Immigrant Investor Programmes: Navigating Economic and Political Tensions

Published 10 February 2015 / By Madeleine Sumption

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Maltese PassportImmigration policies offering residence rights to wealthy investors have existed for decades. Australia, New Zealand and the United States have all had special programmes admitting immigrant investors for over 25 years. Historically these routes have been small and attracted relatively little attention in policy circles.

But over the last few years, the investor immigration field has become rather active. The US EB-5 investor programme, a little used immigration route until the mid-2000s, suddenly took off in 2008 and is now for the first time bumping against its 10,000-person cap. Several EU countries have started to offer temporary residence permits in return for investments in property or other assets. Most controversially, “citizenship by investment”—previously the terrain of a handful of Caribbean islands taking cash donations in return for passports—arrived in the European Union with a programme announced by Malta in 2013.

Despite the new enthusiasm for immigrant investor programmes, designing an economically beneficial and politically popular policy is harder than it might seem. Governments tackling this task must resolve a host of technical, operational, and conceptual questions. 

Why are investor programmes difficult to design?

First, governments must decide “who is an investor”? Is the goal of the programme to admit people with actual business expertise? Or is it OK for a wealthy businessman to give his son or daughter £2m to qualify for the programme? Does it matter if people invest borrowed money rather than the profits of previous successful business ventures? Many countries (including the UK) have no requirement for business expertise, in part because it is difficult to assess on an application form—while some, like Australia, have selection criteria that include a “successful” track record of business experience.

Second, policymakers must decide what types of investment their programme should reward. Some have favoured simple transactions that are easy for officials to verify, such as paying cash or buying government bonds. But cash payments are extremely controversial (more on this below). And there is little reason to believe that getting investors to buy interest-bearing government bonds will bring appreciable benefits, as a Migration Advisory Committee report last year eloquently described.

As a result, other governments have chosen programmes that reward private-sector investment activities that they hope will create jobs and boost productivity. The major challenge these programmes face is compliance—how to ensure that investors are really following the rules.

Encouraging compliance

One reason for this is that the interests of government and the interests of investors are not necessarily aligned. Investors want programmes that are not too expensive, not too much hassle, and not too risky (that is, where there is little chance they will either lose their money or fail to get the desired immigration status, such as permanent residence or citizenship). Policymakers, on the other hand, may prefer programs with high investment thresholds and complicated conditions designed to ensure that the investment is genuine, that the investor is actively involved, and/or that the right kind of jobs are being created.

Because government officials are not well placed to judge an economically beneficial investment activity, such criteria may simply become bureaucratic hurdles for investors to meet on paper rather than in spirit. In the United States, for example, an industry of intermediaries has arisen to help investors ensure they will create the programme’s requisite 10 jobs with as little risk and cost as possible—apparently encouraging investment in low-skill intensive industries with no guarantee that the jobs will last longer than the 2 years the programme requires.

All told, creating an investor programme with tangible economic benefits has been a challenge, and long-standing models in several countries have fallen short of expectations. Canada finally terminated its investor route in 2014 due to a concern that it brought limited economic benefits and that investors entering under the program did not fare particularly well in the labour market. Latvia sharply increased its investment threshold from EUR70, 000 to EUR250,000 following concerns about the large numbers of applicants. The Hong Kong chief executive announced the end of the city’s programme at the beginning of 2015, arguing that Hong Kong did not need these capital inflows.

Why are some investor programmes more controversial than others?

Questions about the ethics of selling citizenship or admitting people because of their wealth apply, in theory, to all types of investor programmes. In practice, these questions are much more visible in some models than in others, however.

money_lockThere are two main ingredients to a controversial programme: accepting cash payments from investors, and not requiring them to live in the country for very long before they can get citizenship. On one hand, accepting cash in return for immediate citizenship visibly strips the interaction between the host country and the investor down to a mere financial transaction. Treating citizenship like an economic commodity makes those who care about the political and symbolic roles of citizenship uncomfortable. So does giving citizenship to people who haven’t lived in the country and may not even intend to (one reason people buy citizenship in Caribbean countries, for example, is not to live there but to access visa-free travel in Europe).

The simple transparency of the investor programme that Malta initially proposed in late 2013 came with both of these ingredients: a payment of EUR650, 000, in return for immediate citizenship. The announcement prompted outcry among Malta’s domestic political opposition, as well as pushback from the European Union, where the new Maltese citizens would be entitled to travel and work.

Interestingly, an existing programme in Cyprus that offered citizenship up front but in return for various other investments—but not cash—attracted relatively little attention. Other jurisdictions, such as Hungary and Ireland, have masked cash payments in the form of zero-interest government bonds designed especially for immigrant investors; in this case, the applicant does not make a lump-sum donation but instead loses their money gradually over a period of several years.

After negotiations with the European Union, Malta agreed to detoxify its investor programme while keeping the core of it—the cash payment—in place. It did this by adding some extra requirements (such as owning property in Malta) and agreeing to a 12-month “residence requirement” that might more accurately be described as a “waiting period” since there is no minimum number of days the investor must spend in the country as a temporary resident.

Tensions between economics and politics?

Empirical evidence on the impacts of investor immigration and on which programmes are most likely to bring economic benefits is relatively limited. Governments have designed their policies largely in the absence of hard evidence (although evaluations conducted in Australia, Canada, New Zealand, and the UK have generated some useful information).

In the absence of empirical evidence, cash-based programmes have some appeal from an economic perspective, since they provide tangible financial contributions while raising relatively few compliance problems. But cash-based programmes are also the most controversial by some distance. As governments navigate the tensions between political and economic objectives in the future, should we expect the balance to tip from transparency to complexity?