The Risks of CBI Real Estate "Financing"

2024-04-18
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I’ve lost count of clients who walk through our doors with a sparkle in their eye and a hankering to haggle. They come in, a stack of quotations from other firms in their hand, and ask me: How much does a Caribbean passport cost at your firm?

The first time this happened, the question took me aback. Then, I looked into the “financing” issue plaguing Caribbean CBIs.

CBI quotations going as low as $70,000 (in one case for an entire family) plagued the Dubai investment migration market. Real estate financing schemes turned one of the world’s most prominent CBI outbound arenas into a flea market.

Citizenship isn’t a pair of pants or a dishwasher that a person can haggle over, and everyone involved in the CBI process should treat it with the gravitas it deserves.

I’ve been vocal in my rejection of the financing process, but it has sadly become the go-to move for investment migration consultants and developers who want to make a quick buck and do not care what harm happens to their clients, the program, or the country.

Distressingly, financing has become a mainstream CBI practice. Caribbean governments have repeatedly published notices and memos to their agents and developers that unauthorized discounting is illegal, but those warnings keep falling on deaf ears.

The issue is quickly reaching its tipping point, and the axe will fall sooner than later. I write this piece to warn potential about the possible risks, especially since I know from practice that they get little to no information from their consultants on what potential harms await.

What is real estate financing?

Before discussing the risks, it is imperative to explain how real estate financing works within the confines of a CBI program.

Financing only works (illegally, of course) under the real estate option. In this scenario, a developer offers the investor a chance to finance their real estate investment, meaning that a client will make an upfront payment (typically $70,000 — $100,000) instead of the mandated $200,000.

The developer then completes the remaining amount to reach the minimum. threshold as a no-interest loan. The developer will then hold the property, or more commonly, the share, as collateral. If the client completes the amount within five years (the minimum holding period for CBI real estate investments), he will get full ownership of the share.

In some cases, the developer makes completing the loan and the road to full ownership so complex that investors just decline to pursue the matter completely. The developer, of course, does not want investors to take ownership so it can resell the share in the same manner once again.

If the investor fails to pay the remaining amount, he will forfeit the share to the developer. In essence, financing is a simplified collateral-based loan. However, it gets problematic under the umbrella of CBI.

To qualify under the real estate option, a developer must show the government that it has fully received the investment in their bank account. Some developers who want to pursue such unsanctioned activity will open a bank account abroad, outside of the Caribbean government's jurisdiction.

In this case, the government's only recourse is to base its judgment on the documents the foreign bank and developer provide. In this messy area, the developer can show that it has, in fact, received $200,000, but the Caribbean Citizenship by Investment Unit (CIU) cannot investigate more intricate details as if it were a local bank.

Basically, developers set up the entire framework to purposefully deceive governments and show that it received the total amount from the investor.

CBI consultants who work with the developer are also aware of the process, or at least part of it. Usually, a developer will impart partial information to their partners to protect the process and keep a low profile.

Some CBI consultants may even argue that the financing option is so mainstream that they believe it to be an official route. This justification,
however, is worse than knowing the truth, as a CBI consultant should have the ability and knowledge to at least open a government's website and check for themselves.

This added layer of ambiguity adds to the potential confusion and risks the client will bear in the long run.

Developers who operate this financing scheme do not plan on completing the construction of their projects. Hence, the financing process allows them to sell air for hundreds of thousands, if not millions, of dollars. The developer sells a share of a project it will not complete nor pay money to build, then recycles it when it gets back ownership after five years.

Financially scheming and an unethical approach play a part in the process, especially regarding the risks involved to the CBI consultancies (who are complicit), the government, and the clients, who may not (and usually do not) comprehend the whole picture.

The risks of financing

To better understand financing risks, it is best to break them into four tiers: Risks for the developer, CBI consultancy, government, and client.

Developer risks

The developer’s risks are significant. By willingly selling nothing to clients under the CBI program, the government may strip the developer of their certification and remove the project from the CBI program.

However, developers that practice financing do not care about this risk, as they come into one country, make a significant amount of money, and then move on to the next.

Another risk developers face is potential criminal or civil charges, such as defrauding the government or intentional contract breaches. However, once again, developers who plan this scheme consider such issues and draft contracts that protect them from them. This is alarming because if something goes wrong, a developer can shift the blame onto another stakeholder within the process, and usually, the client is the weakest link.

Risks to the CBI consultant

CBI consultants who offer financing to their clients are complicit in the illegal activity; there are no two ways about it. These consultants, whether they are registered agents or act as sub-agents, understand the process and the government's crystal-clear rules on the matter.

Yet, the allure of undercutting the competition is too high for some of the less capable firms to ignore. Instead of competing through service standards and professionalism, they create a price war for a “product” that isn’t eligible for discounts or haggling.

This lowers the overall level of service that clients receive as more CBI firms cut corners to reduce costs. The more companies that participate, the greater the confusion spreads throughout the market.

If a government can obtain evidence of wrongdoing and pursues the illegal actors, then CBI firms who partake in financing could lose their certification and take up a place on the CIU’s blacklist.

While unlikely due to the vast number of global localities of CBI firms, prosecution is still a possibility, especially for the biggest offenders. But once again, if push comes to shove, CBI firms that operate within the financing process will try to shift the blame onto the weakest link in the process and the one with the most to lose—the client.

Government risks

The government faces two risks, a minor risk and a major one.

The minor risk is potential financial loss, akin to the “lost sales cost” in economics. The government grants citizenship to facilitate economic growth. If developers do not deliver real estate projects, the government will have effectively granted citizenship for nothing.

Developers are effectively scamming governments and financial loss is involved; even if the government is not actively paying significant amounts of money, it is losing a lot.

The second risk is much more severe. Caribbean governments face constant pressure from global superpowers such as the UK, USA, and EU.

The latter, in particular, is not a fan of CBI, and if some players utilize the program incorrectly, the entire process is at risk. Governments may face
heated political and economic pressure, and a serious issue such as financing may spell the end of a CBI program.

This risk is precisely why Caribbean governments have been fighting illegal discounting and elevating their due diligence processes. It may take some time for these smaller governments with limited resources to stamp out illegal activity worldwide. Still, hopefully, they will do so in time.

Client risks

Clients, or investors, represent the weakest link in the process. While governments are the primary victims of the financing scheme, clients face significant potential risks.

Clients are typically unaware of the intricacies of the process and the legal framework that supports it. They also take the word of their consultants, making the matter much more dangerous if a consultant doesn’t care about the client's wellbeing but instead is thinking about their commission.

This knowledge gap can be catastrophic. Since developers plan the whole thing and CBI consultants are involved, they have the time and know-how to protect themselves in case the hammer drops. Clients do not have that luxury.

Clients can face serious issues, as governments may revoke their citizenship because they did not invest the required minimum, but that is just the tip of the iceberg.

Ifa government revokes an investor's citizenship, the entire up-front payment is lost. So, to save anywhere between $20,000 and $40,000, the investor may end up losing two to three times that amount.

Secondly, if the issue becomes a political one concerning global superpowers, developers and CBI agents will blame clients or at least drag them into it. Caribbean governments will have to take more drastic measures.

This can entail publishing applicant names, applications, and more. This issue could be especially damaging to clients who come from countries that do not allow dual citizenship.

Governments may also take legal action if they deem the developer, CBI agent, and investors knowingly defrauding the government and misusing the program to obtain citizenship under false pretenses. This matter could result in criminal charges and prosecution.

The risks are minuscule for developers who know what they are doing. For CBI agents who can close up shop and re-open with new owners, they are but an irritant. For investors, however, they are significantly worse. The risks are life- altering, and not in a good way.

I will continue to be vocal about this subject. I care about my clients, this industry, and my integrity.

When I speak publicly about this matter, I am on the side of the client. 1am on the side of what is right. Financing is not an official investment route, and I will never risk my client's well-being; that is one of the values that has allowed me to reach where I am today.

To reach out to Anastasia Barna, you can connect through One World’s website here or email her at ceo@oneworld.id

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