A $12.5 million fraud case filed earlier this year against the San Jose, Calif.-based Golden State Regional Center is yet another example of fraud running rampant in the federal EB-5 Immigrant Investor Program and underscores the need for integrity reforms and transparency, sources say.
The plaintiffs in this case are a group of Chinese nationals who in 2015 each paid $550,000 to the regional center (RC) to obtain membership interests in its Bay Area Investment Fund II LLC, as well as individually paid another $50,000 administration fee under the guise of the project being part of the EB-5 Program. They sought green cards through their investments, according to the Jan. 7 complaint that’s pending in California Superior Court.
After making those payments, the plaintiffs’ capital contributions starting in August 2015 were then transferred to property developer Kawana Meadows Development Corp. to facilitate the construction and development of a 143-unit residential construction project located in Santa Rosa, Calif. The project met requirements of the EB-5 Immigrant Investor visa program, according to the complaint.
However, among several issues mentioned in the complaint, “pursuant to that transfer, Kawana Meadows began paying interest to Defendant Bay Area Investment Fund at a rate of 5.5 percent per annum,” according to the filing. “That money was supposed to go to the Plaintiffs after operating expenses. It did not.”
Instead, between 2015 and the present, the defendants reportedly “misappropriated the Plaintiffs’ money in bad faith and concealed their wrongdoing from Plaintiffs as part of a scheme to unjustly enrich themselves at Plaintiffs’ expense,” according to the filing, which charges the defendants not only with fraud, but with breach of contract, breach of fiduciary duty, and obstruction of justice.
The Golden State RC case exemplifies why U.S. Sens. Chuck Grassley (R-IA) and Patrick Leahy (D-VT) in March introduced the EB-5 Reform and Integrity Act of 2021, S. 831, which includes significant integrity reforms to protect against fraud and national security weaknesses within the program, promote program integrity, and improve oversight of the program. The measure also reauthorizes the EB-5 Regional Center Program, which is currently set to expire at the end of June.
“It’s no secret that the EB-5 Regional Center Program has been a mess for years,” Grassley said last month after introducing the bill. “Foreign investors exploited the program to get fast-tracked green cards, domestic developers exploited foreign investors to get fast cash for bogus projects, and government officials picked winners and losers to score political favor. This has got to change.”
And while both the Obama and Trump administrations took important steps to restore incentives for investment in rural and underserved areas, Grassley said that Congress needs to fix other flaws that invite fraud and abuse. “Absent these fixes, this program should not be allowed to continue,” he said.
Leahy agreed, pointing out that U.S. Citizenship and Immigration Services (USCIS), an agency within the U.S. Department of Homeland Security that oversees the EB-5 Program, can’t fix all of the program’s flaws on its own. “Congress must act decisively to comprehensively address the fraud and other vulnerabilities that have come to define the EB-5 program. Our bill would do just that,” Leahy said.
Michael Gibson, managing director at USAdvisors.org, thinks the EB-5 Program is a great idea and that the original intent by Congress to allow foreign nationals to invest in certain projects to get a green card and to create American jobs “was probably one of the best ideas that [federal lawmakers] have had in the last 100 years. When it’s done right, it works great.”
“I’m a big proponent of the program; the issues are in the administration of it,” he said, noting that USCIS is the wrong agency to administer the EB-5 Program. He thinks oversight should be a joint effort by USCIS, which would continue to issue the visas, and the U.S. Department of Commerce, which could monitor the job creation aspect of the program.
The systemic problem, or the greatest reason fraud exists in the EB-5 Program, said Gibson, is that USCIS does not publish any data or release any information on projects they have approved or denied, resulting in investors funding projects sight unseen that end up being nothing more than a dirt lot.
But because RCs are required by law to file a federal I-924A annual amendment, which are used to demonstrate continued eligibility for their regional center designation and include detailed project information, the USCIS could simply start releasing these reports and there would be less program fraud, Gibson said.
Currently, USCIS basically has been accepting whatever information has been presented to it about development projects without any audits, Gibson explained, and developers and others have taken advantage of that fact.
The Commerce Department, he said, is better equipped to measure economic activity and their economists could handle project audits and verify facts. The department also has people on the ground who could verify: did economic activity occur and were jobs created?
“If you have an agency to monitor and establish a sign off, then this would help eliminate or significantly curtail developer fraud,” Gibson said during an interview with Homeland Preparedness News.
And yes, EB-5 Program integrity reforms like those included in the Grassley-Leahy bill would be beneficial, Gibson said.
“I would love for integrity measures to be put into place. I support them 100 percent,” he said. “But we need program transparency and that can be done overnight. No legislative effort is needed or required to make the program more transparent. All that anybody has to do, whether it’s USCIS or the regional centers, is release their I-924As. And that could be done tomorrow without any effort or oversight.”