The Fallout of Cyprus’ Citizenship by Investment Program. Legal Strategies for Recovering Investor Funds in Cyprus

How the abrupt termination of the CIP (1 November 2020) created complex recovery claims for investors and new insolvency exposures for developers

The abrupt termination of the Cyprus Citizenship by Investment Program (CIP) on November 1, 2020, marked a turning point for both the Republic of Cyprus and the many foreign investors who had committed significant capital in pursuit of Cypriot citizenship. Once been a cornerstone of the island’s economic strategy, the CIP attracted billions in foreign direct investment, particularly into the real estate sector. Its sudden discontinuation not only disrupted countless investment plans but also triggered a wave of legal disputes between investors (whose purpose of investment was to obtain naturalisation) and property developers who found themselves exposed in projects that intended to attract such investors.

At AGPLAW, we have taken a leading role in examining such disputes, representing the interests of investors and working to ensure the recovery of misallocated or lost funds. This article aims to outline the legal implications, and strategic avenues available, for those affected by the fallout.

Understanding the Cyprus Investment Program and Its Termination

Launched in 2013, the CIP was designed to attract high-net-worth individuals (HNWIs) through real estate and business investments in exchange for fast-track Cypriot, and by extension, European Union, citizenship. With a minimum investment threshold of €2 million, the program promised residency and citizenship benefits, including visa-free access across the EU, tax advantages, and lifestyle appeal.

However, over time, the program drew increasing criticism from EU institutions and international watchdogs due to concerns on due diligence, potential money laundering risks, and politicized naturalizations. A series of investigative reports, including the controversial “Al Jazeera Cyprus Papers”, fueled public and institutional pressure, eventually leading the Cypriot government to cancel the CIP in late 2020 with minimal notice. This left many pending applications in limbo and frustrated investors, some of whom had already fulfilled their financial obligations in full.

Legal Complications: The Role and Risks of Supplementary Agreements

In the competitive rush to attract foreign capital, many developers entered into supplementary agreements with investors, often promising full or partial refunds should an investor’s citizenship application be rejected. While these arrangements served as a marketing incentive, their enforceability under Cypriot law is a matter of legal scrutiny.

1. Legality and Public Policy Concerns

Under Cypriot and common law principles, any agreement that contradicts public policy or statutory intent may be void or unenforceable. The CIP’s express purpose was to facilitate genuine investment into the Cypriot economy, not to serve as a transactional pathway to citizenship.

If a supplementary agreement effectively rendered the investment conditional on the approval of a passport, rather than an actual standalone investment, it arguably undermined the very premise of the CIP. Courts may therefore find that such agreements are contrary to public policy and void ab initio.

2. Misrepresentation by Developers?

In many cases, developers and their agents promoted real estate projects as guaranteed pathways to citizenship, downplaying the regulatory risks. These representations may now give rise to claims of fraudulent or negligent misrepresentation, particularly where investors were induced into agreements based on false or incomplete information.

Cypriot courts recognize a claimant’s right to seek rescission and damages where misrepresentation is established.

3. The Doctrine of Frustration

From a contract law perspective, the doctrine of frustration is also relevant. This principle applies when an unforeseeable event, such as the cancellation of the CIP, renders contractual performance impossible or radically different from what was originally intended.

While developers may argue that the CIP’s cancellation was beyond their control, investors can counter that certain developers knowingly structured their sales around an inherently volatile program, thus assuming the risk. Although not an easy ground from legal point of view, courts can still be called upon to determine whether such frustration truly extinguishes contractual obligations or merely shifts the burden of loss.

Legal Strategies for Investors

For investors left stranded by the termination of the CIP, there are several legal remedies worth exploring, depending on the facts of each case:

• Enforcement of Contractual Rights
  Where supplementary agreements are deemed void, voidable or unenforceable, litigation or arbitration can be used to force refund payments. At AGPLAW we will examine each agreement for enforceability and will claim contract terminations and payment refunds, in court or in out-of-court negotiations.
• Claims Based on Misrepresentation
  Investors misled about the certainty of acquiring citizenship may have strong grounds to pursue developers for damages. This is especially pertinent where marketing materials or agents falsely guaranteed success under the CIP.
• Creditor Actions in Insolvency
  In cases where developers are insolvent or near insolvency, investors may file as creditors in liquidation proceedings. We are here to provide full representation in such proceedings, advocating for investors to receive their fair share from remaining assets.

Financial and Operational Fallout for Developers

The consequences of the CIP’s collapse have been equally severe for developers, many of whom structured their business models around steady cash flows from CIP-fuelled property sales.

1. Liquidity Crunch and Exposure to Refund Claims

Many developers reinvested investor funds into new projects or used them to pay commissions to agents, particularly those abroad. Now, faced with refund demands, they find themselves cash-poor and asset-rich, creating serious liquidity challenges.

In some cases, we may assist investors in asset tracing and enforcement actions, including the registration of judgments abroad to secure recoveries from developers’ foreign assets.

2. Insolvency and Corporate Restructuring

With some developers facing potential liabilities running into millions of euros, bankruptcy or restructuring may be inevitable. In this context, investors must act quickly to secure their position as priority creditors or to negotiate structured settlements while the company remains viable.

3. Burdensome Commissions and Overheads

Sales under the CIP were often driven by aggressive commission-based networks, particularly in China and CIS countries. It is not uncommon for developers to have paid between 12% to 20% commissions on gross sales, significantly reducing their financial ability to honor refund obligations.
Furthermore, many developers are now entangled in disputes with their own agents and intermediaries, creating additional legal and reputational complications.

Evaluating Developers’ Ability to Pay: Forensic Asset Investigations

Even when legal liability is established, the success of any recovery depends on whether the developer can pay. Legal measures include forensic investigations such including:

• Tracing Developer Assets: Including foreign structures, land holdings, and receivables.
• Registering Legal Charges: Over property or other collateral to secure recovery.
• Pursuing Freezing Orders: Where assets are at risk of dissipation or fraudulent transfer.

In parallel, we also recommend negotiating amicable settlements in cases where full litigation is not commercially viable, finding a balance between legal enforcement and commercial pragmatism.

As part of our services, we can assist with:

• Litigation involving contract enforcement and misrepresentation
• Representing creditors in liquidation and receivership proceedings
• Conducting due diligence and legal audits for group actions
• Drafting legal opinions for use in arbitration and mediation

The collapse of Cyprus’ Citizenship by Investment Program marked the end of an era, and the beginning of complex legal battles. Investors who committed their resources in good faith now face significant uncertainty, while developers confront legal and financial liabilities that threaten their solvency.

In this environment, strategic legal representation is critical. We remain committed to defending investor interests while holding developers accountable, when possible.

The information provided by AGPLAW | A.G. Paphitis & Co. LLC is for general informational purposes only and should not be construed as professional or formal legal advice. While every effort has been made to ensure the accuracy and reliability of the information contained herein, the author, publisher, or any related parties make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability of the information. In no event will the author, publisher, or any related parties be liable for any loss or damage, including without limitation, indirect or consequential loss or damage, or any loss or damage whatsoever arising from loss of data or profits arising out of, or in connection with, the use of this document/article. You should not act or refrain from acting based on any information provided above without obtaining legal or other professional advice.