clients, but not with a sole focus on RBI/CBI programmes, as this makes no sense and cannot be justified by any means other than a direct intent to hurt specific countries, including many OECD member states.

The focus should instead be placed on the individuals themselves who seek to misrepresent whatever status they obtain – through RBI/CBI programmes or otherwise.

There is a need for enhanced training within both financial institutions and wealth and legal advisory firms. This is an inherently complex operating environment, and decisions are often made by individual relationship managers in banks. Relationship managers are in many cases the only effective link between financial institutions and their account holders. They must be given the necessary support to ensure accurate investigation and decision making by the clients of financial institutions, together with their compliance departments.

We also suggest that the relationship manager test be changed to a more objective standard: we cannot see any basis on which a relationship manager should be held to a lesser standard of obligation than the financial institution for which they work in monitoring account holder compliance with the CRS.

Finally, the individual naming of countries leaves out many countries that would be included if the same standards were applied to them, and thus such naming and “blacklisting” appears biased. We fully understand that in doing so the OECD is trying to provide advice and guidance that is easily understood and able to be implemented by financial institutions subject to CRS reporting. However, we would caution that the selective naming of individual countries creates the very unfortunate and presumably unintended impression that the countries in question are in some way complicit in furthering CRS avoidance.

If the OECD’s declared standards of analysis were applied in an unbiased way, many more countries would need to be included in the list of jurisdictions that “potentially pose a high-risk to the integrity of CRS”, including many OECD member states that have low or no tax on foreign income under their tax rules, including the United Kingdom, Spain, Belgium, Italy or Canada. We ask the OECD to clarify what will be done to properly assess the risks emanating from those countries, if there are any.

In the interests of positive dialogue, we have laid out our detailed commentary on the issue below and would welcome the opportunity to engage in conversation with the OECD and its wider stakeholders on these matters. So far, other than a general public consultation, the OECD surprisingly has not engaged with the stakeholders of the RBI/CBI industry, as would be expected from an international organization in any other sector.

In fact, the interests of the IMC are aligned with the OECD and the international community, in that we believe strongly that any abuse of investment migration programmes should be avoided and that measures should be taken to ensure these cannot be used to circumvent, for example, CRS. The real issues, however, lie elsewhere and should be equally addressed.

Bruno L’ecuyer, CEO of the IMC, commented:

“We understand the OECD’s concerns and share them ourselves. This is why our members have signed up to a binding code of ethics and professional conduct and have invested significant time and capital in developing due diligence processes that are effective in protecting both the industry and the sovereign states that offer investment migration programmes.

Investment migration creates value for both the global economy and global society. While we obviously agree that sovereign state regulation must be of the highest standards, we believe that the emphasis should be on those who acquire residence or citizenship rights – by whatever means –  and on the institutions that are embedded within the global financial system and are best placed to make a judgement.

There are dozens of everyday products that could be used to cause damage if placed in the wrong hands but that nonetheless create significant economic and social value. A truck in the hands of terrorists becomes a serious weapon that can kill people – yet should we stop producing and using trucks to transport goods? We request that developers and marketers of investment migration programmes be treated the same way as industrial manufacturers or service providers of any kind, and we encourage more positive engagement between international regulators and the investment migration industry, which provides enormous societal value particularly for smaller states with limited means of attracting foreign direct investment.”

1. Concentrate on the Root Cause of the Problem

We urge the OECD to concentrate on the root cause of the problem: dishonest individuals who seek to misrepresent their tax residence status to financial institutions.

We also urge the OECD to review and strengthen the CRS due diligence requirements. We suggest that the relationship manager test be changed to a more objective standard: we cannot see any basis on which a relationship manager should be held to a lesser standard of obligation than the financial institution for which they work in monitoring account holder compliance with the CRS. Relationship managers are in many cases the only effective link between financial institutions and their account holders.

We urge the OECD to undertake a comprehensive review of the CRS due diligence rules, processes and procedures, including which documents may be accepted as “Documentary Evidence”, and avoid what may appear to be an ad hoc approach to countering perceived abuses.

2. Strengthen due diligence measures for all individuals subject to CRS

We would urge the OECD to consider more inclusive methods for identifying individuals who seek to misreport their tax residence. One method could be to simply make the additional account holder questions indicated in the guidance to financial institutions (under the heading “What should Financial Institutions do?”) compulsory for all future self-certificates. We cannot see any logical reason for these questions necessarily following only where an account holder has indicated a tax residence in a listed “high-risk” jurisdiction.

As an alternative, and something we mentioned in our submission to the OECD public consultation “Preventing Abuse of Residence by Investment Schemes to Circumvent the CRS”, the CRS due diligence procedures might be amended to introduce the concept of a “high-risk” account holder, where recently issued documentary evidence is used to establish tax residence status; for these purposes, “recently issued” could be within the last 3 years, with a requirement placed on financial institutions to determine whether the account holder retains a tax residence status in any other jurisdiction(s).

We would caution that it is possible for account holders to retain dual tax residence, if only for an interim number of years, by not satisfying the strict “exit” requirements of their prior jurisdiction of residence. This can occur without the involvement of a “high-risk” jurisdiction. The problem is in fact wider than the perceived abuse of RBI/CBI programmes, and we therefore urge the OECD to take a more inclusive approach to countering the ability of individuals to misreport their tax residence status.

3. Is residence in a “high-risk jurisdiction” equivalent to a change in circumstances?

We would ask the OECD to urgently clarify whether the published answer to the frequently asked question “What should Financial Institution do?” is intended to direct financial institutions to treat all self-certificates and documentary evidence from account holders resident in any of the listed “high-risk” jurisdiction as unreliable and therefore subject to further review, in line with the additional questions contained in the guidance. In summary, for existing account holders, is residence in a “high-risk” jurisdiction equivalent to a change of circumstances and therefore subject to re-review by the relevant financial institutions in which the accounts are held? We strongly urge the OECD to clarify this point in order to avoid confusion across all implementing jurisdictions and their domestic financial institutions.

4. Adopt open and transparent blacklisting policy

We note the recent removal of Monaco from the list of “high-risk” jurisdictions, on the grounds that Monaco spontaneously exchanges information regarding all applicants to their prior jurisdictions of residence. We ask the OECD to set out the criteria that would allow the remaining jurisdictions to be removed from the “high-risk” list; we also urge the OECD to be sensitive to the real reputational damage to a jurisdiction in its being singled out as a “high-risk” jurisdiction in the context of CRS avoidance and its natural counterparts: tax evasion and criminality. From a rule of law and transparency point of view, it is only fair and appropriate that affected jurisdictions be given the opportunity to be removed from the list and that this process be clear.

5. No objective basis to single out Malta and Cyprus in the EU

We note that both Cyprus and Malta are included in the list of “high-risk” jurisdictions. As the OECD will be aware, following Council Directive (EU) 2018/822 (Directive), both jurisdictions are subject to the EU equivalent of the OECD Model Mandatory Disclosure Rules for CRS Avoidance.

Annex IV Part II D (f) to the Directive contains the specific hallmark dealing with arrangements designed to undermine the effectiveness of exploiting weaknesses in CRS due diligence procedures. This means that the use of RBI/CBI programmes in either Cyprus or Malta to further CRS avoidance arrangements would be subject to mandatory disclosure – this is effective from June 2018.

In the circumstances, it is not clear why Cyprus and Malta have been identified as “high-risk” given the very extensive reporting provisions contained in the Directive and the experiences of other jurisdictions that have implemented mandatory disclosure rules, such as the Disclosure of Tax Avoidance Schemes (DOTAS) in the UK, which has proved to be a significant deterrent to the promotion of avoidance arrangements.

We urge the OECD to evaluate jurisdictions on an entirely objective basis and not only on the basis of whether they offer RBI/CBI programmes that are subjectively and without any evidence marked as “high-risk”. The assessment basis for CRS-related matters must be the basis of the respective countries’ CRS anti-avoidance regime along with similar, objective aspects. Whether or not a country operates an investment migration programmes is simply irrelevant in this context.

6. Confirm methodology and provide data to support the level of risk

We ask the OECD to confirm the methodology used in determining the list of “high-risk” jurisdictions. Section 2 of the prior consultation, “Preventing Abuse of Residence by Investment Schemes to Circumvent the CRS”, sets out the basis on which RBI/CBI programmes are assessed as “high-risk”: was this method adopted to determine the final list?

In both the public consultation and the recent “high-risk” jurisdiction list announcement, the OECD bases its decision to act in this area on “information released in the market place and obtained through the OECD’s CRS public disclosure facility”. We ask the OECD to provide statistical data to confirm the level of risk. In the contribution submitted to the public consultation by one of our founding members and one of the major firms in this field, the results of an internal review of their clients’ reasons for pursuing RBI/CBI programmes were published. The firm found no meaningful data for the use of such programmes to avoid CRS reporting; instead, they found that 22% of their clients are looking for better visa-free travel, 20% for better career opportunities and 19% for better security and safety.

We would ask, again, that the OECD confirms the basis on which jurisdictions have been selected for the “high-risk” list and the extent to which jurisdictions have been placed on the list based on disclosures to the CRS public disclosure facility. We also expect the OECD to carry out independent and representative assessments to confirm the review submitted by a major firm in the industry, or else to arrive at alternative findings and publish the same.

With more than 400,000 financial institutions implementing the CRS globally, reporting on an estimated 1 billion accounts, it in the public interest that the OECD publishes the factual basis on which “high-risk” jurisdictions have been selected.

7. Confirm implementation of Mandatory Disclosure Rules leads to “non-risk” status

We ask the OECD to confirm whether a “high-risk” jurisdiction that implements the OECD Mandatory Disclosure Rules for CRS Avoidance would be re-assessed as being not “high-risk” and taken off the list, given the very extensive reporting obligations and strong deterrent effect of the Mandatory Disclosure Rules.

8. Confirm regarding the OECD Commentary to the Standard for Automatic Exchange of Financial Account Information in Tax Matters

Paragraph 23 of page 133 of the OECD Commentary to the Standard for Automatic Exchange of Financial Account Information in Tax Matters, Second Edition, provides that “Reporting Financial Institutions are not expected to carry out an independent legal analysis of relevant tax laws to confirm the reasonableness of a self-certificate”. We would ask the OECD to confirm that this will remain the case, notwithstanding the additional questions to be asked of account holders seeking to establish tax residence in “high-risk” jurisdictions, or if not, how this commentary is intended to be amended, and if so, by when..

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