Why the EU’s Top Court Should Clarify EU Law

A legal battle is brewing in the EU as the European Commission has taken action against Cyprus and Malta over their citizenship-by-investment programmes. Elena Basheska sheds light on the Commission’s arguments and explains why it would be good if the cases end up at the European Court of Justice.

In October 2020, the European Commission opened infringement procedures against Malta and Cyprus over their citizenship-by-investment programmes, pointing out that these schemes undermine the essence of EU citizenship. What general comments would you like to make about this development?

It is not a secret that the EU is not happy with the fact that some member states run investment migration programmes. This situation has been dragging on for quite some time. Investment migration programmes have been often criticised by the European Commission and the European Parliament, and both institutions demanded in the past that countries phase out the programmes.
The infringement procedures against Cyprus and Malta come as no surprise. Actually, the European Commission first reacted to the launch of the Malta Individual Investor Programme (IIP) back in 2013 and reportedly started to plan for an infringement procedure against Malta due to the lack of the genuine link requirement and on the basis of the principle of sincere cooperation enshrined in Article 4(3) TEU. Instead, however, Malta agreed to amend its IIP to introduce a residence requirement for those who wanted to acquire citizenship through investment. Such compromise by Malta seemed more like a tactic to prevent escalation of the issue than being based on facts and law as there is no such thing as a residence requirement for the purposes of acquiring nationality from a member state in EU law.

The investment migration industry has long argued that the granting of citizenship is the prerogative of member states. What’s the EU’s competence in this area?

A simple answer to the question would be that EU member states have exclusive competence to determine who their citizens are. Allow me to elaborate further.
First of all, the limits of EU competences are governed by the principle of conferral. This means that the EU acts only within the limits of the competences that EU member states have conferred upon it in the Treaties, and nationality is not among these competences. Limitations on the principle of conferral are interpreted strictly and require close involvement of member states.

Furthermore, EU citizenship is complementary to, but does not replace, national citizenship. Put differently, EU citizenship protects the rights of member states’ nationals which are not granted by their states but by the Union itself. It is for the EU member states, however, to regulate who qualifies as a national, having due regard to EU law.

The EU case law preserves this competence of member states, with the only exception of instances where it is necessary to ensure effective and uniform protection of rights of EU citizens. Thus, the EU has normally interfered in nationality matters where member states have enacted measures that restrict rights of EU citizens rather than where such rights are to be enjoyed by new citizens.

What’s the legal basis for the action against Malta and Cyprus?

Article 258 TFEU is a standard infringement procedure which empowers the Commission to act against a member state that fails to meet its obligations under the Treaties. The Commission, however, enjoys discretion in its right to commence infringement procedures pursuant to that provision. If it finds that a member state has not applied EU law and has accordingly failed to meet its obligations, it will not bring the member state before the European Court of Justice (ECJ) immediately. Proceedings under Article 258 TFEU comprise two stages: administrative and judicial. Under the first stage, the Commission will make various attempts to negotiate an agreement with the member state concerned informally and usually by exchange of correspondence, documents, data etc. If no agreement is achieved in the pre-infringement stage and the Commission decides to initiate an infringement procedure, it will send a formal notice to the member state. The member state is then given the opportunity to submit its observations. After the member state’s submission, the Commission decides whether to deliver a reasoned opinion explaining why it considers that the member state has failed to fulfil its Treaty obligations. Once the member state has replied to the Commission’s reasoned opinion or the lack thereof, the Commission will refer the matter to the ECJ and thus start the judicial procedure.

The infringement procedures against Cyprus and Malta have now been initiated with the formal notices sent by the Commission. What is less clear, however, is what arguments the Commission would use with regard to the obligations under the Treaties that these two member states allegedly failed to fulfil if this case is brought to the court.

The EC’s objections are partially based on the concept of “genuine links”. What can you tell us about this notion?

In its Press Release on the matter, the European Commission stated that it ‘considers that the granting by these member states of their nationality – and thereby EU citizenship – in exchange for a pre-determined payment or investment and without a genuine link with the member states concerned, is not compatible with the principle of sincere cooperation enshrined in Article 4(3) of the Treaty on European Union. This also undermines the integrity of the status of EU citizenship provided for in Article 20 of the Treaty on the Functioning of the European Union’.

The Commission will most likely argue that Cyprus and Malta failed to fulfil their obligations under Article 4(3) TEU and Article 20 TFEU by granting nationality in exchange for payment or investment and without genuine link. This argument is, however, somewhat problematic.

First of all, the ‘genuine link’ theory has not developed into obligatory rules or principles of international law, let alone in EU law which provides for non-discrimination on the basis of nationality. Trying to impose a ‘genuine link’ requirement on member states with regard to their criteria for acquisition of citizenship would not only be incompatible with EU law but would also almost certainly spark ethnic nationalism and undermine the values of the Union itself.

Secondly, it is difficult to imagine that the principle of sincere cooperation could be successfully invoked in the context of these cases. Article 4(3) concerns the achievement of EU objectives and genuine compliance with EU law, none of which seems to be related with the investment programmes. A possible infringement of that provision could be imagined in the case of mass naturalisation, which may have a significant negative impact on the internal market. This is where a member state confers its citizenship to a large, disproportional numbers of third-country nationals. However, this doesn’t seemed to be the case with Cyprus and Malta because the number of citizenship granted through their investment programmes remained low in general and compared to the number of other naturalisations in the EU in particular.

The EU has also pointed repeatedly towards other possible negative side-effects of investment migration, including money laundering, tax evasion and corruption. In your opinion, what measures can the EU implement to mitigate the risk of crime related to investment migration?

Money laundering, tax evasion, corruption and other illegal activities are one thing, and acquisition of citizenship through investment quite another. Acquisition of citizenship through investment is a legal path of naturalisation, likeable or not. Yet, associating money laundering, tax evasion, and corruption with investment migration make the latter look somewhat illegal, and this is wrong. Similar to other industries that involve large financial transactions, investment migration is prone to all sorts of illegal activities – which may come from both dishonest clients pursuing illegitimate ends, or corrupt politicians misusing the programmes for personal gains – and this is unacceptable. However, these illegal activities result from the malfunctioning of the law and are not related to investment programmes as such. The focus should be, therefore, on the enforcement of the rule of law in EU member states. Investment migration should undergo the same scrutiny as other industries involving large international financial transactions.

While the EC has also written to Bulgaria to request further information about its programme, Austria, which also grants citizenship to foreign investors, is not being mentioned. Why do you believe this is the case?

The fact that the Commission is concerned about the investment programmes of Bulgaria, Cyprus and Malta, and has not raised its concerns about other EU member states that allow for acquisition of citizenship by investment through their legislation, suggests that the EU is more concerned with the form than with the substance of investment migration. In its 2019 Report, the Commission explained that the discretionary naturalisation procedures in countries other than Bulgaria, Cyprus and Malta are highly individualised and used on a limited basis, and that, therefore, such procedures were not the object of the Commission’s report. That explanation, however, is contrary to the arguments used by the Commission so far. If the lack of a genuine link is problematic in the view of the Commission, then all other practices of member states granting nationality in absence of a genuine link should be deemed problematic too, as such practices, according to the Commission, infringe the principle of sincere cooperation. If the Commission is genuinely concerned about the lack of a genuine link, then this issue would go way beyond investment migration, affecting other forms of naturalisation too.

Thus far the EC’s action is directed only towards member states’ citizenship-by-investment programmes and not against the more common investor residence programmes. Do you expect that the EC will move to take action in this area too? If so, what competence does the EU have to adopt legislation that restricts member states’ rights to establish RBI programmes?

The EU has voiced its concerns about both citizenship-by-investment programmes and residence-by-investment programmes in the past. Citizenship-by-investment programmes, however, are of a more immediate concern for the EU because mobility entitlements of new EU citizens who have gained their citizenship through investment are more far-reaching than the entitlements of new EU residents who have gained their residence through investment programmes.

Thus, new EU citizens do not have to reside in the member state that granted their nationality but have the right to move and reside freely within the territory of any other member state and beyond (in the EEA and Switzerland, albeit with certain limitations in some instances), to mention the most important right stemming from EU citizenship. Unlike EU citizens, new EU residents are entitled to lawful residence in the member state where they made their investment. Their residence permit allows them to travel within the Schengen area and in other non-Schengen EU countries (Bulgaria, Croatia, Cyprus, and Romania) based on the unilateral recognition of residence permits by those states, but their residence status does not allow for free movement within the territory of other member states.

However, long-term residence leads often to citizenship, and this is where the EU may voice its concerns again and for the same reasons discussed in the context of citizenship by investment – absence of genuine link and in particular, physical presence during the residence of the investor, which takes us back to the beginning of this interview. Whether the EU will take action with regard to RBI programmes would, in my opinion, depend pretty much on the outcome of its current actions against Cyprus and Malta.

How do you believe the situation will develop in the coming months?

Launching infringement procedures against Cyprus and Malta does not mean that we will necessarily see a case on this matter in front of the court. The European Commission has discretion on whether or not to bring those cases to court. It would be very good, however, if these cases reach the court, and EU law on this specific subject matter is clarified.

Interview with DR ELENA BASHESKA, Legal Researcher and EU/International Affairs Consultant/Advisor

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