Will the global market for investor citizenship survive COVID-19?

By Jelena Dzankic (EUI).

This contribution is part of a blog series featuring contributions by Kristin Surak (How COVID-19 will transform the market in investment migration) and Peter Spiro (COVID-19 and the future of dual citizenship).

The last few months saw a major disruption of all aspects of human lives caused by the novel coronavirus. Human movement within and across geographical spaces is at its lowest in a century, our consumer habits are undergoing tectonic changes, and our lifestyles are adapting to living in fight-or-flight mode. Social, political, and economic challenges that will ensue are real, and we see that crucial aspects of citizenship as the relationship between individuals and the state are changing amidst the global epidemic. The choices which states face about whom to let in, whom to rescue and whom to give healthcare and social rights are just some of the many questions that these strange and difficult times have raised. Answers to these questions, combined with changes in consumption and lifestyle choices will determine the post-pandemic fate of the global market for investor citizenship. Will the sale of passports die out as a result of decreased mobility and new economic realities, or will the industry successfully thrive on the virus, advertising ‘pandemic’ passports as risk insurance?

The state’s responsibility to provide

Peter Spiro’s central claim is that citizenship-by-investment (and dual citizenship in general) is unlikely to suffer, because ‘short of full deglobalisation and sustained lockdown, citizenship is likely to remain a valuable asset at the same time that states are unlikely to see serious new costs in pre-COVID-19 citizenship practices’. In principle, I agree that states are unlikely to detour significantly from dual citizenship acceptance. This has been on the increase since the 1960s and is not likely to disappear again. However, the pandemic has expanded the role of the state not only as a regulator, but also as provider of essential services. In so doing, it has revealed the potential ‘burden’ of citizenship for states. Defining to whom the state has ‘the responsibility to provide’ will inevitably change the way states view individual interests in strategically acquiring dual citizenship (Harpaz). We can already see this shift in the Portuguese draft bill seeking to introduce a two-year residence requirement for descendants of Sephardic Jews to qualify for naturalisation. From 2015 until now, Sephardic Jews, whose ancestors were expelled from Portugal in the 15th century could qualify for the country’s passport if they could prove their ancestry, without any residence conditions.

The example of Portugal, and of other countries such as Ireland, shows how the focus of the state’s ‘responsibility to provide’ may shift towards settled residents rather than strategic citizens. Residents – whether citizens or not – are lifetime taxpayers, while instrumental passport holders are not. To be sure, investor citizens provide temporary fiscal relief to countries (e.g., investment obligation is three to five years). This relief may indeed generate ‘return’ for states, but the investment belongs to the investor and may be withdrawn from the respective country after the designated period. Citizens by investment are frequently not bound by the tax laws of the country of which they bought a passport, precisely because they do not reside there. Rather, the holding of multiple passports has become their strategic way of sidestepping substantial obligations towards any state in this regard. By contrast, over a lifetime, an average taxpayer contributes 15 years of his or her income in direct and indirect taxes. If delivering healthcare services is one of the core functions of the state, made possible through tax revenue, it is reasonable to expect that states would seek to extend their role as a ‘provider’ towards those who contribute continuously. The rallying cry of the American Revolution was ‘no taxation without representation’, so why should states provide duty-free nomads with ‘services without taxation’? 

So far, during COVID-19, states have generally allowed their nationals to repatriate regardless of their place of residence. Inevitably, as Spiro also notes, ‘there will have been some instrumental citizens, those who were not returning home but who were seeking refuge from their dangerous places of residence and primary citizenship’. With no liability to pay taxes in their country of (non-resident) citizenship, such individuals are seen by their fellow citizens as undeserving and a potential burden on the healthcare system. Even though the number of investor citizens is small compared to other groups and hence should not present a major risk, that argument is only valid in part. Most of the countries that have investor citizenship programmes (those running programmes, and not those engaging in unregulated sale of passports) are small states, with limited healthcare capacities. In case the number of patients (resident citizens, resident non-citizens, non-resident citizens who have strategically relocated) in need of intensive care is greater than hospital capacities, there will be resource allocation and prioritisation issues. What are the criteria on which those scarce resources will be allocated? How do we compare a one-off contribution to the national exchequer and a long-term tax and social security contribution record? In a crisis like a pandemic, diverting state resources to privileged people could be deeply resented by citizens who are suffering, who have to accept draconian restrictions of their freedom, and who are not guaranteed a hospital bed or a ventilator if they needed one.

Now, obviously, when raising these hypothetical scenarios, we need to think about investor citizens together with other strategic passport holders, neither of whom actually moved to their new country of citizenship in the pre-COVID-19 world. In practice, the rights and obligations of an external citizen with ancestry in country X should be no different from those of an external investor citizen in country X, even though there could be millions of the former and only a handful of the latter. US officials have already expressed concerns over the potential upsurge in repatriation claims of dual US-Mexico citizens if the coronavirus outbreak in that country worsens, or if it causes a major economic downfall. States can take different measures in this regard, and each measure (whom to let in, who qualifies for what once inside the state) is subject to trade-offs and is far from uncontroversial. What needs to be avoided is selective admission, in which either non-resident citizens by investment or by ancestry are given precedence, while others are discriminated against. The approach to rights afforded to dual citizens that states will take in the post-COVID-19 period in view of their ‘responsibility to protect’ will be one of the key determinants of the future fate of the market for the sale of passports.

 Selling-points on thin ice

One of the problems with the investor citizenship market is the absence of independently verified and transparent data. The chairman of one of the intermediary companies for the sale of passports has recently stated that there has been a 42 per cent ‘increase in the number of people filing a formal application for a new nationality during the first three months of 2020’, indirectly implying that the market is doing very well at the moment. Yet, the reported percentage mostly refers to the period before the World Health Organisation declared the pandemic on 11 March. In some countries, such as Malta, the application also consists of submitting biometric data for which a visit to the island is necessary. Hence, it is unlikely that the number of filed applications remained high in cases when the applicant had to travel, and in various countries that are not processing naturalisation applications at the moment.

While logistics are likely to improve in the coming months, and thus may not be a long-term problem in the global investor citizenship market, the pandemic has also posed a major challenge to the investor citizenship industry by putting most of its key selling points – mobility, luxury, tax benefits – on thin ice. Leisure travel privileges afforded by passports for sale are virtually non-existent at the moment. As of 20 May, 185 countries worldwide are implementing travel bans, exempting only nationals, and individuals with long-term or multiannual links to the country. As already noted by Spiro, this has ‘seriously compromised’ the key elements of the various passport rankings. These have mostly been produced by the citizenship industry and have been a crucial element in marketing investor citizenship programmes. Right now, hardly any passport can be deemed better than another for the purpose of international mobility. Presumably, with the gradual re-opening of international borders in the coming months, passports will regain their role in the context of cross-border movement. Yet the demand for investor citizenship is likely to remain depressed. With the likelihood of future travel bans, the value attributed to passports by passport rankings is unlikely to match their real mobility value for some time. The ‘global lockdown’ caused by COVID-19 in Spring 2020 may well be followed by selective lockdowns responding to national outbreaks in case of a second wave of disease later in 2020 or 2021, or even repeated in the event of any future pandemic. Restrictions on human movement during the novel coronavirus pandemic will remain for a long time a reminder that mobility should not be taken for granted, as it can easily be swept away. This fact should upset any supposedly stable ranking of passports.

Passports-for-sale have also been advertised as a luxury good, another aspect of the market for citizenship that has been put to the test by the pandemic. As I argued in the Global Market for Investor Citizenship, the ‘commercialisation of the passport is a direct outcome of the dynamics of luxury consumption in emerging markets’. Emerging elites in developing countries seek to emulate consumption patterns and the lifestyles of the affluent in other parts of the world, but may be constrained by the lack of visa-free access that their original passport affords them. They also often acquire the second passport to signal a superior status vis-à-vis other citizens of their own country (Dzankic 2019; Harpaz 2019a). Yet, luxury consumption and experiences have cratered since early March. Robust data of a major global consultancy specialising in this area predict a market contraction between 18 and 35 per cent. Even with the revival of luxury shopping, the lifestyles and experiences aspect of the luxury markets will remain much affected by the travel restrictions. People may opt to buy an Italian luxury brand, but they may do so online; without the experience of purchasing an Italian brand in Quadrilatero d’Oro. Further to this practical side of the luxury markets, the conspicuous aspects of luxury consumption have faced harsh criticism on social media. Signalling privilege during lockdown has cost the global influencers millions – of dollars and of followers. In a pandemic context where the whole experience – and in part purpose – of luxury has been called into question, marketing passports as a sumptuous good or a pathway to ultra-high-end consumption has become rather difficult.

Similarly, the tax benefits afforded by multiple passports are hanging by a thin thread. Most of the world’s countries apply residence-based income tax based on the number of days individuals would spend in a country, or the profits made whilst in it. The ‘wealth preservation’ aspect of the passports-for-sale industry has been underpinned by the creation of tax nomads in search for tax havens. Lockdowns and travel restrictions caused by the pandemic have now confined the world’s ultra-high-net-worth individuals to single places. The situation is likely to have tax implications, which ‘include the prospect of higher levies from spending too many days in a foreign locale, or having to shelve plans to obtain tax breaks by moving abroad’. In other words, faced with a downfall of the key marketing points, the pandemic has shown how vulnerable the business of selling passports is, and has led to its re-branding.

Re-branding: passport as an insurance card

Any branch of industry or service whose key selling points have been compromised will most likely seek alternative advertising strategies. The ‘citizenship industry’ is thus focusing on passports as ‘the ultimate insurance policy [for the super-rich] to make sure they will be able to travel to whatever virus-free, sunny bolt-hole they choose, if a second spike in Covid-19 infections triggers another global lockdown’. This is very much in line with Spiro’s observation that the scope of investor citizenship will change in that ‘states whose passports never offered much in the way of global travel rights can at least offer a shelter from spreading disease’. To what extent does this match the reality?

Countries that operate investor citizenship programmes have indeed reported remarkably low official numbers of COVID-19 cases, which would contribute to promoting them as ‘corona-free’ destinations. The low numbers could potentially be attributed to the world’s most restrictive lockdowns and border closures in place in these states. St. Kitts and Nevis as well as Malta imposed a very short deadline for residents and citizens to return before sealing their borders completely (except for vessels carrying food, medical supplies and fuel). Nationals and residents in these countries who did not manage to enter before the border closure will remain offshore until the restrictions are abolished. Other countries operating investor citizenship schemes, such as Antigua and Barbuda, were among the first to enforce blank travel bans without exceptions (even without the return deadline for nationals and residents). Cyprus has a ban on the entry of non-resident citizens (with unspecified exceptions) and, similar to Montenegro, implements a 14 days mandatory quarantine at a state facility. Both countries had strict curfew rules. Finally, most countries engaging in the outright sale of passports are not known for the high quality of their healthcare system. Many of them – including the Commonwealth of Dominica, Cyprus, Malta, Moldova, Montenegro, St Kitts and Nevis – have a track record of political instability and governance issues, such as cronyism, nepotism and corruption. This calls into question the extent to which one could rely on these countries as safe havens in case of a second wave of COVID-19.

A final thought on post-COVID-19 citizenship: no strings attached or a lasting relationship?

Like Spiro, I doubt that the pandemic will bring about the end of dual citizenship, or that it will simply wipe out investor citizenship. But I equally doubt that COVID-19 will skyrocket the ‘pandemic passports’ – a catchy phrase but an ethically problematic approach to the business of selling citizenship. What the pandemic might do is cause a re-evaluation of the states’ approaches to nationality, especially as regards the balance in (1) the states’ interests in granting citizenship entitlements to individuals with different types of connection and (2) individual interests in (and potential risks from) naturalising in a particular country. For many states offering (or considering to offer) travel documents in exchange for investment, the quick injection of capital will certainly be tempting amidst the economic recession that will ensue. Yet they will need to re-think their approach to different statuses, as the pandemic has opened the Pandora’s box of state ‘responsibility’. Who should be allowed to return? Who should be evacuated? Who should be offered protection inside the state’s borders? These are all questions that should be top priority on the political agendas of the world’s leaders. And the response to each of them needs to show a responsible and healthy approach to governance and a core awareness of human rights. The response to them will also reveal whether citizenship after COVID-19 will be ‘a thing’ with no strings attached, or a lasting and substantive relationship between individuals and states.