Conflicts of interest have been a common factor in nearly all isolated allegations of fraud involving EB-5 projects.
The majority of EB-5 projects target raises between $5-15M—a substantial sum of money. Without the right safeguards in place, the temptation for an unscrupulous issuer to misuse investor funds can be high.
Conflicts of interest only exacerbate this risk. In situations where the issuer or new commercial enterprise is controlled by the same or related parties as the job-creating entity, the fiduciary duty the issuer owes to their investors may be compromised by their role as project developer.
Many believe such conflicts of interest are only a concern if the Regional Center and project are controlled by related parties, however, as recent allegations against projects involved with Jay Peak in Vermont have demonstrated, conflicts of interest can wreak havoc even when the Regional Center is independent.
Related-party transactions, and the conflicts of interest that necessarily accompany them, are not uncommon in EB-5, but not all projects are subject to the same risk because of them.
Projects that implement third-party tracking and administration solutions like those provided by NES Financial safeguard against these conflicts of interest by introducing additional, independent oversight.
As a result, investors and regulators can be more confident funds will be properly monitored and protected from misuse.
This is the third in a series of blogs examining cases of alleged fraud in EB-5. Other blogs in this series cover:
- Preventing fraud as funds are released from escrow
- Third party oversight
- Risk factors for fraud in EB-5
For more information on best practices in EB-5, download our EB-5 Solution Kit.
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