Another Perspective on a Major EB-5 Scandal, the One in Chicago

By David North on April 2, 2013

My immediate reaction in a blog about the EB-5 scandal in Chicago, involving investments of $145 million last month was off the mark.

Being all too accustomed to writing about fraudulent practices by promoters of this program, I was a bit blase about the news and emphasized the fact that the Securities and Exchange Commission had taken the lead in breaking this case, not USCIS. The court filings dealt with getting money under false pretenses, not with the multiple violations of the immigration law and regulations that also had occurred.

What I did not realize at the time was that this really was a very big deal, nationally and internationally.





This is the case because the endangered would-be immigrant investors were all Chinese and because there were more than 250 of them. Both the Chinese media and the American EB-5 community were alarmed by the situation. The scandal was especially significant to the program because something like 80 to 90 percent of the money in the EB-5 program comes from China.

Now, it looks like the Chicago story has put a major damper on the whole EB-5 program.

As background, the two now-indicted con artists, both named Sethi, said that they had firm contracts with big hotel chains, such as Hyatt (which they did not), and they sharply over-valued a piece of real estate they owned to be used in the alleged development, among other shady maneuvers. The Sethis collected $11 million in fees from the investors, which they wasted, as well as the $145 million in investments that were not quite in their hands when the SEC swooped down on them. Their scheme included their control of a USCIS-licensed regional center, as well as the investment vehicle itself, A Chicago Convention Center (ACCC).

This was the lead story in the newspaper read by Chinese expatriates in America, World Journal, when it happened, but more significant to me was the detailed analysis of a New York law firm that is deeply involved in other EB-5 deals, Mona Shah and Associates.

In an article titled "How the ACCC Scandal has Disturbed the EB-5 Market in China", the law firm noted that:


China Central Television (CCTV), the biggest network in China has highlighted the U.S. Securities and Exchange Commission prosecution against ACCC and EB-5 investment as "high risk investment products". On March 8, the Chinese Ministry of Foreign Affairs warned the Chinese investors of the "EB-5 Fraud". … It is very rare for the Chinese Ministry of Foreign Affairs to make such a bold comment … the unrelenting problems of the EB-5 program had started to cause a regression among Chinese investors against investing in the U.S. long before the ACCC scandal.



The law firm continued:


The negative publicity surrounding ACCC certainly has contributed to pushing potential investors into the arms of the European competition. In the last month alone, we are aware of at least 20 confirmed investors who had signed up for the U.S. EB-5 projects, withdraw[ing], preferring to invest in Portugal instead.



Portugal!


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That nation might be considered to be one of the weaker economies in Europe, one of the club of the Sick Men of Southern Europe, but it has long had an alien investor program that has some real attractions. Among them is the reward, residency (not, as in EB-5, a conditional resident permit, which needs to be converted to a green card after two years) and then on to citizenship after a residence of another five years.

I have not examined Portugal's program in years, but when I was working for the German Marshall Fund a few years ago I ran into the Portuguese program, which was then (and probably now) based on buying a residence in that country, using the house a bit, and then, soon, citizenship. It isn't that there is a sudden urge of rich Chinese to move to Lisbon, it is the attraction of obtaining another passport in case of trouble.

Better to have an actual house in Portugal and citizenship, the thinking must go, than to risk losing half a million U.S. dollars in a risky scheme for a conditional residence permit and, one hopes, a green card later. The bird-in-hand theory at work.

Then, again, there is tradition. After all, Portugal had a toehold in China for more than 500 years in Macau and the relations between the two countries were usually quite comfortable.