Proposed Integrity Measures Are Only Partly Helpful: Only Change In How Investors Approach EB-5 Investments Can Alleviate EB-5 Fraud

Recently, many anti-fraud and anti-money laundering reforms have been proposed and some implemented.  USCIS, for example, has modified its staffing to include financial specialists to better track lawful source of funds, and has engaged more experienced business analysts to determine whether projects meet the feasibility standards.  The proposed changes which are aimed at ensuring transparency and program integrity are usually referred to as Integrity Measures.  What follows is a general overview of some of the proposed integrity measures, and is by no means all-inclusive or comprehensive.

1. Preapproval of a business plan may be required, and if it is, such preapproval would be binding upon USCIS when adjudicating I-526 petitions filed by immigrant investors using the regional center program.  While this is good for investors in that the investor will know whether a conditional Green Card is available for a generic investor in the project who meets all other requirements, it does not provide protection for the investor in relation to removal of conditions.  Further, this type of a provision may enable greater fraud in that the investment can be sold as preapproved, then money misappropriated while no one is looking, followed by a rash of I-829 denials.  Without the guidance of a good attorney from start to finish, an investor may be lulled to sleep and encouraged not to pay attention because of the preapproved status of the business plan.  On balance this proposal is good because it creates certainty at the early stages of the investment, and streamlines the adjudication process by narrowing the issues for adjudicators.
2. There are various proposals related to regional center reporting requirements, and background checks for key personnel working in and operating regional centers, and site visits are also possible.  This is a very good proposal, that will ensure disclosure regarding regional center activity and personnel.  It will reduce the chances of bad actors involving themselves in the industry.  Further, the background checks coupled with additional reporting will set a baseline against which the SEC can check statements contained in PPMs and other offering documents, when the regional center is operated by, rented or owned by either the development company or a related entity.  The reporting also protects the program’s stated goal of job creation by focusing on whether the regional center is performing its mandate by working to spur economic growth.
3. Clarifying that securities laws compliance and a clear affirmance that EB-5 related membership or partnership interests are securities, is required is proposed as part of the annual certification process for regional centers.  This proposal is key to weeding out bad actors.  By way of example, there is presently a lawsuit and criminal investigation against a California lawyer who sold investments using the EB-5 program, and embezzled the money without even taking rudimentary steps to initiate his supposed projects, much like the Chicago Convention Center.  The lawyer is defending himself by asserting that he did not sell securities.  This is an outlandish defense that should not see the light of day outside of the press.  However, requiring securities compliance in the regulations or statute governing regional centers will put this ridiculous assertion to rest permanently.
4. DHS would be permitted to immediately terminate or otherwise prohibit regional center program participants from participating in the program in any capacity if there is a finding of fraud, misrepresentation, or activities outside of or in contravention of the national interest.  It is a longstanding tradition of the law in the United States to effectuate action by punitive justice for failure to act in a given way.  The carrot here is the opportunity to raise funds and save money in the cost of capital.  The stick is that if a developer gets too greedy, or involves itself in too much puffery about its project, the developer, its principals, and others directly involved may be out of the program for good, and may also be subject to prosecution or civil claims for securities violations.  This is another good provision, but it begs the question of who will be watching for the fraudulent behavior or identify the misrepresentations if the investors (who are not well equipped to do so) are not consistently represented from project selection to removal of the conditions.
5. USCIS may require promoters of projects to register with USCIS, and submit to USCIS’ authority, as well as show a working knowledge of the program, its fees and requirements.  This can be a win for USCIS and the migration agents in that by registering, the agents can assert that they abide by the law, and have met the requirements of USCIS, or at least imply it by stating the truth; “Registered with USCIS” or something along those lines can be placed on all marketing material.  While this does provide some additional oversight and incentive for migration agents to focus on selling better projects, it also gives the investor an additional false sense of security.  Again, this is a good and necessary provision, that will prove helpful, but does not accomplish much additional protection for the investor.

On the whole, these proposals, and many more that have been put forth are helpful.  They are also in line with the general scheme and focus of the United States legal system.  The foundational principles of the United States legal system include the presumption that the government should generally stay out of the private business affairs of the people and businesses.  In fact, it is the government’s position that it sets the boundaries, or the guardrails if you will, and as long as people and entities operate within those guardrails, the government will not involve itself.  Further, the government is not constantly active in seeking evidence that anyone is operating outside of the bounds of proper business.  The government, instead, awaits reporting of misbehavior before it will act.  The government also provides a trustworthy forum for private disputes to be resolved in the judiciary.  There are also parallel systems of mediation and arbitration that those involved in the dispute may use.

All of this together results in certain legal maxims such as caveat emptor – buyer beware and that the law protects those who protect themselves.  There is no good way to convey these principles and maxims to foreign investors who tend to be either overly trusting of the government, or to have no faith in government whatsoever.  But the system works well, and that is why (in part) people want to conduct business in the United States.  However, doing so then requires vigilance and efficient use of attorneys and professionals in the United States.

While the integrity measures are good, and add a layer of protection, they do not address problems related to the market conditions, cultural impediments or the fraudsters’ desire for easy money, nor should they.  Instead, it remains incumbent upon the investor to take steps to protect himself or herself, and there is a better way to do so than the current approach.  Convincing investors to take this different path is difficult, but will be worthwhile and valuable to the investors.  It is the better way to which this post now turns.