Strange Birds in the Archipelago: Finland’s Legislation on Foreign Real Estate Investment
April 7, 2020
On the morning of September 22, 2018, more than 400 Finnish authorities, including police officers and military commandos, supported by helicopters and surveillance aircraft, conducted a raid on the tiny island of Sakkiluoto in the Finnish archipelago as well as in 16 other properties in western Finland. The property on Sakkiluoto, ostensibly a summer house, was dotted with security cameras and motion detectors and equipped with multiple satellite dishes, nine piers, a helipad, and sophisticated communications equipment, suggesting it was intended for use as more than just a place for rest and relaxation. What these properties have in common is that they are all linked to Russia and are all located in strategic locations near key ports or transit lanes in the Baltic Sea.
Publicly, Finnish officials ascribed the raids to a crackdown on money laundering and tax fraud, but the full story may be more complicated. Finland’s security and intelligence service has long warned that properties purchased in Finland by Russian nationals could be used for military purposes. In this case, the purchases in question were linked to the real estate firm Airiston Helmi Oy, whose backers include several Russian nationals. The true owners’ identity was obfuscated by a series of shell companies registered in the British Virgin Islands and other offshore tax havens. Curiously, the company’s investments concentrated on properties located at strategic locations in the archipelago outside of Turku in southwestern Finland. The port of Turku and the sea lanes that pass just south of it are vital to Finland (and Northern Europe) in peacetime, carrying some 90 percent of Finnish exports and imports and would become even more important in a conflict with Russia.
To be sure, most foreign purchases of Finnish real estate are legitimate, including among the Russian middle classes who see property in Finland as a safe investment. In 2017, Russian nationals accounted for the second-highest number of real estate purchases by foreigners, second only to Estonians (with China in third place). Yet the above case points to the need for caution, particularly in areas that are critical to fulfilling national security tasks. The challenge is finding the right balance between maintaining an open, investment-friendly environment and putting in place reasonable precautions to protect national security and economic interests.
A Decisive Response
Finland is no stranger to Russian hybrid activity, having been the victim of Russian (and Soviet) influence operations before, during, and after the Cold War. Finland’s response to these operations has focused on building societal resilience and trying to balance cooperation with Russia with maintaining a strong national deterrence and defense posture. This pragmatic approach stands in stark contrast with how visibly and robustly the Finnish government raided the questionable properties, and how swiftly it moved to address security concerns related to foreign purchases of sensitive properties.
Finland’s pragmatism and deterrence approach were on display even before these events, as early as June 2017. At that time—more than a year before the Sakkiluoto raid—the Prime Minister’s Office established a working group to prepare legislative amendments designed to improve state security in connection with transfers of immovable property. The working group drafted new regulatory measures that were subsequently approved by Parliament and entered into force in January 2020. The new statutes require all entities whose domicile is located outside the European Union or European Economic Area to apply for permission to buy property in Finland. The decision on whether to allow the sale rests with the Ministry of Defense, working closely with the Ministry of Economic Affairs, Finnish intelligence services, and other government entities.
The statutes are an example of deterrence by prevention using a whole-of-government approach. By requiring the advance vetting of purchases in sensitive areas, the legislation helps forestall situations in which security authorities’ ability to operate is compromised. Uniquely, the new legislation includes the right of preemption, namely the ability of the Finnish government to step in to purchase the property in question. The legislation also affects zoning regulations, allowing areas to be designated as strategically important long before there is the prospect of anyone trying to purchase the property. Expropriation is also permitted, though the Finnish government maintains this would be a last resort. Both provisions are important in that they give sellers alternatives rather than simply blocking the sale. With government purchase as an option, citizens are more likely to be more forthcoming when approached by questionable buyers, in turn ensuring that this legislation is both enforceable and sustainable in the long term.
Lessons for the Transatlantic Community
As the transatlantic community grapples with how to limit Russian and Chinese disinformation, malign economic influence, and dual-use activities and investments, Finland’s response provides a useful guide.
First, rather than issue a blanket ban against a specific country (e.g., Russia) or activity (e.g., all real estate transactions by non-EU citizens), Finland’s legislation focuses on a very limited category of real estate transactions and lays out transparent criteria for vetting. Specifically, the real estate legislation applies only to properties located near sites deemed essential to carry out the tasks of security authorities and vital functions of society. This includes areas designated in the Finnish national defense plan; communications stations, radar stations, airports, ports, or key transit points; and sites used by the Finnish Defence Forces or Border Guard. This application zone is modest in scope, amounting to less than 1 percent of Finnish territory. As NATO and EU leaders move to establish “baseline requirements” for communications, transport, and other infrastructure, they should consider a similar, proportional approach. For example, rather than ban a particular provider of 5G technology outright, they should establish clear criteria on security requirements, access control, security of supply requirements, and diversity of supply chains, much like Finland carefully defines which areas are subject to restrictions.
A second smart feature of the Finnish legislation is that, with its provision to buy properties located in sensitive locations, it offers citizens an alternative in the event the government rejects a real estate transaction. The Kingdom of Denmark took a similar approach in September 2018 when it stepped in with an offer to finance construction of two new airports in Nuuk and Ilulissat, Greenland, after it was discovered that a Chinese company had submitted a bid to finance and construct the airports. Given Greenland’s strategic location in the North Atlantic and the role the Thule early warning radar plays in the defense of the United States, it is understandable that such significant infrastructure investment by a non-NATO ally or a non-Arctic nation raised concerns. Europe and the United States will likely face similar dilemmas in the future, to include deciding whether to allow Huawei into their 5G communications networks. Absent viable alternatives—in terms of quality, price, and delivery time—many governments will conclude that they have no choice but to assume any potential risk and hope to mitigate it over time. In order to change this calculus, the European Union, together with likeminded actors such as Australia, Japan, and the United States, should take steps to actively promote viable alternatives, for example issuing credit or tax breaks to firms such as Nokia and Ericsson to help them regain market share in the 5G space.
Finally, it is notable that the real estate legislation was preceded by a years-long effort to overhaul Finland’s intelligence legislation, to include steps to strengthen both its civilian and military intelligence (the provisions entered into force in June 2019). One result of the effort was the Civilian Intelligence Act , which was created to allow Finland’s intelligence services to gather information not only for the prevention and detection of crime but also for the purpose of protecting national security. This includes threats such as terrorism, espionage by foreign states, or disruption of critical infrastructure. Likewise, the legislation on military intelligence improves the Finnish Defence Forces’ intelligence-gathering capabilities related to serious international threats, granting them authority to draw on human intelligence, information systems, radio signal intelligence, and network traffic intelligence. In the future, the ability of Finland’s intelligence services to work with counterparts in other countries and other government departments, such as defense, will facilitate their ability to piece together a complete picture in suspect cases and respond quickly. This approach reflects a necessary change of mindset in Finland, both in terms of acknowledging that Finland is increasingly an espionage target and in recognizing that national security threats are no longer only military or conventional in nature. This shift is critical as the number of “dual-use” investments and activities by adversaries increase.
This evolution in threat assessment is increasingly reflected at the multinational level, where the European Union and NATO are working both independently and together to address so-called gray zone threats (e.g., cyberattacks, disinformation, and economic interference), with the Hybrid Center of Excellence in Helsinki serving as a main hub for sharing expertise among countries. Insofar as this shift in mindset provides an opening, a helpful next step would be improving cooperation among intelligence services as well as mechanisms for sharing sensitive or classified information among NATO and EU countries. Particularly in gray-zone scenarios, where detection and attribution can be challenging, obtaining actionable intelligence in a timely manner is crucial to deterrence. Over time, greater intelligence cooperation and information sharing will also allow countries to connect their rapid alert systems, enhance indications and warnings, quickly identify known individuals, and track patterns of suspicious behavior, not unlike what the banking sector has done to fight global money laundering, fraud, and terrorist financing.
Learning by Best Practice
In order to deter and counter adversaries who intentionally operate below the threshold of armed conflict, governments must continue to hone their ability to monitor, detect, and respond to activities that, although outside of the security and defense space, have a direct impact on the ability to carry out national security and defense tasks. In this regard, identifying and sharing best practices—as the United States did when EU leaders were standing up their own CFIUS-like system for screening foreign direct investment on national security grounds—can help avoid mistakes and build on success. Finland’s real estate legislation (and accompanying enhancements to its intelligence service) offers one example of how to manage increased national security risk without undermining the very strengths of our democracies (e.g., open markets, free and fair competition, citizens’ rights). It also demonstrates that a pragmatic approach, characterized by transparent criteria, a limited scope, and inclusion of viable alternatives, can go a long way.