Comment on ILW "EB-5 Enforcement Begins"


The below article posted by ILW on Feb 26th is both encouraging and disappointing.

Encouraging, because if true, it would mean the SEC is finally beginning to correct several practices that threaten the credibility of the EB-5 program, as many in the industry have known for a long time that some U.S. law firms have been accepting significant "finder's fees" from EB-5 Regional Centers, undisclosed to their clients, and doing little or no legal work in return on behalf of the clients they are supposed to be representing.

Disappointing, because being paid a finder fee by a Regional Center simply to introduce your client to an entity that is looking to solicit large amounts of money from that client, without disclosing to the client that you are being so paid for that introduction, is troubling, to say the least.

Over the past year, other long-time immigration practitioners and I, have made little secret of our concern about law firms that turn their unsuspecting clients toward Regional Centers, which in turn require those clients to pay them large management fees, much of which then ended up in those lawyers' own pockets as a "finder's fee."

When one of our clients approaches a Regional Center I have suggested he or she might want to consider, not only don't we take a finder's fee, I insist that the Regional Center reduce the management or admin fee they normally charge investors by whatever amount they now no longer have to pay to a finder. After all, why should my clients have to pay a significant management or admin fee in total, when a large portion of that fee is only being charged by the Regional Center to cover a finder fee that now doesn't have to be paid?

Further, I was recently apprised that it is "common knowledge" within the industry that some law firms that claim to be working on behalf of individual investors to prepare their I-526 and I-829 petitions are actually being paid directly by the Regional Centers from their management or admin fees. This begs the question as to whether such an obvious conflict of interest has been properly disclosed to the investor, and whether a truly informed and knowing waiver and consent of that conflict has been obtained from the foreign investor to permit such a joint representation to occur.

On another recent occasion, I was told that finders in certain foreign countries are compelling their investor clients to use a specific immigration law firm or individual immigration attorney with whom the foreign finder had an undisclosed financial or other relationship, and that the foreign finder then determines what fees those attorneys must be paid by their clients, a portion of which is later kicked-back by the law firm to those same foreign finders.

Last year, I had one foreign investor contact me, crying on the phone, saying she and her husband were being told by their foreign finder they had to pay a certain attorney to prepare their I-526 petition, but that they couldn't speak to or meet the attorney until the foreign finder permitted it. The investor wanted to know from me if that was proper under the U.S. rules.

I told her that she had every right to use whatever attorney she wanted, and to have full access to that lawyer at any time. She countered that the foreign finder had told them that they would be thrown out of the finder's program if they didn't use the lawyer the foreign finder required.

I don't know the truth of any of these representations, and I clearly hope they are all false. But if they are true, even anecdotally, then the industry as a whole should have serious worries that those practices tarnish everyone involved in EB-5, and they should be stopped immediately. The industry should institute "best practices" that end the undisclosed nature of such financial arrangements, and if that is not possible, end them entirely. We either police ourselves, or face the very real prospect, as outlined by ILW below, that years of enforcement actions are on the horizon, not only from the government, but as regards the lawyers involved in those questionable practices, likely from state bars as well.

If we, as EB-5 lawyers, want to keep faith with our clients, we should follow these simple rules of practice:

1) An attorney should only represent one party in an EB-5 transaction. But if the attorney chooses to do otherwise, then such a joint representation must include a transparent and knowing waiver of that conflict of interest, obtained from both parties to the proposed joint representation, in which the possible negative consequences of such a joint representation are fully explained to the foreign investor (and then, only after first advising the foreign investor that they should consult separate counsel, as regards the conflict of interest they are being asked to waive);

2) If it is representing the EB-5 petitioner personally, the law firm or individual lawyer should be retained only by its foreign investor client. But if it is being retained or otherwise paid by anyone else in but the foreign investor, it should disclose to its investor client any financial or other relationship it has with a Regional Center, a foreign finder, or any other third party involved in any investment their immigrant investor client is considering (and this should be done transparently, and in a manner and language that the client clearly understands);

3) Any compensation that a law firm receives from an EB-5 investor client relationship should only be for actual legal work performed on behalf of the client, and not simply for introducing the client to a Regional Center (a situation made even worse by the fact that we all know those undisclosed finder's fees weren't being paid to those law firms and individual lawyers unless and until their investor client signed up with that Regional Center; leaving the plausible conclusion by the client, had it known of such, that the reason its law firm encouraged the client to sign up with a particular Regional Center was for the law firm's own undisclosed benefit, instead of the client's); and,

4) Immigration law firms and individual immigration lawyers who are working on EB-5 matters for clients should possess the necessary expertise (or insure their client has easy access to and in fact retains additional counsel) to review and assess not only the immigration, but also the transactional documents, involved in the I-526 and I-829 petitions. Clients should never be left to the mercy of finders or Regional Centers for competent legal representation to explain to them the obligations, responsibilities and limitations of the transactional documents for deals they are investing their hard-earned money in.

Whatever the outcome of what ILW clearly sees as a series of enforcement actions over the next few years, the EB-5 industry should be prepared to advocate effectively for reauthorization of the EB-5 program at the end of 2015 by putting forth a stringent set of best practices it will be requiring of all of its participants, particularly the immigration lawyers.

But in addition to what the immigration lawyers need to do adhere to best practices, industry trade and advocacy groups need to ensure that this narrative focuses on ensuring a cleaner and more ethical EB-5 market on the part of Regional Centers and foreign finders as well. It is clear that payments from Regional Centers to third party finders of investors are permitted by law, both in the U.S. and elsewhere, under certain regulated or exempt provisions of the law. But the EB-5 industry should be one where regardless of whether a finder's fee being paid is legal:

(1) No third party collects an undisclosed finder fee; and,

(2) Wherever such finder fees are being paid, the Regional Centers should make pre-subscription and transparent disclosures to the foreign investors and their immigration and transactional lawyer that such finder fees are being paid out of the management or admin fees paid by those foreign investors to the Regional Center; including to whom the finder fees are being paid, and the purpose for which those fees are being paid (i.e., solely for the introduction, or additionally for the sourcing and documentation of the investment funds, or some other legitimate reason).

If the industry agrees to adhere to those two simple rules, in addition to fully complying with SEC and FINRA, as well as local country sale of securities rules, then a successful immigrant investor program that has brought billions of investment dollars into the U.S. can continue to contribute to our domestic economic growth. Such a committed approach will then allow foreign investors to apply to settle in our great country with complete peace of mind that the EB-5 program is the right option for them.

Please see the ILW EB-5 Enforcement posting from Feb. 26th at (also below):

Feb 26 - EB5 Enforcement Begins

Published on 02-26-2015 04:03 PM


Comment: EB5 Enforcement Begins
For the last several months, Immigration Daily has reported on increased enforcement of securities statutes by SEC in the EB-5 field. In our view, prior actions such as the mid-western fraud by Los Angeles-area attorneys, the Chicago convention center, etc., were not really feared enforcement actions, because they were aimed at outright fraud, and not at systemic practices in the EB-5 field which are contrary to proper securities practices in USA. At long last it appears that SEC is poised to take action against some of the bad systemic practices. This is multiple step, multiple year, process which will result in a near-total overhaul of the EB-5 field. We expect that this process will culminate in:

1. More than half of industry players today to exit the field;

2. The entrance of large US-based financial and real estate enterprises as the only central players in EB-5;

3. Marginalization of Chinese migration agents to the periphery of EB-5 ecosystem.

Accomplishment of the above will not happen in a few months but in a few years.

Two enforcement actions by SEC are likely within the next few weeks:

1. SEC will announce that approximately twenty immigration law firms have disgorged finder's fees to the tune of $1 million per law firm along with interest and penalties.

2. SEC will announce that securities sanctions have been applied to several Regional Centers engaged in a pattern and practice of paying finder's fees to immigration attorneys.

This is the beginning, not the end, of enforcement activity. We believe that USCIS enforcement of immigration consequences of securities non-compliance will follow. This field is about to become a gold mine for securities plaintiff's lawyers.

We believe that this industry-wide misbehavior is directly traceable not to human greed in the US, but to Chinese business practices, which, while perfectly valid in the Chinese cultural context, are corrosive and corrupt in the US business context. EB-5 is an American program and must follow American custom, not Chinese custom. Imminently anticipated SEC enforcement begins the process of returning EB-5 to its American roots.

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Copyright (c) William P. Cook. Reprinted with permission.

About The Author

William P. Cook William P. Cook chairs the Global Migration Law Group (GMLG) and is resident in its offices in Washington, D.C. He is the former General Counsel of the U.S. Immigration & Naturalization Service (INS), and has more than 25 years of experience in the practice of immigration law. Mr. Cook advises business immigration clients and high net worth individuals on their global migration needs, and assists them with all facets of their relocation requirements. He focuses on the EB-5 Investor Visa program and is an accomplished transactional lawyer as well as experienced in U.S. immigration legal matters. Mr. Cook recently retired from the global law firm DLA Piper LLP, where he lead the firm's India practice; he continues to serve as a Special Advisor to the firm on many issues, including business in India.

The opinions expressed in this article do not necessarily reflect the opinion of ILW.COM.