EB-5: A Study in “Moral Hazard”

If you took an economics course in college, you might vaguely remember the term “moral hazard”.  I do, and I remember it precisely because, in contrast to the rest of what the brilliant University of Florida Prof. David Denslow tried to hammer into my dense 18 year old brain, it was a foreign concept in a course focused on metrics and theory.  According to Wikipedia:

“In economics, a “moral hazard” occurs when one person takes more risks because someone else bears the cost of those risks. A moral hazard may occur where the actions of one party may change to the detriment of another after a financial transaction has taken place.  Moral hazard occurs under a type of information asymmetry where the risk-taking party to a transaction knows more about its intentions than the party paying the consequences of the risk. More broadly, moral hazard occurs when the party with more information about its actions or intentions has a tendency or incentive to behave inappropriately from the perspective of the party with less information.” [emphasis added]

SMALL WONDER I’ve had this nagging déjà vu for these past few years as I have seen the EB-5 industry mutate into the textbook example of a “Moral Hazard”, where U.S. developers manipulate everything from risk allocation to TEA zoning in order to herd in unsuspecting investors by the roomful (usually via migration agents whose sole interest is in lining their pockets with inflated fees.)   By perverting the concept of “funds at risk” as required by Congress (which simply wanted to insure that the foreign investor faced the same normal business risks faced by the job creating U.S. partners) into a hodge podge of false promises, false innuendos, and unwarranted assurances of future results, the EB-5 industry, led by some of America’s most distinguished developers, has segued into a proverbial snake pit trapping investors on a daily basis.

Never have I witnessed this more blatantly than in these last few weeks of frustration over the Regional Center program extension.  Just one example: two couples duped by agents who added $100K or more in fabricated fees to the real costs of a project, only to have the U.S. attorney reject the filing based on a complete absence of verifiable Source of Funds (“SOF”).  Each couple lost $150,000 to these sleaze balls in a matter of two weeks, as the agent sternly rejected their protests, proudly boasting that he had returned the $500,000 investment.   Like the song Billy Joel originally wrote and recorded, made even bigger by Garth Brooks…..”SHAMELESS”.

But, when you reflect on it, is it really that surprising?  Despite the clear intention of Congress when it created the EB-5 category and despite the best efforts of the U.S. Securities and Exchange Commission (“SEC”), such is the culture prevalent in the U.S. securities industry.  Witness the millions spent by the sector over the years as the SEC has tried in vain to impose “fiduciary duty” to stockbrokers and financial advisors.  With a collective gasp of horror, the industry has bonded together and continues to successfully fight the unthinkable prospect that they could one day soon be required to actually act in their investors’ best interests!!!

Outrageous, right? LOL (-:

That fundamental culture of avoiding responsibility is EXACTLY why Congress must ACT NOW TO  REFORM the EB-5 program to end the lies, the TEA manipulations, and the specifically SEC-prohibited but endemic practice of paying under-the-table commissions to unethical foreign agents by EB-5 Regional Centers.

When I built AVS Regional Center, I built it without any “Moral Hazards”.  In each of our EB-5 projects, firmly placed between AVS EB-5 investors and the U.S. enterprises using their investment dollars, is AVS Regional Center as the General Partner, with a self-imposed fiduciary duty to our EB-5 Limited Partners.  My company.  My name.  My reputation.  If things go wrong, I’m in trouble.

I challenge you to find another EB-5 Regional Center that can say that with a straight face.