As part of the budget deal, the U.S. Congress will reportedly keep our messed-up immigration system as-is, including extending the EB-5 Regional Center Program through September 30 without amending this controversial program. What a missed opportunity.
The Kushner family is doing a road show in China, “promoting $500,000 investments in New Jersey real estate as the path to a residency card” through the EB-5 program. It’s too bad they don’t have a better program to offer both Americans and potential foreign investors.
The EB-5 Regional Center Program, also known as the immigrant investor program, allocates 10,000 green cards (permanent U.S. residency) a year to investors and their family who invest at least $500,000 and create 10 U.S. jobs in areas suffering from high unemployment. The 1990 Immigration Act gave birth to this program to attract foreign investment and create jobs in the United States. Like many visa programs we have, it started as a good idea but gradually evolved into something very different that causes more problems than the intended benefits it brings.
Good Intentions, Bad Results
There are several problems with the EB-5 investor visa program. First, rather than bringing capital and jobs to areas with high unemployment rates, this program has become a low-cost source of financing for developers of high-end real estate in big cities such as New York and Miami.
According to The Wall Street Journal, since “state governments are allowed to define the boundaries of a high-unemployment area,” developers often work with state officials to “draw maps that stitch together wealthy census tracts with poor ones” to qualify for the EB-5 investment projects. Critics of EB-5 call this “gerrymandering.” Real estate developers have been the strongest force to lobby against any changes to this program.
Second, the immigration law sets the investment threshold relatively low at $500,000, and it hasn’t changed since 1990. The threshold is very affordable to many international applicants, and not surprisingly, there is a waiting list. The demand is especially high from mainland China. More than 70 percent of EB-5 applicants are from mainland China.
Some criticize this program for failing to attract true entrepreneurs who are committed to building and running businesses in the United States. Our immigration agency does a rather poor job of verifying whether the funds for investment came from legitimate sources. Over the years, the EB-5 program has become a shortcut for corrupt officials or even criminals from other nations to buy themselves and their families green cards and transfer their illicit gain to the United States.
Third, this program has also became a magnet for fraudsters. In several high-profile cases Chinese investors gave their funds to supposed immigration representatives, believing they were buying green cards for their families through the EB-5 program, only to find out later they would never see their money again nor get green cards. The most recent case involved Anshoo Sethi, a Chicago developer. He pleaded guilty in February this year for having defrauded 290 Chinese investors, who had invested $158 million in his real estate development project through the EB-5 program.
Finally, the program does nothing for someone who has a brilliant idea but no capital.
What to Do to Fix These Problems
Some critics of the EB-5 program want to get rid of this program entirely. I don’t agree with this “throwing the baby out with the bathwater” approach. Despite all these problems, the EB-5 program is relatively successful, compared to some others we have. A report from the Brookings Institute shows that “the program has created 85,500 direct full-time jobs and attracted approximately $5 billion in direct investments since its inception, with nearly half of this figure accruing since just 2010.”
Rather than scrapping the entire program, we should fix it by learning from other countries with similar programs. In my opinion, the most successful one is Australia’s. Australia’s program does several smart things America’s program does not.
First, it requires an investor to be nominated by a state (or territory) government or the national government. Second, it requires investors to pass the same point-based online screening system as all other skilled immigrants must, to ensure quality of applicants. Third, it divides its program into four streams based on business skills and the level of capital an investor brings. These four streams are:
- The Business Innovation stream for people with business skills who want to establish, develop, and manage a new or existing business in Australia.
- The Investor stream for people who want to make a designated investment of at least AUD 1.5 million (about USD 1.1 million) in an Australian state or territory and maintain business and investment activity in Australia.
- The Significant Investor stream for people who are willing to invest at least AUD 5 million (about USD 3.5 million) into complying significant investments in Australia and want to maintain business and investment activity in Australia.
- The Premium Investor stream for people who are willing to invest at least AUD 15 million (about USD 11.3 million) into complying premium investments in Australia and want to maintain business and investment activity in Australia.
Even at its lowest investor stream, the Australian system requires a potential investor to bring far more capital than our program does. Last but not least, the Australian government requires an investor to maintain business and investment activity in Australia. Since first implementing its investor program, Australia has attracted AUD $4.3 billion (U.S. $3 billion) in investment.
In 2015, Australia enhanced its investor program by capping residential real estate investment, demanding investors put more capital into venture capital funds and private equity funds to help stimulate innovation.
How to Upcycle Australia’s Program to Fit the U.S.
We can reform our own EB-5 program based on the Australian model and make it better. I propose we establish two streams: a business innovation stream and an investor stream. The business innovation stream is for people who don’t necessarily have the capital but are equipped with business skills and want to establish, develop, and manage a new or existing business in the United States.
I call this a “Shark Tank” version of skilled immigration. Let states, private businesses, or investors nominate applicants and back up their nomination with verified funding for applicants’ new business ventures. The federal government will issue a green card to applicants who have both the nomination and funding. Silicon Valley would love this idea.
The investor stream is for people who want to make a designated investment in a U.S. state or territory and maintain their business and investment activities in the United States. Since a U.S. green card ought to be more valuable than an Australian green card, and currently there’s a long waiting list for the U.S. investor program, we should increase the investment threshold immediately.
How about we demand desired investors invest at least $5 million in a U.S. state or territory, or existing business? We should also tie the investment threshold to an inflation index so it will increase automatically. A back of the envelope calculation shows that if we hand out 10,000 green cards (the current cap) to each EB-5 visa holder who brings a $5 million investment into the United States, that’s $50 billion in direct foreign investments every year.
To prevent this program from becoming a magnet for fraudsters, corrupt officials, or even criminals, our immigration agency needs to work closely with other law enforcement agencies and financial institutions to increase oversight and accountability, which includes verifying the background of each applicant and the legitimacy of their funding sources.
With reform, the EB-5 investor program could be a very successful program and create win-win for both the United States and skilled immigrants. Doing nothing is not an option. Congress, don’t simply extend the EB-5 visa program, fix it!