Tiny island nations like St. Kitts and Nevis, Dominica and Grenada have struggled since the financial crisis to attract money for new construction projects to boost tourism. One way they have found to sweeten the deal: selling citizenship as part of the package. A collection of Caribbean nations have enticed wealthy Chinese, Russians and Middle Easterners, and even some from the U.S., to invest up to $400,000 in real-estate developments in the Caribbean. The investors have helped pay for new resort projects anchored by hotels from big companies including Hilton, Hyatt and the Four Seasons. In exchange for buying a residential unit or taking an equity stake in a project, the property owners gain citizenship in these countries. Since many investors come from nations that face travel restrictions, their new passports make it easier for them to visit more than 100 countries, including much of Europe, without visa requirements. Americans, meanwhile, are attracted in part to the possibility of cutting their U.S. tax bills.
The programs aren’t a new concept. They have existed for years in the region, though they have attracted only sporadic attention, as well as in places like Cyprus and Malta. Even the U.S. has the EB-5 visa program, which grants residency to foreigners who invest at least $500,000 in certain business ventures that create jobs. But the Caribbean is emerging as the new hot spot for so-called citizenship-by-investment programs, in part because the citizenship process is more streamlined than others parts of the world. Some governments fear they can’t measure up businesswise without them. “We realized we were becoming less competitive with developers without a citizenship-by-investment program,” said Ernest Hilaire, chairman of the board for St. Lucia’s citizenship by investment program. His country begins accepting applications on Jan. 1, joining St. Kitts and Nevis, Dominica, Grenada and Antigua and Barbuda among the Caribbean nations offering the programs. The programs represent one of the few ways for the smaller island nations to attract investment when banks and many developers see them as risky bets. But they have their skeptics. The U.S. government, for one, has alleged that some people have used their new citizenship in at least one Caribbean country to provide cover for financial crimes. The countries usually don’t share figures related to citizenship-by-investment programs. But St. Kitts and Nevis Prime Minister Timothy Harris said in an interview that 2015 revenue from his country’s program exceeded expectations by 42%, though he declined to offer a dollar amount. Apex Capital Partners, a Montreal-based wealth-management firm that specializes in these programs, estimates Caribbean countries granted new citizenship to as many as 2,000 investors this year, at least doubling from five years ago. Scores of U.S. citizens are helping boost those numbers. At least some might be worried about recent government efforts to enforce tax laws on American citizens living abroad. Apex estimates that in recent months more than 100 Americans have received new citizenship in the Caribbean through these programs. “America is beginning to be a great source market for persons wanting second citizenship, and I think you’ll see more and more Americans participating,” Mr. Hilaire said. This comes as a record 3,415 Americans gave up their citizenship in 2014, up about 14% from 2013 and more than triple the amount in 2012, according to an analysis of Treasury Department data by tax lawyer Andrew Mitchel. That reflects in part Washington’s stricter enforcement of its tax collection for citizens living abroad with the Foreign Account Tax Compliance Act, enacted in 2010. The act compels foreign banks to report U.S. individual accounts or risk losing access to the U.S. market. That has motivated a number of U.S. expats to give up their citizenship, said Apex President Nuri Katz. “You can save 45% a year in taxes for the rest of your life,” he said. Still, even though most of the Caribbean nations impose little to no tax on their citizens, Americans giving up their citizenship must pay a hefty one-time exit tax on their assets. Developer Valmiki Kempadoo said he has seen a sprinkling of U.S. citizens among the many Asians and Middle Easterners investing for citizenship in his $500 million project in St. Kitts and Nevis. The two-island nation in the West Indies with a population of about 55,000 is known for its rain forests and black sand beaches. Mr. Kempadoo said he has made about 200 sales at his Kittitian Hill hillside development to citizenship-by-investment owners. The project includes an 84-room high-end hotel and an 18-hole golf course. “It was very useful,” he said of the foreign investment program. “Especially in the early stages when we couldn’t sell anything.” Christophe Harbour, a master-planned community in St. Kitts that includes a marina, private residences and a 125-room luxury Park Hyatt slated to open next year with average room rates expected at more than $700 a night, according to its developer Buddy Darby. His group has spent about $350 million on the project so far, and he has raised more than $42 million from wealthy investors who got involved to gain St. Kitts citizenship, Mr. Darby said. He sold them residences for $400,000 or private lots within his 2,500-acre complex for $700,000. Last year, the U.S. Treasury issued an advisory letter to financial institutions warning that “certain foreign individuals” were using the St. Kitts program to obtain passports “for the purpose of engaging in illicit financial activity.” The letter added that the U.S. government believed that “several Iranian nationals” obtained St. Kitts passports to elude international sanctions that stood last year before the global nuclear agreement with Tehran. Mr. Harris, the prime minister, said that after the Treasury report his country worked with the U.S. and other foreign governments to “make sure our due diligence process meets the highest international standards.” Despite the Treasury’s warning, citizenship-by-investment programs should continue to bloom in the West Indies, said Rick Newton, a founding partner at Resort Capital Partners, a real-estate investment advisory firm that focuses on the Caribbean. With foreign banks still reluctant to lend for projects there, new citizens of St. Kitts and its neighbors “are becoming the lenders of last resort,” he said. Write to Craig Karmin at craig.karmin@wsj.com This article originally appeared on The Wall Street Journal.