Compliance Code Cracker: "Golden" investor visas face scrutiny from Home Office, regulators and courts

Regulatory Intelligence Analysis

Wealth managers providing services for applicants to the "Golden" Tier 1 (Investor) visa scheme should be aware of recent regulatory and legal developments in this field that may affect them in the future. The scheme, introduced in 1994 to encourage inward investment into the UK by high-net-individuals, is under review by the Home Office and has featured in recent actions by the Financial Conduct Authority (FCA) and the Court of Appeal. Issues raised include the existence of conflicts of interest between wealth managers and the providers of investment products and the definition of a "qualifying" investment for the scheme and the nature of the "control" of funds.

The scheme featured in the Intelligence and Security Committee Report "Russia," (discussed here). According to the report, the Russian elite has developed ties with UK which has been viewed as a particularly favourable destination for oligarchs and their money on the basis of: the exploitation of the Tier 1 (Investor) visa scheme; the promotion of a light and limited touch to regulation; London's strong capital and housing markets offering sound investment opportunities and the UK’s rule of law and judicial system. The committee proposed an overhaul of the programme as there needed to be a "more robust approach to the approval process for these visas."

Dolfin Financial (UK) Ltd Tier 1 (Investor) visa VREQ

One wealth manager, Dolfin Financial (UK) Ltd (Dolfin) has faced repeated regulatory action – culminating in an application for special administration. Dolfin is part of the Dolphin Group co-founded, according to Charles Hollander QC in Andoro v Dolfin Financial (UK) Ltd, by Russian national, Roman Joukovski. Dolfin is the main operating subsidiary of Dolphin Group (UK) Ltd whose parent undertaking is Dolfin Group Ltd, a company incorporated in Bermuda. According to documents in Companies House Dolphin Group's services cover asset management (discretionary and advisory), brokerage, safe custody and execution services, fund advisory services (fund platforms and bespoke investment fund strategies) and wealth structuring. Dolfin "serves high-net-worth private clients, financial intermediaries and wealth managers providing them investment expertise with digital agility."

On December 24, 2019 the FCA stated on its Ltd register that Dolfin faced restrictions with regard to conflicted securities, defined as securities involving potential conflicts of interest between Dolfin or its directors, and companies seeking to raise finance via the Tier 1 (Investor) Visa scheme.

Following supervisory action (voluntary application for the imposition of requirements (VREQ)) under Section 55L(5) of the Financial Services and Markets Act 2000 (FSMA) Dolfin was prohibited from: on-boarding any new Tier 1 (Investor) visa clients except for discretionary investment management services where the portfolio did not contain any conflicted securities; accepting any new client money or new custody assets from existing Tier 1 (Investor) Visa clients to purchase any conflicted securities or to structure, promote, issue or distribute any bonds or loan notes which were conflicted securities.

Dolfin published a notice on its website stating it had ceased to "be involved in structuring, promoting, issuing or distributing bonds and loan notes issued by companies in which Dolfin or its directors have an interest."

Subsequently, on March 12 the FCA announced it had identified a number of serious concerns around the way Dolfin operated its business, including its Tier 1 (Investor) visa business activities and financial crime controls. It said it had been working with Dolfin while it took steps to try to address those concerns, including by commissioning a skilled persons review under s 166 of FSMA.

Notwithstanding those actions, the FCA said it had decided it was in the best interests of consumers to stop the firm from carrying out regulated activities and had issued Dolfin with a supervisory notice under its own-initiative powers (OIREQ) under s 55L(3) FSMA prohibiting it from carrying on any regulated activities. The restrictions would stop Dolfin from carrying on any regulated activity and prevent it from reducing the value of its assets, or any of the client money or custody assets that it held, without the consent of the FCA, it said.

Special administration application

On June 30, the FCA announced Dolfin's directors had applied to the court to place the firm into special administration. On July 12, FCA said the joint special administrators had agreed terms for the transfer of certain Dolfin client agreements to Britannia Global Markets Limited as a successor service provider. Britannia was described as a wealth manager and broker authorised and regulated by the FCA. It also stated that the Financial Services Compensation Scheme was working with the joint special administrators to determine whether FSCS-protection might exist for Dolfin's clients. This was confirmed by special administrators, Smith & Williamson.

Dolfin Financial (UK) Ltd, Dolfin Asset Services Limited, Ankor Private Office Ltd (formerly Dolfin Private Office Ltd) and Roman Joukovski are defending a pending civil action concerning an alleged fraud in connection with an investment on the part of the Andora Trading Corp and Urococ Limited – which are part of an investment management group known as GEM Capital – into the "Vostok Fund".

According to Hollander, in a recent hearing, the fund was created for the first funding round of the " Vostok Project", a blockchain project in which $1 billion cryptocurrency was to be issued as tokens ("Vostok tokens" (VSTs)). The Vostok Project is described as "a universal technological solution for scalable digital infrastructure developed by the Waves Platform in 2018."

In a press release relating to the second round of funding the main purpose of the Vostok Project is described as being to form the basis of the digital infrastructure for certification, registration and data tracking, and to make new forms of technology easy-to-use in business and public administration. In another press release, VSTs are described as becoming "the system tokens for the new corporate blockchain solution Waves Enterprise, a management system for business processes with restricted access to confidential information."

The claimants said they purchased VSTs, which they did not receive, and they had been the victims of a fraud. In the recent hearing, the Dolfin related defendants applied, unsuccessfully, to strike out the amended particulars of claim or, alternatively, for summary judgment on all or part of the claim.

Tier 1 (Investor) visa and the "circular loophole"

A recent report on the Tier 1 (Investor) visa scheme claimed major loopholes remained in the current regime and that the Court of Appeal had concluded, reluctantly, that a circular investment scheme involving 100 golden visa applicants, allowing them to borrow money from a firm owned by Russian nationals in order to make investments that ultimately went to companies largely in Russia, was legal and the judges had called for a comprehensive review of the Immigration Rules.

Under Table 8B of rule 57 applicants who submitted their Tier 1 (Investor) visa applications before November 6, 2014 had to show they had invested not less than £750,000 in the UK by way of UK government bonds, share capital or loan capital in active and trading UK registered companies. Some types of company were, however, excluded from the category of "active and trading UK companies". Under paragraph 65(b) of Annex A – open-ended investment companies, investment trust companies, investment syndicate companies or pooled investment vehicles were excluded.

The facts of the case were that on January 20, 2014 the appellant had been granted entry clearance as a Tier 1 (Investor) Migrant and had been granted leave to remain until April 6, 2017. On February 20, 2017 she had applied for further leave to remain based on her participation in a scheme which had been sold to her and over 100 other applicants for investor migrant visas. Under the terms of the scheme the applicant was enabled to borrow £1,000,000 from Maxwell Asset Management Limited (Maxwell) and invest it in Eclectic Capital Limited by way of a convertible loan. The Secretary of State for the Home Department (Home Office) refused the applications and the appellant lost a judicial review case at the Upper Tribunal Immigration and Asylum Chamber.

The person of significant control at Maxwell was Dmitry Kirpichenko, a Russian national. Documents at Companies House state Maxwell was engaged in the provision of loans to high-net-worth individuals looking to invest in the UK. The documents also state that it was originally established to manage overseas investment funds primarily investing in the Russian stock market, but the company never commenced to earn any trading income from that activity. Furthermore, Maxwell was said to have been regulated until February 2018 as a limited licence BIPRU £50K firm authorised by the FCA. Its permissions were, however cancelled in 2018 when it agreed with the FCA that they were no longer required.

The applicants were required to invest the funds in Eclectic Capital Limited (Eclectic), a UK registered company whose person of significant control was Dmitry Kirpichenko's wife. The loaned £1 million passed directly from Maxwell to Eclectic. More than 100 applicants took part in the scheme and were required to pay a fee to Maxwell Holding Limited, the offshore holding company in which Maxwell was a wholly owned subsidiary.

However, when applicants submitted their Tier 1 (Investor) visa extension applications, the Home Office refused on the basis that the £1 million loaned to the applicants was not "under their control" because they were unable to invest the money anywhere other than Eclectic and the investment in Eclectic was not a qualifying investment. This decision was confirmed in the Upper Tribunal Immigration and Asylum Chamber.

Court of Appeal decision

On April 20, the Court of Appeal overturned the Upper Tribunal decision, ruling the scheme was legal. The court found the definition of "control" involved the "personal availability" of the funds to the applicants and this requirement was met if the applicants had sole and unrestricted power to direct that the loan was used for a qualifying investment. Consequently, the strict terms and conditions of the loans at issue did not mean the funds were not personally available to the applicants.

In relation to the question as to whether investment in Eclectic was excluded by paragraph 65(b) as a non-qualifying investment, Lord Justice Popplewell said he would have been attracted by an argument that the investment in Eclectic was an investment in a "pooled investment vehicle" and had been excluded on that basis. That, however, had not been argued by the Home Office. It had argued the scheme was excluded because – although it did not fall within one of the excluded categories of entity – it did share the objectionable characteristics of those entities which were exemplified by each of the four categories in paragraph 65(b).

Lord Popplewell said the Home Office and Upper Tribunal's case was that the Home Office should be to be permitted to apply the spirit rather than the letter of paragraph 65(b). He considered, however, that it would be unfair to applicants to require them to seek to divine the limits of such an imprecise concept, which would involve speculation about a subjective judgement by the Home Office.

The predictability that was required of a points based system, based on clear objective criteria, and what might be described as its tick box approach, meant the applicant ought to be entitled to proceed on the basis that if the investment was not one of the entities listed in sub-paragraph 65(b) and it was not excluded, he said.

Poor drafting – policy purpose not fulfilled

Lord Justice Popplewell did criticise the poor drafting of the Immigration Rules as the scheme did not fulfil the policy purpose behind the Tier 1 (Investor) category – to encourage capital investment in UK companies and to generate tax revenue from those investments. Eclectic had invested predominantly in Russian companies. Changes may be afoot following the Home Office review and this judgment.

Further information on compliance matters can be found https://podcasts.apple.com/gb/podcast/compliance-clarified-podcast-by-thomson-reuters-regulatory/id1548510826 here.

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