EB-5 visa pitfalls
The EB-5 visa investment program can’t keep up with demand, but the process is fraught with hazards, Chris Davis reports from New York.
The US investment program can’t keep up with demand, but the process is fraught with hazards.
This is one of those areas where fraud takes many faces and takes many forms.”
Rosie Dawn Griffin, whistleblower attorney
When it’s completed in 2025, Hudson Yards on Manhattan’s Westside will include more than 17 million square feet of commercial and residential space, more than 100 stores, 4,000 residences, 14 acres of public open space, a 750-seat public school and a luxury hotel with more than 200 rooms.
The largest private real estate development in the history of the US also will have created more than 23,000 construction jobs – and made 1,200 Chinese permanent US residents. All of them gained citizenship by using the most popular residency-for-sale program in the world, the EB-5 visa, collectively providing some $1.2 billion for the $20 billion development in exchange for green cards.
The green-card program was barely noticed when it was introduced in the early 1990s to attract foreign investment and create jobs in the US.
By 2007 it was issuing about 700 visas a year. But after the financial crisis — when businesses had trouble finding financing from traditional sources — EB-5 took off, reaching its annual quota of 10,000 for the first time in 2014 and overloaded with a waiting line ever since.
“We used to never reach the cap and now we do every year,” said Sarah Poppy Alexander, a whistleblower lawyer at the San Francisco branch of Constantine Cannon. “The vast majority are Chinese.”
The good news, according to the US Citizen and Immigration Services (USCIS), is that the program has pumped about $8.7 billion worth of investment into the US economy and created 35,150 jobs since 2012.
The bad news is that when that kind of money flows, some of it comes with fraud. “This is one of those areas where fraud takes many faces and takes many forms,” said Rosie Dawn Griffin, who also specializes in whistleblower law and works at the Washington office of Constantine Cannon.
EB-5 is controversial for a number of reasons, said Alexander. “It’s under the Immigration and Customs Enforcement office, but they do not seem to have the resources right now to be able to track the program and make sure would-be investors are not being defrauded,” she said.
Over the past year, the Securities and Exchange Commission (SEC) has been lending a hand.
Their highest-profile case came in April — the biggest EB-5 scam ever. Though it didn’t target Chinese investors per se, it gives a glimpse of the scope that EB-5 abuses can expand to. A 52-count complaint alleges that two Vermont businessmen orchestrated an eight-year scheme “systematically looting” millions from a $350 million pool for a ski resort that was raised from hundreds of foreign investors in 74 countries.
Investor immigrants from China get about 90 percent of EB-5 visas, so they are the most common target of scams.
In California last November, physician Robert Yang, 45, and his office manager Claudia Kano, 45, were accused of siphoning off at least half of the $20 million they raised from 40 Chinese investors to build nursing homes in Pamona.
Earlier that month, the SEC went after Lin “Lily” Zhong and her company EB-5 Asset Manager LLC in Florida. The complaint said that Zhong had raised $8.5 million from 17 investors, mostly Chinese people hoping to immigrate to the US.
Instead of using the money for the real estate development as advertised, Zhong allegedly spent it on a $2.5 million “part-time” home (she is a permanent resident of New Zealand), a $55,000 year-old BMW SUV for her daughter, a new $98,346 Mercedes S550 for herself and a $175,495 48-foot Sea Ray muscle boat.
Last week, a district court judge in Northern California entered a final judgment against Luca International Group, a San Francisco Bay Area oil and gas company that promised investors annual return rates of 20-30 percent “knowing the operations were losing millions of dollars and the enterprise was sinking under a mountain of debt.”
Aside from reaching out to Chinese-American investors through Chinese-language media, the SEC charged, Luca CEO Bingqing Yang and her chief fundraiser Lily Lei also targeted Chinese citizens who sought permanent US residence through the EB-5 program. The SEC said Luca comingled investor funds to prevent the scheme from collapsing and used money from new investors to make sham profit payments to earlier investors.
The court ordered Luca to pay $68.3 million in disgorgement for the Ponzi scheme.
“The SEC is doing as good a job as they can going after these companies,” Alexander said. “The hard part is that oftentimes these frauds are very hard to detect and unless there’s someone who knows something and brings insider information forward to the SEC, they don’t know who has a legitimate investment opportunity and who does not.”
US whistleblower laws allow anyone with information about fraud to help bring scammers to justice and sometimes get a cash reward of up to 30 percent of the amount recovered, even if they’re not based in the US.
EB-5 investment fraud can be reported through the SEC’s whistleblower program, which is part of the Dodd-Frank act and encourages anyone with knowledge of violations of US securities laws to step forward. Since the inception of the program, the agency has paid more than $85 million in awards to more than 32 whistleblowers.
$14.7 Million award
One of them is Michael Sears, a principal in a small Virginia-based real estate investment fund management firm. He was awarded $14.7 million award for blowing the whistle on an EB-5 fraud perpetrated against Chinese investors by a Chicago-based businessman who claimed to be building a massive convention center and hotel complex near O’Hare Airport.
The businessman, 32-year-old Anshoo Sethi, amassed $158 million from 290 Chinese investors, promising each a green card.
In January, Sethi pleaded guilty to wire fraud, admitting he gave investors forged documents saying the project’s hotels would be operated by Hyatt, which had no connection to the deal. Sethi, who faces up to 20 years in federal prison, has been selling properties to pay back investors, including the $41,500 administrative fee he collected from each (a total of $11.5 million).
None of the investors received green cards.
Griffin said one of the most controversial parts of the EB-5 program are the regional centers, what she calls “the people who group together investors, handle the paperwork and then funnel the money into particular investments.”
The number of these groups that sponsor EB-5 projects has ballooned, going from 11 in 2007 to 588 in 2014 and 867 as of last month, according to the (USCIS).
But making the agency’s headcount is not the same as getting their blessing. “The fact that a business is designated a regional center by USCIS does not mean that USCIS, the SEC, or any other government agency has approved the investments offered by the business,” an SEC statement reads.
“As you have more and more regional centers coming online, we’re seeing more and more frequently centers that are not fully complying,” Reaz Jafri, a lawyer at the international firm of Withers LLP, told Forbes recently.
Alexander said that regional centers are one of the main reasons Congress has grown so concerned about the EB-5 program, “because that adds an extra layer in the process making it easier for people to not really know who they’re giving their money to.”
Republican Senator Chuck Grassley of Idaho and Democratic Senator Patrick Leahy of Vermont put forward a bill last year to curb fraud in EB-5 but it was put on hold and will be debated next month as part of the budget process, Alexander said.
Regional EB-5 centers have their counterpart in China with hundreds of so called “migration agents,” who have been key in hooking up investors with some of the most successful EB-5 projects, but some are reportedly ratcheting up the finder’s fees they charge regional centers.
The consultants can make up to $200,000 per investor, which works out to as much as a 40 percent commission on deals that start at $500,000 and range to $1 million. But, as The Real Deal reports, developers and regional centers continue to hire them, because they are the “gatekeepers” to thousands of wealthy Chinese eager to buy in, and get a green card.
Alexander emphasized that “no matter how sophisticated in their fields or powerful in their home countries hopeful immigrants are, they suffer a special sort of vulnerability when they risk their savings and to come to the US.
“The DOJ (Department of Justice) and the SEC have demonstrated their commitment to pursuing bad actors ready to exploit this vulnerability to line their own pockets,” she wrote in an op-ed recently. “But these frauds are so destructive to hopeful immigrants — and so antithetical to American values — that action cannot come soon enough.”
A building under construction in the Hudson Yards complex.
Four Seasons Hotel New York
Central Park Tower