18 March 2022

Not the Time for Carrots?

How the EU Could Sanction Golden Passport Schemes

Issuing ‘golden’ passports and residence permits to non-Europeans in return for investment in their national economy has always been controversial. Now with the Russian invasion of Ukraine, these deals have attracted new attention. Since Russians account for a significant share of the customers, there have been widespread calls, including from the European Parliament, for an end to this practice. Can the EU do anything about this?

Some EU Member States have heeded the mood and already excluded Russians from eligibility, while other Member States have ended or are winding down their schemes entirely. Nevertheless, the practice is not over, and it seems strange that in a time of wide-ranging sanctions putting Russia, and particularly its wealthiest and most powerful citizens, under pressure, some Member States are able to undermine this by offering those same wealthy the option of escape to the EU. Despite declarations of intent to act by the Commission, and embryonic legal action, it is often doubted whether the EU has any competence to actively regulate this field.

It is true that the determination of their nationals, and the granting of residence permits to third-country nationals, are competences of the Member States. However, there are two distinct paths that the EU can take to regulate and control citizenship by investment (CBI) and residence by investment (RBI) schemes. One is through the competence to adopt sanctions, and the other is through the competence to regulate the internal market.

Non-targeted Sanctions

The EU’s power to adopt sanctions via Article 29 TEU and Article 215 TFEU is surprisingly broad and open-ended. It is not limited to specific kinds of measures or specific fields of activity, so long as the measures serve the EU’s strategic interests and respect its principles. In its own guidelines on sanctions, the Council emphasises that the point of such measures is not to punish, but to achieve change. This effectiveness orientation is what explains the openness regarding form and substance.

Although there might be political challenges in obtaining the required unanimity, there is no obvious legal obstacle to a Council decision and further measures requiring Member States to cease issuing golden passports or RBI documents to those with Russian citizenship. This would be consistent with the goals and effects of the other sanctions taken, since it would put pressure on the Russian elite. That focus would also make it arguably more compatible with principles of human rights and justice than general trade sanctions whose pain will be felt, alas, primarily by the poorer Russian citizen.

Human Rights and Group-Based Measures

The Court of Justice has taken a robust approach in judicial review of targeted individual sanctions, showing considerable respect for the procedural and substantive rights of those targeted. It could be argued that a blanket approach, which would no longer be based on a list of names of those specifically associated with war-making, would fail tests of fairness. However, this would be jumping to conclusions: If a measure is targeting an individual because of their specific actions, then surely there must be evidence that this is justified, and the individual must have a right to judicial review. Targeted measures entail, by nature, careful judicial scrutiny. However, the more general exclusion of wealthy Russians as a group of influential and important people is based on a different logic, and therefore requires justification by that logic. It would not be necessary to show that every Russian affected was a Putinista, but merely that there was reason to believe that this group as a whole might be pressured to change position through use of this tool.

Of course, general measures against groups inspire a certain human rights revulsion, and this might be thought to be an objection to a blanket ban. However, this point has been passed: The same critique can be made of economic sanctions, whose effects are widespread and indiscriminate, not limited to those with particular power or responsibility. General sanctions act on a society and its economy as a whole, attempting to change its direction by pressuring all people, or groups within it. Excluding Russians from CBI or RBI is not analytically or morally different from banning imports of Russian steel or oil.

While both the Council Guidelines and the Commission’s overview of sanctions suggest that these should be targeted as precisely as possible, and seem to envisage measures aimed either at named individuals or groups that have some formal, organisational substance, there is no obvious legal obstacle to a wider net. Indeed, measures aimed at CBI and RBI customers, which by definition only affect the very wealthy, could be seen as targeting the Russian elite as a group; those most powerful and most capable of causing change. They would meet the fundamental criterion that measures must be suited to their goal.

In contrast, it would be more difficult to act against those already possessing their EU passports or residence documents. Although not fully unimaginable under EU law, any sanctioning decision requiring Member States to revoke their documents would risk constitutional conflicts with domestic law that does not allow such instrumental revocation of rights. Even EU law might have some misgivings, particularly about citizenship revocation. After all, in Rottmann, where the Court first announced that Member State nationality law was in fact subject to EU law constraints, it also emphasised that any withdrawal of Union citizenship should take into account the individual situation. If this applies to Member States acting within the sphere of EU law, it will also apply to the EU itself.

Restricting the Movement of CBI and RBI Customers

An alternative approach would be to limit the movement of CBI and RBI beneficiaries, thereby reducing the value of the documents they have bought. As Union citizens or holders of long term residence rights, they generally enjoy free movement throughout the EU or Schengen respectively. Yet, such free movement rights are subject to limitations on the grounds of public policy and public security, and a Council decision requiring Member States not to allow Russian holders of CBI and/or RBI documents to cross their borders could be defended. While it is normally for Member States to decide who constitutes such a threat, in light of an Article 29 TEU decision they would be expected to make this judgment in a way respecting the Council’s view.

This would create considerable tension with the established case law, ruling that such restrictions can only be imposed for individual reasons. However, this case law was dealing with quite different situations. With a well-reasoned sanctions decision, showing how these restrictive measures are a necessary contribution to the policy and security goals of the Union, the outcome before the Court would be far from certain. A legal case for competence to restrain inter-state movement would not be hopeless, particularly for RBI customers.

CBI and RBI as Economic Matters

The second, more structural, pathway for the EU is to treat CBI and RBI as an internal market matter, just as it does with other factors appreciably affecting inward investment flows. Here, Member States are essentially competing for foreign investment, and the situation of businesses and markets in the individual states is affected by their relative success. Analogously to the situation that Member States become more or less attractive for business because of their differences in labour or environmental law, it can be described as a distortion of the internal market for capital.

As is well-known, in such circumstances the EU is competent to adopt harmonising legislation, limiting and sometimes eliminating the space for policy divergence between states. There does not seem to be any principle preventing a measure harmonising the terms for issuing passports or residence documents in return for investment. That harmonisation could conceivably be a ban on such schemes, or it could regulate them, for example addressing the issue of whether nationals of a state subject to EU sanctions should be considered eligible, and on which terms.

Of course, there will be national jurists crying that these matters are a national competence. However, this argument will be quite as irrelevant as it was when it was made in the context of free movement cases concerning public health, social security or criminal law. The fact is that Member States are still expected to exercise their competences in a way compatible with EU law, and that the EU is entitled to adopt the measures necessary for an undistorted internal market which is compatible with the values of the Union: there are no unbounded national competences anymore.

The Irony in Fighting Fire with Fire

Thus, the EU is not nearly as powerless as has been suggested. It can adopt legal measures, and more immediately it can use this power as a threat to push Member States into line. However, there would be a certain irony in this: the moral case for CBI is that it helps to deconstruct the ethno-cultural nationalism that has been Europe’s historical bane, and which the EU primarily exists to combat. CBI treats membership of the national community as part of a pragmatic policy, rather than a reflection of thick, bloody identity. Precisely such ethno-cultural nationalism is exploited by Putin, justifying his war and gaining support for it among Russians. The idea of Russia and the Russian as distinctively thick concepts, profound enough to justify violence, is central to his ideology. Europe would then be responding to Russian ethno-culturalism by entrenching its own. Much resistance to CBI has been based on the claim that it undermines a sense of national identity. Good! How sad that we have to combat xenophobia by excluding foreigners.

In the long term, a policy of openness is likely to be more effective. Contact – the opposite of sanctions – achieves change, eventually. Nevertheless, there may be a time for the carrot and a time for the stick, and the best peacetime policy may not be the best one for an emergency. If the EU decides that it needs to do something about CBI and RBI, it does possess the legal means.

SUGGESTED CITATION  Davies, Gareth: Not the Time for Carrots?: How the EU Could Sanction Golden Passport Schemes, VerfBlog, 2022/3/18, https://verfassungsblog.de/not-the-time-for-carrots/, DOI: 10.17176/20220319-001337-0.

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