Golden passports and the limits of due diligence

A new report by Reuters reveals that Cambodian elites have been looking for ways to escape their home country and have found an appropriate exit route through Cyprus. The Cypriot citizenship scheme has been used by high-profile Cambodian officials and their families, raising questions about whether Cyprus and the EU are doing enough to prevent corrupt funds from entering the European financial system.

So instead of showing you how AML regulations help catch fraud and other wrongdoing, this time we look at its limitations: how, despite regulations on monitoring Politically Exposed Persons (PEPs) and Knowing Your Customer (KYC), one could still not be able to do much to stop proceeds of corruption from entering one’s country.

What’s the story? 

This story by Reuters focuses on high-status officials from Cambodia, which is under the rule of the long-time authoritarian, Prime Minister Hun Sen, in power since 1985.

Hun Sen is the reason why the US and EU are threatening Cambodia with sanctions, and the reason why the US State Department has a ‘visa blacklist’ with some of his top government officials on it, banning these people from travelling to the US unless on official business. Sen has outlawed the main opposition party of Cambodia which is just the latest move in his campaign to eliminate political rivals and consolidate his own longstanding power. Democratic countries presumably hope that they can force some change in the Cambodian political situation through various measures like sanctions. 

Sen remains unfazed by the US’s move on the visa blacklist nor by ongoing talk of sanctions. He claims that none of his officials keep any of their assets overseas – so there is no way that international organisations can touch them or him. 

But a recent Reuters investigation shows significant flows of money from some of these officials into the European Union, mainly through a particularly headline-grabbing island’s scheme: Cyprus’s ‘golden passport’ scheme. 

According to the report, this suggests that top Cambodian officials are indeed interested in insuring themselves against any insecurity in Cambodia and that European authorities might have some leverage over them if they have siphoning off their assets to Europe. 

But does this also tell us something about the configuration of the Cypriot and European financial systems? 

Cyprus passports – a lawless zone?  

As has already been quite widely publicised, it is relatively easy to become a Cypriot citizen, if one has the money. With an investment of at least EUR 2 million into the Cypriot economy, one can easily map out a path to Cypriot citizenship, and indeed that has been the case for 3,200 people turned Cypriot citizens so far. 

While the Cyprus government maintains that the scheme is properly regulated, concerns about this remain, not least at EU level where worries have been voiced about the security implications for the whole of Europe. 

So the fact that Cambodia’s national police chief has obtained Cypriot citizenship will not come as a surprise to many observers, even though he denies this is the case. Cyprus is a prime destination for wealthy investors who are looking for a way into Europe. 

These revelations about Cambodian officials turning Cypriot necessitate some questions, but especially the following…  

PEPs and Enhanced Due Diligence – is more oversight needed?

One of the reasons the case is gaining notoriety is that the individuals in question are known collaborators of what has been identified by both the US and the EU as an anti-democratic regime. As public officials (and their families), they are subject to Enhanced Due Diligence checks by the firms processing their ‘golden passport’ applications. 

Thanks to AML regulations, firms are required to have in place an enhanced due diligence process that enables them to ensure the origin of the funds in question. In the words of one of the lawyers in the midst of this in Cyprus, ‘That doesn’t mean that they’re bad people,” he said. “It just means that you have to investigate further their source of funds.’  

So if the enhanced due diligence process is in place and Cypriot citizenship has nonetheless been granted to Cambodian top officials and their families, does this case mean that the system might not be working as it should? 

The system’s primary purpose is to root out dirty money (whether gained through organised crime or corrupt means) and prevent it from entering Cyprus. Although we do not have public information about the exact origin of the funds, the worrying state of affairs in Cambodia should make lawmakers think about how better oversight might be beneficial for Cypriot, European as well as Cambodian citizens.

Reports earlier this year suggested that the EU was looking at imposing trade sanctions on Cambodia. The above analysis shows that there might be other, more effective, ways to sanction Cambodian top officials that zero in on them and avoid the inevitably more widespread misery of broad-hitting trade sanctions.