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EB-5: America’s institutions stress test the world’s favourite investor visa

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Debates in Congress over the EB-5 programme continued late into the night

The EB-5 visa programme for investors may have survived its American lawmakers, but changes could be inevitable as the country’s financial regulators get in on the game. The visa earned itself a temporary reprieve last December after months of debate. It has been renewed until 30 September 2016 when Congress, once again, will debate whether to raise the entry threshold and impose stricter scrutiny by Homeland Security.

Golden visa controversy

The EB-5 programme offers affluent business people residency in the U.S. (Green Card) in exchange for investment and job creation. It is currently the world's most popular golden visa programme and has delivered some 720 residence permits per month on average since it was launched in 1990. In 2014, Chinese investors snapped up 9,128 of these visas (figures include family members).

-> The Golden Visa Club: profile of the world's most affluent buyers

It ignited several months of hot debates in Congress (the governing body that created the EB-5), but lawmakers failed to find consensus over key changes to the rules: in particular, the question of restricting 60% of the visa quota to specific investment projects and the controversial clause pertaining to employment in “regional centres”. Currently, investors in the “regional centres” can declare indirect employment as part of their 10-job quota. Simply put, investors can claim jobs in surrounding businesses as their “own” for EB-5 criteria, as a consequence of growth linked to their investment, in lieu of direct employment.

Suggested amendments to the EB-5 programme:

– limited number of qualifying investment projects
– minimum threshold raised to $800,000
– stricter oversight on candidate applications and the activity of regional centres
– defined quota of visas allocated by project and location

Despite the decision in Congress, the EB-5 probation period got off to a bad start. In January 2016, U.S. financial regulators launched probes into the programme following concerns over fraud and due diligence pertaining to the real estate industry. The Securities and Exchange Commission (SEC) has upgraded it to a “exam priority” target while the Financial Industry Regulatory Authority (FINRA), which regulates broker-dealers, plans to “address concerns [over] suitability, disclosure and due diligence for private placements.”

Property developers in the line of fire

Property developers stand to earn billions from foreign investors and may have helped sway the decision in Congress. According to OpenSecrets.org, lobbying on the EB-5 question cost them about $730,000 over the past months alone. Estimates by The Real Deal also suggest that investors (mostly Chinese) spent over $3.7 billion in the programme in 2015.

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Affluent foreign nationals have been creating waves in the real estate industry over the last year or so. Sluggish growth, weak commodities’ trading and currency devaluations as well as growing geopolitical instability around the world provoked a flood of overseas investments into prime property in the United States in 2015. Chinese investors became the centre of attention as they outbid the competition, and eventually replaced the Canadians as America’s biggest investors.

Foreign citizens are eligible for the EB-5 visa regardless of their descent, sex, language proficiency and other details. They need to invest in a commercial enterprise that creates 10 or more full-time jobs for American residents (35 hours per week at least). The general minimum investment is $1 million, or $500,000 for “Targeted Employment Areas” (high unemployment or rural zones). If these conditions are met, EB-5 applicants earn a Green Card, valid for two years of lawful residency in the United States. It also allows them to bring family members.

Heightened media coverage and negative public opinion in the country’s most expensive markets also attracted the interest of authorities, particularly with regards to the origin of funds used to buy luxury and prime property. On January 16, the U.S. Treasury Department announced a project requiring title companies to disclose the names behind shell companies buying expensive property. This pilot programme will target “all cash” purchases over $3 million in New York City and $1 million in Miami Dade, following suspicions of “dirty money” and “corrupt foreign officials”.

Transparency to serve investors and authorities

Florida real estate developer, EB-5 Investment Manager LLC, run by Lin (a.k.a. Lily) Zhong, is at the forefront of these scandals assailing America’s investor visa programme. In November 2015, the SEC obtained a court order to freeze the company’s assets after Zhong, a New Zealand citizen, allegedly diverted $1 million from funds she rose within the scope of the EB-5 program. She is accused of having spent this money on personal luxury items including a boat, cars and a house from a total $8.5 million collected from Chinese investors.

These debates and probes signal a positive move towards stricter transparency thanks to the growing popularity of the EB-5, American real estate and the country’s economy. From just 700 visas issued in 2007, the programme reached its quota limit in both 2014 and 2015 according to The Atlantic, an American literary and political magazine.

Regulators, banks and the property industry are still working to make up the ground lost nearly a decade ago. New laws and amendments on opaque transactions are a natural consequence of the short-sighted policies and fraudulent decisions that first rocked the boat in 2007. Strides towards transparency will no doubt continue to be made as the United States and global market players wait for the current economic confusion to play out.

Ivan Chepizhko, Tranio

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