Both Anshoo Sethia (Chicago Convention Center) and Bruce Cole (Mamtek), leaders of the failed projects discussed in Part I of this article, were rogue players, peddling deeply flawed projects, operating on the periphery of the EB-5 industry (neither, for example, were members of IIUSA, the EB-5 industry trade organization). Yet each was able to attract investors from China; in the case of the Chicago Convention Center, 250 of them. This is because Chinese emigration agents have commoditized investors for sale to the highest bidder. This allows flawed or fraudulent projects to be sold to investors, weakening the field of projects and providing fertile ground for fraudulent operators.
In the past, emigration agencies have shown very little interest in due diligence review of regional centers or their projects. In December of 2012 we had discussions with several different emigration agencies in China to offer them our research to help them decide which regional centers are offering good projects and which are not. We offered to review any project for the emigration agency for $10,000 (a modest sum considering that some of these Bosses are raking in millions from the EB-5 program). No agency was willing to pay that amount. In fact, our overriding impression was that the emigration agencies contacted us solely to find out, at no charge, which regional center projects we are promoting.
Now, after the Chicago Convention Center scandal, the emigration agents are crying foul and claiming that they were victims, too, of these cunning regional center operators. This argument is belied by the fact that, as we demonstrated in Part I of this article, the weaknesses of recent failed projects were overwhelmingly obvious to anyone with the slightest interest in performing due diligence.
The emigration agents are certainly shrewd enough to understand that the regional centers offering the highest referral fees are likely to be the ones offering the weakest and most questionable projects. Still, they clamor toward them. Due diligence is seen as something that would limit the agency’s profit potential.
In the Chicago Convention Center case three of the largest Chinese emigration agencies – Yameiou, Worldway and The Shanghai International Service Trade (in partnership with JustInfo) at some point jumped on the opportunity to market Mr. Sethi’s project
While Worldway terminated the cooperation agreement with Mr. Sethi in October 2011 and according to Worldway “there has been no client from Worldway in ACCC project since late 2011.” The ability of even the largest and most highly-regarded immigration agents in China to engage with projects of questionable merit should raise serious concerns.
The Chinese investors in today’s market know that the potential for fraud exists. Whenever failed projects or fraudulent cases emerge, the Chinese media does a more than sufficient job of getting the story out. Why haven’t the investors replaced the scorned Chinese agents? There are many factors at play, one of which can be understood by examining the background of the investors involved. The majority of EB-5 investors are self-made businesspersons in their early 40s to early 50s. Only a minority earned their investment funds through professional jobs or high-level managerial positions. Among this group there is a strong culture of dealing face-to-face. Business deals are spelled out on paper, but the real cooperation happens at the dinner table. In a country where rule of law is still developing, value on face-to-face meetings and personal connections over reliance on contracts is ground in reason.
Regional Centers will rarely have the language ability or know-how, or interest in establishing the permanent presence in Chinese cities necessary for forming these relationships. Also, the Chinese investor will not often directly seek out a law firm. Chinese law firms, until recently, rarely engage in investment immigration, other than out of curiosity, and for the investor, the idea of communicating with a U.S. lawyer exclusively over the phone to mitigate risk seems counter-intuitive.
Personal research is also not an attractive option. For the Chinese investor, there is a dearth of publicly available information on concurrent projects and the research and language skills required to be successful can present an obstacle. It is not uncommon for investors to commit themselves to engaging in their research to come up with nothing more than a collection of Regional Center marketing pamphlets and an uninformative trip to the U.S. to visit a project.
These are the ideal circumstances for a middleman to emerge and intermediate the market. To mitigate risk, Chinese investors have traditionally gone to Chinese immigration agents. The agent provides a brick and mortar office where the client can walk-in and shake hands, as well as an avenue to form human relationships in the event there is a problem in the case that would require that relationship to be called upon. In reality, if a client becomes sold on a bad project, signing on with an agent is little more than escaping the tiger by jumping in the shark tank. Investors are becoming increasingly, if not from the start, aware that the agent model doesn’t work. Nonetheless, they continue to “prefer the devil they know to the devil they don’t”.
There are some encouraging signs, however. In the wake of the Chicago Convention Center scandal, we have been approached by several Chinese emigration agencies to see whether we can help them with due diligence. Time will tell whether it is just for show or they see that, for their own survival, they will need to perform some review of promoted EB-5 projects..