The good news, if you live in another country and want to skip to the front of the U.S. immigration line, is that a government program that grants visas to overseas investors is more popular than ever. The catch: The program, which critics say is rife with the potential for fraud, could visit money laundering and sanctions problems upon the banks facilitating the process.

Congress created the Employment-Based Fifth Preference program, better known as EB-5, an employment-based visa program, in 1990. It was intended to encourage capital investment in the United States by foreign investors in exchange for “green cards.” Conditional visas are offered to foreign nationals (and eligible dependents) who invest $1 million (or $500,000 in rural or government-designated “targeted employment areas”) in a new commercial enterprise that creates at least 10 full-time jobs.

Approximately 10,000 EB-5 visas are available each fiscal year, subject to Congressional reauthorization. The Immigrant Investor Program Office within the Department of Homeland Security’s U.S. Citizenship and Immigration Services administers the program, which draws investors through regional centers and private promoters.

Initially, the program was underused, a trend that continued during the global financial crisis. In recent years, bolstered by Chinese investors, it has seen a resurgence, spiking from just 64 visas in 2003 to, for the first time last year, hitting its 10,000 cap, with Chinese investors accounting for more than 8,000 of those applicants. The Marriott Convention Center Hotel in Washington, D.C, and the Barclays Center in Brooklyn, New York, both took in tens of millions of dollars in EB-5 investments. Upwards of $110 million is being raised though the program for a 36-story condominium tower in Brooklyn.

As the program becomes more popular, concerns are escalating. “It is widely acknowledged that the EB-5 program is riddled with flaws and corruption,” Sen. Chuck Grassley (R-Iowa) said during a February hearing convened by the Senate Judiciary Committee. Among the vulnerabilities he cited: Investments can be spent before business plans are approved; gifts and loans are acceptable sources of funds from foreign nationals; regional centers don’t have to certify that they comply with securities laws; and files and applications lack needed information to monitor compliance.

“Many of these are big real estate projects that are attractive to banks, or they may serve as an escrow agent because the investors in these projects don’t want to release the funds until the applications have been granted by the citizenship authorities.”
Matthew Schwartz, Partner, Boies, Schiller & Flexner

The Department of Homeland Security, in an internal memo, outlined concerns that it could be used by Iranian operatives to infiltrate the United States, and it identifies “areas of program vulnerability, including the export of sensitive technology, economic espionage, use by foreign government agents and terrorists, investment fraud, illicit finance, and money laundering,” Grassley said.  

A troubling aspect of the initiative was detailed at the hearing by Stephen Cohen, associate director for the SEC’s Division of Enforcement. As regional centers pool multiple investors’ funds into commercial enterprises, they can offer EB-5 investments that qualify as securities offered under one or more exemptions from the registration requirements of federal securities laws.

“Just like the thousands of other unregistered private offerings in the United States every year, the SEC has limited visibility into this market,” Cohen said. Between February 2013 and December 2015, the SEC filed 19 actions, nearly half involving fraud allegations.

In February 2013, in the first case of this kind, the Commission halted a scheme that defrauded more than 250 investors, mostly from China, who invested more than $145 million (and millions in “administrative costs”) through an EB-5 program. Instead of financing construction costs for a convention center in Chicago, as was claimed, proceeds were used “for the purchase of luxury goods … to make a payment on an unrelated lawsuit settlement, and to fund a cosmetic surgery business.”

In June 2015, in a settled administrative proceeding, the Commission brought the first stand-alone unregistered broker-dealer case charging two firms involved in handling investments for more than 150 EB-5 investors. The SEC is also working with the Financial Industry Regulatory Authority to share information regarding the role of brokers and dealers in the EB-5 industry. FINRA has issued guidance and rulemaking addressing suitability and due diligence obligations for brokers facilitating these transactions and the role of foreign brokers or finders.

Thus far, no financial institution has been swept up in an EB-5 scandal. Given the potential for fraud and money laundering, they should take little comfort in that fact. “You can see which way the winds are blowing,” says Eric Berg, special counsel for Foley & Lardner and a former trial attorney at the Department of Justice. “The government is paying more attention to the corrupt acquisition of wealth overseas. The risk to financial institutions is determining how the wealth was obtained and trying, to the best of their ability, not to deal with tainted funds. When foreign investors bring money into his country, it would probably behoove you to do more than the standard due diligence you would for opening a checking and savings account.”


The following is from an August 2015 report by the Government Accountability Office on EB-5 visa programs.
To strengthen U.S. Citizenship and Immigration Services’ EB-5 Program fraud prevention, detection, and mitigation capabilities, and to more accurately and comprehensively assess and report program outcomes and the overall economic benefits of the program, we recommend that the Director of USCIS take the following four actions:
• Plan and conduct regular future fraud risk assessments of the EB-5 Program;
• Develop a strategy to expand information collection, including considering the increased use of interviews at the I-829 phase as well as requiring the additional reporting of information in applicant and petitioner forms;
• Track and report data that immigrant investors report, and the agency verifies on its program forms for total investments and jobs created through the EB-5 Program; and
• Include a discussion of the types and reasons any relevant program costs were excluded from the Commerce study of the EB-5 Program.
Source: Government Accountability Office

 “Many of these are big real estate projects that are attractive to banks, or they may serve as an escrow agent because the investors in these projects don’t want to release the funds until the applications have been granted by the citizenship authorities,” says Matthew Schwartz, a partner at law firm Boies, Schiller & Flexner. Banks, he advises, need to ensure they truly understand the project, review any offering materials, and compare the proposed and actual use of funds. A particular concern is if, in a fraudulent transaction, funds end up in an offshore account. “You can imagine how a regulator or other government authority would look at a financial institution that was the bank for a real estate development project when all of the disbursements were not project related, but went off to a separate company or personal bank account,” he says. “It creates the risk that the EB-5 project may be one layer in a money laundering scheme.”

An important precaution is to ensure that no party to the transaction appears on government sanctions or terrorism lists, says Thomas Sporkin, a former senior SEC enforcement official, now a partner with law firm BuckleySandler: “You don’t want to be a pawn in a terrorism finance game.” 

If a bank is instructed to disburse funds to a project coordinator, it should strive to validate the arrangement and “make sure the money is really going to its purported purpose,” he says. “It should only disburse the money to an agent who it’s comfortable with. I’d want something like a typical construction contract where you have milestones and inspections prior to the release of funds.”

Among his advice: confirm the identity of the source and ultimate recipient of funds; seek the ability to audit the promoter's books and records; independently confirm the use of proceeds; and review the promoter's prospectus for warning signs of fraud. The risk profile of prospective customers and the EB-5 project itself should be addressed in the financial institution's risk assessment and transaction monitoring rules.

In January, the Treasury Department’s Financial Crimes Enforcement Network issued Geographic Targeting Orders requiring title insurance companies to identify the natural persons behind companies paying cash for high-end real estate in Manhattan and Miami-Dade County, Florida. The move, targeted at combating international money laundering, could be an omen of future EB-5 scrutiny.

“There has been a lot of attention in the AML area recently on U.S. investments by foreign persons, in particular with real estate investments,” says Seetha Ramachandran, litigation special counsel at law firm Schulte Roth & Zabel and a former deputy chief in the Department of Justice’s asset forfeiture and money laundering section. “Given recent cases involving fraud, it is just a matter of time before regulators start focusing on EB-5 investments as well.”  Questions banks need to ask: “Are the funds coming from another bank that has its own AML program? Who is the investor, what does the investor do for a living, and what’s their source of wealth or income?” Particular care should be made to identify any political figures connected to a transaction, and scrutinize deals that include investors from countries that have been affected by political corruption.

“As for the concerns these investments raise for banks, I don’t really see them as that different from the issues that banks already address through existing AML checks before accepting money from customers,” Ramachandran says. “If a bank is asking the right questions as part of a robust, global AML program, it should be able to identify some of these issues, regardless of the context."