01-03-2015, 10:14 AM
Significant scheming
2147 words
28 Feb 2015
The Australian Financial Review
AFNR
English
Copyright 2015. Fairfax Media Management Pty Limited.
Property What price can be put on selling a ticket to call Australia home? All is not well with a scheme that does just that, writes Matthew Cranston.
When Andrew Martin first stepped into a Chinese immigration office in Shanghai in early 2011 he could barely believe his eyes. On the walls were the flags of countries ranging from the very big to the very small: Russia, Canada, Singapore, Malta. Next to each was a score sheet rating their investment visa programs.
The competition for selling residency to Chinese millionaires was under way and the Australian flag wasn't even flying.
"I was bowled over by the depth and breadth, and I thought we were really behind the eight-ball," Martin says.
Fast-forward four years and Australia's flag is flying high. Our Significant Investment visa (SIV) program is just over two years old but the number of applications each month has seen it crowned as one of the world's most successful by the Migration Policy Institute. So far, 651 millionaires from around the world, 91 per cent of them Chinese, have been given the right to live and work in Australia in return for ploughing more than $3.2 billion into our weakening economy. Another $2.8 billion worth of investment is currently being proposed.
Martin - the managing director of boutique investment house Moelis and a former managing director at UBS where he ran a multibillion-dollar global infrastructure fund - has until now never spoken publicly about his role as the original draftsman of Australia's SIV program. He could see how Australia was missing out on a lucrative source of foreign capital and, it's fair to say, a lucrative new business opportunity.
The financial adviser spent about a year in front of departments and ministers, refining aspects of the visa before it was unveiled by then immigration minister Chris Bowen in 2012. The visa means anyone willing to invest $5 million into Australia can become an Australian resident.
There are none of the usual residency requirements such as proficiency in English. It's a golden ticket into Australia. Martin's firm manages more than $500 million in investments for wealthy foreigners looking to call Australia home.
This father figure of selling residency, who is proud of the scheme's success - and profiting handsomely - now warns that some operators, while complying with the law, are not acting in the program's spirit.
"We have seen a number of operators in Australia and overseas move in on the game, pushing the envelope," he says.
"Some overseas fund managers are not subject to the strict regulatory environment we have in Australia and have been offering schemes which are blatantly designed to get around the regulations. We think there needs to be a tightening-up of the rules around both products and managers."
Further tightening is indeed soon to be announced. It won't be the first time changes have been needed. And with a populist, anti-foreign investment wind suddenly blowing through Canberra, it probably won't be the last.
This is the story of Australia's experiment in citizenship for the rich. Like most of history's great flights of migration, there has been a journey of painstaking planning coloured by national political agendas, cultural sensitivities, and financial brilliance and craftiness. Fund managers and lawyers have pushed just about every boundary they can, including into the highly charged area of foreign investment in established residential real estate.
Freedom of Information applications by AFR Weekend, and interviews with key players, raise questions about whether rules to prevent SIV applicants stashing their money into established housing offshore are being circumvented. Fingers are being pointed at a number of smaller offshore fund managers especially, but there are also concerns about esteemed investment banks such as Macquarie and Credit Suisse.
It was in 2011 at Governor Phillip Tower in the heart of Sydney's financial district, when property veteran and former chairman of the Sydney Swans, Richard Colless, together with Martin, started to fathom the massive wealth pouring into nations such as Singapore and Canada from Chinese entrepreneurs using Significant Investment visas.
Meetings were convened with politicians such as former NSW minister for trade and investment Andrew Stoner and then immigration and citizenship minister Bowen. Lunches at the Chophouse on Bligh Street and top seats at Sydney Swans football matches set the scene for discussions on what would become Australia's first Significant Investment visa program.
What price to put on the right to come and live in Australia? It was the most sensitive topic Martin remembers debating. The Caribbean island of Dominica breezily sells off citizenship for $100,000 a pop, while France asks for €10 million for a 10-year resident permit.
"At one point the minister [Bowen] was testing whether it should be a higher amount than $5 million," Martin recalls. "There was a suggestion that $10 million should be the investment amount but we thought that was a stretch too far and we thought $5 million was about right and didn't undervalue our residency."
The dollar amount, the duration of the residency, whether the applicant needed to speak English and the level of business skills were all key areas Moelis tested.
And the key area for testing was China. In 2014, China had a record 152 billionaires, up almost 25 per cent from the previous year according to Forbes. They account for more than 90 per cent of all SIVs in Australia and dominate the SIV programs in Canada, the United States and European countries such as Portugal.
It was May 2012 when Bowen announced the SIV. It was welcomed with newspaper headlines such as "Wealthy to get it easier" and "Labor reaches out to the rich".
"The Significant Investor visa will provide a boost to our economy and help Australia to compete effectively for high-net-worth individuals seeking investment immigration," Bowen said at the time of its official launch six months later.
One part of the economy that's already felt the boost is professional services: the lawyers, bankers and fund managers who advise those wanting to call Australia home on where and how to put money into SIV-"compliant" investments such as government bonds, unlisted businesses and managed funds. AMP, ANZ, BT, Credit Suisse, Legg Mason, Macquarie and Moelis are all giving applicants a hand.
There has already been some tricky financial engineering. One problem has been the creation of investment schemes that allow a SIV applicant to put their $5 million in a safe and liquid asset such as a government bond, and then the money is simply lent back to them by their fund manager who holds the bond as collateral and collects a fee. The schemes are technically legal but, given there is little economic boost to Australia, they are arguably against the intent of the scheme. Macquarie Bank allows foreign investors to borrow up to 100 per cent against the value of their investment and Credit Suisse allows about 50 per cent. Credit Suisse says it checks to ensure those other purposes are legitimate investments in Australia and Macquarie says it refuses the loan-backs to be used for property.
Former immigration minister Scott Morrison announced in September last year a crackdown on these so-called loan-back schemes. Under changes to be enacted in June, complying investments will have to remain unencumbered for the entire duration of their provisional visa.
"If it's a loan-back, it is dangerous," migration agent Jennifer Kwok from AUSA Migration & Education Service says she tells her clients, adding that they shouldn't get involved. "Clients do seem to know more about other products than we do; they usually compare at least three different products before they make up their mind on which product they are going to invest in. One client of mine introduced a bank from China with a product I did not know about."
Perhaps worried Australia was not getting enough bang for its buck, the Department of Immigration and Border Protection, as well as Austrade, were last October given the task of developing a new complying investment framework to determine what types of investment under the SIV would better create real economic benefits.
Austrade has set out a proposal that will see the required $5 million no longer allowed to go into bonds or proprietary companies and instead be used only for areas such as venture capital and managed funds. Part of the reasoning behind scrapping bonds is to prevent investors from entering into loan-back schemes.
In FOI applications, AFR Weekend asked whether any illegal activity had been brought to the attention of any ministers involved in the SIV. In response, the government said no illegal activity had been identified. But there does appear to have been circumvention of the rules. Property is one of the areas that clearly needs to be tightened up.
Under the rules, established residential property is not a complying investment. Laws require non-residents to also obtain Foreign Investment Review Board approval for buying existing homes. No one in Canberra wants to be seen as allowing large amounts of foreign capital coming in and competing with local buyers for homes.
This week the Abbott government went even further than the recommendations of its own parliamentary inquiry into the issue of foreign investment into housing, announcing fees starting at $5000 to pay for greater FIRB oversight, plus steep fines for non-compliance.
However, there are schemes that appear to get around the ban. AFR Weekend has obtained documents in Chinese that purport to show how a Hong Kong-based fund manager offered a SIV applicant a way to invest in an existing property as a way to qualify for the SIV. It sets out how the applicant can invest in a fund that has separate trusts, each owning an existing property. After the applicant lives in the property for the first four years of the SIV program, the managers of the fund wind up the trusts. The SIV holder then takes their home as their cut of the investment in the fund.
One fund manager has in their promotional material an example of a palatial property at 8 Maxwell Court, Toorak, Melbourne. The fund's manager says he doesn't know why the Toorak property was in the promotional material and says no one has or is buying established residential property.
The two-storey Regency-style home was once owned by racing car identity Paul Dumbrell. He had it listed for sale at $5.5 million in early 2014. However, land titles show that a person called Mialong Li bought the property for $6 million late last year.
Demetrios Papademetriou, who co-founded the Migration Policy Institute and now helps governments in refining their investment visa programs, says the motives for wanting a SIV need to be watched very closely. "This investment is not really about making money as it is about settling in another country or getting an insurance policy if you need an alternative place to live," he says.
Many applicants want their children schooled in Australia. Gaining permanent residency allows them to enter university through the domestic education system - a lot cheaper than overseas student fees.
Papademetriou, who also helped steer America's first investment visa program in the 1990s, says integrity will be the key to a successful economic stimulating program. He believes the Australian version is one of the most stringent in the world, with only one in five applicants processed.
"Your government is clearly doing a lot of due diligence," he says. "But the due diligence has to happen not just up front, but during and after the program."
Assistant Minister for Immigration Michaelia Cash is also reminding the plethora of fund managers, lawyers, immigration agents and the applicants themselves that the federal police will be engaged in anything dodgy.
"The department remains aware there is potential for economic fraud, and assesses and refers these matters as appropriate to the Australian Federal Police," she says.
Austrade will now take over the responsibility for complying investment policy for the SIV.
It will be a key test for Trade and Investment Minister Robb to make sure that any of the program's loopholes are closed.
The government's current review, however, might introduce some unwanted changes. Duration of residency is a key one.
The government is thinking about residency requirements for spouses and children of SIV holders of 180 days a year in an attempt to make the SIV about family migration, and not just a place to park money.
However, Moelis's Martin doesn't like the sound of it. "It's a radical change. We think it will make it far less competitive globally."
$5
million
the minimum amount to bypass usual residency requirements and fulfil the Significant Investor visa conditions.
Fairfax Media Management Pty Limited
Document AFNR000020150227eb2s0001m
2147 words
28 Feb 2015
The Australian Financial Review
AFNR
English
Copyright 2015. Fairfax Media Management Pty Limited.
Property What price can be put on selling a ticket to call Australia home? All is not well with a scheme that does just that, writes Matthew Cranston.
When Andrew Martin first stepped into a Chinese immigration office in Shanghai in early 2011 he could barely believe his eyes. On the walls were the flags of countries ranging from the very big to the very small: Russia, Canada, Singapore, Malta. Next to each was a score sheet rating their investment visa programs.
The competition for selling residency to Chinese millionaires was under way and the Australian flag wasn't even flying.
"I was bowled over by the depth and breadth, and I thought we were really behind the eight-ball," Martin says.
Fast-forward four years and Australia's flag is flying high. Our Significant Investment visa (SIV) program is just over two years old but the number of applications each month has seen it crowned as one of the world's most successful by the Migration Policy Institute. So far, 651 millionaires from around the world, 91 per cent of them Chinese, have been given the right to live and work in Australia in return for ploughing more than $3.2 billion into our weakening economy. Another $2.8 billion worth of investment is currently being proposed.
Martin - the managing director of boutique investment house Moelis and a former managing director at UBS where he ran a multibillion-dollar global infrastructure fund - has until now never spoken publicly about his role as the original draftsman of Australia's SIV program. He could see how Australia was missing out on a lucrative source of foreign capital and, it's fair to say, a lucrative new business opportunity.
The financial adviser spent about a year in front of departments and ministers, refining aspects of the visa before it was unveiled by then immigration minister Chris Bowen in 2012. The visa means anyone willing to invest $5 million into Australia can become an Australian resident.
There are none of the usual residency requirements such as proficiency in English. It's a golden ticket into Australia. Martin's firm manages more than $500 million in investments for wealthy foreigners looking to call Australia home.
This father figure of selling residency, who is proud of the scheme's success - and profiting handsomely - now warns that some operators, while complying with the law, are not acting in the program's spirit.
"We have seen a number of operators in Australia and overseas move in on the game, pushing the envelope," he says.
"Some overseas fund managers are not subject to the strict regulatory environment we have in Australia and have been offering schemes which are blatantly designed to get around the regulations. We think there needs to be a tightening-up of the rules around both products and managers."
Further tightening is indeed soon to be announced. It won't be the first time changes have been needed. And with a populist, anti-foreign investment wind suddenly blowing through Canberra, it probably won't be the last.
This is the story of Australia's experiment in citizenship for the rich. Like most of history's great flights of migration, there has been a journey of painstaking planning coloured by national political agendas, cultural sensitivities, and financial brilliance and craftiness. Fund managers and lawyers have pushed just about every boundary they can, including into the highly charged area of foreign investment in established residential real estate.
Freedom of Information applications by AFR Weekend, and interviews with key players, raise questions about whether rules to prevent SIV applicants stashing their money into established housing offshore are being circumvented. Fingers are being pointed at a number of smaller offshore fund managers especially, but there are also concerns about esteemed investment banks such as Macquarie and Credit Suisse.
It was in 2011 at Governor Phillip Tower in the heart of Sydney's financial district, when property veteran and former chairman of the Sydney Swans, Richard Colless, together with Martin, started to fathom the massive wealth pouring into nations such as Singapore and Canada from Chinese entrepreneurs using Significant Investment visas.
Meetings were convened with politicians such as former NSW minister for trade and investment Andrew Stoner and then immigration and citizenship minister Bowen. Lunches at the Chophouse on Bligh Street and top seats at Sydney Swans football matches set the scene for discussions on what would become Australia's first Significant Investment visa program.
What price to put on the right to come and live in Australia? It was the most sensitive topic Martin remembers debating. The Caribbean island of Dominica breezily sells off citizenship for $100,000 a pop, while France asks for €10 million for a 10-year resident permit.
"At one point the minister [Bowen] was testing whether it should be a higher amount than $5 million," Martin recalls. "There was a suggestion that $10 million should be the investment amount but we thought that was a stretch too far and we thought $5 million was about right and didn't undervalue our residency."
The dollar amount, the duration of the residency, whether the applicant needed to speak English and the level of business skills were all key areas Moelis tested.
And the key area for testing was China. In 2014, China had a record 152 billionaires, up almost 25 per cent from the previous year according to Forbes. They account for more than 90 per cent of all SIVs in Australia and dominate the SIV programs in Canada, the United States and European countries such as Portugal.
It was May 2012 when Bowen announced the SIV. It was welcomed with newspaper headlines such as "Wealthy to get it easier" and "Labor reaches out to the rich".
"The Significant Investor visa will provide a boost to our economy and help Australia to compete effectively for high-net-worth individuals seeking investment immigration," Bowen said at the time of its official launch six months later.
One part of the economy that's already felt the boost is professional services: the lawyers, bankers and fund managers who advise those wanting to call Australia home on where and how to put money into SIV-"compliant" investments such as government bonds, unlisted businesses and managed funds. AMP, ANZ, BT, Credit Suisse, Legg Mason, Macquarie and Moelis are all giving applicants a hand.
There has already been some tricky financial engineering. One problem has been the creation of investment schemes that allow a SIV applicant to put their $5 million in a safe and liquid asset such as a government bond, and then the money is simply lent back to them by their fund manager who holds the bond as collateral and collects a fee. The schemes are technically legal but, given there is little economic boost to Australia, they are arguably against the intent of the scheme. Macquarie Bank allows foreign investors to borrow up to 100 per cent against the value of their investment and Credit Suisse allows about 50 per cent. Credit Suisse says it checks to ensure those other purposes are legitimate investments in Australia and Macquarie says it refuses the loan-backs to be used for property.
Former immigration minister Scott Morrison announced in September last year a crackdown on these so-called loan-back schemes. Under changes to be enacted in June, complying investments will have to remain unencumbered for the entire duration of their provisional visa.
"If it's a loan-back, it is dangerous," migration agent Jennifer Kwok from AUSA Migration & Education Service says she tells her clients, adding that they shouldn't get involved. "Clients do seem to know more about other products than we do; they usually compare at least three different products before they make up their mind on which product they are going to invest in. One client of mine introduced a bank from China with a product I did not know about."
Perhaps worried Australia was not getting enough bang for its buck, the Department of Immigration and Border Protection, as well as Austrade, were last October given the task of developing a new complying investment framework to determine what types of investment under the SIV would better create real economic benefits.
Austrade has set out a proposal that will see the required $5 million no longer allowed to go into bonds or proprietary companies and instead be used only for areas such as venture capital and managed funds. Part of the reasoning behind scrapping bonds is to prevent investors from entering into loan-back schemes.
In FOI applications, AFR Weekend asked whether any illegal activity had been brought to the attention of any ministers involved in the SIV. In response, the government said no illegal activity had been identified. But there does appear to have been circumvention of the rules. Property is one of the areas that clearly needs to be tightened up.
Under the rules, established residential property is not a complying investment. Laws require non-residents to also obtain Foreign Investment Review Board approval for buying existing homes. No one in Canberra wants to be seen as allowing large amounts of foreign capital coming in and competing with local buyers for homes.
This week the Abbott government went even further than the recommendations of its own parliamentary inquiry into the issue of foreign investment into housing, announcing fees starting at $5000 to pay for greater FIRB oversight, plus steep fines for non-compliance.
However, there are schemes that appear to get around the ban. AFR Weekend has obtained documents in Chinese that purport to show how a Hong Kong-based fund manager offered a SIV applicant a way to invest in an existing property as a way to qualify for the SIV. It sets out how the applicant can invest in a fund that has separate trusts, each owning an existing property. After the applicant lives in the property for the first four years of the SIV program, the managers of the fund wind up the trusts. The SIV holder then takes their home as their cut of the investment in the fund.
One fund manager has in their promotional material an example of a palatial property at 8 Maxwell Court, Toorak, Melbourne. The fund's manager says he doesn't know why the Toorak property was in the promotional material and says no one has or is buying established residential property.
The two-storey Regency-style home was once owned by racing car identity Paul Dumbrell. He had it listed for sale at $5.5 million in early 2014. However, land titles show that a person called Mialong Li bought the property for $6 million late last year.
Demetrios Papademetriou, who co-founded the Migration Policy Institute and now helps governments in refining their investment visa programs, says the motives for wanting a SIV need to be watched very closely. "This investment is not really about making money as it is about settling in another country or getting an insurance policy if you need an alternative place to live," he says.
Many applicants want their children schooled in Australia. Gaining permanent residency allows them to enter university through the domestic education system - a lot cheaper than overseas student fees.
Papademetriou, who also helped steer America's first investment visa program in the 1990s, says integrity will be the key to a successful economic stimulating program. He believes the Australian version is one of the most stringent in the world, with only one in five applicants processed.
"Your government is clearly doing a lot of due diligence," he says. "But the due diligence has to happen not just up front, but during and after the program."
Assistant Minister for Immigration Michaelia Cash is also reminding the plethora of fund managers, lawyers, immigration agents and the applicants themselves that the federal police will be engaged in anything dodgy.
"The department remains aware there is potential for economic fraud, and assesses and refers these matters as appropriate to the Australian Federal Police," she says.
Austrade will now take over the responsibility for complying investment policy for the SIV.
It will be a key test for Trade and Investment Minister Robb to make sure that any of the program's loopholes are closed.
The government's current review, however, might introduce some unwanted changes. Duration of residency is a key one.
The government is thinking about residency requirements for spouses and children of SIV holders of 180 days a year in an attempt to make the SIV about family migration, and not just a place to park money.
However, Moelis's Martin doesn't like the sound of it. "It's a radical change. We think it will make it far less competitive globally."
$5
million
the minimum amount to bypass usual residency requirements and fulfil the Significant Investor visa conditions.
Fairfax Media Management Pty Limited
Document AFNR000020150227eb2s0001m