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Passport to Fraud

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Passport to Fraud

The federal visa program for wealthy investors is plagued by scams, influence-peddling, and national security violations. Spring 2020
Economy, finance, and budgets
Politics and law

After the former head of South Dakota’s office of tourism and development turned up dead in October 2013, conspiracy theories consumed the state’s tight-knit political class. Officials ruled that Richard Benda had killed himself once it became clear that he faced indictment for misappropriating government money. Skeptics, though, pointed to his involvement in a controversial deal that cost foreign investors millions. Some 50 Chinese nationals had forked over $27 million in loans and fees to finance a South Dakota meatpacking plant, taking advantage of a federal initiative that promised green cards in exchange for large investments in the United States. But the business cratered just months before Benda’s death, as reports swirled that he had illicitly profited from the deal. Some speculated that Benda was a target of Chinese mobsters, bent on avenging the losses, or that maybe he’d been silenced to cover up pervasive corruption in the state’s economic-development plans. Gubernatorial candidate Mike Myers, a former University of South Dakota law professor, even staged a “reenactment” of Benda’s demise, seeking to demonstrate “the lack of credibility” in the official version of events—and to call attention to state mismanagement of the visa program that enabled the foreign investments.

Such controversy might seem surprising in the typically sleepy world of local economic development. But Benda’s death isn’t the only fatality associated with the federal EB-5 immigration program. Last May, former Warren County, Virginia, sheriff Daniel McEathron took his own life, shortly after a local economic-development authority sued him, as well as the former director of the authority, for misappropriating EB-5-associated funds for personal use. Among the accusations: that a police academy to be built on a development site funded by EB-5 investors was really a front to funnel money to McEathron and his coconspirators.

These kinds of troubles regularly afflict the EB-5 system. As the program has grown in popularity, its bad design and weak oversight have become glaring, reflected in hundreds of millions of dollars in investment losses and outright fraud. Michael Gibson of USAdvisors.org, who does due diligence for potential EB-5 investors, estimates that half the initiative’s projects are “very bad deals.” Several studies, including one from the Department of Homeland Security’s inspector general, have found that the program produces zero benefits for the American economy. Meantime, federal and local authorities have filed dozens of actions against American developers and financial middlemen for misleading EB-5 investors, misusing their money, and promising them visas that never materialize.

Yet, because EB-5 serves as a source of cheap financing for politically connected developers, it enjoys the protection of some of Washington’s most powerful officials. Congressional critics have failed to reform it comprehensively, let alone kill it. While the Trump administration has introduced new program controls, supporters and critics continue to spar in Congress over EB-5’s fate.

The EB-5 program originated with the Immigration Act of 1990, which expanded employment-based visa categories from two to five and more than doubled—to 140,000—the number of skills-based workers who could be admitted yearly to the United States. The act set aside 10,000 visas out of that total for “alien entrepreneurs,” a provision that resembled a plan in Canada admitting “blue-ribbon” immigrants—individuals worth at least $500,000—if they agreed to invest locally. The American program initially required individuals to spend a minimum of $500,000 setting up a business that created at least ten jobs. When EB-5 found few takers, Congress changed the rules in 1992, letting green-card seekers put their money into approved regional centers, which pooled the funds and invested them in local economic development. This shift turned EB-5 into a program aimed primarily at investors, not foreign-born entrepreneurs. Dozens of rich foreigners could now combine and invest millions into large projects. Yet, even with the change, EB-5 often granted fewer than 1,000 visas annually.

The 2008 financial meltdown, precipitated in part by excessive debt and serial failures of financial institutions, changed everything. As U.S. lenders found themselves severely constrained, big developers realized that EB-5 could be a source of easy money. The conditional visas granted through the program expanded more than tenfold—from 806 in 2007 to 10,602 in 2014—with a new generation of Chinese millionaires pouring in money. In 2007, just 14 percent of EB-5 green cards went to Chinese investors; from 2011 through 2017, at least 70 percent did.

Real-estate projects have become especially attractive for program participants because construction jobs—by their nature, temporary—now count in the employment totals needed to qualify for a visa. Much of this money has funded luxury projects, not developments in poor urban and rural areas, as EB-5’s proponents had originally envisioned. Among the projects that EB-5 has bankrolled, New York University scholars Gary Friedland and Jeanne Calderon found, are the Lucky Dragon casino in Las Vegas; luxury condominiums and hotels in midtown Manhattan, Tribeca, and the Upper East Side; condo projects in South Florida, San Francisco, and Boston; and a Four Seasons in Beantown that bills itself as a “new kind of urban chic, complete with a stunning Wellness Floor and the world-renowned Japanese izakaya-inspired restaurant, Zuma.” Most of these developments have relied on Chinese funding, but a $70 million luxury tower near Houston’s prestigious Galleria shopping center garnered millions from wealthy Mexican and Nigerian investors seeking visas.

EB-5 loopholes have made many of these deals possible. The program is supposed to encourage investment in designated “targeted employment areas” with unemployment at least 150 percent of the national average. But federal regulations also let states certify targeted employment areas that include distressed neighborhoods adjacent to better-off districts—and, through a form of gerrymandering, EB-5 promoters have proceeded to carve out urban zones where projects in thriving areas can qualify for funding. “Only 3 percent of EB-5 investors now invest in rural areas,” Vermont senator Patrick Leahy, a program critic, testified during March 2017 congressional hearings. “Less than 10 percent invest in true high-unemployment areas. Almost every other EB-5 project uses gerrymandering to qualify as distressed.” A 2016 Government Accountability Office study, cited by Leahy, found that, during one 2015 period, 70 percent of investor money went to projects in zones with unemployment below 6 percent, and only 10 percent or so to developments in areas with double-digit unemployment.

This distorting of EB-5’s original purpose is apparently just fine for elected officials in states getting most of the funds, including New York, which, in recent years, has ranked with California as one of the top two receiving money. In 2016 Senate Judiciary Committee hearings, New York senator Chuck Schumer defended the influx of EB-5 money into big-name local projects, such as the more than $1 billion in financing for the upscale Hudson Yards commercial and residential project on Manhattan’s West Side. Hudson Yards qualified for EB-5 after New York State’s economic-development agency invented a district that connected the development site to economically distressed West Harlem. For Schumer, such accommodations are necessary because targeting poorer areas for investment won’t work. “I disagree with one of the witnesses who said, ‘Oh, we want to put the projects in only poor-people areas.’ It won’t happen—it’s not how cities are structured,” said Schumer. Schumer’s declaration belies his past support for laws that direct development dollars to low-income communities, including the New Markets Tax Credit Extension Act of 2019, which gives a tax credit for such investments.

The same pattern of loose controls has led to massive woes for hundreds of visa applicants, who’ve lost their shirts through unwise investments or outright fraud. Soon after the EB-5 investing boom began a decade ago, federal enforcement agencies were inundated with reports of dubious EB-5 schemes. The Securities and Exchange Commission issued an alert in October 2013 that investors should beware of “scams targeting foreign nationals who seek to become permanent lawful U.S. residents.” Among the notable cases, federal authorities in 2013 shut down an Illinois developer’s solicitation of foreign investors to finance what he billed as the “world’s first zero carbon-emission platinum LEED certified” hotel at Chicago’s O’Hare airport. The developer vacuumed up more than $150 million in investments and fees from 250 Chinese visa-seekers, which he started spending before he had a franchising agreement for the hotel or even permission to participate in EB-5. Though the investors regained their principal, they collectively lost some $11 million in development fees. Also in 2013, the SEC quashed a scheme by a Texas husband and wife whose company, USA Now, was a designated regional EB-5 center, after they’d collected $5 million from Mexican investors with visa promises but spent the money on personal ventures unrelated to the program—including opening a Cajun-themed restaurant in McAllen, Texas.

State economic-development agencies, eager to tap cash from overseas investors, have enabled some of the most egregious cases of EB-5 fraud and mismanagement, provoking lawsuits from disgruntled foreign parties. Last October, the Vermont Supreme Court waived the state government’s sovereign-immunity law, which protects it from civil lawsuits, and ruled that up to 800 foreign investors could sue the state’s Agency for Commerce and Community Development over its lax supervision of an EB-5 project that involved building a biomedical facility and expanding a ski resort. (The facility never opened; the resort expansion mostly failed to materialize.) By helping to market the plan, the state had misled investors about its viability, the court ruled. The Vermont judges also said that gross-negligence lawsuits could go forward against two officials who ran the state effort, and federal officials charged several people involved with it with misappropriating more than $200 million of some $350 million raised from investors. Federal immigration officials eventually withdrew authorization for Vermont’s economic-development agency to participate in EB-5.

Several dozen Chinese investors have sued South Dakota over the failed meatpacking-plant deal that seems to have played a role in Richard Benda’s death. Like their Vermont counterparts, South Dakota officials actively pursued the investments in the plant, with questionable intentions. Benda resigned from his state job in order to work for the company that would oversee the state’s investment in the plant, and before he left government, he engineered a state grant to pay his private salary. The lawsuit alleges that agents of the state misrepresented the plant’s health—it went bust—to secure the foreign loans.

Equally problematic have been federal immigration authorities’ selections of certain private individuals and businesses to become authorized sponsors for EB-5 projects. The feds have often chosen poorly, making the U.S. government complicit in huge losses. In 2010, to take one example, the U.S. Citizenship and Immigration Services approved Oakland businessman Tom Henderson’s application to solicit EB-5 investments. Over the course of several years, his San Francisco Regional Center attracted hundreds of millions of dollars from more than 200 foreigners who thought that they were investing in ventures ranging from call centers to warehouses to restaurants. Last year, federal prosecutors indicted Henderson on 12 counts of fraud and for making false statements to a government agency, alleging that he and his partners stole $110 million as part of their EB-5 solicitations.

As so often with government-sponsored economic programs, EB-5 has generated charges of influence-peddling. In 2013, then-senator Harry Reid began pressuring immigration officials to expedite the EB-5 application of SLS Casino, a group trying to raise foreign dollars to remodel and revive the Sahara casino in Las Vegas. At the time, according to the Washington, D.C.-based Cause of Action Institute, the law firm of Reid’s son represented the casino push. After immigration officials ruled that the application didn’t qualify for expedited status, partly because some of the investors had been flagged for suspicious financial activity, Reid began pushing the head of the U.S. Citizenship and Immigration Services to overrule his staff. An investigation by the inspector general of the Department of Homeland Security, prompted by a whistle-blower’s complaint, recounts numerous exchanges between Reid and his staff and immigration bureaucrats. Ultimately, the Obama administration intervened and granted accelerated consideration for the project, enabling it to raise nearly $400 million from about 800 foreign investors. The deal turned out poorly for some investors. In 2017, 60 Chinese backers sued the project, claiming that they’d never received their visas and warning that the hotel faced bankruptcy. It has since been sold to a new owner.

Terry McAuliffe is another political powerbroker who tapped EB-5. McAuliffe, cochair of President Bill Clinton’s reelection campaign in 1996 and chair of the Democratic National Committee from 2001 through 2005, pressured federal authorities to approve his plans to raise EB-5 money from foreign investors to manufacture electric cars in the U.S. through his GreenTech venture, according to a Department of Homeland Security inspector-general investigation. The Homeland Security report concluded that Alejandro Mayorkas, director of the U.S. Citizenship and Immigration Services, which supervises the EB-5 program, created “an appearance of favoritism and special access” by repeatedly discussing GreenTech’s application with McAuliffe and Tony Rodham, Hillary Rodham Clinton’s brother, whom McAuliffe had hired to help him pitch to investors.

GreenTech eventually won approval to solicit investors, and McAuliffe and Rodham raised millions from wealthy Chinese individuals—at a time when Hillary Clinton was secretary of state. McAuliffe left GreenTech in 2012 to run for governor of Virginia, and in 2018, the firm filed for bankruptcy. A lawsuit by 32 investors against McAuliffe and Rodham claimed that they had used their political connections “to assure investors of both the success of the company and their ability to obtain U.S. Citizenship and Immigration Services (USCIS) approval of the visa applications.” Though a federal court dismissed the suit, it criticized how the company marketed itself. “Far from building investor confidence, misstatements like those alleged in this case undermine public trust. We decline to whitewash the alleged misstatements here.”

The visa program has also raised national security concerns. In 2013, Iowa senator Chuck Grassley revealed that an internal memo from Immigration and Customs Enforcement prompted “concerns that this particular visa program [EB-5] may be abused by Iranian operatives to infiltrate the United States.” The ICE memo, Grassley said, outlined seven vulnerable areas in the EB-5 program, including its potential facilitation of the export of sensitive U.S. technology, its use by government agents or terrorists to gain permanent residence in the U.S., and its serving as a means for criminals to launder illicit profits, presumably by investing them in legitimate American enterprises. According to Grassley, a subsequent 2017 audit of 119 EB-5 cases from 2011 through 2015 found 19 instances “with national security concerns”—primarily from China, Iran, and Russia.

Grassley and Vermont’s Leahy, who became a program critic after the mismanagement of his state’s regional EB-5 center emerged, introduced the first significant effort to reform the program—the American Job Creation and Investment Promotion Reform Act of 2015. The bill proposed a fee on regional EB-5 centers to finance audits of projects, required background checks of individuals who run regional centers or development projects, and gave the Department of Homeland Security the right to terminate visas in cases where fraud or national security issues arose. It also proposed procedures meant to reduce political influence and preferential treatment on applications by businesses. The bill gained little traction, however, and in September 2015, President Obama signed a temporary extension of the EB-5 program, without significant changes.

Grassley introduced another bipartisan bill aimed at EB-5 in 2017, this time with California senator Dianne Feinstein. Declaring EB-5 “inherently flawed” and charging that it suggests that “U.S. citizenship is for sale,” Feinstein and Grassley proposed eliminating the program and folding its green cards into the broader category of skills-based visas. In an editorial titled “An Immigration Policy Worth Ending,” the Washington Post noted that the number of jobs created by EB-5 was “paltry” compared with the size of the U.S. economy and that the program survived mainly because it “created a lot of jobs for consultants, lawyers and lobbyists, who get paid to entice wealthy foreigners into applying for the visas, and to persuade Congress to renew it each year.” Worryingly, the paper observed, “a disproportionate number of those admitted recently come from communist China, whose nontransparent economy makes the origins of their wealth difficult to trace,” and, the Post continued, audits had found that “the Department of Homeland Security lacked the capacity to vet EB-5 applicants from China and elsewhere adequately.” Even so, the Grassley and Feinstein bill died in committee.

Since then, the Trump administration has moved to close some of EB-5’s glaring loopholes. Though the president’s son-in-law, Jared Kushner, has attracted publicity by utilizing EB-5 to attract Chinese investors to a Jersey City project, last summer the administration released rules that raised the minimum for investing in so-called distressed areas to $900,000 from $500,000, and increased the minimum to invest in other areas to $1.8 million. The new rules also strip from states the right to design their own targeted employment areas, transferring that power to federal authorities. Still, supervision remains troublesome, and, in September, Senators Leahy and Grassley proposed new legislation to improve oversight and give federal officials greater leverage to terminate regional centers that promote questionable projects.

At the same time, several congressional backers of EB-5, including Schumer and Senator John Cornyn of Texas, have proposed a different bill that alarms some critics. Though the law would boost program supervision, it would also slash the minimum for investing in ventures outside of distressed areas to $1.1 million. That would potentially reduce the incentive for investors to sink their capital into underdeveloped regions. The legislation would also try to clear up some of the applications backlog for EB-5 visas through a “parole” process, which would allow those waiting for visas—for Chinese investors, it’s 16 years—to enter the U.S. through temporary work permits as they wait to qualify. Given the worldwide coronavirus outbreak, which originated in China, that measure is likely to face stiff resistance once Washington gets back to debating EB-5 reform.

Repercussions from the program continue to reverberate. Virginia officials have indicted more than a dozen local officials in the Front Royal development linked to the death of Sheriff McEathron last May. McEathron’s alleged coconspirator in what prosecutors say was an orchestrated attempt to use $3.5 million in redevelopment funds to buy property for personal use faces 28 counts, including embezzlement and money laundering. A police report on McEathron’s death ruled it a suicide. “No foul play is suspected,” the report said.

Alas, the government cannot say the same thing about EB-5.

Photo: Oakland businessman Tom Henderson, whom federal prosecutors have indicted on 12 counts of fraud; they allege that he stole $110 million from EB-5 investors. (LAURA A. ODA/MEDIANEWS GROUP/EAST BAY TIMES/GETTY IMAGES)

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