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.