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Selling Citizenship

News & Features | September 23, 2013

As the comprehensive immigration reform bill awaits an uncertain vote in the House, a little known immigration program is drawing the attention of American business owners, Chinese millionaires, Federal prosecutors, and the People’s Supreme Court of China. Visa brokers and Ponzi schemers have founded a new cottage industry around the EB-5 Immigrant Investor Visa Program— a 20-year-old program with no statistical history other than the number of green cards it has issued, and a bevy of criminal cases. Yet EB-5 is about to reach its yearly allotment of 10,000 visas for the first time in its history.

EB-5 became more popular than ever after the the global financial crisis, when many U.S. businesses, unable to get loans from banks and institutional investors, began using it as a way to fund their projects.

The program lets a foreign investor earn a green card by investing at least $1,000,000 in a job-creating American business venture, or at least $500,000 in a project located in what the federal government deems a “high unemployment area.”

The program enjoys near-unanimous support amongst lawmakers, but there is no statistical evidence to support its supposed contributions to job creation. While the Obama administration promotes EB-5 and deems it an effective economic stimulus, an astonishing number of fraud and embezzlement allegations have accompanied the program’s sudden popularity.

Hotbed of crime

One failed EB-5 project, a massive hotel and convention center complex near Chicago’s O’Hare Airport, was led by a 28 year old developer whose LinkedIn page advertises his “nearly 15 years of property development experience.” The developer of the complex, Anshoo Sethi, raised $145 million through 250 Chinese investors, but the project ended last year when the SEC sued him for securities fraud.

In New Orleans, foreign investors accused the operators of an EB-5 regional center — one of 225 centers authorized by the federal government — of directing $13.5 million into fictional companies, only to funnel the money back to themselves.

In El Monte, California, the principals of a commercial project were arrested for fraud and embezzlement.

In Texas, a regional center is being investigated for luring Mexican investors into a Ponzi scheme.

In Mississippi, a failed startup car manufacturer called GreenTech, once touted by Bill Clinton as the spearhead of a new breed of American businesses, is being investigated for making improper claims to Chinese investors during its EB-5 venture in 2009. In addition, Alejandro Mayorkas—the head of the U.S. Citizenship and Immigration Services (USCIS) and the individual responsible for administering the EB-5 program—is currently under investigation for using his influence to obtain a visa for one of the GreenTech investors.

The list goes on.

How it works

An EB-5 project usually begins with an appeal from American entrepreneurs to foreign investors, most of whom are Chinese. In China, a brokerage industry that profits from the American principals’ need to recruit Chinese millionaires has emerged, and charges both parties stiff fees.

Some foreign investors have fallen prey to phony American principals, when their brokers falsely claimed that the U.S. government guarantees EB-5 projects. And some of the regional centers—the privately-owned, U.S. government-sanctioned offices through which the projects must be arranged—have also misrepresented the program to investors.

Even if investors avoid fraud, they take on substantial risk in a typical EB-5 project. They can be pressured to invest without having had an opportunity for due diligence.

After providing capital to the American business, investors must then prove to the USCIS that their investment has created at least ten jobs, or preserved 10 jobs in a “troubled business.” They must wait two years before they are eligible for a permanent green card.

China reacts, U.S. plans to regulate

The Obama administration announced an effort to streamline the EB-5 process in 2011 and pushed for its renewal in late 2012, but it has not addressed the foundering credibility of the program.

Yet Senator Patrick Leahy (D-VT), the leading proponent of the program, says the credibility problem poses a threat to the future of foreign investment. Senator Leahy’s amendment to the current immigration bill acknowledges the pitfalls of EB-5, but only adds more USCIS oversight to the process rather than changing the process itself.

Meanwhile, despite the rash of criminal cases, only one regional center has lost its certification, and 197 additional regional centers have been opened since 2008.

Regulation of the project remains lax in the United States, but in China the conduct of EB-5 brokers has earned a rebuke from the Chinese People’s Supreme Court. Following the collapse of Anshoo Sethi’s O’Hare project and the resulting securities fraud investigation, several agencies of the Chinese government attempted both to warn the public and to discredit EB-5 advertising.

Since the Chinese government does not normally allow its citizens to invest abroad, the official acknowledgement of the burgeoning industry is highly irregular, calling attention to the lack of U.S. government oversight.

While Senator Leahy has been the most prominent voice in favor of EB-5 and is the only real advocate for reform, other senators including Chuck Schumer (D-NY) and Mike Lee (R-UT) have advocated for a fundamental expansion of the program. They propose allowing EB-5 to offer a visa to foreign investors who make a residential property purchase of over $500,000.

Some would take the program a step further. Edward Lazear, a Stanford professor and the former chief economic advisor to President George W. Bush, argues that the United States should sell citizenship directly for $50,000 per person.

Statistical mystery

The rationale for EB-5 depends on whether or not the program’s measurable influence on the economy outweighs its inefficiencies. Since the program’s inception in 1990, EB-5 investors have poured over $2 billion into the U.S. economy. According to a USCIS representative, the investments have led to the creation of 46,000 American jobs.

But what kind of jobs have been created? Are they temporary or permanent? And what does businesses’ increasing reliance on EB-5 say about the recovery of the U.S. economy?

Despite the claims of the USCIS, no reliable metric exists for determining the number of jobs created as a result of EB-5. In the agency’s figures, no breakdown of jobs created by EB-5 can be found. In fact, no job creation statistics are included on the USCIS website at all.

USCIS representative Christopher Bentley, whose statement was confirmed by another source, has said that the agency does not track the success or failure of the business ventures after the issuance of a green card. If that is true, then USCIS cannot prove that EB-5 has created a single job that has persisted beyond a period of two years. Regional centers—with government oversight nearly nonexistent—are keeping mum regarding the number of jobs their projects have created, and it is impossible to know how they compile their statistics and present them to USCIS. And in an economic recovery that ideally should see 300,000-400,000 jobs created per month, a tenuously projected figure of 46,000 jobs over a span of 22 years is barely a drop in the bucket.

A foreign investment program for large private projects with little measurable effect on the job market may not seem to be the ideal formula for economic recovery in the wake of a building bubble that contributed to the worldwide financial collapse. But as the economic malaise continues and partisan gridlock in Washington stifles hope for bolder measures, some might argue that the economy needs all the help it can get, and that regardless of its job-creating power, EB-5 provides an important boost for businesses.