Homeland Security and SEC Investigating EB-5 Program

The Daily reports that the EB-5 program for immigrant investors is under investigation by the U.S. Department of Homeland Security (DHS) and Securities and Exchange Commission.

Under this program, a minimum investment of $500,000 in the U.S. that creates jobs for ten U.S. workers can qualify a family to immigrate to the U.S.

According to the Daily, the DHS Office of Inspector General has launched an investigation to determine if the program is “effectively administered and managed to detect and deter fraud, waste, abuse, while avoiding national security threats.” I’d speculate that, if this is true, the Office of Inspector General may be looking into whether DHS rules are drafted in such a way as to create jobs for Americans as Congress intended, and whether investors are complying with their promises to DHS as to how they will invest their money and create jobs.

The Securities and Exchange Commission (SEC) has also requested hundreds of files related to EB-5 “regional centers,” an immigration official told the Daily. There have been allegations of unlicensed brokers offering EB-5 regional center investments and misrepresentations by brokers to investors. According to that unnamed official, “This is huge; this shuts down everybody.” But  the agencies’ spokespersons aren’t commenting about the ongoing investigation.

Under DHS rules, a regional center is an entity that is engaged in the promotion of economic growth, improved regional productivity, job creation, or increased domestic capital investment. It must must provide a framework within which individual investors affiliated with the regional center can invest their money in such a way as to create the requisite ten jobs. A regional center must apply to and be approved by DHS.

It seems to me possible that the investigations (or the bad press) could delay or otherwise impact Congressional renewal of the regional center aspect of the EB-5 law, which is set to expire on September 30. The Senate has already passed a bill to extend it. A House vote is scheduled for September 11.

My take is also that potential fallout from the investigations could tilt investors’ focus more to what’s termed “direct” investment instead of “regional center” investment. The latter now make up more than 90% of EB-5 investments.

Direct investors, who start their own business or invest in another’s business, must prove that they’ve “directly” created ten jobs. In other words, there must be an employer-employee relationship between the business in the new workers.

But a regional center is subject to a looser standard. A regional center investor can satisfy the job creation requirement through “indirect” jobs. This can include employees of the producers of materials, equipment, and services that are used by the business. The method for counting “indirect” jobs is inherently subjective, and DHS’s rules have been less than clear. I’d speculate that the DHS Office of Inspector General may, in part, be looking into whether such ambiguity has left the program open to abuse.

We’ll have to wait to see whether Congress is willing to act before the November election and what the fallout is from the government investigations.

5 thoughts on “Homeland Security and SEC Investigating EB-5 Program”

  1. I’ve gotten questions about The Daily and the article’s author, Sarah Ryley.

    The Daily is a startup newspaper. It’s part of News Corp., which is owned by Rupert Murdoch. News Corp.’s portfolio includes Fox News and the Wall Street Journal.

    Ryley is the recipient of a press award from an immigration restrictionist group, the Center for Immigration Studies. Here’s her bio.

    Ryley has been working on this story since at least February: The USCIS log shows a couple requests she’s filed under the Freedom of Information Act seeking EB-5 records.

  2. Based on he following text from the story, it would appear that Ms. Ryley has relied on a blogger [name deleted] who is self promoting EB-5 direct investment by slamming EB regional centers in Regional Center blogs for months.

    There is NO announcement that the program has been shut down. Additionally there is absolutely nothing new about Ms. Ryley’s reporting; it’s well known that there is a hand full of consultants in the US that are operating outside the SEC guidlelines and they should be fined. The tight controls that USCIS CSC places on each immigrant applications (I526) & Regional Center (I526 Exemplars) is substantial and to the point of exhaustion for the RC investor, SEC/Immigration/Contract attorneys, economist, developers and owners of the regional centers. The average application filing of a Regional Center (I924) will cost from $250K to $750K by the time USCIS CSC grants certification to operate.

    Where creating jobs should be considered a positive American activity, these folks are clearly acting very Anti American and should work harder to support the Regional Center communities efforts not use words such as “may be investigating” . Under the current banking and commerce regulatory laws now on the books, everything is NOW under investigation!

    John Anderson
    SVP CSRC

  3. John,

    Thanks for your comment. You mention that the Daily story’s allegations about regional centers may rely on a source that is promoting EB-5 direct investments by slamming regional centers. Actually, although my post isn’t clear enough, it was my point–not the journalist’s–that investors may take a second look at direct investments. This may be inevitable if DHS continues to make it harder for regional centers to count indirect jobs. And here’s a post from a promoter who has tirelessly worked on behalf of regional centers: Report from China: direct EB-5 project draws attention.

    As to whether the Daily is right that these are major DHS and SEC investigations that could have signficant impact, I’m not ready to speculate.

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