Misappropriations Fraud
Detection and Deterrence
by Robert Kraft
It is hard to miss the numerous news articles and SEC actions
citing cautionary tales of EB-5 gone wrong. Allegations have
revolved around misappropriation of funds, centering on
diverting funds for other uses. The question that informed EB-5
practitioners are left with is who will be the antagonist in the
next account of fraud? Will your firm be caught in the collateral
damage zone, through association or client selections?
It is impossible to prevent misappropriations fraud, but anyone
can place themselves in a position to detect and deter.
I-829 Approval
PEOPLE
Fund Administration
The first step in due diligence is generally to know the parties
that will be involved in the fund management and disbursement.
Conduct background checks to verify the resumes and resources
of individuals within the organizational structure who will have
access to the capital and ask for evidence of their track record.
Once satisfied, confirm the results of the research with the third
parties listed in the documents.
Most regional centers and New Commercial Enterprise (NCE)
fund managers are members of industry trade associations like
Invest In the USA (IIUSA®). Place a call to these associations
to make sure the member is in good standing and has not been
issued any past or present best practices sanctions.
Past experience of a fund manager can be crucial. In a rapidly
growing and evolving industry, a proper appreciation of EB-5
from a historical perspective can provide clarity. A good fund
manager has already considered potential sources of fraud, and
has likely structured the investment to detect and deter such
actions. Some fund managers even have a designated anti-money
laundering compliance officer who develops internal policies,
procedures, and controls to safeguard investor funds.
Related Parties
While most of the fraud allegations appear to have occurred at
the NCE level it becomes easier to misappropriate funds when
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the Job-Creating Entity (JCE) and NCE are related parties.
This related party structure is very common and does not mean
that there is intent to defraud, but does mean that there is one
less party reviewing the flow of funds. If the JCE and NCE are
related parties, confirm that other parties, such as a bank or other
organization, are monitoring the transactions. While we have not
seen many cases of misappropriation at the JCE level, it is still
prudent to verify successful results, resumes and present commitments with independent third parties.
Within 90 days prior to the second anniversary of admission
to conditional permanent residence status, an immigrant
investor must file Form I-829 (Petition by Entrepreneur to
Remove Conditions) to remove conditions on conditional
permanent residence. An approved Form I-829 evidences
regulatory compliance and past proper use of funds in the scope
of the EB-5 requirements.
In Form I-829 the petitioner must evidence expenditure of the
EB-5 funds, tracing each transaction from escrow to expenditure
by the JCE. Objective evidence may include bank statements,
invoices, subcontractor receipts, payroll records, bank draws, title
company disbursements, final lien waivers, and wire receipts. If
the NCE Fund Manager misappropriated funds, the petition will
most likely be denied on the basis that the full amount capital
was not made available to the business most closely related to
job creation. In a model where the NCE is not the JCE it is vital
that none of the $500,000 or $1 million capital contribution is
expended at the NCE level.
PROJECT
Escrow
Most regional center investments use some form of escrow.
Investors and EB-5 practitioners are typically focused on the
terms for release, but an equally good question might be:
where do the funds go after release and who is monitoring the
movement of funds though the structure? One of the benefits
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