Fraud on Investors in EB-5 Investments: Caveat Emptor! Part 4

EB-5 Fraud Buttressed by Systemic Problems in the Industry Continued…

3. Cultural and Legal System Distinctions

The overall system does not present a clear picture to the investor of the value of professionals, and instead has the impact of turning professional services into a commodity.

The legal systems are different, and whereas in many other parts of the world, the Government works overtly to stop misuse of a system, in the United States prevention is usually accomplished by deterrence coupled with punishment for those caught.  In the United States, business relationships are largely situations where the buyer should beware, and is in charge of conducting his or her own due diligence, or creating a team to accomplish necessary diligence.  However, in the United States, unlike many areas of the world, the court system is set up to efficiently and effectively redress wrongs and determine appropriate results for disputes between litigants.  The existence of an effective judiciary limits the need for the government to actively police private business relationships.  This includes private business relationships that are made possible by government programs.  In fact, in most situations, wrongdoing must be reported to the government before an investigation may begin, as the government does not actively patrol looking for wrongdoing.  

In the EB-5 scenario, investors may be easily misinformed or may simply misunderstand the Federal Government’s role in the program.  The government’s role is not to vet the investment opportunities any differently than any other private securities transaction is reviewed.  The government’s role has to do with whether the criteria are met in relation to obtaining a Green Card.  Sometimes misinformation about the government’s involvement is inadvertent, and others it is intentionally disseminated to the investors, as in the Chicago Convention Center case.  Either way, the fact that it exists and the fact that investors rely upon others not directly employed by them, to provide due diligence for their benefit, is very disconcerting.

4. The Commodification of Professional Services

Professional services in the United States, when contemplating a transaction of this size and with the end goal of obtaining a Green Card or citizenship, are more efficiently used with an eye toward having a trusted advisor to walk through the entire process with the investor.  However, in the EB-5 world, professional services, at least on the U.S. side of the transaction, are treated as commodities.  Some of this is a result of attorneys who do not have sufficient expertise in areas outside of immigration, and the fact that investors do not seek the advice of corporate or securities lawyers.  Some is driven by the desire of the other participants in the transaction trying to make the process seem as simple as possible, but avoiding any advisors who may muddy the waters with legitimate questions.  And it is likely that much of this is a result of the fact that the investors do not wish to spend more money than is necessary, and no one has spoken with them about the value that a comprehensive approach to their case and the transaction has, when compared to hiring a professional for a discrete job, without much care as to obtaining advice from him or her.

The lack of a trusted adviser who takes the time to understand the client’s goals, desires, and provides well thought out counsel in relation to selection of the investment, and works with the investor from project selection through removal of conditions on the Green Card leaves investors as easy targets for fraud.

The time at which the investor seeks legal professionals in the United States is also of great concern.  Committing to a project, prior to engaging a U.S. attorney, leaves the investor with little chance of escaping a bad investment decision even if the U.S. attorney provides the correct advice.  It is also highly unlikely that the attorney will provide that advice in light of the fact that too many times, the attorney is working for the project and for the investors.  Even if the attorney does not have such a blatant conflict of interest, the investor likely selected the attorney on the advice of the project developer, the regional center, or the migration agent.  Selection of an attorney through the recommendation of those who stand to gain from the transaction, and the fact that the attorney gets significant work through these sources, reduces the likelihood that the attorney will advise against a specific project.  The decision not to advise a client on whether an investment decision is wise is supported by a lack of expertise in the field, but also suits everyone’s needs and desires, except the investor’s.  While lawyers are not investment advisors, and should not pretend to be, many lawyers with business backgrounds or corporate law experience, can provide advice in relation to business law, likelihood of legal issues with the chosen investment, background information that may help an investor make a decision, and most importantly, any attorney with an understanding of corporate law can also distil a PPM down to its relevant points and describe it such that it is useful to a client.

Finally, communication is lacking when a service rendered by an attorney is treated as a commodity.  Often communication is not direct between the attorney and the investor. It may run through an attorney in another country, or through a migration agent, but this lack of direct communication is risky for attorney and client both.  The likelihood of miscommunication when using intermediaries and when there is no ability to verify a complete understanding can leave the client not seeing the bigger picture, not understanding a strategy, or agreeing to something that he or she assumes will cause one result, but in fact is designed to cause another result.  The lack of direct communication is usually designed to preserve control over the investor and manage the flow of information, but it is usually cloaked in simplifying the process and making it less of a burden on the investor.  What it really does is ensure that no independent third party is really looking out for the investor’s best interest, and the investor does not have access to the best possible information in order to make decisions.

All of this results in the attorney and other professionals’ services being undervalued.  Put differently, the highest and best use of attorneys, accountants and business consultants who may be involved in the EB-5 transaction on behalf of the investor, are never made.  The failure to make the most efficient and best use of professionals is most likely a failure on the part of those familiar with the U.S. legal system to advise investors to make appropriate use of professionals in the United States as a protective measure.