The below was authored by Howard Schweitzer and Robert Freeman, the Managing Partner and Government Relations Principal, respectively, of Cozen O’Connor’s Public Strategies group.

The Failures and Future of the EB-5 Regional Center Program: Can it be Fixed?

Senate Committee on the Judiciary Hearing

February 2, 2016

The Senate Committee on the Judiciary (“Committee”) held a hearing on February 2nd regarding the future of the EB-5 Regional Center Program. The hearing was led by Senators Chuck Grassley (R-IA) and Patrick Leahy (D-VT); the two witnesses were Nicholas Colucci, the Chief of the Immigrant Investor Program Office (IPO) for U.S. Citizenship and Immigration Services (USCIS), and Stephen Cohen, the Associate Director of the Enforcement Division of the U.S. Securities and Exchange Commission (SEC).

In 1990, Congress created the EB-5 Immigrant Investor Program to stimulate the U.S. economy through job creation and capital investment by foreign investors. Two years later, it created the Regional Center pilot program, which allows investors to use regional centers to pool their investments. Through the EB-5 program, foreign investors can obtain permanent residency in the United States by investing capital, the amount depending on whether the investment is in a high-unemployment area called a Targeted Employment Area (TEA), and directly or indirectly creating a certain number of jobs.

In December 2013, the Department of Homeland Security (DHS) Office of Inspector General issued a report on the results of an investigation to determine whether the EB-5 regional center program is administered and managed effectively. The report’s major finding was that USCIS was in fact limited in its ability to prevent fraud or national security threats and could not adequately demonstrate that the program is improving the U.S. economy and creating jobs for U.S. citizens, as originally intended. Another report was issued in March 2015 in response to whistleblower allegations of improper influence and favoritism by then-USCIS Director Alejandro Mayorkas. The report concluded that, while not taking a position as to the legitimacy of Mr. Mayorkas’ actions, they did create a perception within the EB-5 program that certain individuals had special access and received special consideration.

Several bills in Congress last session sought to reform and reauthorize the EB-5 Program by, among other provisions, increasing the level of capital investment, revising the definition of TEAs, and adding reporting and compliance requirements. However, despite what many in Congress see as a clear need for reform to prevent fraud and corruption, the EB-5 program was reauthorized in its current form under the fiscal year 2016 omnibus appropriations bill.

Senator Grassley, in his opening statement for the hearing, listed a number of the program’s problems and vulnerabilities, many of which were reiterated by other committee members in their opening statements and questions, including concerns over the source of capital funds, the reliability of job creation data, the possibility of foreign government involvement in

regional centers or projects, and the problem of “gerrymandering” of regional centers to include low-employment areas. Senator Grassley and others also mentioned Senator Jeff Flake’s (R-AZ) EB-5 Integrity Act, which has widespread support within the Committee to reform the EB-5 program before it is up for reauthorization at the end of September 2016.

Among the Committee members, there was widespread agreement that the EB-5 visa program should be reformed rather than ended. One notable exception was Sen. Diane Feinstein (D-CA); she opposes the program entirely, saying that America shouldn’t sell a path to citizenship when so many are in line for visas and green cards. She cited numerous cases of fraud and questioned Mr. Colucci about the ability of his agency to verify the source of EB-5 funds, since the U.S. government often doesn’t have access to information from foreign financial systems. She gave an example of a case in which funds were tied to a brothel in China, and expressed concern about the possibility of funding sources having ties with the drug trade, human trafficking, or terrorism.

Among the rest of the senators who support reforming the program, there was unanimous agreement that issues of fraud, corruption, and national security need to be addressed in order for the EB-5 to be reauthorized. When asked what tools could help USCIS address fraud, Mr. Colucci responded that the program’s integrity could be improved if USCIS had the authority to terminate regional centers in cases of fraud or national security concerns. Currently, centers can only be terminated for failing to file paperwork or create the requisite number of jobs. Mr. Cohen agreed with a statement by Sen. Richard Blumenthal (D-CT) that among many government programs there are problems with fraud, but that the response should be to reform the programs and not to eliminate them entirely.

Another issue that came up repeatedly was how states designate TEAs and where the money ultimately goes. Often, states will connect wealthier, urban tracts to unrelated poorer ones in order to attract more investment at a lower capital level. Mr. Colucci acknowledged that USCIS defers to the states to create TEAs, but the agency is currently contemplating changes to regulations so that there is consistent guidance for states. This is one way that the program can be improved with USCIS’s existing authority and without legislative action.

A related issue came up about urban versus rural regional center funding. Senators from rural states such as Sen. Grassley and Sen. Leahy questioned the tendency for capital to go to projects in wealthy, urban areas rather than distressed areas that could benefit most from investment. Sen. Chuck Schumer (D-NY) argued that the urban poor also benefit from investments in cities, for example those who commute from the South Bronx to work in office buildings in Manhattan. He urged his fellow senators to work for balance and a compromise for rural versus urban investment, which was mostly met with agreement by the other senators. Mr. Colucci noted that coming up with new guidelines for designating TEAs to encourage investment in disadvantaged areas is a top priority for EB-5 regulators, and that they have a large amount of data at their disposal about issues such as commuting patterns.

Another question, raised by Sen. Jeff Sessions (R-AL), was whether USCIS had the authority to raise the investment level, in order to get more investment with the same number of visas. Mr. Colucci responded that this was within the agency’s power to do without Congressional action, and that the issue was being addressed in forthcoming regulations.

In his closing questions, Sen. Grassley made several additional points about what he saw as shortcomings to the program. One was the fact that USCIS doesn’t deny investment for TEAs that have clearly been “gerrymandered”; the agency ensures that proper data is used, but doesn’t question the construction of the tracts. He again raised concerns about the source of funds, since USCIS’s “source of funds review” only ensures that funds are legitimate, but doesn’t discriminate beyond that. Additionally, he asked about whether the available data and methodology were sufficient to determine that job creation requirements had been met, mentioning the problem that arises when all jobs associated with a project are counted even when EB-5 money only makes up a fraction of total investment. Mr. Colucci acknowledged this limitation and noted that regulations differentiate amongst jobs created in different industries in an attempt to address the issue. Lastly, Sen. Grassley asked if USCIS would commit to performing site visits if given sufficient resources. Mr. Colucci responded that the visits are already being planned, and he hopes routine visits will begin this year.

Overall, the hearing was less substantive than reiterating the support of the senators in the Committee to reform rather than end the EB-5 visa program. Everyone agreed that there are problems with fraud, corruption, and national security concerns. However, with the exception of Sen. Feinstein, they also agreed that the program delivered enough economic benefits that it was worth continuing. Little new information was presented at the hearing, since Mr. Colucci often declined to take a stance that could potentially contradict official policy positions. He also often didn’t have detailed data about the program, but offered to submit requested information following the hearing. Mr. Cohen, in his capacity at the SEC, spoke about the agency’s role in prosecuting fraud, but noted several times that their influence over the program itself is limited.