Thursday, April 23, 2015

After report charging favoritism in EB-5, industry advocates nervous of reforms; why shouldn't immigrant investment do more for the public?

I'm catching up on a lot of news related to the EB-5 program, which has helped the developers of Atlantic Yards/Pacific Park raise $477 million in cheap capital, with another $100 million to go. Perhaps the clearest summary of the lure and sketchiness of the program came in a February 2012 quote from an EB-5 fundraiser to The Daily:“It’s just a way of being able to get free money, basically, to build all sorts of projects.”

The political configuration regarding EB-5 is notable: there are numerous organized advocates, who get low-cost loans and earn profits, bringing investment to their locality, which understandably reels in local elected officials. Regular campaign contributions bolster such support.

Despite reasons to opposed EB-5 on fundamental levels--buying your way into the company doesn't sit right with many--or on instrumental ones--is our Rube Goldberg system effective, or should the money instead go to the government--there's little or no organized opposition.

However, the Department of Homeland Security Inspector General's report I described about political intervention in EB-5 has changed the equation, as Politico reported 4/15/15: Watchdog report spooks investor visa advocates.

The alternative headline could be "Watchdog report spooks investor visa profiteers."

You see, because Sen. Charles Grassley (R-IA) now heads the Senate Judiciary Committee, he could stall, kill, or put conditions on the reauthorization of the regional center component of the investor visa program. 

While immigrant investors can get green cards for themselves and their families by investing $500,000 directly in a job-creating enterprise, a huge majority instead choose to do so via regional centers, federally approved private (in nearly all cases) investment pools that can produce the required ten jobs per investor via an economist's report that also counts indirect jobs and is based on the entire pool of money in the project, not merely the immigrant investor funding.

It's a sweet deal.

"Political fodder"

Reported Politico:
"You’re hearing a lot about it and you’re going to hear a lot more, whether you like it or not," former USCIS [United States Citizenship and Immigration Services, which oversees EB-5] acting director Robert Divine said about the IG report Tuesday. "This thing is not going away. It is political fodder and it's unavoidable. It's too tempting for Republicans not to take advantage of the implications, the appearances in that document and suggest that a whole bunch of people on the other side are into giving each other political favors....The reality is there are Republicans who have gotten involved in EB-5 and sometimes those things didn't go all that well, and there'll be allegations back the other way.....And we'll be in the middle."
Divine addressed the issue as he spoke to hundreds of lawyers, investor recruiters, real estate developers and state and local government officials who play roles in the EB-5 program, which allows foreign investors to win green cards for themselves and their families by investing as little as $500,000 in a U.S. business or development project.
He's right that EB-5 is not a partisan issue. While the report focused on three projects connected to Democrats, numerous Republicans have sought political blessing if not favor for their EB-5 projects.

At the International Invest in the USA conference, Divine suggested that the reports of favoritism would close down access to the USCIS: "What really needs to happen is that everybody ought to get better access." Really?

As I commented on Politico, Divine is no mere ex-federal agency head. He's deeply embedded in the world of EB-5, representing them as a lawyer and as VP of the national trade group for regional centers.

Grassley's concerns

A spokesman for Grassley indicated concerns:
"Chairman Grassley is considering whether the EB-5 program should be extended," spokesman Taylor Foy said in a statement emailed to POLITICO, "If the program continues, it must have safeguards that ensure national security is not compromised and the job creating benefits of the program are realized. Any EB-5 reauthorization must include more stringent guidelines and reporting requirements that prevent abuse, address security concerns and provide a better understanding of how the program benefits our economy."
Politico, ever conscious of horse-race journalism, notes that, despite the IG's report and the fallout, "the EB-5 program has a strong base of support on Capitol Hill" and state and local officials. (The article noted two Republican and one Democratic representative who spoke at the conference.)

Exactly. Which is why journalism is needed to right the balance. The scandal is--as Michael Kinsley might put it--what's legal.

Potential changes

Politico notes that changes in the EB-5 program are expected, such as raising the minimum investment to $800,000--less than in other countries and surely not a deterrent to the fierce demand from China. 

A more interesting suggestion comes from former Pennsylvania Gov. Ed Rendell, a consultant to EB-5 firms, who denied he was seeking favors (as noted in the IG's report) and told the Washington Post:
"I think the EB-5 program should be changed where aliens are still able to get to the top of the green card list by investing in America, but those funds should be the ones to seed the infrastructure bank,” he said.
He would also like to see the program shifted from Homeland Security to the Commerce Department.
“It is an economic development program,” he said. “They [Homeland Security officials] have no understanding of economic development projects.”
Huge demand

Clearly, there's huge demand for EB-5 visas, which suggests they are priced way too low. Not only that, there are no age limits or language requirements.

CNN reported 4/15/15, U.S. runs out of investor visas again as Chinese flood program:
The United States has depleted its annual supply of EB-5 immigrant investor visas for the second year in a row after a huge wave of applications from rich Chinese.
The State Department has announced that starting in May, no more spots will be available to Chinese for the rest of the U.S. government's fiscal year, which ends Sept. 30.
Known as EB-5, the immigration program hands out green cards to foreigners who invest at least $500,000 and create 10 jobs in the U.S. The program, which caps the number of visas issued annually at 10,000, hit its annual limit for the first time last August.
This year, the program has reached the quota even earlier, reflecting the massive jump in demand among wealthy Chinese to move to the U.S., especially after Canada ended a similar program in 2014.
There are 13,000 pending applications, and the delay means that those with children approaching 21 face a risk when applications have delays. One main reason for leaving--along with going to a more stable society--is to get an American education for their children.

While in 2004, Chinese nationals accounted for 13% of EB-5 visas issued, last year the figure was 90%, according to CNN's analysis.

In March, the South China Morning Post reported, in More wealthy Chinese set to flood US investor visa scheme: think tank report, that the growth spurt was even more recent:
Mainland Chinese received 9,128 EB-5 investor immigrant visas last year, 46 per cent more than in 2013. Among the 10,692 investor visas the US issued last year, mainlanders received 85 per cent of them.
Attorney Mona Shah also pointed to the elimination of competitors' programs:
On January 15, 2015 the Hong Kong government announced its immigrant investor program was indefinitely suspended. After Canada terminated its federal immigrant investor program in early 2014, US eliminated another fierce competitor. Experts predict that about 40,000 potential investors from HK will transfer to the EB-5 Program. 
Raising the price

Slate's Jordan Weissman last year observed that because the investors mainly want a green card, "there’s a good chance they won’t be particularly careful with their investments." An alternative phrasing: there's a good chance they'll be vulnerable to deception. 

His suggestion:
So here’s a potential solution: Since so many foreigners—too many, in fact—are willing to pay good money for the right to live here, Washington should up the charge and use some of the extra profit to fund better oversight. Right now, applicants have to invest $500,000 in a high-unemployment area, or $1 million elsewhere, to qualify for the program. By the standards of today’s global rich, that’s nothing. Why not double it, or even triple it? Let supply-and-demand work its magic.
It's not just oversight that's needed. It's actually getting a public return.

More for the public

On 3/7/14, analyst David North, who works for an organization that would like less immigration--criticized as nativist but one of the few that seriously critiques EB-5--wrote The Economist Has a Good Idea that Could Net US $4 Billion-Plus a Year.

Modifying a UK proposal for raising the price of visas, he suggested the U.S. could charge eight times more. North's proposal: 
To modify this proposal for the American scene, where there is a ceiling of 10,000 visas (for both investors and family members, combined), I would suggest the following: The INA should be changed to allow no more than 1,000 immigrant investors (and families) thus producing about 3,000-3,500 admissions, a potential reduction of 6,500 or 7,000 a year, an important gain in itself. (At maximum, the current system brings $1.5 billion a year to the United States.)
The 1,000 immigrant visas would then be auctioned off with a reserve price of $4 million but with the winner paying a not-to-be-disclosed bonus above that....My suggestion is that the recipient should be the Social Security or Medicare trust funds, on the grounds that both need additional income and the politics of such a decision would be more attractive than simply putting the money in the Treasury.
Putting aside the issue of limiting the numbers, and recognizing the cost could vary, North's proposal makes sense because would eliminate all the middlemen--lawyers, regional center operators, migration agents--who make big money off the deal, and make it more likely the funds would serve the public interest.

A federal recommendation

As I wrote in January 2014, Grassley released an internal memo from Homeland Security Investigations (HSI), the investigative arm of U.S. Immigration and Customs Enforcement, an agency within the Department of Homeland Security, which also houses USCIS.

HSI proposed major policy changes, including doubling the minimum investment amount from $500,00 to $1,000,000, and recommended that the program be limited to only active investors involved in managing and directing a business--again, a huge change, given that the program allows investors to live anywhere in the country.

It also recommended that "induced jobs"--resulting from workers' spending in the local economy--be eliminated from the job creation calculations. And it recommended that  "the Regional Center Model be allowed to sunset, as HSI maintains there are no safeguards that can be put in place that will ensure the integrity of the RC model.”

HSI concluded, based on its own research, that it has has "reason to believe that the RCs [regional centers] are greatly exaggerating their indirect and induced job creation figures. By not having to provide evidence of jobs directly created, the RC inherently creates an opportunity for fraud, where the business goal can be initiating projects that give the appearance of creating job growth, with the sole intent to meet USCIS criteria rather than produce jobs."

The Brookings recommendation

A February 2014 research report from the centrist Brookings Institution noted the "complicated network of intermediaries with little regulatory oversight," the lack of coordination "between regional centers and local economic development agencies (EDAs), even though these entities often share similar goals and could develop mutually beneficial partnerships," and the lack of good data to evaluate EB-5.

I'd suggest that regional centers and local EDAs do not share similar goals in most cases.

Brooklyn suggested reforms to "help federal policymakers strengthen the utility of this tool and better accomplish the central goal of the program, which is to aid regional economic development, especially in distressed areas."

However, that goal is hardly firm, given the willingness to defer to gerrymandered Targeted Employment Areas, which give a break to projects--like Atlantic Yards--in relatively prosperous areas.

The reforms:
Designate an oversight role for the Department of Commerce to supervise the adjudication of regional centers, standardize data and methodology, and better monitor program impact.

Create incentives for partnerships between regional centers and EDAs, thus aligning similar goals in mutually beneficial arrangements. Regional centers and EDAs often possess complementary resources and can leverage more funding and reduce risk for investors.

Generate high-quality, multi-variable public data on regional centers to facilitate better evaluation of the program.
Brookings did not, however, suggest raising the entry fee.

Another centrist organization raises questions

The nonpartisan Migration Policy Institute issued a report 10/1/14, headlining its news release As New Countries Embrace Immigrant Investor Programs, Others Question Their Economic Benefits, MPI Report Finds:
The report, Selling Visas and Citizenship: Policy Questions from the Global Boom in Investor Immigration, examines the increasing mix of players and types of immigrant investor programs, their policy design, benefits and other considerations. During the past decade, the number of countries with immigrant investor programs has increased dramatically, and about half of all European Union member states now have dedicated routes. Demand has increased as well, with the U.S. EB-5 program, for example, nearing its annual cap of 10,000 visas this year for the first time, after two decades of relatively low uptake.
“Cash-for citizenship” policies have not been without controversy, however, as Malta experienced in 2013. Its plan to sell passports for 650,000 euros (later upped to 1.15 million euros in cash and investments) sparked an outcry in the country—as well as in Brussels, since a Malta passport grants immediate access to EU citizenship.
...The report explores the two primary models: (1) investment in private-sector assets, such as the business investment programs used in the United States, Singapore and the Netherlands, or the purchase of private property, as seen in Greece, Latvia, Portugal and Spain, and (2) providing funds to the government via non-refundable fees, low-interest loans or bonds, as occurs in the Caribbean as well as Australia, Malta and the United Kingdom.
The report argues that the clearest economic benefits come from programs that encourage cash payments to the government or national development funds, though it notes that these are the most controversial as they accentuate public concerns about whether it is appropriate to sell citizenship. Programs requiring private-sector investment—such as the U.S. EB-5 program—are promising in theory but raise some thorny compliance issues. In particular, the government may have little control over where and how the money is invested, as well as whether investments actually create the expected number of jobs.
(Emphasis added)

In other words, they're saying EB-5 is sketchy.

The MPI summarized some concerns:
Citing concerns over economic benefits, Canada earlier this year scrapped its federal program. And the United Kingdom’s Migration Advisory Committee has argued that the country is giving away residence rights in return for a government bond investment with no economic value. Australia, meanwhile, has adjusted its program to target investors who will make clearer economic contributions.

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