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Sketchy federal program sells citizenship

Sketchy federal program sells citizenship

THE BASTILLE KITCHEN is the kind of destination restaurant that stamps a redeveloped neighborhood as a success. The Innovation District bistro, owned in part by renowned restaurateur and nightclub czar Seth Greenberg, draws such bold-faced names as Derek Jeter and Scott Brown and adds an air of panache to the renovated row of former warehouse and industrial buildings just over the Fort Point Bridge on a gritty, sun-starved side street in South Boston.

The project, with offices, residential condominiums, artist lofts, and affordable housing scattered across several buildings along Melcher Street, was announced with great fanfare by the late Boston mayor Thomas Menino in 2008. But then it nearly died on the vine, in part because the Great Recession dried up available capital and banks tightened their lending practices. The development was rescued by foreign investors, most of them from China. They saw an opportunity to not only turn a profit on a real estate deal in an area of Boston experiencing explosive growth, but also to snare a quick path to US citizenship for themselves and their family members.

Doug Edwards, whose company is part owner of the Bastille Kitchen, won’t go into specifics, but he says roughly $5 million of the $34 million needed for the project came from 10 foreign investors, who put up $500,000 apiece. In return, he says, the investors received a stake in the project and green cards for their families from the US government. The project created at least 100 permanent jobs plus the construction work, Edwards says.

The Bastille Kitchen in the Innovation District benefited from from EB-5 money.

The Bastille Kitchen in Boston’s Innovation District benefited from EB-5 money.

The Melcher Street project is just one of hundreds across the country taking advantage of a federal program that took a long time to gain traction but is now bursting at the seams, with more than 10,000 green cards handed out last year. Federal officials say the program has attracted to the United States more than $8.6 billion in foreign investment, nearly all of it in the last seven years. The officials say the program has created 57,300 jobs.

Yet the Immigrant Investor Program, dubbed EB-5 in fedspeak, is strangely cloaked in mystery, even though it’s been in existence for a quarter century. Federal officials release almost no information about the program and the investments it subsidizes. The Inspector General for Homeland Security said in late 2013 that the administrators of the program have no documentation to back up their numbers on foreign investment or jobs.  There have also been scattered instances of fraud in Chicago, Texas, California, and South Dakota.

Concerns are also rising that the program is not lifting up distressed economic areas the way it was intended, with developers gerrymandering employment areas to fit regulatory requirements. To many, the program also raises fundamental issues of fairness. With hundreds of thousands of poor people in this country illegally and others clamoring to get in, the Immigrant Investor Program comes across to some as a way of selling citizenship to those who can afford the $500,000 price tag.

Peter Joseph, executive director of Invest In the USA, the advocacy arm for the private companies scattered across the country that link well-heeled foreigners to domestic investment projects, says the program is working exactly the way it was intended, attracting investment money from abroad to create jobs and expand the US economy.

“These are the kinds of folks we really want to bring into this country,” Joseph says of the foreign investors. “The initial EB-5 investment is just a drop in the bucket.”

But critics of the program say it creates an inequitable system that penalizes under-educated, low-skilled immigrants, especially from Central America, who don’t have a $500,000 down payment on the American Dream.

“It certainly divides the haves and have-nots,” says Mary Holper, the director of the Immigration Law Clinic at the Boston College School of Law and an associate clinical professor at the school. “It furthers the idea of who’s desirable and who’s not.”

A MILLION WELCOMES TO AMERICA

The late Ted Kennedy was a champion of immigration, often credited by both detractors and supporters with changing the face of the country through his push for opening the nation’s borders to families, students, and workers from around the world.

In 1990, Kennedy introduced a bill that exponentially increased the number of green cards available to aliens by lottery. To garner Republican support for the measure, including from then-President George H.W. Bush, Kennedy included several measures to attract highly skilled immigrant workers and investment capital for an economy that was beginning to enter a recession. In the bill, EB-5 was shorthand for “Employment-Based Immigration: Fifth Preference.”

Under the statute, if a foreign national invested $1 million in a new company that created at least 10 jobs that lasted at least two years—or put the same amount in an existing company to help it grow beyond certain fiscal and employment benchmarks—the investor, his or her spouse, and their minor children would get green cards entitling them to permanent US residence, a pathway to eventual full citizenship.

The $1 million entry cost and the strict quota on job creation proved too rich to draw the number of investors that were envisioned, so in 1993, in the midst of a recession, Congress reduced the minimum investment to $500,000 while restricting eligible projects to areas of high unemployment or rural areas. Congress also authorized so-called regional centers, private corporations that were often created by developers or marketers to act as one-stop conduits for investments from immigrants with cash looking to move to the United States.

“We couldn’t raise a million so we had to come up with a process that would allow people to get in with less money, to get funds directly into local and state businesses,” says Edwards, who has been involved in EB-5 investment since the program’s inception and is now president and CEO of EB-5 Jobs for Massachusetts in Boston. The company became the state’s first certified regional center in 2009.

The regional centers subsequently pushed for other changes to the law. One of those changes retained the requirement that an investment needed to yield at least 10 jobs, but the wording was changed from “direct” jobs to “direct, indirect, or induced” jobs.  The US Customs and Immigration Services, the agency within Homeland Security charged with administering the program, allows projects to count not only the jobs directly created by the investment but also, using an economic forecast model, positions created by other businesses to support those direct jobs. The regional centers don’t have to show the jobs actually exist, merely that the investment would likely lead to their creation.

Jack Worthington, managing partner of the New York-based Arundel Group, which is designated as a Massachusetts regional center, says the ripple effect of investments is real even though the jobs may not be immediately apparent. “You know the guys are buying tomatoes, you know guys are buying onions and mayo and bread. Those things are making real jobs. Those [items] have to be grown, picked, stored, and trucked,” he says.

According to Invest In the USA in its 2014 annual report, foreign investments in 2012 through EB-5 “supported” nearly 43,000 jobs, of which about 19,000 were directly created, 8,500 were indirectly created, and 15,000 were induced. The top three categories were 14,200 construction jobs, 2,000 jobs in the food and drink industry, and more than 1,400 legal service jobs.

While the first 15 years of the program drew a tepid response with no more than several hundred immigrants a year putting money into American businesses, the seven years since the onset of the Great Recession have seen a flood of money from outside the country. For the first time ever, the program hit its annual 10,000-visa cap last year.

One of the main attractions of the program is that an investor can get a green card not only for themselves but also their spouse and their minor children. It’s a rare chance to move everyone to America.  In addition, the investors are not required to live where they invest.

The vast majority of visa recipients are Chinese; their share of the total green card pot has grown from 12 percent in 2007 to 85 percent in 2013. The growth is astounding given that the Chinese government forbids the transfer of more than $50,000 out of the country, yet the EB-5 program requires a minimum investment of $500,000.

Officials at some of the regional centers say there are “workarounds” to the $50,000 limit. One official said relatives can pool individual $50,000 transfers so one family can take advantage of the visa program. Other officials say the key factor for American officials is that the money does not originate from illegal activities.

“The US government is checking on every single source, making sure [the funds] are from a lawful source and it was a lawful path of funds,” says Joseph of the Invest In the USA group. “It’s not the US government’s job to enforce Chinese laws.”

US officials are unusually tight-lipped about the program. The investors’ identities are cloaked in secrecy and there is little aggregate data available to track them or their investments. Officials at the US Customs and Immigration Services repeatedly declined to talk on the record and told CommonWealth the data that was being requested—how many projects have been approved in Massachusetts, where the state ranks in relation to others, how many immigrants have filed for green cards through Massachusetts investments, and where those investors came from—was not information they aggregated, analyzed, or retained.

The Securities and Exchange Commission, which enforces violations of the investment aspect of the program, also declined to speak on the record. The State Department, which grants visas, only compiles data on overall visas issued and the countries of origin of the investors. A spokesman did not respond to a request for comment.

In fact, no federal agency with even tangential oversight of any aspect of the EB-5 program was willing to talk on the record. Politicians also had little to say.  Despite the questions that have been raised about the program, Congress is considering a bill, now in the House Homeland Security Committee, that would make permanent the EB-5 regional center program, scheduled to expire September 30. But having information available for lawmakers to make informed decisions could be difficult.

US Rep. William Keating, who sits on the House Homeland Security Committee where the bill to make the program permanent awaits a hearing, did not return several calls and emails for comment. The Baker administration, which must approve where foreign investments can be made in Massachusetts, also declined comment on the merits of the program.

Sen. Elizabeth Warren, who now occupies the seat previously held by Kennedy, released a cautiously positive statement. “With too many Americans still unemployed or underemployed, it is important that we take action to encourage job creation in hard-hit areas. The EB-5 visa program has been successful at attracting investment and creating tens of thousands of American jobs, but I am deeply concerned about reports of corruption and fraud, as well as the backlog of unprocessed applications.”

REGIONAL CENTERS

Regional centers are like matchmakers, bringing foreign investors and their money together with business developers here in the United States. Although foreigners are making investments in US businesses, the centers tend to promote the benefits of citizenship (access to schools, homes, and, for those from totalitarian countries, freedom) instead of the ins and outs of a specific business deal.

The solicitation for investors on the website of New York-based Live in America Financial Services, a Boston regional center, is available in English as well as five Asian dialects and reads like a roadmap for wealthy people eager to come to America. “No sponsor or language requirements…no business or management experience requirement…no quota backlogs obstructing your application’s progress…investment capital can come from a gift, inheritance, business ownership, or other lawful activities…day-to-day management of your investment is not required, so other ventures can remain uninterrupted.”

EB-5 Jobs for Massachusetts. From left, Doug Edwards, president and CEO; Jillian Fortuna, COO; Paiya Wang, client services and liaison to China; and Bob Fox, project development manager.

EB-5 Jobs for Massachusetts. From left, Doug Edwards, president and CEO; Jillian Fortuna, COO; Paiya Wang, client services and liaison to China; and Bob Fox, project development manager.

There are more than 700 regional centers operating across the country. Many of them are set up by developers to help finance a single venture or a series of ventures and then dissolved once the project is completed. Other regional centers move from project to project, acting as middle men between the foreign investors and the business seeking capital.

In 2009, Massachusetts had just one regional center. Today, there are eight that include Massachusetts in their geographic zones, including a Florida developer looking to build a $290 million mixed-use project in Boston’s Fenway and a New York-based venture capital firm whose focus is using EB-5 money to set up fast food and quick service franchises in the state.

“It’s an underserved market, dramatically underserviced in the EB-5 program,” says Worthington, of the Arundel Group, the most recent company to receive approval to act as a regional center for Massachusetts. “When we looked around the country, Massachusetts had fewer regional centers than just about every other state. We thought that was ludicrous. I think Alabama has more, Mississippi had more.”

Foreign investors seeking to tap into the EB-5 program don’t need to go through a regional center, but the centers offer several key advantages. Under federal immigration law, projects run through a regional center have to produce 10 direct, indirect, or induced jobs for every $500,000 of foreign investment. Foreign investors who go it alone have to produce 10 direct jobs. At least 3,000 visas are also set aside for regional centers.

But the centers also charge a fee. In addition to the half-million dollar investment, most regional centers charge an unregulated fee between $25,000 to $50,000 for each investor as well as get a piece of the interest from money loaned to developers.

Regional centers must be certified by the US government, but the certification doesn’t mean the government has given its blessing to any investments. In fact, the SEC and the US Customs and Immigration Service recently issued a warning to potential investors. “The fact that a business is designated as a regional center by USCIS does not mean that USCIS, the SEC, or any other government agency has approved the investments offered by the business, or has otherwise expressed a view on the quality of the investment,” the notice states. “The SEC and USCIS are aware of attempts to misuse the EB-5 program as a means to carry out fraudulent securities offerings.”

In the mid- to late-1990s, the EB-5 program, which still was trying to gain traction, became a magnet for money launderers, con artists, and schemers who bilked foreign investors, making promises that couldn’t be kept about their money. One group, calling itself Interbank, defrauded more than 200 foreign nationals out of more than $21 million with false promises of investments and green cards. The organizers of the scheme were caught and prosecuted but the investors lost all their money and none ever received a green card.

Customs tightened regulations in the wake of the Interbank scandal, but scams have continued. In February 2013, the SEC successfully brought charges against a Chicago man who bilked foreign investors, mainly from China, out of $145 million with a promise of creating the “world’s first zero carbon emission” hotel and convention center next to O’Hare Airport. Later that year in Texas, SEC investigators charged developers with scamming $5 million from Egyptian and Nigerian nationals for non-existent projects and using the money for their own investments. SEC regulators in Los Angeles also broke up a Ponzi scheme that defrauded would-be immigrants out of $150 million and charged a Los Angeles attorney, his wife, and his law partner with bilking foreign investors out of nearly $12 million for a nonexistent ethanol plant in Kansas.

In South Dakota, former governor Mike Rounds championed the creation of a state-run regional center to draw foreign investment to the state. In 2013, however, the center became engulfed in controversy when questions were raised about a bankrupt $115 million meat-packing plant and a mysterious $30 million investment out of Hong Kong. While no charges have been brought yet because the main official in the scandal committed suicide, some of the discoveries by a state investigator found that there was misdirection of state grants, self-dealing in privatizing the state-run regional center, and numerous conflicts of interest. The scandal nearly derailed the US Senate bid of Rounds because many of those involved were his appointees.

In March, the Inspector General for Homeland Security released the results of an investigation that showed that a deputy secretary at the agency had intervened on behalf of several investors and developers with projects awaiting approvals. One of the projects was a hotel and casino project in Las Vegas that was important to then-Senate Majority Leader Harry Reid.

The Inspector General, in both the March report as well as a 2013 audit of the EB-5 program, says poor regulatory oversight coupled with shoddy record-keeping contributes to program abuses. “As a result, USCIS is limited in its ability to prevent fraud or national security threats that could harm the US, and it cannot demonstrate that the EB-5 program is improving the US economy and creating jobs for US citizens as intended by Congress,” says the audit.

IS IT BENEFITING THOSE IT WAS MEANT TO BENEFIT?

The EB-5 program is supposed to steer foreign investment money into projects located in high unemployment areas, but available evidence suggests most projects are finding ways to sidestep that requirement. The vast majority of EB-5 projects, at least in Massachusetts, are in the service industry or real estate ventures catering to an upscale clientele.

Under EB-5 rules, a project seeking foreign investment must be located in a rural area or an urban area with an unemployment rate 1.5 times higher than the national average. The so-called Targeted Employment Area must be certified by the state, but it can be drawn up by the project developer. Many developers have located their projects in well-to-do, low unemployment areas, but then satisfied the law’s requirements by incorporating Census tracts with high unemployment that are located a good distance from the development. The result has been snake-like districts that would make the 19th century Massachusetts governor Elbridge Gerry, the father of gerrymandering, proud.

mapEB5

A prime example is The Point project in Boston’s Fenway neighborhood, a proposed $290 million mixed-use building on Park Drive with grand vistas of the Charles River. The 30-story building will house a combination of retail, residential, and office space and is soliciting about 25 percent of its funding through EB-5 investors. EB-5 Jobs for Massachusetts is the regional center soliciting foreign investors for the project. The developer is Birch Capital LLC, an EB-5 regional center with offices in Florida and Wellesley that is not designated to do business in Massachusetts.

The Census tracts where the proposed building will be located have an unemployment rate of about 4.4 percent, less than half the benchmark required to qualify for EB-5 status. The adjacent Census tracts in the Back Bay and South End are also below the national unemployment rate. To reach the necessary 9.5 percent target unemployment rate, which is 1.5 times the national average, the project needed to incorporate Census tracts with high unemployment rates in Roxbury and Dorchester.

The Massachusetts Department of Unemployment Assistance approved the final map, which starts on the banks of the Muddy River in the Fenway and then snakes through Mission Hill, into Roxbury, and down into Dorchester, about 4.5 miles away.

The project developers also used Census data from 2000 rather than more current data from 2010. Ann Dufresne, a spokeswoman for the Executive Office of Labor and Workforce Development, which includes the unemployment assistance agency, says the federal government allows states to choose which Census information to use.

The gerrymandered maps have not gone unnoticed. The US-China Economic and Security Review Commission, a congressionally appointed panel, released a report in February about trends in Chinese investment in America and devoted a lengthy section to a scorching critique of the regional center program, including “the loose designation of EB-5 Investor Targeted Employment Areas.”

It’s unclear how much of the economic benefit of a project in the Fenway flows to people in Dorchester and Roxbury. Audrey Singer, a senior fellow at the Washington-based Brookings Institution, wrote in a Federal Reserve Bank newsletter this year that nothing in immigration law requires that jobs go to residents of the targeted employment area. “Nothing prevents the hiring of non-TEA residents for the jobs,” she said. “Indeed, it is likely that most of the workers are from outside the TEA. Thus, although economic benefits may accrue to the community in the medium or long term, there may not be an immediate boost.”

A formal list of EB-5 projects in Massachusetts is not available, but those projects that are known tend to be upscale. In addition to the Bastille Kitchen, EB-5 money has spurred construction of boutique hotels and destination recreation spots around the region. Jay Peak, a popular ski resort in northern Vermont that features a massive indoor water park, was built with EB-5 investments. A Boston-based regional center is building the Taconic Hotel, a $19 million project which it describes as a “luxury boutique hotel in the beautiful town of Manchester, Vermont.” Manchester’s unemployment rate in January was 4.5 percent and has been below the national average for at least 10 straight years.

Only one EB-5 project appears to have been successfully funded in any of the state’s Gateway Cities, the New Bedford Urban Renaissance Project at the former Standard-Times building downtown. The mixed-use project received money from 10 investors, all of whom were approved for their green cards.

Derek Santos, executive director of the New Bedford Economic Development Council, says there have been other entreaties by potential EB-5 investors but most of them wanted to build hotels in anticipation of a possible casino. “That’s really not our primary concern here in New Bedford,” says Santos. “A second hotel downtown would really have to hit high on a lot of marks to be successful.”

EB-5 proponents say a project doesn’t have to be located in a distressed area to benefit residents of the area. Joseph says a project can benefit surrounding areas with jobs and by adding to the local tax base. He says developers are willing to take risks but not be foolhardy. “This is a program that deals with finance and immigration,” says Joseph. “Whenever there are holes in our markets, there need to be ways to attract the economic activity.”

Worthington says lawmakers should do away with the requirement that a project be located in a high unemployment area. He says his quick service industry projects can succeed in high unemployment areas, but many projects cannot. “It’s ridiculous,” he says. “The way that the Target Employment Areas are drawn is fundamentally flawed from a business investment standpoint. The golden rule of real estate is location, location, location.”

 

Immigration advocates, however, take a very different view. They see a two-tiered immigration system, where already-rich developers build in already-well-to-do areas using money from already-wealthy immigrants who offer no more than cash.

“It’s almost like two different worlds that don’t really align,” says Mary Holper, the BC immigration law professor. “They’re all called immigration but it’s almost like two separate systems. Sweat equity labor doesn’t get to benefit from the system the way money does. No, I don’t think it’s fair. It’s sending a message that, ‘We want you if you’re rich.’ What it sends is the message, ‘We want you to give money and everything else is irrelevant.’”

Source : CommonwealthMagazine

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