Updated: Oct 16, 2019
What do Comoros, Cambodia, and Cyprus all have in common? If you said they all start with the letter 'C' you'd be right, however, they also have a more important commonality. All three countries offer their passports for sale in exchange for a fee; a process known as 'citizenship by investment.'
Despite an appreciable increase in media coverage as of late, these programmes are not a new phenomenon. The story of citizenship by investment goes back as far as 1984, when St. Kitt's debuted the first official programme in a bid to boost government coffers for investment in tourism infrastructure, the overhaul of social programmes, and attracting vital FDI for the property market. In return, an investor received a passport offering visa free travel to over 130 countries, low taxation, and citizenship to a tropical country of unparalleled beauty.
Today, these programmes are administered across the Caribbean, as well as in Europe, Africa, and Asia – allowing prospective applicants to choose a jurisdiction from almost any corner of the globe. For governments, citizenship by investment is a source of valuable revenue that does not come with the drawbacks of taxation on the local population.
But is it a win win?
Well, the reality is that it has not always been plain sailing for the trade in passports. Case in point: the St. Kitts and Nevis programme ran into trouble with the US Treasury Department in 2014, when suspected Iranian operatives were caught using their St. Kitts passports to launder money for banks in Tehran in violation of US Sanctions.
Such incidences of skulduggery inevitably led to accusations of broad government corruption in an industry already perceived to be shrouded in secrecy and geared towards the rich. Consequently, reforms to many programmes in conjunction with increasingly strict anti-terrorism and anti-money laundering (AML) legislation, have prompted some governments to prohibit persons of certain nationalities from applying for citizenship through citizenship by investment programmes, and to restrict funds transferred from certain jurisdictions in order to ensure compliance with international sanctions.
Fast forward to the present day, and citizenship by investment is experiencing somewhat of a renaissance. Back in 2014, the total investment in the global passport trade was estimated at around $2 billion a year, and some industry sources put the number at almost double that for 2016. The fact that the Cypriot programme alone has attracted $4.4 billion in investment since 2013, and that the Caribbean governments of St Kitts & Nevis, and Antigua & Barbuda are generating approximately 25% of revenue through their respective citizenship by investment programmes, again underscores the meteoric rise of an industry that seems not to know where the brakes are.
But what is the spark that set the powder keg alight?
The dual need for financial and physical safety
The noxious mix of economic uncertainty, increasingly autocratic governments, social turbulence, and geopolitical stress, has given rise to a trend of closing borders, decreased safety, and a receding social contract. The more these factors come to bear on the local population, the more they fuel interest for second citizenship in the process. For example, one citizenship industry insider reported a 400% increase in demand in CBI programmes from Turkish nationals in the past year alone.
Seen within the context of the destabilising military coup attempt in July 2016, and the hoards of Kurdish militants and Islamist factions spilling across the border from Syria, the correlation becomes clear. Furthermore, with capital flight flight taking hold at lightning speed, it is also unlikely to be a coincidence that the Turkish government chose to announce the launch of its very own foreign investor programme in May 2017.
For those of high net worth (HNW), or ultra high net worth (UHNW)–a group that is expanding year-on-year–the threat of socio-politcal turbulence or outright war means that having a well diversified portfolio simply no longer suffices, even if that portfolio contains assets from different geographical regions. Compounding this further is the fact that technology has turbo-charged governments' powers of surveillance, enabling them in many cases to oversee citizens' financial and business affairs, including emails, residence, banking, brokerages, gold/silver deposits, business registration, e-commerce, customer base, phone/fax, financial instruments, postal mail, and more.
The fact that persons of Chinese and Russian origin make up over half of citizenship investors–owing to the need to shield their assets and businesses from expanding government encroachment–only serves to underline the stated reasons for the explosion in second citizenship demand. For Middle Eastern applicants, the additional citizenship not only offers vital access to many international business hubs that remain inaccessible with their native passports, but also acts as a crucial safeguard against getting trapped by social unrest in an Arab Spring-type scenario.
Investors are looking for insurance against another Arab Spring-type event. (Source: Pixabay)
Ultimate insurance product, ultimate premium
Although technology has also facilitated the extent to which investors can achieve diversification, only a second citizenship can truly provide the geographical diversification necessary to hold assets in a separate legal jurisdiction, whilst at the same time offering the insurance of physical safety against a rapidly multiplying number of "black swan" events.
But it doesn't come cheap. Cypriot citizenship is only available to those able to part with upwards of €2 million, and comes with the condition of mandatory travel and ownership of real estate for the rest of the applicant’s life. While less costly options do exist (Dominica offers citizenship for a minimum investment of US$100,000 and fewer travel requirements), the size of the investment outlay invariably puts it beyond the reach of smaller investors.
Regardless of investment outlay, having a plan B has never been more important to those who have the most to lose, and the means and motivation to take action to insulate themselves and their families from risk. As a potentially life saving investment, therefore, a second passport represents the ultimate insurance product for which the ends may certainly justify the means.