On Jun 14 2016 by Jessica A. DeNisi

Fraud Mitigation Through Enhanced Compliance

Recent allegations of fraud and misuse of funds involving well-known EB-5 projects have underscored the need for oversight, transparency and compliance procedures for EB-5 projects. EB-5 investors should surely be aware that, regardless of regional center designation from USCIS, no assurance of quality or safety is bestowed by the government on a given project or corresponding investment. Investors should, as result, learn to identify the circumstances that allow for fraud and seek to invest in projects with established compliance regimes.

Through analyzing information provided by the SEC regarding cases of alleged fraud or mismanagement, a few common elements emerge. In particular, fraudulent projects commonly have a lack of three important elements: independent parties, transparency, and third party oversight.

The typical EB-5 regional center-based investment involves at least three entities:  the regional center, the new commercial enterprise established to accept capital from EB-5 investors, and a job-creating enterprise, serving as the vehicle to develop the project in question. When these entities are operated and controlled by separate parties, the transactions occur at arm’s-length, providing a certain level of built-in oversight. However, when there is a special relationship between all the parties to a transaction – through common ownership or management or other affiliation – the inherent level of objectivity and care typically found in an arm’s-length business transaction may not present.

A lack of transparency is another common feature in EB-5 fraud cases. When the view into the flow and use of investor funds in a project is murky, project owners can easily claim monies have or will be used for legitimate purposes while the actual use of funds or progress on a project is quite different. If there is no means to examine the project’s progress or expenditure of funds, investors are forced to simply take the owner’s assertions, no matter how inaccurate, at face value.

Finally, EB-5 projects that lack third party oversight or controls allow unethical owners plenty of room to misuse funds. Funds may be transferred through a number of accounts over the course of development – often into and out of escrow and then eventually transferred to the project or developer. Each of these transfers is an opportunity for fraud or misuse of EB-5 funds. Without an independent third party monitoring the transfers and, later, the expenditures for veracity and suitability, investors may find that their EB-5 funds were not used for job creation and, as a result, they will not be successful in removing their conditions.

While foreign investors’ loss of their capital contributions and years of wasted time are certainly bleak outcomes on their own, these results are that much more tragic as they were largely preventable. If nothing else, investors and the EB-5 community at large should be aware that steps can be taken to inhibit the creation of environments that are conducive to fraud and, as a result, reduce the instances of fraud.

Instituting a compliance regime to increase transparency and oversight is certainly among the steps that can and should be taken. Klasko Compliance, for example, can help projects and their investors by providing additional oversight, administration and reporting. We assist projects in monitoring the flow of investor funds, helping to ensure the funds are properly deposited and transferred according to the project’s offering documents and business plan. In addition, we monitor project expenditures, not only assisting in properly coding costs to support the economic report submitted with investor I-526 petitions, but also facilitating a regime that ensures that EB-5 funds are spent on eligible and anticipated costs. Klasko Compliance continually reviews documents and data collected by owners and developers for sufficiency and accuracy. And, on a more fundamental level, we help regional centers and developers in administering their projects by advising on the documentation that should be maintained as well as on implementation of procedures for maintaining such documentation. Helping projects to maintain and organize their data will aid in the preparation of regular reports and updates that may be provided to investors to enhance transparency. These actions and the maintenance of documentation will also provide a strong base for review in the event of a USCIS site visit or audit.