Monday, April 20, 2015

The EB-5 scandals bubble up, from Nightline to Inspector General; fed official claimed "nothing is more important" than job creation (sure)

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.”

ABC's Brian Ross and Matthew Mosk have been breaking news about EB-5, the immigrant investor program, and has found numerous examples of sketchy operations, raising questions about crime and national national security.

And their investigation has since been backed up by a blistering report from the Inspector General (IG) of the Department of Homeland Security (DHS), which houses the United States Citizenship and Immigration Services (USCIS), the agency that oversees EB-5, in which immigrant investors can get green cards for themselves and their families by investing $500,000 in a purportedly job-creating investment.

The IG concluded--after interviewing numerous whistleblowers inside USCIS--that Alejandro Mayorkas, then-Director of USCIS and current Deputy Secretary of the DHS--intervened in three cases involving politically prominent promoters of EB-5 investments and steered a favorable outcome.

What was missing

Neither the ABC reporting nor the IG's report, however, challenge the routine evasion of the law's intent, which (in part) is to stimulate jobs in areas of high unemployment (or rural areas).

That means developers can get state agencies to gerrymander maps--like the Bed-Stuy Boomerang I've described regarding the Atlantic Yards EB-5 project--to ensure that an EB-5 investment qualifies for a Targeted Employment Area (TEA).

And it means that the economists hired to calculate job creation can base that figure not merely on the sum invested by immigrant investors but on the whole pot of money in the project, which can include taxpayer subsidies.

That might make sense if the contribution by immigrant investors truly serves as seed money. But in cases, as in the Atlantic Yards example, it simply substitutes for a higher-interest loan.


The investigation

A package ABC produced in February, The $500,000 Green Card, suggested that the EB-5 program was "one being aggressively marketed to wealthy foreigners, and one that whistleblowers say is being exploited by criminals, spies, and possibly even terrorists."

Notably, ABC found numerous governmental sources to express dismay:
The federal official who oversaw the growth of the program, Deputy Homeland Security Secretary Alejandro Mayorkas, told lawmakers last year that any weaknesses in the program have been tightened. But whistleblowers told ABC News that little has changed since concerns were raised about visa applicants being approved despite being suspected of fraud, money laundering, and in one instance, possible involvement in selling child pornography.

Mayorkas declined requests for an interview for this report, and when ABC News caught up with him, he ignored the cameras and questions altogether.
....Documents obtained by ABC News show that U.S officials had undertaken an investigation of a southern California shipping company, American Logistics International, and its Iranian-born owner, Alireza Mahdavi, for possible illegal shipments to Iran. Even as the investigation was underway, the company was re-certified by U.S. immigration officials as an EB-5 regional center, which entitles it to recruit foreign investors with the promise of a visa, and potentially, a Green Card. The company has raised millions of dollars from foreign investors, many from Iran.
Senator Charles Grassley (R-IA), the chairman of the Senate Judiciary Committee, expressed concern about the national security aspects of the program. ABC reviewed a report that indicated that more than 30 EB-5 "projects had at some point become the subject of a criminal investigation."

Advocates, however, point to a few bad apples. ABC reported on the positive side:
Investment from EB-5 applicants has helped finance the construction of a New York sports arena and a Vermont ski resort and water park, help provide financing for a Hollywood movie studio, and even finance the construction of the FBI office building in San Diego.
Actually, that part about the arena isn't true. (The video here actually showed the arena.) So ABC offered backhanded endorsement of the EB-5 investment in Atlantic Yards, which is hugely dubious.

(Elements of this story were broken by the Washington Times in November 2013, as far as I can tell, and was based at least in part by revelations by Sen. Charles Grassley (R-IA), the ranking Republican on the Judiciary Committee.)

Bi-partisan support

A 2/3/15 ABC piece, Whistleblowers: US Gave Visas to Suspected Forgers, Fraudsters, Criminals, reported:
Five different Homeland Security whistleblowers spoke with ABC News about a range of cases where visas were approved despite numerous red flags. They said objections were often ignored because the immigration program is so popular within the Obama Administration and with members of Congress from both parties.
It's got bipartisan support because elected officials like to offer local developers/entrepreneurs cheap capital at no seeming public costs.

But why is it so popular within the Obama Administration, or within any presidential administration? They represent the national interest.

If they acted wisely, they'd recognize that a different program--say, one in which the investment goes to the government--would serve the public interest rather than one that favors entrepreneurs who are willing to push the envelope or lie in marketing the project.

Selling green cards?

It's interesting that ABC could find someone to offer the bedrock criticism of the program, reporting:
Some immigration groups have criticized the program as “nothing more than selling Green Cards.” Brent Wilkes, the executive director of the League of United Latin American Citizens, one of the largest Hispanic civil rights groups in the U.S. said it “short circuits” the immigration process, allowing foreign nationals “with enough cash” to leap ahead of legitimate applicants who lack the means.
Of course it's selling green cards.

But because other countries do it, it's likely the United States won't stop. The question then should be how and whether the public getts any value. As Dartmouth's John Vogel put it:
One of the oddities about the EB-5 program is that the U.S. government is giving out the green cards, but the entrepreneur who puts together the investment gets the money. This scheme seems inefficient and open to corruption. If our government really believes that it is a good idea to sell green cards, maybe we should drop the pretense that this is a job creation program. It might be more efficient to have the money go directly to the U.S. Treasury and reduce the deficit by billions of dollars a year. In fact, the U.S. government could auction off these green cards and perhaps raise even more money.
The industry spin

ABC quoted Peter Joseph of the trade group Association to Invest in the USA:
Joseph noted the program is now so popular that the 10,000 visas allotted in 2014 for EB-5 investors were claimed in a matter of months, and he is lobbying for its expansion. The money has paid for popular projects -- a Brooklyn basketball arena, a California winery, a Vermont ski lodge, even a Hollywood movie studio – that have supported an estimated 42,000 jobs.

“It's a win for the investor, who's seeking to get an immigration benefit, along with a return on their investment, along with the American worker who's able to get to work, thanks to the capital investment coming through the program,” Joseph said.
That's tired rhetoric. How about: it's a win for the developer, especially since those jobs figures are so fuzzy.

Other controversies

ABC pointed to several EB-5 controversies, involving then-Virginia gubernatorial candidate Terry McAuliffe, former South Dakota Governor (and then Senate candidate) Mike Rounds, and Nevada Sen. Harry Reid's intervention in a Las Vegas hotel project, prompting the USCIS to reverse its position.

In another piece, Feds Investigating Iran Ties to Firm Involved in US Visa Program, Ross and Mosk reported on American Logistics, a Los Angeles shipping firm, and its Iranian-born owner, stating that a confidential Department of Homeland Security document warned that the EB-5 program might be used by Iran “to infiltrate the United States.”

In another report, The $500,000 Green Card: Obama, Clinton Kin Courted By Foreign Middlemen, ABC reported how big names were recruited to promote EB-5:
Hillary Clinton’s brother is involved. So are powerful California politician Willie Brown and Chicago political boss Richard M. Daley. One firm that helps wealthy Chinese gain access to the little-known immigration program even tried to recruit President Obama’s half-brother, Mark Obama-Ndesandjo.
In New York, of course, some elected officials or former officials have been involved, including former Gov. David Paterson and Sen. John Sampson.

The industry response

Responding in the Huffington Post, Ali Jahangiri, CEO and Publisher, EB5 Investors Magazine, wrote 2/13/15, 'Nightline' Misunderstands Fundamental EB-5 Program Functions and Safety:
Most pointedly, the article misunderstands how the EB-5 program works. The article alleges that immigrant investors "can jump to the front of the line and obtain legal status to live in the U.S. for two years." This implies that immigrant investors take visas and a place in "line" from other immigrants who do not have the financial means to utilize the EB-5 program. This is simply inaccurate. Each visa category is distinct and separate from other categories, so the assertion that EB-5 applicants "leap ahead of legitimate applicants who lack the means," is simply not true. 
He's right, but also not quite the full story. EB-5 applicants leap ahead simply because they're wealthy, and can show their money is legit and have found an investment that purports to create ten jobs. That doesn't ring right.

More importantly, many EB-5 applicants leap ahead of other potential immigrant investors who might actually invest in creating jobs.

As to whether "the program has become a magnet for those seeking to sidestep the scrutiny of the traditional immigration process," Jahangiri is right that there are checks and protocols. But the Nightline report aired significant in-house dismay about management.

Janangiri blamed it on a few bad apples:
As with any governing body, fraud typically stems from individuals, not the system, and the EB-5 program is no more systematically prone to exploitation than any other visa program. The program is not perfect, but the overwhelming evidence shows that right now, it is working.
And he suggested legislation would improve it:
That being said, there are several pieces of legislation in the pipeline that would drastically improve it. The most notable bill is the American Entrepreneurship and Investment Act of 2015, co-authored by Congressmen Jared Polis (D-CO 2nd District) and Mark Amodei (R-NV 2nd District). The bi-partisan bill would make the regional center program permanent, and also set more rigorous standards for regional center operators and administrators. Legislation like Congressmen Polis' and Amodei's bill makes the program more secure and efficient, and would drive more money into the American economy and create more jobs for American workers.
Other than setting some new standards regarding those involved in regional centers--a rather modest lift--the bill is an industry wish list. It endorses gerrymandering and does nothing about the job-counting issue.

The report on Mayorkas

ABC, naturally, had a field day in late March when the IG's report was issued, in Top Homeland Official Alejandro Mayorkas Accused of Political Favoritism.  (Here's coverage in CNN, the Wall Street Journal, and the New York Times.)

The special treatment involved a Las Vegas casino project pushed by Sen. Harry Reid (D-NV), an electric car company run by Terry McAuliffe, a longtime Democratic fundraiser who's now governor of Virginia (and also involving Hillary Clinton's brother Tony Rodham), and a Sony film studio in Los Angeles promoted by former Pennsylvania Gov. Ed Rendell, another Democrat.

ABC noted that, when facing confirmation, Mayorkas previously told the Senate, "I have never, ever in my career exercised undue influence to [change] the outcome of a case."

That was contradicted by the IG's report, which found:
  • USCIS personnel, including Mr. Mayorkas, recognized the risks to the EB-5 program if benefits were granted without transparency and were not adjudicated according to statute, regulations, and existing USCIS policy governing EB-5 matters. USCIS therefore took pains to ensure all communications with stakeholders were properly documented and to ensure the process for deciding on petitions and applications closely followed statute, regulations, and established policy. Indeed, USCIS was obligated by law to follow the procedures set forth in the regulations. We found a number of instances in which Mr. Mayorkas declined to become involved in certain matters, stating that he did not think it would be appropriate for the Director to do so.
  • In three matters pending before USCIS, however, Mr. Mayorkas communicated with stakeholders on substantive issues, outside of the normal adjudicatory process, and intervened with the career USCIS staff in ways that benefited the stakeholders. In each of these three instances, but for Mr. Mayorkas’ intervention, the matter would have been decided differently.
  • We were unable to determine Mr. Mayorkas’ motives for his actions. In each instance he recollected, Mr. Mayorkas asserted that he intervened to improve the EB-5 process or to prevent error. As a result, he claimed that he took a hands-on approach when a case warranted his personal involvement. Mr. Mayorkas told us that his sole motivation for such involvement was to strengthen the integrity of the program; he said he had no interest in whether a particular application or petition was approved.
  • Regardless of Mr. Mayorkas’ motives, his intervention in these matters created significant resentment in USCIS. This resentment was not isolated to career staff adjudicating within the EB-5 program, but extended to senior managers and attorneys responsible for the broader USCIS mission and programs.
  • The juxtaposition of Mr. Mayorkas’ communication with external stakeholders on specific matters outside the normal procedures, coupled with favorable action that deviated from the regulatory scheme designed to ensure fairness and evenhandedness in adjudicating benefits, created an appearance of favoritism and special access.
"That so many individuals were willing to step forward and tell us what happened is evidence of deep resentment about Mr. Mayorkas’ actions related to the EB-5 program," the IG reported.

The complaints, the IG reported, went beyond Mayorkas's efforts to change the culture of USCIS, in which "he exhorted individuals to 'get to yes.'"

No new jobs

The IG's report notes that Mayorkas created a handpicked “deference review board” (DRB) to review Time Warner movie projects and reversed proposed denials of the EB-5 applications.

The report notes USCIS staff told the DRB in a teleconference that they disagreed with the deference decision. According to one adjudicator:
I explained to the review board that we did not feel that the project was creating new jobs, and that [LA Films IV] [was] just using the money to replace other funds available to Time Warner, including cash reserves and their $5 billion revolving credit facility with Citibank. So the EB-5 money was not really resulting in any new projects that would not have otherwise been produced in the absence of EB-5 capital.
That dubious use of lower-cost immigrant investor funds to replace existing funds is exactly what happened with Atlantic Yards, and when it replaces bridge financing, it's considered A-OK.

Regarding the electric car case, a participating summarized Mayorkas’ remarks:
The Director stated that he believes that nothing is more important to the United States at this time than the creation of jobs for U.S. workers. This will inform how he views every classification. So, if the regional center claims that it will create jobs for U.S. workers, he will read the statute and the [regulations] as generously as possible. For other classifications, such as H-1 B, where there are statutory provisions designed to ensure that U.S. workers are protected, he will read the statute and [regulations] more narrowly. The director noted several times that these cases are affiliated with "people of influence" and "people with money" and that he has several more of these on his radar. It seemed clear to me that since "people of influence" have raised other cases to him (or a higher authority at DHS or the White House), the AAO will be requested to defend our draft I-924 and EB-5 decisions to the Director in the future, prior to issuance. 
(Italics added by IG, bold added by AYR)

If nothing is more important than creating jobs, then maybe they should check to ensure that jobs are actually being created. (Mayorkas told the IG he did not remember making the statement about people with influence or money, and said it sounded “absurd.”)

The DHS response

Astonishingly, DHS Secretary Jeh C. Johnson issued a statement calling Mayorkas "an exceptionally conscientious, honest and patriotic public official" who "can at times be very hands-on in resolving issues" but "works hard to do the right thing."

Johnson acknowledged that involvement in "individual matters that happen to reach our desk [can] risk the appearance of preferential treatment,"  so he is now confident that Mayorkas "understands this." OK.

Indeed, Inspector General John Roth told Congress that, while Mayorkas violated his own code of behavior, as stated in a memo he'd prepared, there was no criminal activity, according to the Times.

The continued pressure

Johnson, in his statement, also noted that DHS officials "are constantly contacted by outsiders – including Members of Congress of both parties –on behalf of those with an interest in the outcome of a particular EB-5 case," which shows how those Congressional reps are influenced by the money back home.

Johnson said he was developing "a new protocol to ensure that the EB-5 program is free from the reality or perception of improper outside influence," and requests changes from Congress:
In the past, this Department has sought unsuccessfully from Congress a number of statutory enhancements to the program’s integrity, including added legal discretion to deny or revoke cases when necessary, authority to exclude people with criminal backgrounds from participating in EB-5 regional centers, and authority to require regional centers to certify compliance with our securities laws. The EB-5 regional center program is up for statutory renewal again this year. I urge Congress to work with the Department to strengthen the security and integrity of the program.
The latest scandal

The scandals just keep coming. On 4/13/15, ABC reported FBI Investigating Former White House Military Aide:
The FBI is investigating a former top military aide to three U.S. presidents and his firm over allegations it bilked foreign investors out of millions of dollars by touting his White House ties and making promises of quick U.S. Green Cards to raise funds for a giant hotel complex, ABC News has learned. Five years after an elaborate ground-breaking ceremony in New Orleans, there is only a vacant lot and investors say almost $16 million has disappeared.
The Noble Outreach project, let by retired Air Force Col. Timothy Milbrath, is among more than 30 EB-5 projects under some form of criminal investigation. In this case, there's a civil lawsuit filed against Milbrath's company by investors who claim the firm took their money but they didn't get green cards.

Given that EB-5 marketers like to play up ties to governmental bodies or public figures, it's not surprising that, according to ABC, Noble Outreach's promotional materials "flaunt[ed] Col. Milbrath’s White House ties and feature photos of him serving Presidents Ronald Reagan, George H.W. Bush and Bill Clinton as chief of staff to the White House Military Office."


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