Global Banking & Finance Review: "U.S. Immigration with EB-5 Visa Program"

Thursday, May 3, 2018

U.S. Immigration with EB-5 visa program - risks and critical steps to avoid falling victim to fraud

First Published: Global Banking & Finance Review / May 3, 2018 

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Too many EB-5 immigrant investors have fallen victim to scams that have put their personal wealth in jeopardy and taken away their opportunity to attain a U.S. green card. The EB-5 program has been prone to fraudsters, failures, and errors, yet hopeful immigrant-investors have had little recourse should the process take a wrong turn. Investors might hope that U.S. Citizenship and Immigration Services (“USCIS”) would help to direct investments toward opportunities that are compliant with regulations, or have a proven record of success. This is not the case. As of March 5, 2018,[i] USCIS has approved 919 regional centers for funding with the EB-5 program.[ii] However, this “approval” offers little in the way of investor protection. It is not a guarantee or an endorsement. Regional centers that are “USCIS approved” are not necessarily compliant with governing regulations or securities laws.[iii]

Without the ability to rely on USCIS for guidance on good investments, EB-5 investors must depend on independent background due diligence and ongoing background monitoring. Understanding the backgrounds of those individuals with critical roles in the success of an investment is an important step toward the goal of obtaining a U.S. green card.

Risks of Bad Actors 

There are several key risks involved in choosing a regional center that investors would be well advised to understand. If a regional center project fails within the first two years after a conditional green card is issued, an investor will be unable to remove the conditions, and subsequently lose the green c­­ard. This is also the case in circumstances where USCIS revokes the certification of a regional center. As of March 5, 2018, USCIS has revoked the certification of 166 regional centers.[iv]Risks can be dramatically reduced by gaining an understanding of the personal and professional backgrounds of all stakeholders involved with the regional center and the underlying development project through effective due diligence.

EB-5 investors, or their agents, are entirely responsible for vetting a regional center and its owners and management. The process of vetting should uncover specific risks based on beneficial ownership and the track-records of previous projects. Yet, vetting is no easy task. In many cases, it may be difficult to identify the ultimate beneficial owners of a regional center, much less their solvency, criminal history, or track records in managing investments, particularly those involving real property development. Proper due diligence includes background checks and ongoing background monitoring of the project developer, the regional center and possibly the general partner or manager of the new commercial enterprise.

Lawyers and agents may offer background check services, but better services exist. While immigration lawyers are a critical part of the EB-5 process for the immigrant investor, lawyers generally are not equipped to engage in thorough background due diligence investigations or ongoing background monitoring. In some circumstances, the same law firm may even represent both the regional center and the investor, posing a potential conflict of interest.

The Value of Proper Background Due Diligence

Fraudulent EB-5 projects would cause hundreds of EB-5 immigrant investors and their families to lose their investment funds and the opportunity to obtain a U.S. green card.A review of failed cases reveals that due diligence would have identified major red flags for the potential investors:

  • In February 2017, AnshooSethi, a regional center founder and administrator, was sentenced to three years in prison and ordered to pay $8.85 million in restitution for defrauding approximately $158 million from more than 290 investors.[v] The EB-5 offering documents for a hotel project in Chicago stated that Sethi was a “respected veteran of real estate” with “15 years of experience in real estate development and management.”[vi] However, background due diligence shows that Sethi would have had to enter the real estate industry at age 14 to have his purported 15 years of experience. Additionally, his development firm, Upgrowth LLC, which had a purported “more than 35 years of experience” and claimed a reputation as a premier nationwide hotel contractor, had only been organized in 2010, according to Illinois corporate records.[vii]

Proper background due diligence would also have revealed that Sethi’s regional center project was only recently granted permits for a tent for a “groundbreaking ceremony”, demolition, construction of a fence, and minor electrical wiring. This directly contradicted the project’s Offering Memorandum which claimed that all building permits had been secured.[viii]

  • In another matter, principals of Pacific Proton Therapy Regional Center were recently prosecuted by the SEC for misleading investors and diverting funds. Pacific Proton’s cancer center project had allegedly claimed the support of former President George H.W. Bush and former California Governor Arnold Schwarzenegger to garner investments. The support was false, however. Proper background due diligence could have disclosed these material misrepresentations and helped investors with the decision to seek out a different investment opportunity. Over $18 millions of funds raised from investors in this case was diverted to firms in China and personal bank accounts.[ix]
  • Elsewhere, an $8.5 million fraud perpetrated by Lily Zhong through EB5 Asset Manager LLC might have been foreseen if background due diligence had been undertaken on the project principal. The SEC’s complaint raised allegations that Zhong had misrepresented her “extensive history of developing real estate projects” and failed to disclose her personal and business bankruptcies to prospective investors. During the time Zhong was marketing the project to investors she was also the subject of an ongoing bankruptcy proceeding in New Zealand. Additionally, her role as a director and shareholder of a New Zealand real estate development company had resulted in a voluntary liquidation of the firm in 2008.[x]

Had potential investors conducted background due diligence and sustained ongoing monitoring, information on Zhong’s bankruptcies would have been uncovered. The misrepresentations of Pacific Proton and Sethi would also have been found. These investors could have retained their funds andtheir dreams of immigration to the U.S. 

Better Protection for Investors 

Recent fraud cases and failed projects have shown that engaging background due diligence on investment stakeholders is a necessary, yet often overlooked, step in the EB-5 process. Background due diligence involves the credential verification and comprehensive investigation into the personal history of key individuals. This can surface noteworthy red flag issues concerning financial history, litigation history, past and current insolvencies, bankruptcies, false claims of SEC and FINRA licensing, prior business and investment successes (and failures), false claims of specialized or industry expertise, and other potential concerns surrounding the regional center and the project developers. Paired with an advanced technology platform for ongoing background monitoring, an EB-5 investor can significantly reduce the risks of fraud, deception,and project failure with respect to their EB-5 investment not only at inception, but throughout the course of the extensive EB-5 process. Prudent investors will take this step.

For EB-5 investors, the life-cycle of the investment is long, increasing the risks. The potential motivations and opportunities for fraud will change over time, along with the regulatory landscape, and the economy. Enhancing the pre-investment due diligence process by incorporating comprehensive background checks of the project developer and the regional center’s main principals will allow investors to understand who is managing their money, and their immigration dreams. Ongoing, automated background monitoring of these stakeholders, through experienced industry professionals,is a prudent approach to mitigate the risks of a changing landscape and will create the greatest possibility for a successful path to U.S. EB-5 immigration.

[i] https://www.uscis.gov/working-united-states/permanent-workers/employment...

[ii] Private firms, approved by USCIS, that match EB-5 investors with development projects and job creation. Each EB-5 investor must demonstrate at least 10 jobs created because of the investment funds.

[iii] https://www.uscis.gov/working-united-states/permanent-workers/employment...

[iv] https://www.uscis.gov/working-united-states/permanent-workers/employment...

[v] https://www.justice.gov/usao-ndil/pr/hotel-developer-sentenced-three-yea...

[vi]https://www.sec.gov/litigation/litreleases/2014/lr22945.htm

[vii] Ibid.

[viii] Ibid.

[ix] https://www.sec.gov/litigation/litreleases/2016/lr23556.htm

[x] https://www.sec.gov/litigation/complaints/2015/comp2015-263.pdf

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Russell Scarcella, Director

Russell Scarcella is a Director based in Exiger’s New York City office. Russell brings more than 20 years of legal and risk management consulting and advisory experience assisting clients in developing and implementing due diligence and operational risk programs. He has provided domestic and cross-border investigative due diligence consulting services across the alternative asset community as well as to multiple foreign governments with respect to immigration and citizenship programs.

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