By Charles Raether
Knowledge of the EB-5 program has gradually improved over the past few years among Russian investors and other Russian-speaking investors in surrounding markets. However, despite the program's increased profile, these markets continue to be underrepresented among EB-5 investors, particularly in light of the number of high net-worth individuals in these markets. Likely explanations for this phenomenon are multifold, including a low level of knowledge of the program in general and typical structuring of projects, the absence of specialized and knowledgeable agencies to assist with project promotion, and a near complete lack of any concerted marketing efforts by EB-5 stakeholders to promote the program in general.
Many of these factors can be easily remedied by more direct engagement in these markets by EB-5 stakeholders. At the same time, other indirect factors are likely to improve awareness and interest in EB-5. The wave of anti-Americanism that was widespread at the time of the annexation of Crimea by Russia in 2014 has significantly subsided. The continued economic stagnation in Russia and elsewhere in the region has caused many to seriously consider offshore options for their capital and families. The election of Donald Trump has also raised hopes of a reset of relations between Russia and the United States, although that optimism now seems to be a bit misplaced. All of these developments will likely lead to more potential immigrants to consider the U.S. for relocation, and, in particular, EB-5.
Interest in the U.S. market has also been bolstered due to new policies in Europe regarding the sharing of bank information between Western European countries and Russia. Pursuant to Russia’s decision in 2016 to accede to the Common Reporting Standard regime, starting in 2017 Russian authorities will be able to acquire account information for Russian citizens in partner jurisdictions that are also subject to the CRS. This includes most major jurisdictions in Western Europe.1 This development has been the source of serious concern for Russian high net-worth individuals, since they traditionally have kept the majority of their assets in banks in Western Europe. As a result, affluent investors from Russia and surrounding markets are increasingly turning to the United States as a favorable jurisdiction for capital.
SENTIMENT AMONG RUSSIAN-SPEAKING INVESTORS REGARDING EB-5
Despite the longevity of the EB-5 program, knowledge of the EB-5 program in Russia and surrounding markets remains relatively low. This is true not only among actual investors but also advisors, agents, and other professionals in legal and financial spheres who could serve as potential referral sources. Even agencies with significant years of experience in dealing with European and other jurisdictions for second citizenship have at best a rudimentary understanding of the general requirements of the EB-5 program and typical project structures. There have been an increased number of Russian-language sites with information related to EB-5. However, for the most part, these are opportunistic sites set up by intermediaries with limited, if any, experience and knowledge in the EB-5 program and generally are promoting only one particular project.
The low, if not completely non-existent, level of marketing and on-the-ground presence in these markets by EB-5 stakeholders plays a large role in the unfamiliarity of the EB-5 program. A lack of credible and correct information from stakeholders themselves has created a vacuum that has allowed less-than-knowledgeable sources to occupy the media space of EB-5 and provide misleading and even incorrect data about the program. As a result, sentiment about the program among investors tends to be skeptical given the negative light in which the program is conveyed. Agents and other potential intermediaries generally are agnostic. Their primary concern is the ability to generate profit; whether it is a result of promoting residency in Cyprus, Malta or the U.S. is really of little concern to them. If given proper training in the program and industry best practices, intermediaries could well serve as an excellent source for investors.
One of the more attractive aspects of the EB-5 program for Russian-speaking investors is the ability to safely receive a green card without the need to satisfy the numerous qualifications and other work or educational requirements of other visa categories. However, the vast majority of Russian-speaking investors are not adequately informed about EB-5 in general to make an independent assessment of the generally high reliability of the program, much less delving into the nuances of projects and their structures in order to proper evaluate them.
Consequently, most investors rely to a large extent on anecdotal stories from acquaintances and incorrect information they discover online on dubious websites to learn about EB-5. This often results in them having distorted perception of EB-5 before they walk into the door of a developer or attorney.
Motivations for considering EB-5 among Russian-speaking investors differ from those of, say, Chinese investors. Chinese investors are very much motivated by the opportunity to provide their children with access to the U.S. higher education system as well as the U.S. job market after graduation. While these issues are important to the majority of Russian-speaking investors as well, concerns about political stability and raising their children in a less corrupted and socially cynical environment generally rank higher than educational ones.
An additional concern of investors from this region centers on the “guarantee” that investors receive that their funds will be returned in full and on time. Many investors are also deterred by the long investment cycle in typical EB-5 projects (5-7 years) as well as potential challenges with exiting the project. Failed real estate projects are relatively rampant in these markets, and therefore potential clients evaluate EB-5 projects in the same light. Significant time is needed to educate investors as to the capital stack, exit strategy and other key elements of projects, for example, construction guarantees, which are completely non-existent in this part of the world. Qualified advisors must provide guidance to investors to clearly explain the structures of projects to understand the features in place to protect the investors and ensure -- to the extent legally possible -- completion of the project and the return of the investor’s principal.
The election of Trump was originally greeted in political and media circles with such enthusiasm in Russia that various sources reported that the Kremlin was even forced to issue a missive to the Russian media to tone down its prolific and glowing coverage of Trump. They were at risk of overshadowing President Putin himself. The extreme animosity between the Obama administration and Putin was matched only by Putin’s open hostility towards a possible Clinton administration. In this respect, Trump’s election has ever so slightly lessened the negative connotations of having interactions with the United States. At the same time, President Trump’s somewhat unpredictable policy-making process since entering office has raised concerns in investor circles as well about the long-term stability of the U.S. immigration system and EB-5 in particular. Potential investors have a difficult time of distinguishing, say, potential changes to the laws concerning political asylum from laws affecting the EB-5 program. Therefore, any changes to immigration policy would likely create uncertainty among potential investors.
However, when considering participation in the EB-5 program, many potential Russian-speaking investors have recently started to question the likelihood of successful adjudication of their petition in light of the geopolitical tensions between Russia and the United States. Given the realities in Russian society and the overriding role of politics in their daily living, it's only reasonable in their eyes to assume these political issues would also spill over into the adjudication of EB-5 or any other petitions of investors from this region. Consequently, this presents another potential barrier in the minds of potential investors.
As a side issue, it is noteworthy that although having residency in another country or having second citizenship is by no means illegal in most of these markets. However, Russian citizens, for example, are obligated to report about the presence of second citizenship or long-term residence in another jurisdiction. Many Russians are hesitant to do so due to fears as to how this information might be kept confidential and how it could possibly be used against them in the future. Related to this, potential EB-5 investors are still careful to avoid open discussions of their intentions to possibly apply for any type of residency in the U.S. Parties are even discreet about using text messaging and cell phones to discuss plans, preferring instead to use web applications which aren’t immediately recorded or accessible by authorities. For this reason, events or conferences of any size and format on this topic are very unlikely to attract any potential investors. Investors strongly prefer individual meetings to ensure confidentiality.
COMMONLY ENCOUNTERED PROBLEMS
The predominance of cash transactions in this part of the world, however, often causes challenges in handling issues involving source of funds. However, this issue is not at all specific to this region as this has been a problem that precluded their participation in the EB-5 program on only rare occasions with investors from the region. In fact, difficulties regarding the path of funds and other issues tend to be more prevalent.
However, investors from Ukraine might be the exception to this generalization. They pose some of the most daunting challenges among the countries of the former Soviet Union. The majority of Ukrainian investors have problems with sourcing funds given widespread income tax evasion. In addition, harsh restrictions exist both in terms of currency conversion as well as wiring hard currency overseas. Any transfers of hard currency overseas require a license from the Central Bank of Ukraine. Anecdotally it is very difficult to receive this license (without any illegal grease payments), and the procedure and process for doing so is very opaque. As a result, there is a thriving grey market of hard currency transfers using non-transparent structures of Baltic or other offshore banks, which generally cost 1 to 2 percent of the amount. However, for EB-5 purposes these structures in most cases would not meet source of fund requirements under the EB-5 program. In addition, Ukrainian residents are not allowed to exchange more than approximately $5,000 per day in hard currency, which is a marked liberalization of the $500 limit that was in place until earlier this year. As a result, even in the best of scenarios it would take roughly 100 days just to exchange the required amount of local currency to dollars.
Generally, the currency and banking regulations in Kazakhstan are liberal enough to not create significant problems for potential EB-5 investors. Nonetheless, there are some limitations that could create some challenges depending on the investor’s circumstances. Most recently with Kazakh investors, it has been noticed that for transactions involving the purchase of real estate above $100,000, a certificate (“свидетельство”) from the Central Bank is required.2 This requirement can be obviated if the investor, for example, simply transfers the funds to his or her personal account overseas from which he then wires the funds to the EB-5 project. Moreover, as noted above, the regulations -- as well as their interpretations by the banks -- seem to vary from time to time and by bank to bank, making long-term planning somewhat difficult.
Difficulties in other regional markets are generally less difficult, although the lack of transparency not only for investors but also the banks themselves often leads to unpredictable demands by the banks. And even within one country the demands can vary from bank to bank and their interpretations of the regulations. Thus, investors sometimes inquire at various banks where they have accounts to find the least burdensome options. For example, in the past some banks have required Russian-language translations of the partnership or other offering documents to prove the validity and purpose of the investment. Most investors are very reticent to disclose the immigration component of the EB-5 transaction given the negative political connotations. Therefore, they generally only provide documentation related to the offering and investment which make no reference to the EB-5 program.
Given the number of high net-worth individuals in Russia, it is clear that latent opportunities exist to attract greater numbers of EB-5 investors. Vietnam perhaps serves as an example of how the Russian market could also rapidly ascend in the EB-5 country rankings, all the more so given the much larger and more affluent client base to work with in Russia. The most needed steps at this point are concerted efforts by all stakeholders in the EB-5 community to rectify misperceptions about EB-5 in these markets and raise its general market profile and familiarity among agents and investors alike.