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Risk factors for fraud in EB-5

The EB-5 program has grown exponentially since 2008, generating more than $11 billion in foreign direct investment and supporting more than 30,000 jobs per year.

However, with this growth comes growing pains: since 2013, the Securities and Exchange Commission has brought enforcement actions against more than eight allegedly fraudulent EB-5 projects.

Across these projects, common themes appear: in every case, the absence of third party controls enabled the fraud to take place and a lack of transparency to the projects’ investors allowed misuse of funds to go unnoticed.

Third-party administration is a best practice in EB-5, but is particularly important when more than one project entity is controlled by the same party. In cases where the EB-5 issuer also controls the project entity, conflicts of interest can undermine their fiduciary duty to the project’s investors.

In many cases, lack of independent oversight allowed the alleged fraudsters to divert investor money into uses wholly unrelated to the job creating project, violating EB-5 program requirements and putting immigration outcomes at risk.

Because these allegedly fraudulent projects operated with little to no investor transparency, investors had no way of knowing anything was wrong until it was far too late.

The majority of these investors are likely to lose some if not all of their $500,000 investment principal. Worse still, many will find their immigration outcomes in jeopardy as a result of the projects’ malfeasance.

Third-party controls and investor transparency are best practices in EB-5; moreover, solutions exist that allow projects to keep these situations from ever taking place.

By working with an experienced third-party administrator like NES Financial, projects can provide transparency and establish safeguards against many of the most common EB-5 risk factors, reassuring investors and regulators alike that funds are managed securely and in compliance with immigration requirements.

This is the last in a series of blogs examining cases of alleged fraud in EB-5. Other blogs in this series cover:

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2017-02-14T20:30:12+00:00 June 8th, 2016|Categories: EB-5|Tags: , , , , , |