It was in 2013 that this blog first started discussing the risks to foreign investors when investing in so-called “regional centers” approved by the US Citizenship and Immigration Services agency for the U.S. EB-5 Visa program.
A regional center is usually a private enterprise organized to pool invested funds from foreign investors seeking the EB-5 visa, the visa that grants permanent green cards to immigrants that invest a minimum of $500,000 in an enterprise that creates at least 10 permanent U.S. jobs. The normal minimum is $1 million, but “targeted employment areas”, areas having unemployment greater than 50% above average, have that threshold reduced to $500,000.
Many investors have mistakenly believed that approval of a regional center by USCIS means approval of the soundness and integrity of the regional center. The USCIS was never given the mandate or the resources to vet these regional centers, however. Nor have they been given the authority to terminate regional centers for malfeasance, only for failure to submit paperwork on time. According to Baidu Baike (a Chinese on-line encyclopedia), there were 5539 Chinese EB-5 investor lawsuits filed in U.S. courts just within the 18 months between February 2014 and August 2015, or more than 300 investor lawsuits per month. That’s a large number considering that only 10,000 EB-5 visas are allocated per year.
When first studying EB-5 regional centers, I cynically suspected that a lot of these EB-5 regional centers were founded by real estate developers who couldn’t find funding elsewhere -- turned down by all the banks.
As I looked into the backgrounds of these regional center executives, however, I found that I had not been cynical enough. Many have no real estate development experience and were instead underemployed immigration lawyers, securities salesmen and realtors appointing themselves as middlemen in search of worthy real estate projects. At my first EB-5 conference, when I introduced myself as a commercial appraiser to regional center exhibitors, I was often asked if I knew of any projects that needed funding. I said yes, all of the many projects that had been rejected by my lender clients, such as a proposed Biblical Theme Park to be built in a flooded Texas sand quarry.
Worse yet, when I conducted background checks on regional center executives, many had histories of civil liens and judgments against them, foreclosures, and even bankruptcies. Background checks were not part of the USCIS vetting process in approving I-924 applications from prospective regional centers and their founders. One of the regional centers represented at OPIE did not disclose to investors that the CEO had gone through bankruptcy 12 years ago, recently sold 20% of his regional center to a Chinese company (these are all investor funds) at about the same time he bought a $2.9 million power boat, and then went into default on his primary home loan last October. Yet he is soliciting $443 million for a large luxury residential project. What investor, knowing this, would trust their funds to such a man?
USCIS investigators were not trained to vet business enterprises wishing to operate regional centers; they traditionally investigate visa fraud, such as fraudulent marriages for green cards.
In the last 3 years the SEC (U.S. Securities and Exchange Commission) has been assisting the USCIS by investigating regional centers that violate U.S. securities laws, yet USCIS keeps on approving new regional centers faster and faster, with 824 approved regional centers as of today. This surplus of regional centers will spell the ruin of many existing centers that can no longer find enough investors for worthy projects.
One of the first major actions by the SEC was against “A Chicago Convention Center” and founder Anjoo Sethi, described in my post http://www.internationalappraiser.com/2013/05/attempt-to-defraud-261-chinese.html. If USCIS had had a proper vetting process, this 29-year-old pharmacy technician would have probably not been given the authority to take $156 million from investors to supervise construction of 5 hotels and a convention center. His claim of 15 years of development experience would have been quickly derided. No one in the U.S. thought to verify permits with the city of Chicago (it only takes one phone call) or verify hotel management contracts with the three major operators, including Starwood and Intercontinental Hotels Group. Instead, it was a rival exhibitor at a property exhibition in China who blew the whistle on Mr. Sethi. In my own observations, fraudulent regional centers tell much bigger lies in China than in the U.S., and China is the source of 83.5% of EB-5 applicants. This was the reason I went to China.
At this point, I think the most important issue to consider is how to repatriate the funds of thousands of foreign investors who have been defrauded. The SEC is on the case, as is the FBI (Federal Bureau of Investigation), but justice is slow and meticulous, and there are hundreds of regional centers, with more added all the time without proper due diligence. All that is required for regional center approval is an economic report from one of the econo-whore consulting firms.
I have currently complained to the SEC about three dozen EB-5 regional centers.
Here are the red flags I have noticed in researching these regional centers:
1. Fake mailing address. If the regional center has no personnel at the advertised mailing address, how much confidence would you place in them?
2. No mention of the persons managing the regional center. Don’t you want to know who you’re entrusting your money to?
3. No projects advertised. Many times their web sites claim that U.S. Securities Laws prevents them from disclosing their projects within the U.S., but when I go overseas, I either see no projects or fake projects on their web sites. EB-5 applicants should look for “shovel-ready” projects and not projects that do not even have development approvals.
4. Unqualified executives. If one wants to invest in a real estate development, the regional center should be managed by a successful real estate development company, not immigration lawyers, securities salesmen or realtors.
5. Fake projects. A phone call to the local planning office will disclose whether the development project is real and approved.
6. False representation of success. For instance, one regional center crows about all the Wal-Marts they’ve built, but these stores were built in 1992, long before the regional center existed. Claims that 100% of applicants have received green cards, particularly from regional centers only two years old, are very doubtful.
7. Regional center executives who have not properly disclosed their unfavorable legal histories. I can do a $10 background check on a regional center executive and often find a history of 1) civil court judgments, 2) tax liens, 3) foreclosures and 4) bankruptcies. If these events were not disclosed in the offering document, typically a PPM (Private Placement Memorandum), the regional center has violated the Securities Act of 1933.
PS: October 4, 2016 update
As a result of my Freedom of Information Act Request to USCIS, I have received names of all EB-5 regional centers that still exist and have obtained permanent visas for their investors. There are 46 of them out of the now 863 regional centers in operation. In other words, only about 5% of regional centers have fulfilled their purpose in getting their investors permanent visas.
Here is my assessment of the landscape of the 863 EB-5 regional centers:
20% are fraudulent
5% are effective
75% are ineffective for various reasons:
1. They are too large in scope and will never become fully invested because they are competing for investors with 862 other regional centers.
2. The leaders are not qualified to create the jobs. Many are opportunistic middlemen that founded a regional center before they even find a project to build or fund. They pay themselves salaries.
3. Some will not be able to prove that they created 10 jobs per investor.
Worried investors are welcome to contact me privately about concerns about their regional centers, as are their attorneys. Feel free to contact me if you have been cheated.