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Is EB-5 coming apartat the seams?

With gridlock in Washington and increasing allegations of fraud in the courts, the federal visa program is facing a new threat — its inability to clean up

(Illustration by Isabel Espanol)
(Illustration by Isabel Espanol)

As migrant children lay separated from their parents in detention centers in south Texas, the Senate Judiciary Committee met in Washington in mid-June to discuss the EB-5 visa program, which gives foreign investors a path to U.S. citizenship if they commit at least $500,000 to job-creating enterprises.

The Trump administration has tried to reshape America’s immigration system through executive orders and increased prosecutions, but Congress has temporarily renewed EB-5, once again, with the White House having little to say on the matter.

For now, the federal “cash-for-visa” program, which has pumped billions of dollars into New York real estate projects, isn’t going away — despite ongoing reform efforts and multiple allegations of fraud.

Some Democrats in the June committee hearing were quick to point out the irony.

“We’re talking about a program that allows rich people to buy legal status in the United States with their wealth at the same time as poor people are risking their lives and the health of their children to even apply for legal status in the United States,” said Illinois Sen. Dick Durbin.

And Republican Sen. Chuck Grassley of Iowa — one of the program’s most vocal opponents in Washington — maintained that the EB-5 economy of brokers, dealers and developers is so fraught with corruption, the program should be closed if it is never adequately reformed.

“This has gone on through three Congresses,” Grassley said at the June hearing. “Each and every time we’ve gotten an agreement at the last minute, really powerful, really well-connected EB-5 industry groups have torpedoed our compromise efforts.”

Grassley’s ongoing push for reform comes as incidents of alleged investment fraud have increased in recent years. In February, for instance, the Securities and Exchange Commission settled with a Miami-based businessman who spent $50 million of investors’ money to buy two Manhattan luxury condos and pay off his taxes, rather than fund a ski resort in Vermont designated for EB-5 capital.

Recent concerns about the program also extend beyond white-collar crime. The Department of Homeland Security reported in 2017 that it tracked 19 separate national security concerns posed by EB-5 activity within the previous five years.

U.S. Citizenship and Immigration Services, meanwhile, is shutting regional centers — which create the investment funds for immigrants — at a greater clip than in the past. USCIS terminated 82 regional centers in the first half of 2018, nearly surpassing the total for all of last year (the agency has not released data on how many of those closings are due to violations of securities or immigration laws).

And in China, which has seen the highest number of EB-5 investors over the years, the program is steadily losing traction. Since USCIS only issues 10,000 new EB-5 visas a year and imposes quotas on individual countries, the wait list for a Chinese national to get a green card through the program is now about 15 years.

“China is dead,” said Min Chan, an immigration attorney who specializes in the EB-5 program and has helped regional centers attract investors. “No one is going to waste 15 years to get a green card and have their money tied up for that long.”

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Some foreign investors, however, are locked into commitments they made without realizing the wait list was swelling out of control.

In one of two related stories this month, The Real Deal looked behind the scenes at three major New York City developments where some EB-5 investors from China want to call in their chips and stop the immigration process altogether. Those investors are hiring American attorneys to help them try to retrieve their money in what could become a bigger threat to the many projects and regional centers heavily backed by Chinese investors.

Related: Chinese investors want their millions back

Meanwhile, one of the biggest regional centers, located in New York, has been hit with two major lawsuits. One complaint alleges that the firm, New York City Regional Center, defrauded more than 100 Chinese investors by marketing investments in a project whose developer had defaulted on loan payments.

Related: Overselling NYC: EB-5 pioneers face investor backlash

EB-5 participants who put up $500,000 to $1 million are more vulnerable than traditional investors — since their primary goal is to obtain a green card rather than a financial return. Many are reluctant to take legal action against regional centers and developers, fearing that it could impact their immigration petitions, legal experts say. As a result, there’s less litigation over EB-5 claims in U.S. courts than there might be otherwise.

Integrity measures outlined in pending Department of Homeland Security laws and past reform bills floated in Congress could help root out cases of abuse of the program before they spiral out of control. But there are few signs that the government is moving any closer to such reform.

“Nothing has changed, which is really disappointing,” one Washington lobbyist, who advocates on the long-term reauthorization of EB-5 for property developers, said on the condition of anonymity. “The parties remain kind of dug in where they are.”

That has little to do with better record-keeping and deeper background checks that could help reduce the prevalence of fraud. The real split in Washington comes from proposals to raise the minimum investment thresholds well above $500,000 and restrict the ability of states to draw their own boundaries on what qualifies as an area of true employment need — a practice critics have referred to as “gerrymandering.”

While Trump’s USCIS director, Lee Cissna, has said both he and DHS Secretary Kirstjen Nielsen support these more restrictive measures, the real estate industry has been making its case directly to the White House. Many real estate lobbyists who believe such changes will make large urban development projects more difficult to finance through EB-5 oppose them. And over the past 18 months, Washington hasn’t take any steps toward new regulations.

The next chance for Congress to do so is on Sept. 30, when the EB-5 program is scheduled to sunset again.

Rodrigo Azpúrura, a developer in Florida who has used EB-5 to fund several real estate projects, lamented the “black cloud of uncertainty” over the program, but said he’s still hopeful that Congress will eventually reach consensus on reforms that result in long-term reauthorization. He just doesn’t expect it to happen this year.

“It’s a really complex program,” he said. “There’s so many [aspects] that need to be addressed.”

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