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Fraud on Investors in EB-5 Investments: Caveat Emptor! Part 7

Fraud on Investors in EB-5 Investments: Caveat Emptor! Part 7

EB-5 Fraud Courtroom

A Better Way: Walking Alongside the Investor Start to Finish

Having reviewed what types of fraud exist within EB-5, what causes the EB-5 Fraud to occur, and what systemic issues enable the fraud, this blog post now turns to a description of steps that can be taken to reduce the risk of falling victim to EB-5 Fraud.  The alleviation of fraud within the EB-5 program requires a three-part approach.  First, the U.S. government must clarify and strengthen EB-5 regulation.  Second, the industry must be vigilant and self-policing.  Third, immigrant investors must play a more active role in protecting themselves.

The U.S. government is taking its obligation to prevent fraud quite seriously, and many of the proposed integrity measures do a very good job of moving the industry in a better direction.  The approach seems to have a number of distinct goals.  

First, the government is requiring additional reporting.  

This additional reporting is aimed toward ensuring that regional centers are actually working on economic development, as opposed to sitting dormant.  This is important because there are many approved regional centers that are not active in the space promoting projects, and many have no affiliated projects at all.  Those who formed and obtained authority for the regional centers have spent a great deal of money and time on the project.  If there are no affiliated projects, the regional centers will eventually be terminated.  So, the owners look to recoup their investment in any way possible.  This makes their regional center more willing to accept projects that appear questionable in order to be paid for promoting the project, or in the alternative, they are willing to sell their regional centers to purchasers with questionable projects.  The impact of forcing more reporting is two-fold.  It may force many regional center owners to scrap the idea and let the regional center’s close, thereby culling the herd.  Second, the additional reporting and activity requirements will force regional centers to either pay contractors or attorneys to handle the work, or staff themselves appropriately, creating more legitimate businesses which will naturally provide better service.  

Second, the government, by increasing reporting requirements and fees is enabling itself to better staff the program without allocating taxpayer dollars.  

This is a substantial benefit to anti-fraud work.  USCIS will be able to hire more and more qualified experts, and receive the information it needs to better police the industry.  In keeping with the nature of the program, the increase in staff and staff expertise is revenue neutral or potentially even positive for the government.

Third, increased reporting, increased cost and more clear and precise regulation increases the barriers to entry.  

While it is clear that increasing barriers to entry has a negative impact on innovation, it also has the positive impact on stabilizing and industry and improving the industry’s outcomes.  Higher barriers to entry make it more difficult for smaller projects to afford the capital, through increasing the cost of affiliating with regional centers, but they also keep those who think that money comes easily through the EB-5 program from accessing that so called “easy capital”.  Those who commit fraud do so for the purposes of obtaining money without a great deal of effort or expense.  When entry is more difficult, fraudsters are likely to seek out other avenues, rather than adapt to the new, more difficult standards.  Obviously this is not universally true, but if the integrity measures are adopted in conjunction with the additional steps outlined below, the result will be effective protection for investors.

Fourth, further increasing the review of people involved with regional centers and the promotion of projects will also enhance the protection of investors.  

Background checks may not turn up incriminating evidence immediately, but the disclosures and background checks create a baseline against which claims and assertions in marketing material can be tested, either immediately, or if a potential problem arises.  Further, registration of any promoter (foreign or domestic) with USCIS ensures that the regional center is only working with registered promoters.  This further allows additional policing of regional centers by reviewing with investors the source of their information on a particular project.  Combined, these steps enhance the transparency of the program, and enhance the anti-fraud toolbox of both USCIS and the SEC.

The EB-5 Industry must be self-policing.  If something about a project does not seem to add up, Industry members should obtain further information, and if concerns remain, members should inform potential investors and USCIS or the SEC.  The Chicago Convention Center case is a perfect example of how this can work, and what the benefits are to the whistle-blower.  Beyond that, while it is ethically permissible to limit the scope of representation, (as described further below) attorneys have an obligation to their investment based immigration clients to disclose aspects of a potential investment that do not seem to add up.  Even if the attorney handling the I-526 does not contact USCIS or the SEC about the dubious nature of a specific project, he or she should let his or her clients know of the issues and risks, even if those risks are not directly immigration risks.  The obligation arises because any investment risk is ultimately an immigration risk for an EB-5 client.