By R. William Cornelius | Attorney, Torres Law
This article was originally published in the 2023 Q1/2 edition of IIUSA’s Regional Center Business Journal.
As many are by now aware, the EB-5 Reform and Integrity Act of 2022 (the “RIA”) imposes stringent oversight and compliance obligations upon regional centers and requires those regional centers to have in place policies and procedures designed to shape EB-5 industry participant behavior.
Though the RIA includes numerous provisions that are intended to help ensure compliance and promote accountability, those integrity efforts may only be as effective as the RIA’s enforcement provisions can compel.
This article explores the sanctions and other penalties for which regional centers, new commercial enterprises (“NCEs”), and job-creating entities (“JCEs”) may become subject for violations of the RIA, which help give some “teeth” to the RIA’s integrity and compliance measures and allow USCIS to better self-regulate the EB-5 Program to some extent.
Sanctions for Inconsistent Activity and Annual Statements
Under the RIA, a regional center may be subject to sanctions if USCIS determines that the regional center is conducting itself in a manner inconsistent with its designation, which the RIA expressly states includes any willful, undisclosed and material deviations by NCEs from their filed business plans.
Though the RIA makes clear that material deviations from filed business plans would fall under the umbrella of “inconsistent activity,” it remains to be seen just how broadly USCIS could apply this concept. Without further guidance or a clear precedential record of past transgressions and the sanctions imposed with respect thereto (both by USCIS and the courts), regional centers would be well advised to err on the side of reasonable, good-faith caution in order to protect their designations and avoid USCIS sanctions.
Even if the application in this context remains broad and/or unclear, the RIA does explicitly contain a list of possible sanctions available to USCIS for a regional center engaging in activity inconsistent with its designation.
While there does not appear to be any bright line rule with respect to violations and associated penalties, the RIA does provide for a graduated set of sanctions based on the severity of the violations, which could include each of the following:[1]
- fines equal to not more than 10 percent of the total capital invested by alien investors in the regional center’s NCEs or JCEs directly involved in such violations;
- temporary suspension from participation in the EB-5 Program (which may be lifted if the individual or entity cures the alleged violation);
- permanent bar from participation in the EB-5 Program for one or more individuals or entities associated with the regional center, NCE, or JCE; and
- termination of a regional center’s designation.
Though suspension, disbarment and termination could alone deter bad conduct by industry participants, it is USCIS’ authority to levy fines of up to 10% of the total capital invested that arguably packs the hardest punch, particularly since such fines cannot be paid using investor capital (meaning the individuals and/or entities that engaged in such violation would be required to pay those fines from their own pockets, either at the entity or personal level, or both).
In addition to sanctions for inconsistent activity, USCIS also has authority to sanction regional centers for violations of their annual reporting requirements. While it appears that USCIS would have discretion over the scope of sanctions it may impose for violations related to annual statements, the RIA removes any discretionary element for such sanctions and does in fact require USCIS to sanction regional centers if a regional center either: (1) fails to file its annual statement; or (2) knowingly submits (or causes to be submitted) a statement, certification or any information submitted in connection with an annual statement that contains an untrue statement of material fact. Since regional center submissions contain much information provided by others (NCEs, JCEs, persons “involved” with the regional center, direct and third-party promoters and more), regional centers risk penalties derivatively based on inaccurate or incomplete (or worse) information they receive and rely upon from others.
Since annual statements provide a key oversight mechanism for USCIS, they also serve as a potential pitfall for regional centers, who must be careful to ensure compliance by their various NCEs and JCEs so as to not knowingly submit annual statements that could expose the regional center to potential sanctions.
Securities Laws Compliance
Another key oversight mechanism available to USCIS is the ability to sanction and/or suspend regional centers due to their failure to comply with applicable securities laws. Under the RIA, USCIS may suspend or terminate the designation of any regional center, or impose other sanctions against the regional center, if the regional center, or any parties associated with the regional center that the regional center knew or reasonably should have known:[2]
- are permanently or temporarily enjoined by order, judgment, or decree of any court of competent jurisdiction in connection with the offer, purchase, or sale of a security or the provision of investment advice;
- are subject to any final order of the Securities and Exchange Commission (“SEC”) or a state securities regulator that (a) bars such person from association with an entity regulated by the SEC or a state securities regulator or (b) constitutes a final order based on a finding of an intentional violation or a violation related to fraud or deceit in connection with the offer, purchase, or sale of, or investment advice relating to, a security; or
- submitted, or caused to be submitted, a certification as to securities laws compliance that contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.
This provision is significant not only because it allows USCIS to police securities violations (which would be separate from and in addition to securities enforcement mechanisms available to securities regulators such as the SEC), it also grants to USCIS the right to both suspend or permanently bar participation under the EB-5 Program and impose other sanctions, which could include the assessment of fees.
Redeployments, Audits and Payment of Fees
In contrast to the aforementioned sanctions, where USCIS seemingly possesses at least some discretion with respect to violations, there are certain instances where the RIA grants USCIS less discretion and instead requires USCIS to terminate the designation of a regional center in connection with certain violations.
For example, the RIA states that USCIS shall terminate the designation of a regional center if USCIS determines that an NCE has violated any of the RIA’s capital redeployment provisions (including, without limitation, where the NCE did not execute its business plan without material change or did not create a sufficient number of jobs to satisfy the job creation requirements for all investors in the NCE).[3]
Additionally, the RIA requires USCIS to terminate the designation of a regional center that fails to consent to an annual audit or deliberately attempts to impede any such audit.[4]
USCIS also has the ability to impose a reasonable penalty for the failure to pay fees to the Integrity Fund. Any penalties imposed by USCIS in connection with the failure to make such payments would themselves be deposited into the Integrity Fund, which USCIS may utilize to further compliance efforts with respect to immigration laws, to detect and investigate fraud or other crimes, and to conduct audits and site visits (including where at least a third (1/3) of which would be used for investigations based outside of the United States).[5]
Furthermore, USCIS is required to terminate the designation of any regional center that does not make the required payments within 90 days after the due date.[6]
Bad Actors and Fraudulent Activities
Under the RIA, USCIS may suspend or terminate the designation of any regional center, or the participation under the EB-5 Program of any NCE or JCE, if USCIS determines that such entity:[7]
- knowingly involved either (i) a person lacking bona fides under subsection (H) of the RIA[8] or (ii) a person that is not a U.S. national or lawful permanent resident, or a representative of a foreign government, by failing, within 14 days of acquiring such knowledge, to (A) take commercially reasonable efforts to discontinue the prohibited person’s involvement or (B) provide notice thereof to USCIS;
- failed to provide an attestation or information requested by USCIS in connection therewith in compliance with the RIA; or
- knowingly provided any false attestation or information in connection therewith as required under the RIA.
While the sanctions authorized with respect to these “bad actors” would be limited to the entities that have engaged in any of the above listed prohibited activities, USCIS has the discretion to suspend or terminate the designation of any regional center that knowingly permits the involvement of these so-called bad actors.
Since USCIS requires persons involved with the NCE and JCE to file an I-956(H) to confirm their bona fides, regional centers again risk penalties based on inaccurate or incomplete information they receive from others (including parties the regional does not control). This could be particularly problematic where USCIS could interpret that I-956(H) filings serve as an affirmation that no other persons are in fact involved other than those affirmatively disclosed in an I-956(H).
As a result, a regional center could be exposed to potential liability due to both material misstatements and/or omissions in current filings as well as liability for a third party’s failure to file an I-956(H) that would have otherwise been required by the RIA.
Based on this potential liability, regional centers must be careful to conduct appropriate due diligence and other factual inquiries in order to uncover all involved persons and their respective backgrounds to ensure that all appropriate filings are made with USCIS.
Importantly, if the regional center, NCE, or JCE fails to discontinue the prohibited person’s involvement with the regional center, NCE, or JCE, as applicable, within 30 days after receiving such notification, the entity will be deemed, for the purposes of the RIA, to have knowledge that the involvement of such person with the entity violates the RIA, thus subjecting such entity to potential suspension or termination under the RIA.
In addition to penalties for the inclusion of bad actors, the RIA requires USCIS to deny or revoke the approval of a petition, application or benefit if USCIS determines such petition, application, or benefit is contrary to the national interest of the United States or was predicated on or involved fraud, deceit, intentional material misrepresentation, or criminal misuse. Furthermore, if a regional center, NCE or JCE has its designation or participation in the EB-5 Program terminated for reasons relating to public safety or national security or for reasons relating to fraud, intentional material misrepresentation or criminal misuse, any person associated with such regional center, NCE, or JCE, including an alien investor, shall be permanently barred from future participation in the EB-5 Program if USCIS determines, by a preponderance of the evidence, that such person was a knowing participant in the conduct that led to the termination.
From a practical perspective, these penalties could serve as a death sentence for regional centers and industry operators, particularly since there is little information available to assess whether USCIS’ determination in such regard could later be overturned by the courts. In addition to the time, effort and expense associated with challenging USCIS decisions, a regional center, NCE or JCE may also sustain reputational damage or a loss of goodwill by virtue of an adverse determination by USCIS, even if it were able to overcome the associated stigma in the long run.
Conclusion
Ultimately, the RIA requires issuers to remain vigilant in their policies and procedures to avoid exposing themselves to penalties for some of the common pitfalls discussed in this article. Even without further clarification on how USCIS may impose penalties and sanctions (which will likely be very slow in coming, and very costly if resulting from litigating against the agency), regional centers, NCEs, and JCEs should seek the assistance of knowledgeable and experienced financial and legal professionals to ensure they are well advised and take meaningful steps to comply with applicable provisions of the RIA so they can avoid the consequences described herein.
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[1] See 8 U.S.C. §1153(b)(5)(G)(iii).
[2] I.d. at (I)(vi).
[3] I.d. at (F)(v)(II).
[4] I.d. at (E)(vii)(III).
[5] I.d. at (J)(iv).
[6] I.d. at (J)(iv)(II).
[7] I.d. at (H)(iv).
[8] Under the RIA, persons lacking bona fides include persons that: (i) were found to have committed a criminal or civil offense involving fraud or deceit within the previous 10 years, a civil offense involving fraud or deceit that resulted in liability in excess of $1,000,000, or a crime for which the person was convicted and sentenced to a term of imprisonment of more than one year; (ii) are subject to a final order of a state securities commission (or similar agency or officer performing similar functions), a state authority that supervises or examines banks, savings associations or credit unions, a state insurance commission (or similar agency or officer performing similar functions), an appropriate Federal banking agency, the Commodity Futures Trading Commission, the Securities and Exchange Commission, a financial self-regulatory organization recognized by the Securities and Exchange Commission, or the National Credit Union Administration, which is based on a violation of any law or regulation that either (a) prohibits fraudulent, manipulative or deceptive conduct, or (b) bars the person from association with any of the foregoing, appearing before any of the foregoing, engaging in the business of securities, insurance or banking, or engaging in savings association or credit union activities; (iii) is engaged in, has ever been engaged in, or seeks to engage in, certain prohibited activities, including amongst others, (a) illicit trafficking in control substances, (b) espionage, sabotage or theft of intellectual property, (c) any activity related to money laundering, (d) terrorism, or (e) human trafficking or human rights offenses; or (iv) is, or during the preceding 10 years has been, included on the Department of Justice’s List of Currently Disciplined Practitioners, or during the preceding 10 years, has received a reprimand or has otherwise been publicly disciplined for conduct related to fraud or deceit by a state bar association of which the person is or was a member.
