Statement of Senator Patrick Leahy (D-Vt.), Ranking Member, Senate Judiciary Committee, Floor remarks on extending the EB-5 Regional Center program without reforms
I once again come to the floor, joined by Senator Grassley, to share my frustration with the EB-5 Regional Center program. Senator Grassley and I have been working for years to improve this flawed program, which is set to expire tomorrow. But once again Republican congressional leadership has rejected our bipartisan reforms and the program will be extended in the continuing resolution. Time and again, Republican leadership has caved behind closed doors to narrow corporate interests. I believe this is a serious mistake.
The EB-5 program I once championed seems like a distant memory. The program was designed to bring jobs to underserved rural and distressed urban communities. And for some time it did just that. Communities in Vermont, like Warren and Vergennes, once used EB-5 to create and save jobs during difficult economic times. But that is the EB-5 of yesterday.
Today EB-5 is mired in fraud and abuse. It suffers from obvious and outrageous flaws. It is a magnet for fraud. Securities violations are rampant. And the incentives that Congress created to promote investment and create jobs in rural and high unemployment areas—the sole reason why I championed this program—have been rendered obsolete through economic gerrymandering.
Only three percent of EB-5 investors now invest in rural areas. Three percent. Less than 10 percent invest in true high unemployment areas. Almost every other EB-5 project uses gerrymandering to qualify as distressed, despite many being located in the most affluent areas of the country. The fact that a luxury hotel in Beverly Hills can use gerrymandering to claim it is located in a distressed community is troubling. But the fact that this type of abuse now represents almost 90 percent of the entire EB-5 program is appalling.
Anyone who maintains that today’s EB-5 program is about creating jobs is either a lobbyist for the real estate industry or is simply not paying attention. An untold number of the luxury developments that now dominate EB-5 would be pursued regardless of EB-5 financing. Financing provided through EB-5 represents a small portion of the capital stack. To claim that EB-5 is responsible for all of the jobs created by these projects is a farce. EB-5 merely allows developers to replace their conventional financing with dirt cheap capital subsidized by the sale of U.S. visas.
This corporate handout is not just exploited by wealthy American developers. Chinese developers, and even the Chinese government itself, are now exploiting the EB-5 subsidy. This is beyond troubling. A foreign government should not be permitted to earn tens of millions of dollars from the sale of U.S. visas.
The proposal I developed with Senator Grassley would address these abuses. Our proposal would require background checks and third party oversight of funds. It would create protections for defrauded investors. It would ban foreign government ownership of an EB-5 company. And it would end gerrymandering and provide modest incentives to direct a small portion of investment to underserved areas—just 15 percent to both rural and urban poor communities. But even this was too much for some developers.
Gluttonous, shortsighted corporate greed blocked these critical reforms. Greed that was given a voice by the U.S. Chamber of Commerce. Republican leadership has allowed a couple of powerful developers who exploit this program’s flaws to derail critical reforms. I find it shameful: the worst abusers of this program have been given veto power over its reform.
Thankfully, Secretary Johnson is serious about improving EB-5. I commend his efforts to strengthen rules to address fraud, inadequate investment levels, and the abuse of development incentives. I will work with the Chairmen of the Senate and House Judiciary Committees and the next Secretary of Homeland Security to ensure that these reforms are implemented and enforced. But even Secretary Johnson has acknowledged that this problem ultimately needs a legislative solution.
The EB-5 Regional Center program no longer serves the American people’s interests. And it certainly does not serve the rural and urban poor communities as Congress intended. As the Vice Chairman of the Appropriations Committee next Congress, I will continue to press for broad, bipartisan reforms. I know Senators Grassley and Feinstein, the incoming Ranking Member of the Judiciary Committee, will not sit idly by either.
Almost everyone agrees this is a broken program. It is time we fix it. If EB-5 cannot be reformed due to a paralysis of leadership, the time has come for it to end.
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