Nick Shaxson ■ Fake residency: the yawning loophole the OECD must close
The OECD’s Common Reporting Standards (CRS) is the big game in town for curbing cross-border financial transparency. As we’ve often noted, it is a good project, with global reach, but with loopholes.
One of the biggest of these loopholes, perhaps — after Loophole USA — is the problem of ‘fake residency’, where countries allow wealthy people from elsewhere to “buy” their way into being residents of that jurisdiction, perhaps in exchange for their investing a certain amount there, or paying a flat fee.
How does this enable people to escape the CRS?
Very simply: the CRS collects information about the beneficial owners of assets, then transmits that information to the owner’s place of residence. If the residence is fake, then the CRS system will require relevant agencies to collect and transmit the relevant beneficial ownership information to Dominica, say, and Dominica will ignore it, and not tax it either. End of story. The information trail goes cold. Banks, which are a core part of the CRS project, willingly collude in this monkey business.
For most of these fake residency schemes, there is a requirement to hand over relatively serious cash. Dominica, with only 70,000 residents, charges $100,000 for individual fake residency, and they only need a relatively small number of applicants to receive revenues that are meaningful for its 70,000 odd residents, many of whom are quite poor fisherfolk and so on. (No matter that the scheme may be cheating the citizens of other developing countries out of tens of billions: that’s not their concern.)
All sorts of places are jumping on this bandwagon. Following the recent decision of St Lucia to dive in, there are now five such places in the Caribbean alone, including St. Kitts and Nevis, Antigua and Barbuda, Grenada and Dominica.
Of course, this is a recipe for a race to the bottom. The next jurisdiction will offer residency for $75,000, and then it’ll be 50,000.
In short, you can obtain residence visas through three main avenues.
First, buy real estate in one of the United Arab Emirates, worth over a million Dirhams.
Second, get an employment contract there.
Third – and this is the super-sleazy one:
“Incorporation of your own company in the United Arab Emirates. This is the most convenient and efficient option for obtaining business visas in the UAE. It takes only a few weeks to obtain visa and the expenses incurred are relatively low. Moreover, it is not necessary for a company to perform real activity – its business may be purely formal.
. . .
within a few days you are issued a certificate of incorporation of onshore company. Thereupon you and your family members receive residence permit in the UAE.”
Easy as pie. For a couple of thousand dollars, and a couple of visits to Dubai each year, you’re off the hook. We hear that this is a very busy business for Dubai. If the OECD doesn’t tackle this one, quickly, then they will all start doing it.
How could this be closed down? Well, quite simply by putting together a blacklist of such jurisdictions: if a beneficial owner is resident in one of these places, then their previous (non-blacklist) place of residency must be registered.