The $500,000 card: Buyer beware

Updated: 2016-08-05 23:04

By Chris Davis(China Daily USA)

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The EB-5 visa investment program can't keep up with demand, but the process is fraught with hazards, Chris Davis reports from New York.

The $500,000 card: Buyer beware

When it's completed in 2025, Hudson Yards on Manhattan's Westside will include more than 17 million square feet of commercial and residential space, more than 100 stores, 4,000 residences, 14 acres of public open space, a 750-seat public school and a luxury hotel with more than 200 rooms.

The largest private real estate development in the history of the US also will have created more than 23,000 construction jobs – and made 1,200 Chinese permanent US residents. All of them gained citizenship by using the most popular residency-for-sale program in the world, the EB-5 visa, collectively providing some $1.2 billion for the $20 billion development in exchange for green cards.

The green-card program was barely noticed when it was introduced in the early 1990s to attract foreign investment and create jobs in the US.

By 2007 it was issuing about 700 visas a year. But after the financial crisis — when businesses had trouble finding financing from traditional sources — EB-5 took off, reaching its annual quota of 10,000 for the first time in 2014 and overloaded with a waiting line ever since.

"We used to never reach the cap and now we do every year," said Sarah Poppy Alexander, a whistleblower lawyer at the San Francisco branch of Constantine Cannon. "The vast majority are Chinese."

The good news, according to the US Citizen and Immigration Services (USCIS), is that the program has pumped about $8.7 billion worth of investment into the US economy and created 35,150 jobs since 2012.

The fraud

The bad news is that when that kind of money flows, some of it comes with fraud. "This is one of those areas where fraud takes many faces and takes many forms," said Rosie Dawn Griffin, who also specializes in whistleblower law and works at the Washington office of Constantine Cannon.

EB-5 is controversial for a number of reasons, said Alexander. "It's under the Immigration and Customs Enforcement office, but they do not seem to have the resources right now to be able to track the program and make sure would-be investors are not being defrauded," she said.

Over the past year, the Securities and Exchange Commission (SEC) has been lending a hand.

Their highest-profile case came in April — the biggest EB-5 scam ever. Though it didn't target Chinese investors per se, it gives a glimpse of the scope that EB-5 abuses can expand to. A 52-count complaint alleges that two Vermont businessmen orchestrated an eight-year scheme "systematically looting" millions from a $350 million pool for a ski resort that was raised from hundreds of foreign investors in 74 countries.

The targets

Investor immigrants from China get about 90 percent of EB-5 visas, so they are the most common target of scams.

In California last November, physician Robert Yang, 45, and his office manager Claudia Kano, 45, were accused of siphoning off at least half of the $20 million they raised from 40 Chinese investors to build nursing homes in Pamona.

Earlier that month, the SEC went after Lin "Lily" Zhong and her company EB-5 Asset Manager LLC in Florida. The complaint said that Zhong had raised $8.5 million from 17 investors, mostly Chinese people hoping to immigrate to the US.

Instead of using the money for the real estate development as advertised, Zhong allegedly spent it on a $2.5 million "part-time" home (she is a permanent resident of New Zealand), a $55,000 year-old BMW SUV for her daughter, a new $98,346 Mercedes S550 for herself and a $175,495 48-foot Sea Ray muscle boat.

Last week, a district court judge in Northern California entered a final judgment against Luca International Group, a San Francisco Bay Area oil and gas company that promised investors annual return rates of 20-30 percent "knowing the operations were losing millions of dollars and the enterprise was sinking under a mountain of debt."

Aside from reaching out to Chinese-American investors through Chinese-language media, the SEC charged, Luca CEO Bingqing Yang and her chief fundraiser Lily Lei also targeted Chinese citizens who sought permanent US residence through the EB-5 program. The SEC said Luca comingled investor funds to prevent the scheme from collapsing and used money from new investors to make sham profit payments to earlier investors.

The court ordered Luca to pay $68.3 million in disgorgement for the Ponzi scheme.

"The SEC is doing as good a job as they can going after these companies," Alexander said. "The hard part is that oftentimes these frauds are very hard to detect and unless there's someone who knows something and brings insider information forward to the SEC, they don't know who has a legitimate investment opportunity and who does not."

US whistleblower laws allow anyone with information about fraud to help bring scammers to justice and sometimes get a cash reward of up to 30 percent of the amount recovered, even if they're not based in the US.

EB-5 investment fraud can be reported through the SEC's whistleblower program, which is part of the Dodd-Frank act and encourages anyone with knowledge of violations of US securities laws to step forward. Since the inception of the program, the agency has paid more than $85 million in awards to more than 32 whistleblowers.

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