The Importance of Due Diligence: Lessons from Malta
In an ever-changing world, one that is becoming more volatile both politically and economically, successful individuals seek opportunities to stay ahead. Affluent individuals are looking at citizenship by investment options as a means of securing their future.
CBI is a subject, which attracts a fair share of passionate discussion. Some accept it; some simply despise the concept of citizenship by investment. All in all, it has put countries offering such programmes into the spotlight, with strong calls for stringent due diligent processes; often the result of misconceptions or lack of knowledge about the industry.
The reality is somewhat different; Citizenship-by-Investment Units (CIUs) employ very thorough and unparalleled due diligence systems, which are often looked-up to by their peers in the financial services industries. The benefits of the robust due diligence processes adopted by CIUs go beyond the investment migration industry.
CIUs could be providing an essential service to jurisdictions, through their work in due diligence. Sharing of information across CIUs through distributed ledger technology (DLT) could help to combat financial crime, money laundering and financing of terrorism.
Malta’s Individual Investor Programme (IIP) is the first CBI programme in the EU to be endorsed by the European Commission. It is considered to have the best due diligence procedures in the industry. Jonathan Cardona, CEO of the Malta Individual Investor Programme Agency, shares his thoughts on best practice in the investment migration industry.
Can you give us an overview of Malta’s Individual Investor Programme (IIP) and its economic impact?
The programme was not designed to address any form of economic distress, and our economy does not depend on income from the programme. Malta is experiencing growth rates of 6% plus in recent years, and the revenue from the IIP is certainly welcome and is giving our economy an extra boost, but it is not required to keep our economy afloat. When the programme was launched in 2014, the rationale was to attract international talent to the country and to create a sovereign wealth fund. The programme is currently capped at 1,800 successful applicants, and to date, we have approved 900 applications.
Malta is often cited as being the reference point and gold standard in terms of due diligence. Can you run us through the process that Malta follows?
We have developed a multi-tier due diligence system where we ensure that the applicant does not have a criminal record or pose a threat to national security. First of all, applicants do not approach the agency directly, but all applications have to go through an approved agent. These agents conduct tier 1 due diligence, including KYC checks in line with established industry standards. If these checks yield positive results, the applicant can move on to the next stage, which is the application for a residence card. As part of this process, the Maltese police perform background checks and searches in the Europol and Interpol databases. Once the agent receives clearance from the police, the applicant can start preparing the actual application for the programme. It usually takes between two to six months to complete the application and gather all the supporting documentation.
Can you tell us what checks you perform when screening applicants, and how exactly you develop an applicant’s risk profile?
Once we receive the IIP application, we ensure that all the documents that we require have actually been submitted, such as birth certificates, marriage certificates, inheritance certificates and company information. We then pass on the information to specialist due diligence companies. We always contract with two companies to investigate each applicant. Connecting the dots between people, businesses and financial records has become a complex task, and we take no chances. Once we receive the reports prepared by the third-party due diligence firms, our internal due diligence team goes through the file again, adding our own findings from sanction lists and other online databases. They create an internal executive summary about the applicant, applying a risk matrix with seven categories that we have developed.
The risk matrix starts with the identification of the family and the question of whether they are politically exposed persons (PEPs). We also place a strong emphasis on the source of their funds and the source of their wealth. We are further looking into their business affiliations, their general reputation and any legal as well as regulatory issues that might affect the application. Last but not least, we define their ‘impact radius’. This means we are taking into consideration anything that could affect Malta’s reputation should citizenship be granted. For instance, an individual might be involved in a legal activity that we feel is morally and ethically wrong.
What are the next steps?
We complete a peer review, where our team comes together, and the file is reviewed one more time. The team then prepares a recommendation whether to accept or reject an applicant. This recommendation is presented to a senior manager, who reviews the file again. At any stage, we might request additional information from the applicant if questions arise or we require clarification. Finally, we send our recommendation and the supporting documentation to the responsible minister, who then makes a decision about whether citizenship is granted or not. The decision of the minister is final and cannot be appealed. Approximately 20% of the applications are rejected, which I believe shows that we are taking the due diligence system very seriously.
What other measures have you implemented to safeguard the integrity of the programme?
The entire process is being overseen by an independent regulator, while applicants, as I have already mentioned, need to make use of an accredited agent. These agents are individuals who hold a professional status and are members of a professional body. We have adopted this system to ensure traceability, facilitate communication and ensure personal responsibility for each application. We also expect high communication standards from our agents, and we do not accept agents who act irresponsibly.
Many argue that the industry will need to look to the banking sector and to attain the same level of due diligence that banks are performing. Is this a level that the industry needs to get to?
Ultimately yes, and in many ways, we are already operating like a private bank. The levels of checks that we are doing are not too far off from what the banking sector is doing. For instance, more and more emphasis is put on the source of funds and wealth. We are receiving a substantial amount of funds, and we need to ensure that the source of funds is clean. We need a clear picture of the current wealth and how it is being generated and what is the history behind it.
The investment migration industry seems to feel that it receives a lot of unfair criticism. Do you agree with this statement?
I think everyone in the industry does encounter misinformation as well as a general misunderstanding of the industry. We, in Malta, had discussions both with big media outlets and international organisations, and we have explained our processes and procedures. We have already seen that a lot of the ‘heat’ eases when people gain real insight into how we run our programme. However, I think, as an industry our communication with all stakeholders needs to improve further. We also need to understand better what their real concerns are so that we can, if necessary, implement any safeguards to mitigate these concerns.
Many countries in the world are opposing CBI programmes. What, in your opinion, does the industry need to do to regain credibility and avoid that other countries revoke visa-free access?
Citizenship is a sovereign matter of national competence. However, I believe, everyone in this industry needs to make sure that other stakeholders are also comfortable with the design of a programme. In Malta, we don’t accept applicants from Afghanistan, North Korea and Iran, but we are also careful not to create issues with countries with whom we have visa waiver agreements, such as the US. This means citizens from countries who are on the US travel ban also cannot apply.
Many CBI programmes struggle to achieve the right balance between transparency that is demanded by the public and confidentiality that many clients, for completely legitimate reasons, request. What’s your view?
We publish the names of individuals who become Maltese citizens, and we are one of the few countries in the world, and the only one in Europe, which does that. I understand that there are applicants who prefer if we would not reveal their identity. However, we are committed to this level of transparency, and we make this very clear to every applicant.
How do you believe the industry will develop in the coming years, and what lessons can other countries learn from Malta when it comes to designing and implementing a CBI programme?
I believe the level of international scrutiny will increase in the coming years. Today, financial crime, money laundering and terrorist financing are on everybody’s mind, and we, as an industry, will be subject to more checks and controls. The due diligence process has to be taken very seriously, as failure to do so can tarnish the reputation of a programme, and ultimately, the value of a country’s citizenship. Working collectively as an industry, we all want to continuously evolve our systems and raise the bar, but I must say that it is disappointing to see that applicants who have been rejected by Malta are receiving passports from other countries. This calls for greater cooperation among countries.
Malta’s Individual Investor Programme at a Glance
The Individual Investor Programme (IIP) requires an investment in the National Development and Social Fund of €650,000 for the main applicant and €25,000 for a spouse. In addition, applicants need to pay application and due diligence fees of €13,700 per couple, and are required to purchase a property with a minimum value of €350,000, or rent a property for which the minimum annual rent exceeds €16,000. Finally, they must invest €150,000 in government-approved financial instruments, which, together with the property, must be retained for a minimum period of five years.