Fraud Warning On U.S. Investor Visa Program

The federal Immigrant Investor Program, known as the EB-5 visa program, which allows foreign nationals to obtain green cards in exchange for investing in U.S. job-creating ventures, has emerged as an increasingly popular alternative financing source for commercial real estate projects. However, as with any highly successful financing program, the fledgling program can be vulnerable to those with criminal intent.

The U.S. Securities and Exchange Commission (SEC) and U.S. Citizenship and Immigration Services (USCIS) this week jointly issued an alert cautioning investors about potential scams in the program, and supporters and skeptics alike are calling for tighter oversight of the program.

Along with issuing a warning to potential investors, the SEC stepped up its enforcement action by bringing fraud charges against Marco and Bebe Ramirez and three companies they own for fraudulently raising and then stealing funds from foreign investors under the guise of an investment opportunity to create jobs and a path to U.S. residency.

In the complaint unsealed this past Tuesday in U.S. District Court, Southern District of Texas, the Commission alleges that the Texas couple and their companies raised at least $5 million by making false promises that investor capital would be invested as part of the EB-5 program. The SEC alleges that instead of investing the money into job-creating enterprises, the couple diverted the funds to other undisclosed businesses, for their personal use, and, in at least one case, used investor funds to make Ponzi-like payments to an existing investor. According to the complaint, the couple started by targeting investors in Mexico, and more recently solicited investors in Egypt and Nigeria.

The federal court has granted the agency’s request to freeze the assets and accounts of the Ramirezes and their companies, USA Now LLC, USA Now Energy Capital Group LP, and Now Co. Loan Services, effectively halting their ability to raise or spend funds.

"Through their investment scheme, the Ramirezes abused a program intended to attract foreign capital to create U.S. jobs," said David R. Woodcock, director of the SEC’s Fort Worth Regional Office. Efforts to reach the couple of their representatives were unsuccessful.

The SEC and the USCIS, which regulates U.S. immigration policy, also Tuesday issued a joint investor alert about the program, with the SEC taking "emergency enforcement action" to stop allegedly fraudulent securities offerings made through EB-5.

In recent weeks, Congress and FINRA have also announced investigatory actions.

A group of congress members representing the Inland Empire in California, including Reps. Ken Calvert, R-Corona; Duncan Hunter, R-Alpine; Raul Ruiz, D-Palm Desert and Mark Takano, D-Riverside, sent a letter last month to House Judiciary Committee requesting a hearing to address EB-5 loopholes and abuses. Sen. Patrick J. Leahy, D-Vt., the program's original author, has requested amendments to streamline and improve the program.

Under U.S. securities law, any individual who receives a fee or commission for connecting a developer with investors must have a broker/dealers license. The number of unlicensed individual raising capital has drawn scrutiny from the SEC and FINRA (Financial Industry Regulatory Authority).

Business owners apply to USCIS to be designated as "regional centers" under EB-5 rules offering investment opportunities in "new commercial enterprises" that may involve securities offerings. A foreign investor in a project that meets the criteria is eligible to apply for conditional lawful permanent residency.

However, the foreign investors are not guaranteed a permanent visa, and the fact that a business is designated as a regional center by USCIS does not mean that any government agency has approved or expressed a view on the quality of the investments offered by the business, according to the alert.

In the enforcement action, the SEC alleged that the accused falsely promised investors a 5% return on their investment along with an opportunity to obtain an EB-5 visa and allegedly pitched investors even before USCIS had designated the business as a regional center.

The SEC also claim the defendants told investors their money would be held in escrow until USCIS approved the business but instead spent the funds for personal uses. The end result: investors did not obtain even conditional visas as a result of their investments, according to the SEC's complaint.

"Even though investors provided the Ramirezes with at least $5 million, none of them have ever received conditional visas, let alone green cards,” said David Peavler, associate director of the SEC’s Fort Worth Regional Office. "Instead, the Ramirezes opened a restaurant and purchased other assets for themselves and their employees.”

In another case, the SEC and USCIS halted an alleged $156 million investment fraud in which an individual and his companies used false and misleading information to solicit investors in the "world's first zero carbon emission Platinum LEED certified" hotel and conference center in Chicago.

According to the complaint, the individual falsely claimed that the business had secured all building permits and that the project was backed by several major hotel chains. The defendants promised investors that they would get back any administrative fees they paid for their investments if their EB-5 visa applications were denied.

However, the defendants allegedly spent more than 90% of the administrative fees, including some for personal use, before USCIS made a decision on the visa applications.

Despite the abuses, many developers around the country are successfully using EB-5 to raise huge amounts of capital in projects ranging from a few investors to pools of 100 or more investors.

Proponents have estimated that between $3 billion and $4 billion in direct foreign investment could be raised annually as new regional centers are formed to take advantage of the innovative visa program as a source of low-cost financing and promote it to foreign investors as a valuable investment tool, said Kate Kalmykov, a Greenberg Traurig, LLP attorney with extensive experience working on EB-5 immigrant investor matters.

Like many government programs, EB-5 attracts a few bad-faith actors that can harm the reputation of everyone, Kalmykov said.

“It's important to have government and industry oversight so the program continues and remains viable, and foreign investors feel confident investing in the United States," Kalmykov said. "EB-5 is a wonderful tool because it brings foreign investment into the U.S., it's a job creation program, and offers investors a streamlined way to immigrate to the U.S. without an employer or family sponsor."

One of the weaknesses of the program is what happens after the investment funds are raised, she said.

Currently, there's no follow up by USCIS to monitor how funds are being used. Setting regular milestones for capital raisers to report back to the immigration agency on the status of a project -- along with site visits by the agency to make sure the projects actually exist as proposed -- would likely increase compliance and serve as a tool to prevent fraud, Kalmykov said.