Common Risk Factors in EB-5 Fraud Cases

By Reid Thomas 

The EB-5 program has grown exponentially since 2008, generating more than $11 billion in foreign direct investment and supporting more than 35,000 jobs annually. [1]

However, this growth has come with growing pains. Since 2013, the U.S. Securities and Exchange Commission has brought enforcement actions, including allegations of fraudulent activities, against at least eight EB-5 offerings. 

Our survey of these cases found two common themes: first, in every case, the absence of third-party controls enabled the fraud to take place, and second, the lack of transparency for the projects’ investors allowed the misuse of funds to go unnoticed. 

In most cases, the lack of independent oversight allowed the alleged fraudsters to divert investor money into uses wholly unrelated to creating the jobs necessary to qualify for an EB-5 visa.  Due to the fact that these allegedly fraudulent issuers offered little to no transparency, investors had no way of knowing anything was wrong until it was far too late. 

The majority of these investors are likely to lose some if not all of their $500,000 in investment principal.  Worse still, many will find their petitions to receive a permanent green card in jeopardy as a result of the issuers’ transgressions. 

Lack of Oversight: Not all Escrows are Alike 

Across the board, the proper facilitation of escrow structures has been a common inflection point for fraud and abuse.

In some cases, investors were promised that funds would remain in escrow until I-526 approval. An improperly followed escrow structure and the lack of third-party oversight allowed the funds to be released much earlier in the process, sometimes as soon as funds were received into the escrow account. 

In other cases, including the recent allegations against Jay Peak, funds were held in escrow until the stated release triggers had been met, but were misappropriated, commingled, or misused before they could be used as described in the offering documents. 

Complexity Disguised as Fraud

Part of the complexity of the EB-5 process lies in the number of entities involved. Funds must be tracked throughout a multi-year process as they move through the EB-5 life cycle. Without specialized tracking and reporting capabilities, administering these funds is complex and susceptible to errors. 

In several cases, alleged EB-5 fraudsters have taken advantage of this complexity to mask their misuse or misappropriation of funds.

In the Jay Peak case, “funds frequently flowed in a circular and roundabout manner between various accounts and entities” [2] in an attempt to disguise the shortfalls the alleged fraud created. Even the controller for Jay Peak had difficulties obtaining account documents and other financial information.

Had the Jay Peak projects been more transparent with their investors and their community, the financial shortfalls and ensuing alleged misuse of funds would have been apparent years earlier. The alleged commingling of funds and many violations of limited partner agreements that led to the violation of the immigration requirements of the EB-5 program would have been easily detected. 

Moreover, had a third party tracked the flow of funds in the Jay Peak case, the project principals would not have been able to conceal misuse of funds through the “intricate web of transfers” that SEC investigators allege they created.[3]

Conflicts of Interest Require More Controls 

Finally, conflicts of interest have been a common factor in nearly all isolated allegations of fraud in EB-5 projects. 

The majority of EB-5 projects’ target raise falls between $5-15 million—a substantial sum of money. Without the right safeguards in place, the temptation for an unscrupulous issuer to misuse investor funds can be high. 

Conflicts of interest only exacerbate this risk. In situations where the issuer or new commercial enterprise is controlled by the same or related parties as the job-creating entity, the fiduciary duty the issuer owes to their investors may be compromised by their role as project developer. Many believe such conflicts of interest are only a concern if the related parties control the regional center and issuer; however, as recent allegations against projects involved with Jay Peak in Vermont have demonstrated, conflicts of interest can wreak havoc even when the regional center is independent. 

Related-party transactions, and the conflicts of interest that are inherent in them, are not uncommon in EB-5, but not all projects are exposed to the same levels of risk as a  result. Projects with potential conflicts of interest can safeguard against fraud and abuse by implementing third-party oversight and accounting and by providing maximum transparency to investors and regulators.

As a result, investors and regulators can be more confident that funds will be properly monitored and protected from misuse. 

Third-Party Oversight Deters Fraud 

In all of these cases, third-party oversight and accounting would have likely deterred or detected fraud. EB-5 best practices dictate that projects should work with a third-party administrator to ensure objective oversight of EB-5 funds and that the commitments in the offering are always being adhered to.

Third-party administration is a best practice in EB-5, but it is particularly important when more than one project entity is controlled by the same party. In cases where the EB-5 issuer and the job creating enterprise are controlled by the same people, conflicts of interest can undermine the fiduciary duty owed to the project’s investors.

By working with an experienced third-party administrator, issuers can provide transparency and establish safeguards against many of the most common EB-5 risk factors, reassuring investors and regulators alike that funds are managed securely and in compliance with immigration requirements.

[1] United States, Congress, Senate, Committee on the Judiciary, The Failures and Future of the EB-5 Program: Can it be Fixed? February 2, 2016.  114th Congress. Washington: USCIS 2016 (Written testimony of Nicholas Colucci, Immigrant Investor Program Chief, USCIS). https://www.uscis.gov/tools/resources-congress/testimonies-and-speeches/hearing-eb-5-program-senate-committee-judiciary-february-2-2016-uscis-immigrant-investor-program-chief-nicholas-colucci 

[2] Securities and Exchange Commission v. Ariel Quiros, Jay Peak, Inc., et al., No. 16-21301 (S.D. Fla. 4/12/16) (hereinafter SEC v. Jay Peak, et al). 

[3] SEC v. Jay Peak, et al at 2.    

Reid Thomas

Reid Thomas

Reid Thomas serves as the executive vice president for NES Financial. Responsible for global sales and marketing, he brings over 20 years of experience from both private and public Silicon Valley technology companies. Thomas’s expertise includes escrow and fund administration. He is a frequent author and speaker in the EB-5 community.


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