EB5 Investors Magazine Volume 3 Issue 3 | Page 98

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 96 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 EB5 INVESTORS MAGAZINE