Originally published here by KYC360. Reposted with permission.
The EB-5 visa, created by Section 203(b)(5) of the United State's (U.S.) Immigration Act of 1990, was established to attract foreign capital and create U.S. jobs by providing a method of obtaining a Green Card for foreign nationals who invest either $1,000,000 generally or at least $500,000 in a "Targeted Employment Area." Under the program, immigrants are granted conditional residence, and after two years, permanent residence status, if they invest in a commercial enterprise that will benefit the U.S. economy. An example of this could be an investment that created or preserved at least 10 jobs for U.S. workers, excluding the investor and his/her immediate family. While there have been fewer applications under the program than anticipated, U.S. Citizenship and Immigration Services data indicates that changes made to the application process in 2011 have created a surge in applications.
Unwary investors and financial institutions providing banking services to EB-5 programs should be aware of the risks that this increase in applications may bring, notably highlighted by two emergency actions brought by the Securities and Exchange Commission (SEC): SEC v. Marco A. Ramirez, et al. (February 2013) and SEC v. A Chicago Convention Center, et al. (October 2013). Although no financial institutions were charged with wrongdoing, these cases emphasize the potential jeopardy facing banks if they support EB-5 programs without firstly conducting initial due diligence on the bona fides of promoters and investors and secondly continually monitoring the flow of funds into and out of the accounts. The SEC alleged that the promoters promised above average returns and the opportunity to obtain EB-5 visas. To participate, investors were required to send funds to designated U.S. financial institutions at the direction of the promoter. Instead of using the funds in a manner consistent with the disclosure documents and EB-5 rules, the SEC alleges that the promoters diverted the funds for personal use.
While these cases raise red flags for would-be foreign investors and suggest the importance of caution before making an investment into any purported EB-5 program, the cases also raises potential Know Your Customer/Due Diligence (KYC) concerns for financial institutions looking to provide banking services to EB-5 promoters. At a minimum, financial institutions should consider:
reviewing disclosure documents provided to investors;
understanding the interplay of any master and sub-accounts;
understanding risk profiles of sub-account holders;
understanding the proposed use of funds; and
having a process in place to confirm the identity of the ultimate recipient of funds.
Additionally, financial institutions involved in EB-5 programs should consider adding institutional protections by incorporating into relevant agreements special terms such as a right to:
audit the promoter's books and records,
independently confirm the use of proceeds, or
review the promoter's prospectus for warning signs of fraud.
Finally, the risk profile of these prospective customers and the EB-5 product itself should be addressed in the financial institution's risk assessment and transaction monitoring rules.
Although the SEC cases indicate a likelihood that EB-5 promoters misled, and the SEC elected not to file charges against, those institutions where the promoters banked, this should not be interpreted to mean the programs pose no risk for financial institutions. Indeed, the SEC is increasingly focused on the role of financial institutions in such matters. Andrew J. Ceresney, Co-Director of the SEC's enforcement division, indicated as much regarding the $15 million SEC settlement with TD Bank resulting from the Scott Rothstein Ponzi Scheme: "Financial institutions are key gatekeepers in the transactions and investments they facilitate and will be held to a high standard of accountability when their officers enable fraud."1
Beyond the risks that EB-5 promoters may present to financial institutions, care should also be taken in evaluating the bona fides of the investors themselves; one can easily image scenarios where an EB-5 investment vehicle could be used in the placement or layering stages of the money laundering process. While the application of KYC principles to financial institutions' direct clients (EB-5 promoters) appears to be a business imperative, financial institutions with inadequate processes to know their customers (foreign investors) could also fall foul of regulatory expectations.
Despite these risks, the EB-5 program has sound underpinnings and promoters and their clients may ultimately prove worthy customers of financial institutions with proper risk mitigation processes in place. However, given the potential for abuse outlined in Ramirez and Chicago Convention Center, and increasing focus from the SEC, prudent financial institutions should consider careful planning at the outset of the client relationship and ongoing diligence over its course.
1. SEC Charges TD Bank and Former Executive for Roles in Rothstein Ponzi Scheme in South Florida