One of the nation’s leading experts on EB-5 fraud explains the safeguards necessary to protect against malfeasance.
While the EB-5 Immigrant Investor Program provides incredible opportunities for foreign nationals to gain permanent residency while creating jobs in America, it can be a challenge for interested investors to get the right information in order to make informed decisions.
There have been many high-profile cases of fraud in EB-5 where bad actors have taken advantage of investors’ ignorance about US laws, language barriers, and gaps in regulation to misappropriate and misuse investor funds. While the EB-5 Reform and Integrity Act of 2022 (RIA) created new rules to protect investors, the law may not be easily understood by those who’ve never been involved with the industry, especially where a language barrier exists.
JTC, Akerman LLP, and Brevet Capital co-sponsored a recent webinar entitled, “Making an EB-5 Investment Choice: Considerations for Investors and Agents in the New Era,” aimed at providing investors, agents, and others with information about how to protect investor funds, the impact of the RIA, and eliminating fraud and abuse in the program, among other topics.
The webinar featured panel discussions and speakers from throughout the industry. The keynote speaker was Michael Goldberg, Partner, Bankruptcy and Reorganization at Akerman LLP. Goldberg has worked with the SEC on some of the largest EB-5 fraud cases in history, and even worked with Senator Patrick Leahy’s office on drafting some of the provisions of the RIA. His unique expertise provided attendees with invaluable insights into how fraud can seep into the EB-5 process.
“Fraud is unfortunately not uncommon in the EB-5 world, especially in projects that lack appropriate safeguards,” said Goldberg. The consequences, as he outlined, can be disastrous for investors.
“The net result of the fraud,” he said, is “all or part of the investor’s money is gone, the immigration status is put in jeopardy, and the investors’ lives are thrown into uncertainty and turmoil.” That’s why it’s critical for investors and their agents to monitor investments closely and only invest in projects that have certain safeguards.
“In analyzing the projects that I’ve been involved with,” said Goldberg, “I have seen several things that could have been done that would have prevented the fraud or would have caught it early enough to avoid its significant financial and immigration problems.”
Goldberg outlined seven key safeguards that should be in place for any EB-5 project. This list included actions that can be taken by Regional Centers, investors, agents, and project developers in order to increase investor confidence, protect investor funds, reduce fraud, and increase the likelihood of successful immigration applications. Investors considering EB-5 should understand these safeguards and look for them when deciding upon a potential investment.
1. “The single most important protection that I believe investors should insist upon is that the borrower have an independent and reputable third-party auditor who has complete access to the borrower’s books and records”
This element should be included in the offering documents, stated Goldberg, with written annual audit statements given directly to investors. That way, if a borrower acts inappropriately, it will be caught earlier, and could even deter this behavior in the first place.
For investors, not only will this provide peace of mind that fraud will be uncovered, but it can also potentially provide financial safety. If any malfeasance isn’t caught by the audit, “there will be an insurance policy behind that auditor that will be able to compensate the victims of the fraud.”
This is an “easy ask to make” of borrowers, said Goldberg, because they benefit as well. A thorough third-party audit would be a differentiator in the marketplace, as would the second key safeguard on his list.
2. “There should be third-party control over the funds”
In EB-5, it’s critical investor funds are kept separate from other operating funds, as they are meant to be used exclusively for the creation of the requisite jobs.
Third-party control of funds, with all escrow accounts overseen by the third party and all disbursements reviewed and approved before funds are transferred, can increase the chances the project will be completed by ensuring investor funds go toward the project and are not diverted.
As with an annual audit, this outside oversight can demonstrate to investors and agents that the borrower is comfortable with a high level of scrutiny. If they aren’t willing to subject their processes to that scrutiny, they may not be treating investor funds with the necessary care.
3. “A separate and completely independent Regional Center is important”
In some cases, the borrower or project developer is also a principal in the Regional Center, or controlling it behind the scenes. Goldberg describes that lack of independence as a “fox guarding the henhouse” situation, where there are too many opportunities for malfeasance and fraud. He described situations of total fraud that he’s encountered, where no jobs have been created at all.
Because this requires a thorough examination of the principals behind the Regional Center and the relationship with the borrower, proper research must be conducted. This connects with the fourth safeguard, which investors and agents must act upon themselves.
4. “The Investors and the agents do their own due diligence”
This doesn’t just mean a cursory review of documents. Investors and their representatives should visit project sites, ask for reports, and verify the stated activity is taking place.
“Visit the property,” said Goldberg. “Go to the business. Look at the activity. See what’s going on.”
This is crucial not just for the security of the investors’ capital, but the success of their immigration applications, and shouldn’t be taken lightly. Questions have to be asked from the very beginning and throughout the process.
5. “Read the documents closely. Understand them. Ask questions.”
Many EB-5 investors speak English as a second language, or not at all. In these cases, documents are often translated. If that’s the case, agents need to be sure that the translations are accurate, as there have been some cases where translated documents differed from the original documents.
Investors and agents can demand a translation from a reputable source, along with a certification that the translation is accurate. Agents and investors should work together to go over those documents and make sure they are correct and understood, because if inconsistencies are spotted later, it may be too late.
6. “Ask to speak to the professionals representing the borrower and do some research on the professionals’ reputation”
EB-5 projects are often complex developments and businesses with legal representatives and other hired professionals. Checking up on the people representing the borrower can provide insight into the legitimacy of the project.
“Typically,” said Goldberg, “unscrupulous people do not use top-notch, reputable professionals.”
It’s not unreasonable for investors and agents to ask to speak with representatives of the borrower or Regional Center. Goldberg’s advice for what to do in the event the borrower or their hired professionals refuse to speak with you was quite simple: “move on and find another project.”
7. “Trust your gut”
Goldberg singled this out as “probably the most important” thing for investors to keep in mind. “If something does not seem right,” he said, “do not bury your head in the sand and ignore it, as the passing of time only makes the situation worse.”
Sometimes investors are hesitant to raise issues because they’re afraid that doing so might harm their immigration chances. But as time wears on, more capital could be lost, leaving investors in an even worse position than if they’d said something when they first suspected there was a problem.
“Insist on reports,” said Goldberg. “Speak to professionals. But get the information you need, and if you can’t get the information you need on your own, consult a lawyer.”
He stressed that though following these steps “will not guarantee that your project will ultimately be successful,” as there is always risk in making any EB-5 investment, “these steps should greatly reduce the chance that you get involved in a fraudulent project.”
How to learn more
If you’re interested in getting more information or have a specific question regarding an EB-5 investment, webinar sponsors JTC, Akerman LLP, and Brevet Capital are happy to help.
For all inquiries pertaining to the prevention or instances of fraud, or how to structure investments and projects to maximize benefits for all participants, please contact Akerman attorneys Michael Bailkin or Michael Goldberg for assistance.
For capital raising and structuring investments, contact Abteen Vaziri at Brevet Capital.
Please note that this webinar is for educational purposes only, and the participants do not promote or endorse any product, service, or fund by taking part in the webinar.
JTC offers a full slate of EB-5 services, including fund administration, escrow, cosignatory, and more. Our secure online portal offers investors 24/7 access to fund and project information as well as on-demand document creation and immigration workflow from anywhere in the world. This webinar is part of an ongoing effort to educate investors on the value of proper third-party controls in EB-5.
The webinar recording is now available online, containing not only Michael Goldberg’s full remarks, but two panel discussions, one on the structure of an EB-5 project and another on how investors can protect their EB-5 funds. We hope this information will help investors from around the world better understand EB-5 and promote best practices throughout the industry.
