The PRC's Perversion of an American Immigration Program

By Shae Armstrong on June 14, 2016

Guest post by Dallas EB-5 attorney Shae Armstrong

Why does the People's Republic of China (PRC) quietly warrant the exporting of over $3 billion a year into U.S. markets while taking with it China's most wealthy and competent citizens who seek to immigrate to the United States?

The 1992 EB-5 Regional Center Program, a subset of the original 1990 EB-5 Immigrant Investment regulations, is set to expire on September 30, 2016. The EB-5 program allows U.S. companies to raise capital from wealthy foreigners seeking expedited permanent residency status (a "green card") in the United States. Rich Chinese immigrant investors devour over 90 percent of this visa category, consisting of 10,000 visas per year. A Wall Street Journal article titled "China Cracks Down on Money Leaking Out of Its Borders" reported that despite Beijing banning its citizens from transferring more than $50,000 abroad a year, the Chinese government is frustrated that wealthy Chinese still manage to creatively move their money to foreign countries.

However, inexplicably contrary to China's stiff monetary exporting policy, the PRC has yet to stop the American EB-5 industry from recruiting investors on its own soil. Each weekend, from Beijing to Shanghai, well-off Chinese pack hotel meeting rooms and convention halls eager to watch the dog and pony shows offered by American real estate developers and their Chinese broker cohorts. These wealthy foreigners understand that a $500k investment in one of these projects will allow them to purchase their families U.S. green cards through the EB-5 program.

Even more perplexing is that the PRC closely regulates the EB-5 program through regulations on EB-5 investment brokers in China. These brokers (also known as "agents" or "migration agents") are the gatekeepers of the entire EB-5 industry. Although Chinese investors may communicate with U.S. regional centers directly, the vast majority of these individuals depend on middle-man brokers due to cultural and linguistic challenges. In many instances, the EB-5 brokerage firms steer investors to American projects. Hence, these brokers in China may influence investment outcomes in the United States for projects seeking to obtain this form of cheap capital. The PRC's Exit Entry Bureau regulates these Chinese migration agent companies. Agents are required to place a substantial bond of approximately $300,000 with the Chinese government.

The present placement commission paid to agents in China by U.S. regional centers and immigrant investors for raising EB-5 private equity is astounding when considering that the actual investor usually does not earn more than a 1 percent return per year. The largest agents in China earn up to $60k up front for each investor placed and, in most instances, an additional carried interest of between 2 to 4 percent is earned by the agents on the equity placed for up to five years. Thus, it is not uncommon for agents to earn 30 percent or more commissions over five years on each $500k placed in a U.S. EB-5 project. On many occasions, these agents also may be offered equity positions in the deals as well. Keep in mind that traditional private equity placement rates in the United States hover around 3 percent.

The reality is that the PRC allows U.S. companies to solicit EB-5 investments in China because China state-run and state-regulated companies are essentially the largest beneficiaries of this U.S. immigration program. The PRC uses the EB-5 program to further its geopolitical and economic objectives in America.

New York City's Atlantic Yards is one of the largest and most notable EB-5 financed projects to date. As the Wall Street Journal reported in 2013:

State-owned property developer Greenland Holdings Group of China agreed to buy a majority stake in a 15-tower apartment project in Brooklyn, N.Y., that would rank as the largest commercial-real-estate development in the U.S. ever to get major backing directly from a Chinese company. ... Terms of the tentative deal call for Greenland to buy a 70% stake from Forest City Ratner Cos.

Further, Norman Oder wrote at the PBS NewsHour blog:

[T]he two most recent rounds of EB-5 funding for Atlantic Yards, since renamed Pacific Park Brooklyn, were launched on behalf not just of initial developer Forest City Ratner, but its new 70 percent partner in a joint venture, the Greenland Group. Greenland is owned and controlled by the government of Shanghai. The resulting scenario sounds like something out of the satirical publication The Onion, "a Chinese government profits by marketing U.S. green cards to Chinese immigrant investors."

This trend of China ownership of U.S. EB-5 projects continues. Recently, Wailian Overseas Consulting Group, one the largest EB-5 placement agents in China, thought to be placing over $50 million of EB-5 per month, announced the development of its Renzo Piano-designed residential buildings. The project is financed by a $320 million construction loan from the Bank of China and a $135 million equity investment from a U.S. subsidiary of a Chinese investment firm.

Tom DeWeese with the American Policy Center wrote in 2014 that "China is fast becoming the largest land owner in America," and he further warns of PRC-directed commercial activities in the United States, alleging that "43% of all corporate profits in China are produced by companies that the Chinese government controls outright."

The motives behind the PRC's involvement in the EB-5 program may be uncovered when we look at similar Chinese tactics from recent history. In the 1990s, China's involvement with the Panama Canal caused serious concern for the American private and public sectors. During a Senate Armed Services Committee hearing in 1999, Marine Corps General Charles E. Wilhelm testified that China does not hesitate to use its commercial, state-run businesses to support its political and military objectives.

Moreover, a 1998 declassified U.S. Army intelligence report regarding China's involvement with the Panama Canal indicated that,

Due to a decline in raw materials from within China, freight rates are dropping due to excess tonnage in the market, and the current Asian financial crisis, corporate revenues should decline. Consequently, China is looking to expand into new markets.

The analyst in this report commented that Chinese state-sponsored business interest in the canal was not only strategic, but also a means for outside financial opportunities for the Chinese government.

Journalist Bill Gertz quote the Army intelligence report in his book The China Threat. In the book he also shares the story of Constantine Menges, a senior National Security Council specialist during the Reagan administration. Mr. Menges labeled the new Chinese communist strategy using commercial activities and alliances to further geopolitical goals as "checkbook subversion."

Opponents to the view reflected herein may argue that (1) the PRC may be unable to control capital outflows; or (2) that the PRC may turn a blind eye to this practice as these immigrant investors may be a domestic political and social risk to the party. Nonetheless, the PRC's regulation of the EB-5 program demonstrates its willing participation to facilitate EB-5 investment in the United States. Further, the PRC has a long and successful history of maintaining a zero-tolerance approach to potential domestic threats to its controlling party, and the well-documented priority of the PRC continues to be future economic growth.

Although the legislative future of the EB-5 program is unknown, the PRC's use of this American immigration program to benefit China has been masterful. The PRC understands that this program allows for the PRC and its state-run companies to develop and acquire the most expensive pieces of U.S. real estate at a heavy discount while profiting China-regulated EB-5 brokerage companies.