The ‘icy roads’ of RCBI applications: safer navigation through a common risk assessment framework.

Thought Leadership by Yakof Agius, Founder & CEO, CiviQuo

Many stakeholders in the industry believe that having a common risk assessment framework for the residency and citizenship by investment industry (RCBI) would be very beneficial, but also very difficult to achieve, since every country has its own risk appetite.

However, in May 2019, the European Union invited industry representatives to give their input to a group of member state experts who had been given this exact same responsibility; to address the concerns identified in the Commission’s report on Investor Citizenship and Residence Schemes, including the development of a common risk management process.

To give context to this challenge, it is important to understand how such risks are identified. Countries undertake a periodical process called a national risk assessment whereby the country’s priority concerns relating to money laundering and terrorist financing are identified. This exercise looks at how different risks could impact the country, the probability of those risks materialising and the consequences if they did.

An analogy to this would be driving a car in different weather conditions. The risks involved with driving a car are the same everywhere. However, in conditions where roads are prone to icing, there is a higher risk of losing control of a vehicle as opposed to driving on a dry road. So, based on the probability of there being ice on the roads and the possible accidents that may arise due to this, countries put in place accident- mitigating factors like for example, regularly de-icing the roads.

Even though tax evasion is a risk that applies to all countries, it may be less of a risk in countries where tax rates are low, enforcement is strict, the tax regime is simplified, and information reporting is easy.

A practical example of this would be where a country identifies that tax evasion is an illegal activity which threatens the country’s prosperity. Enforcement agencies would analyse the most vulnerable sectors and focus efforts and resources to mitigate this threat. Even though tax evasion is a risk that applies to all countries, it may be less of a risk in countries where tax rates are low, enforcement is strict, the tax regime is simplified, and information reporting is easy. In this example, the risk of tax evasion is constant, whilst the chances of there being instances of tax evasion and their impact are variable and dependant on several factors.

Having a common risk assessment framework for the residency and citizenship by investment industry would clearly identify the associated risks (constant). However, because probability and consequence (variables) are country-dependent, any viable framework must be flexible enough to allow different mitigating factors to be applied, thus enabling every country to mitigate the risks posed by an applicant who is seeking residency or citizenship in that country, in line with its own risk appetite.

In its summary note from the stakeholders’ consultation, the European Commission highlights that the risk categories that were identified as part of a possible common risk assessment framework include:

(i) intent, identification and verification;

(ii) political exposure, watchlists and sanctions;

(iii) regulatory compliance and legal conduct;

(iv) beneficial ownership and corporate affiliations;

(v) sources of funds and wealth;

(vi) taxation;

(vii) reputational risk; and

(viii) social structure and interaction;

These categories represent the constant risk categories which - as suggested by the stakeholders and reported by the Commision - every country who has a residency or citizenship by investment programme should take into consideration when reviewing applications.

The CiviQuo Risk Assessment Framework not only provides a structured framework which highlights the risks, but also provides recommendations on how to effectively inform the risk assessment process, whilst leaving the flexibility of how to do this to the practitioner in line with the risk appetite being observed.

Establishing a common risk assessment framework for the residency and citizenship by investment industry is a significant development because it allows for the objective and systematic evaluation of an application, hence bringing a high degree of transparency across the industry. Furthermore, it enables government institutions, immigration service providers and due diligence agencies to align their efforts for more effective reviews, and thus better outcomes all round. Through further research, this framework can be improved, but for the time being if you are looking for a better grip on an RCBI application’s risk assessment, this is probably the safest option.