Managing EB-5 Investors’ Risk: Background Checks and Investigative Due Diligence

By Russell Scarcella

                  Making an international investment brings with it many unique challenges. This is even more important when that investment is as sensitive and important as an EB-5 investment when not only is the investor’s capital at stake, but more importantly, the safety and future well-being of their family is also potentially at risk.

                  As a result, there is a compelling reason to ensure that the utmost due diligence is incorporated into this decision process, leveraging all available resources to minimize risk, in order to ensure the success of the investment, and moreover, the eventual issuance of a permanent green card for the investor and his or her family.

                  While this due diligence process includes establishing a comfortable understanding of the finances and strategy behind the project fundamentals, along with the job creation strategy for achieving I-526 approval by USCIS, equally important is reducing the risk of deception or fraud. This risk can be reduced by gaining an understanding of the personal and professional backgrounds of all principals involved with the project. This includes the project developer, the regional center and possibly the General Partner (“GP”) or manager of the new commercial enterprise (“NCE”). Further, it’s prudent to engage in an ongoing due diligence process throughout the investment life cycle to monitor investment compliance and stakeholder activity.  

                  The information presented by the investment offering will paint an enthusiastic picture for the anticipated success of the project. But one need only look at examples such as Jay Peak, Pacific Proton, and Path America to understand that the stakeholders behind these investment opportunities are not always forthcoming with all of the relevant information that a prudent EB-5 investor would want to know prior to making this critical decision, nor do they necessarily always continue on the same path they originally set out upon. Thus, any steps an investor can reasonably take to help mitigate the level of risk inherent in these investments are critical. 

                  As of August 1, 2016, there were over 850 USCIS approved regional centers. Considering that many of these centers support multiple investment projects, an EB-5 investor is faced with an enormous number of options—and thus the potential for deception and fraud. This is especially true considering the intercontinental nature of these investments, the significant family concerns at stake, and the fact that despite noteworthy business success, for many EB-5 investors, this is still a significant and complicated investment process. Moreover, the investor’s capital will be at risk for a minimum of five years (actual estimates now approach 10 years before the final permanent green card is issued at the I-829 stage, and the investment capital can be returned). Taking all this into consideration it becomes clear that a strategic and ongoing due diligence process is necessary.

Best Practices for Proper Due Diligence in EB-5 Investments

                  Proper EB-5 due diligence from the investor’s perspective should involve three (3) components: Financial Due Diligence; Immigration Due Diligence; and, Background Due Diligence.

                  Financial Due Diligence and Immigration Due Diligence involve an in-depth assessment of not only the finances of the specific investment vehicle under consideration, but an analysis of the potential for success of the project obtaining EB-5 approval from USCIS. Each of these assessments requires the input of skilled professionals with an understanding of the EB-5 process and the financial and immigration requirements of success. Investors can reach out to several respected firms that can provide assistance with respect to the Financial Due Diligence process. Immigration law firms can provide expert counseling to investors with regard to Immigration Due Diligence analysis and assessment. By incorporating experts into their investment process, investors can help to reduce the level of risk, allowing them to make more informed decisions about the viability of the business plan and offering documents. 

                  Until recently, this is where the due diligence process ended for many EB-5 investors.  Unfortunately, projects like Luca International, a Chicago convention center, and those referenced earlier are actual examples that the current due diligence process is not enough.  While nothing can be done to completely eliminate the risk of investing, further steps can be taken to significantly reduce and control that risk. 

                  Enhancing the pre-investment due diligence process with comprehensive Background Due Diligence of principals associated with the project developer and the regional center, as well as incorporating an ongoing due diligence process to not only continually monitor the backgrounds of these stakeholders, but also to monitor the ongoing compliance of the investment project, can have a dramatic impact in avoiding problems and ensuring the smoothest path to immigration success. 

                  Ongoing compliance monitoring is another specialty area that requires expert involvement of seasoned professionals. Some companies focus specifically on providing ongoing data gathering and tracking and reporting of the movement of funds. Organizations like this often work in tandem with compliance consulting firms who leverage the collected data to monitor investment projects through completion. This combination of ongoing compliance monitoring can serve to track project progress, ensure the money is going where it is supposed to, confirm that the right jobs are being created, that record keeping is accurate and appropriate, and expose problems that arise after the initial investment.

                  By pairing ongoing compliance monitoring with ongoing background monitoring of stakeholders, the EB-5 investor can significantly reduce their exposure to the possibility of impropriety and fraud. 

                  While incorporating ongoing compliance and background monitoring cannot eliminate risk, it does succeed in establishing a best practices approach to risk mitigation and prudent EB-5 investing. 

Ongoing Monitoring for EB-5 Investors

                  Background Due Diligence involves the credential verification and comprehensive investigation into the personal history of key individuals tied to a potential investment vehicle. Paired with an advanced technology platform for ongoing monitoring, an EB-5 investor is positioned to significantly protect against the risk of fraud, deception or project failure. Background Due Diligence achieves risk mitigation by raising red flags to EB-5 investment vehicles run by project developers with a questionable background, a demonstrated lack of business success in their history, or who are associated with regional centers run by stakeholders who raise similar concerns. 

                  When investing in an EB-5 project, deciding who and what entities upon which to conduct background investigations is the first hurdle in the Background Due Diligence process. This determination rests on a few simple factors, including the risk threshold of the investor, how long the regional center, JCE and/or project developer have been in existence, and the known reputations of the stakeholders. An experienced Background Due Diligence professional can provide guidance on best practices to assist EB-5 investors in making the determination of which stakeholders and business entities to reasonably include in the Background Due Diligence process on a case-by-case basis. As a general rule, any stakeholder specifically referenced in the offering documents and/or project prospectus should be evaluated for this process. 

                  Background Due Diligence investigations first serve to confirm disclosed information of the individuals such as education and employment history, licensing, associations and certifications.  Beyond that, however, they look to identify potential red flags in the subject’s background such as: criminal arrests, convictions or regulatory actions; civil litigations and judgments; illegal or unethical business practices; undisclosed related party transactions; misrepresentations or historical omissions; failed business histories; unreported financial difficulties; questionable associations or relationships. 

                  When investigating a business entity it is important to look at the ownership records of the business in order to uncover trends that may raise a potential concern. Oftentimes, a business entity will try to hide ownership or other previous liabilities through a system of false or shell businesses. Similar tactics have been uncovered with respect to obfuscating bankruptcies and other undesirable historical intelligence, which reiterates the importance of often incorporating research of the business entity as well as the stakeholders. 

                  Only a seasoned and skilled investigation professional has access to the necessary intelligence for comprehensive Background Due Diligence, and fully understands how to interpret this intelligence to recognize and uncover anomalies, inconsistencies, signs of deception and misrepresentation in the data.  These are all indicators of a stakeholder’s trustworthiness and moral compass, which serve as vital factors in the decision-making process of whether or not to select a particular project for a family’s EB-5 investment.

                  When determining the proper geographic scope for Background Due Diligence, the general practice is to investigate in all jurisdictions where the subject has lived and worked for the past 10-15 years. This, coupled with exhaustive media research, and nationwide and/or global searches such as the U.S. federal civil and criminal court system, OFAC and other international watch lists, establishes a broad spectrum search with a local concentration to targeted high probability jurisdictions. 

                  Following completion of a satisfactory background investigation, the investor is highly encouraged to then incorporate a protocol of ongoing Background Due Diligence monitoring in order to keep a watchful eye on the stakeholders charged with successfully applying the investor’s capital, and more importantly, successfully achieving the ultimate EB-5 goal of facilitating the investor in acquiring their permanent green card.

                  Over the course of the investment life cycle the possibility of changes in the economy, in the lives of the stakeholders of the projects and the regional centers, and in the EB-5 regulatory landscape as a whole present many potential opportunities for fraud and other impediments to the success of the investment. Taking reasonable steps to incorporate a protocol of pre-investment and ongoing due diligence through engaging with respected and learned industry professionals is a prudent approach to mitigate these risks and bring about the greatest possibility of success for the EB-5 investor and their family. 

                  While this article focuses on investigative due diligence for EB-5 investments, much of the advice and guidance toward effective due diligence, both financial and Background Due Diligence, is applicable across any type of significant investment or critical business transaction.

Russell Scarcella

Russell Scarcella