Monday, April 29, 2013

As EB-5 controversy surfaces in Virginia political battle, a new focus not just on fraud but on corporate welfare

There's been a shift in the public discussion of the EB-5 immigrant investor program, used in Atlantic Yards and many other projects, in which immigrants investing $500,000 in a purportedly job-creating project can get green cards for themselves and their families.

Often it's been described as a win-win-win for all--the immigrants, the investors, and the public--though with subordinate mention of potential fraud or corruption. See, for example, the 3/21/13 Washington Post article headlined Foreign citizens making big investments in U.S. in exchange for green cards.

Of late, however, that potential fraud has been highlighted, and at least one influential commentator, a Washington Post editorial writer, has looked beyond the issue of transactional integrity to declare the program itself a "dubious policy" of "corporate welfare."

That squares with my analysis of the Atlantic Yards EB-5 deal; after all, the ten jobs per investor need only to be projected in an economist's analysis, and documents suggest the $228 million in immigrant investor funds are not seed money but merely substituting for a higher-interest loan.

So local officials are helping get developers and entrepreneurs cheap capital at no cost--the lure to investors is the green cards, scarce commodities whose value gets downplayed.

And, yes, there were also signs of fraud with Atlantic Yards: potential investors were told they were investing in a basketball arena, though the money instead would go to infrastructure.

Longtime EB-5 critic David North wrote last month:
But, as a matter of policy, the EB-5 program is really a silly little program that lets rich people (and moderately rich ones) buy green cards on the open market. It is tacky. It should be allowed to die, or, if it is to continue, the cost per visa should be much higher, and the money should be used not for Marriotts, but to reduce the national debt.
The McAuliffe kerfuffle

EB-5 has surfaced as a flashpoint in a political fight, as the New York Times reported 4/25/13 Venture Threatens to Backfire in Virginia Governor’s Race:
CLIFTON FORGE, Va. — When Terry McAuliffe appeared with his good friend Bill Clinton at the ribbon-cutting for Mr. McAuliffe’s electric car company in July 2012, the campaign-style event, complete with “Born in the U.S.A.” blaring, was meant to supply the top line of his résumé as he positioned himself to run for governor of Virginia.

But less than a year later, the company, GreenTech Automotive, has become a potential embarrassment as Mr. McAuliffe campaigns on the slogan “Putting Jobs First” and seeks to keep the spotlight on the conservative social views of his Republican opponent, Kenneth T. Cuccinelli II, the state attorney general.

Mr. McAuliffe resigned as GreenTech’s chairman last year but publicly acknowledged it only this month. Documents have surfaced questioning his explanation for why he located the plant in Mississippi, not Virginia, including memos from Virginia officials expressing “grave doubts” about his business model and suggesting its financing was a “visa-for-sale scheme” for Chinese investors.

...The path to GreenTech for Mr. McAuliffe, who has never held elective office, began in defeat in the 2009 primary for governor, when charges that he was a carpetbagger without Virginia ties proved devastating. In the four years since, he traveled the state extensively and raised $20 million to buy a Hong Kong-based electric carmaker, renaming it GreenTech and moving its headquarters to Northern Virginia, where he lives..... 
Officials also questioned GreenTech’s plan to attract Chinese investors using a visa program that awards green cards to foreigners who put up $500,000 or more for a start-up business. One development official wrote that she could not “get my head around this being anything other than a visa-for-sale scheme.”

...Asked how much of GreenTech’s financing was raised through foreign investors seeking green cards, known as EB-5 visas, [McAuliffe] referred the question to GreenTech’s current executives. Marianne McInerney, a vice president, said the EB-5 program was important to “our initial capital strategy” but did not represent the majority of current investments.
The National Review reported, in Virginia’s Fears of a ‘Visa-for-Sale Scheme’Economic advisers to Tim Kaine had concerns about McAuliffe’s green-car company.
But internal communications from VEDP now reveal that the state agency didn’t merely think that McAuliffe’s company had a risky business model. At least two high-ranking officials actually suspected that the company’s real aim was to make money by selling U.S. residency visas to wealthy foreigners.
In an e-mail dated November 17, 2009, Liz Povar, then the director of business development at VEDP, wrote to her colleagues:

Sandi et al. Even if the company has investors “lined up”, I maintain serious concerns about the establishment of an EB-5 center in general, and most specifically based on this company. Not only based on (lack of) management expertise, (lack of) market preparation, etc. but also still can’t get my head around this being anything other than a visa-for-sale scheme with potential national security implications that we have no way to confirm or discount. . . .

This “feels” like a national political play instead of a Virginia economic development opportunity. I am not willing to stake Virginia’s reputation on this at this juncture.
The e-mails were revealed pursuant to a Freedom of Information Act request filed by PolitiFact; 79 pages of documents were posted online in January.
Note that Virginia officials were not questioning the fundamental nature of EB-5 as "visas for sale"--though that's certainly how it could be described--but whether it could work under the program rules. Also, state officials were alarmed that the regional center--the nongovernmental entity set up to recruit and pool immigrants' investments--seemed to be a potential conflict-of-interest, as it was created for just this project.

The latter is hardly an issue for most projects. But the issue seems to be that GreenTech was a riskier investment than most seeking regional center backing.

That raises a question. After all, if the EB-5 investment is totally safe, why they do they need cheap capital anyhow. (The documents are here.)
The critique in the Post

Washington Post editorial writer Charles Lane, in a 4/15/13 column headlined Charles Lane: EB-5 visa immigration program is flawed, nailed it:
Virginia gubernatorial candidate Terry McAuliffe is under fire because an electric-vehicle firm the Democrat formerly headed raised capital through a program that awards green cards to foreign investors in return for creating jobs in the United States — but it’s not clear how many jobs McAuliffe’s firm generated.
McAuliffe quietly resigned from GreenTech Automotive before e-mails surfaced and sparked questions about the company. I don’t know whether McAuliffe did anything especially wrong — and, in a way, I don’t care. The EB-5 visa-for-dollars program itself is the real scandal.

When Congress approved it in 1990, lawmakers saw a win-win: Investors and their families get to emigrate; the United States gets their money, talent and ambition.

Federal law sets aside 10,000 permanent-residency slots for EB-5 each year, along with 130,000 other employment-based immigrant visas and several hundred thousand additional green cards allocated for refugees, family reunification and the like. U.S. officials tout the $6.8 billion invested and 50,000 jobs created since the program’s start.

Sounds impressive — until you realize that foreign investment in the United States totals $2.5 trillion and that the program’s fuzzy job-creation count includes jobs “indirectly” attributable to the investment.

EB-5 would be dubious policy even if it could claim five times that impact. Simply put, it is corporate welfare — yet another attempt to subsidize the flow of capital into politically favored channels.
Lane registers the standard objection to EB-5--that we shouldn't be selling visas--and agrees, but calls it a misconception:
In other words, the government is leveraging its monopoly on green card-issuance into a source of artificially cheap capital for a few lucky companies.
I wonder how many jobs we could create if the government sold 10,000 visas to the highest bidder — then spent the cash on, say, infrastructure or aid to the poor, with their respective Keynesian multipliers.
What we do know is that EB-5 has created a lot of jobs — for consultants, brokers and other fee-seeking middlemen. Again, it’s an open question whether that’s the most productive use of scarce resources, domestic and foreign...
Capital steered to EB-5-favored business is capital not available to others who might have used it more efficiently. Demand for green cards far exceeds the limited supply. Every green card awarded to an immigrant who has already made his fortune abroad is a green card that can’t go to an immigrant who wants to make his fortune in the United States.
One commenter, Alysha Webb, observed,
Thanks for writing about this program. I cover China and electric vehicles, and have run into this program many times as a way companies in the EV sector -- many with Chinese ties or outright Chinese owners -- are able to stay here in the U.S. I have nothing against these companies -- they give me something to write about. But the EB-5 program does need to be more carefully supervised. And as you point out, there is a shortage of green cards for people who would actually work and pay taxes here.
Some of the documents and discussion also surfaced in conservative columnist Michelle Malkin's 4/15/13 column, Desperate Dem Terry McAuliffe sues over green tech/cash-for-visas exposé.

The role of scams

The unseemly side of EB-5 has come to the fore, as Los Angeles Times reported 4/23/13, Scams blocking Chinese investors' path to U.S. green cards:
The North American Securities Administrators Assn., an advocacy group, now ranks EB-5-related scams as one of the top new threats to investors.

Overall, EB-5 visas are a small part of the 140,000 immigrant visas allotted annually on the basis of employment. But given the nation's budget crunch and continued high unemployment, lawmakers have called for expanding the EB-5 program.

...Canada, Australia and Britain have investor-visa programs similar to the EB-5. Portugal and Ireland, hard hit by the Eurozone debt crisis, offer residency papers for big property purchases. And Spain, suffering from a glut of unsold homes, is considering giving visas for house purchases of as little as $210,000.

"The underbelly is that once people started to see growth in this program, we started to see a lot more fraud," said Muzaffar Chishti, a director at the Migration Policy Institute, a nonpartisan think tank based in Washington.
While EB-5 has become popular, the article reports, the program suffers when job creation is not met or projects are misrepresented, notably a proposed convention center and hotel project near the O'Hare airport in Chicago. The LA Times reported:
Officials from the U.S. Citizenship and Immigration Services agency, which had greenlighted Sethi's EB-5 regional center, would not discuss the case because it is pending. More generally, they said their oversight focuses on ensuring that EB-5 projects truly create jobs.
It is not the agency's role to evaluate the effectiveness of a regional center or make any assurances about the quality of the investment opportunities they offer, spokesman Christopher Bentley said.
(Emphasis added)

I don't think they focus on ensuring that EB-5 projects truly create jobs. I think they focus on ensuring that applicants have appropriate documents from economists projecting such jobs.

Another Forest City EB-5 role

Forest City Enterprises, the parent of Forest City Ratner, has been using EB-5 financing elsewhere. From City of Dallas Regional Center-Funded Projects Named Finalists in Dallas Business Journal’s “Best Real Estate Deals”:
Three projects financed by the City of Dallas Regional Center (CDRC), a public-private partnership between the City of Dallas and Civitas EB-5 Funds, have been named finalists in the Dallas Business Journal’s Best Real Estate Deals awards...

“Our practice is to invest in institutional-quality projects with top-tier sponsors to bring new jobs and economic growth to Dallas,” said Daniel J. Healy, CEO of Civitas Capital Group. “We are excited about these projects, and we congratulate Forest City Enterprises, Matthews Southwest, and Trammel Crow Residential on being named finalists.”

The Forest City-Cityplace West Village development began construction in 2013. Located in the heart of Uptown, the twenty-story residential tower also features a four-story wood framed building and will bring a new urban living experience to Dallas, complete with retail and restaurants.
According to the news release:
The City of Dallas Regional Center is the official EB-5 regional center of the City of Dallas. In a unique public-private partnership, the City collaborates with Civitas Capital Group to provide the highest quality EB-5 investment opportunities to investors around the world. The CDRC takes full advantage of the City of Dallas’ pro-business culture, steady growth and job creation, all of which have made the City and the surrounding region a magnet for corporate headquarters, business expansion and foreign trade.

A resonant scandal, from Chicago

The big scandal in the EB-5 world involves a Chicago project. According to EB5Info, How the ACCC Scandal has Disturbed the EB-5 Market in China:
On February 6, 2013, the Securities and Exchange Commission (SEC) charged the EB-5 project A Chicago Convention Center (ACCC) and its principal Anshoo R. Sethi with securities fraud. The project was marketed primarily in China, with great pomp and fanfare. It offered 499 limited membership interests to EB-5 investors and managed to sell more than $145 million in securities, unfortunately under misleading pretenses. There was $11 million in administrative fees collected from more than 250 investors. Despite a promise to refund this fee should the case collapse, more than 90 percent of the administrative fees have already been dissipated. Fortunately for the investors, the actual investment money was kept in escrow and thereby saved. However, as this event is unprecedented in EB-5 history and the first time an EB-5 transaction of this size has been put on the radar of the SEC. The ACCC case has had profound impacts in EB-5 marketing trends in China.
...The negative publicity surrounding ACCC certainly has contributed to pushing potential investors into the arms of the European competition. In the last month alone, we are aware of at least 20 confirmed investors, who had signed up for US EB-5 projects, withdraw, preferring to invest in Portugal instead. Based on our constant interaction with the Chinese investors, brokers and marketing consultants, issues such as the prolonged processing times (investors are tired of waiting for as long as 18 months to obtain a I-526 approval), the greater investment risks, unpredictability in policy making, not to forget the massive amount of negative publicity in China, following the ACCC debacle, have all contributed to this detachment. 

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