EB-5 Program Renewal Debate Spurs Fraud Talk

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There have been a number of articles and an Office of Inspector General report about the EB-5 visa program recently as the 25 year old program must be renewed by Congress for the tenth time by September 30, 2015 or it will expire. One of the reasons we are seeing that it hasn’t been renewed yet is that the EB-5 program is fraught with potential fraud for both investors and the government.

Because of their desire for a visa to the United States and language differences, Chinese investors can be particularly susceptible to scammers. U.S. Government investigators have identified at least 35 cases of securities fraud in the EB-5 program, according to a Government Accountability Office report. The Securities and Exchange Commission has received more than 100 tips about potential securities fraud violations involving the EB-5 program from Jan. 2013 through Jan. 2015. These reports have no doubt been facilitated by the SEC’s whistleblower program.

The applications to the U.S. Citizenship and Immigration Services also raise fraud concerns. The documentation is paper based and funds may come from prohibited sources such as the drug trade.

There have been two notable enforcement actions in this area, one leading to a sizable whistleblower reward and the other leading to the first enforcement action against two firms acting as unlicensed broker-dealers for the EB-5 program, raising $79 million.

For those not familiar with it, the federal EB-5 visa program allows immigrants and their families to get a green card if they invest at least $1 million ($500,000 in rural areas or high unemployment areas) and create 10 or more jobs.

Investments in the program are set to hit $3.6 billion this year, according to an industry trade group. This number has accelerated substantially since 2008 when there were investments of $321 million in the year. The first year to hit the maximum number of EB-5 visas was last year (2014), when the U.S. State Department issued 10,000.

The combination of Canada’s decision to limit immigration and the need for alternative financing for businesses because of the recession caused the program to balloon. Eighty-five percent of EB-5 visas in 2014 when to immigrants from China. South Korea, Mexico, Taiwan and Vietnam make up the rest.

The leading area projects is in construction and real estate, where the investments lead to hotels, hospitals, offices, housing projects and mixed-use developments.

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