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[HOT] Why knowing the turbulent history of EB-5 Program is important to EB-5 practitioners, Regional Center operators, and EB-5 investors

EB-5 practitioners and anyone involved with EB-5 Regional Center Program need to become aware of the turbulent history of EB-5 Program. Because I started practicing U.S. immigration law ever since 1992, I was lucky (or unlucky) to have personally experienced how the USCIS can suddenly change its position on many of the issues then in force in the EB-5 law. After almost 10 years, many of the same issues have still not been resolved in a clear manner, although the USCIS has taken a more supportive view of the EB-5 Program starting from 2003, the year when the EB-5 Regional Center Program re-emerged from a cellar.

The principal actors/movers of the then INS will probably say that this "correction" or "purge" was necessary to stop the intentional or unintentional abuses of EB-5 Program, but there is no doubt that many innocent EB-5 investors and well-meaning EB-5 projects were caught off guard and hurt badly. However, one could argue that this rather nasty past experience has made the USCIS, Regional Center Program and EB-5 practitioners all more sensitive about the need for clear and practical governing rules for EB-5 Program.

Read the below link to the WSJ article written in 1999 to get a historical perspective on the EB-5 Program.


The above 1999 WSJ article appears below in its entirety.

"INS Clampdown on Visa Program For the Rich Creates Controversy"

By Barry Newman, Wall Street Journal, 2/26/99

FREDERICKSBURG, Texas - The letter that has ruined Doris and Wufried Heuer’s lives arrived on Oct. 22 at their little white house on College Street. It came from a company called AIS, and it told the Heuers, who are German, that the U.S. Immigration and Naturalization Service had changed its mind about having let them into the country.

"It is unprecedented," the letter said, "that INS would cancel benefits that it had previously granted over the last seven years to thousands of individuals." But the INS was canceling benefits now, and the Heuers' visa would almost certainly be among them.

The letter presented the couple with three options: Run to Canada, fly home to Germany, or fork up $500,000. It asked the Heuers for an "immediate response."

An Extraordinary Visa

AIS was in the business of procuring green cards for its customers -permanent U.S. residence - by using a special visa meant for the rich. Congress created the visa in 1990, believing rich people might like moving to America. Congress was wrong. The poor may mob the Golden Door, but the rich often don't appreciate the long reach of America's tax collectors. They generally steer clear.

With its new visa, the U.S. offered to swap 10,000 green cards for investments of $1 million, or $500,000 in depressed areas. Each investment would be expected to give 10 Americans jobs. That adds up to over $5 billion and 100,000 jobs a year, if 10,000 investors would only immigrate. In 1992, they numbered exactly two dozen.

But then AIS came along. It was born as American Immigration Services; the name, which seemed a mouthful, has been cut to its initials. The founders, a group of bankers and developers, took on some prominent help: Diego Ascencio, still AIS president, was a former ambassador who once spent 61 days as a hostage in Colombia. A board member: Prescott Bush Jr., was a brother of the former president and chairman of the USA China Chamber of Commerce. Mr. Bush, who recently stepped down, was recruited for his China contacts by Gene McNary, who became an AIS lawyer. Under President Bush, Mr. McNary had been INS commissioner, the top dog. He now has also distanced himself from AIS, but the investor visa was set in motion - slow motion - on his INS watch.

AIS set out to get the visa moving. Its method was the classic American response to a sluggish market: It discounted. Focusing on East Asia but covering the globe, an AIS sales force charged out, promising to deliver an American green card in a matter of months -not for $1 million or even $500,000, but for a bargain price of $125,000. To accomplish that, AIS used a set of devices hat might have been familiar to bankers and tax attorneys, but took the INS years to understand. Thanks to these maneuvers, the investor visa would no longer be for the rich, but for the middle class - for people like the Heuers.

Who went for it. They quit their jobs, sold their house in Bavaria and all but 18 boxes of their worldly goods, took their young son out of school, plunked down the money and moved. A year ago January, they started over in Fredericksburg, this old German enclave in the Texas hill country. Four months ago, AIS told the Heuers that they had, in fact, landed in the middle of a flap between INS lawyers and former INS lawyers over the investments AIS had been offering. Their cut-price green cards look like anything but bargains now.

"It seemed 100% safe," Doris Heuer says, standing at her kitchen stove. On a warm winters afternoon, she is fixing Wilfried a chicken-and-rice lunch before he goes to work. She is 36 years old, with a ready smile and fluent English. "When we got our visas, we were so glad," she says. "We thought wed made it."

Her husband sits at the table, his son's drawings on the wall behind him. Daniel, who is nine, is at school. Mr. Heuer is 40 years old; the hair on his head has turned to fuzz. "It's a pretty bad way to get a green card," he says as his wife sets a plate in front of him. "But the reputations of these AIS people could really raise no doubts." He reaches for a plastic ketchup bottle and gives his rice a squirt. "When I learned that INS had been approving these visas for years, I thought: This must be fine."

What the Heuers didn't know was that INS clerks were approving visas based on investments the agency now admits they couldn’t comprehend - plans clothed in the financial finery of promissory notes, guaranteed returns, balloon payments, pools, reserve funds, puts and calls. It was 1997 before the consuls at several U.S. embassies in Asia became alarmed. Only then did the INS wake up, scratch its head, and bring down the curtain on the whole show.

Last year, with the visa suspended, it took a stem look at a bunch of complex investments and introduced new standards of clarity and simplicity. It has also started a probe of AIS, and of one other company in the business, for possible fraud. But the INS didn’t issue new regulations or hold hearings. And it announced that its new standards would apply retroactively - to plans, like the one the Heuers signed onto, that its own clerks had blessed.

"What the INS did was totally unconstitutional," says Mr. McNary, the former INS head who still represents AIS clients. "You can't change the rules without changing the regulations, which requires public comment. The INS never did that.

"AIS denies any wrongdoing. And even lawyers not connected to AIS consider the INS decision odd. "Once people's rights are set, what, the INS can go back years and tell them their petitions shouldn't have been approved" says Theodore Ruthizer, a past president of the American Immigration Lawyers' Association. "We've changed our view of what the law is? We were too liberal? People acted in reliance. I don't accept it."

But the association's director, Jeanne Butterfield, detects a pattern: In 1996, Congress authorized the INS to deport immigrants, who committed crimes decades ago, a law that has led to both roundups and constitutional challenges. "This is a tendency in the immigration area," Ms. Butterfield says. So now the INS is chasing down confused investors along with reformed robbers.

Clearing dishes after lunch, Mrs. Heuer says, "We read articles about people being deported who have been here for years."

"I have nightmares," says Mr. Heuer. "I see myself being put into handcuffs and taken to the airport."

He goes into the bedroom to put on his work clothes and comes out in a candy-striped shirt with "Heuer' stitched above the pocket. Snagged between AIS and INS - between a difficult deal and a hard-nosed government - the Heuers are living frugally this winter. To save on health insurance, Mr. Heuer has taken a job at his son's school. He is earning $6.28 an hour -as a janitor.

Original Intent

This isn't quite what Congress expected of immigrant investors 10 years ago, as Hong Kong's wealthy made tracks for New Zealand, Australia and Canada ahead of Britain's pullout. Canadian provinces were hawking residency for under $200,000. Watching money like that rebuild Vancouver, the U.S. went for a piece of it. Just then, the Germanys reunited, and the Heuers started itching to get out, too.

Easterners, they felt, were befouling Germany with nasty taxes and nasty manners. Most of all, Mr. Heuer, an agricultural technician for Bavaria's government, saw his hopes of owning a business crumbling with the Berlin Wall. "At a certain point you get tired of working for somebody else," he says. "The best country for becoming self-employed and staying self- employed - that's America."

So the Heuers took to playing the U.S. green card lottery, and lost four years in a row. Meantime, Mr. Heuer staked out a claim in America: He spent his mothers legacy - $495,000 - on eight4enths of an acre on a busy highway in North Carolina with a Chick-Fil-A chicken restaurant on it. But it was 1996 before he read about AIS and its cheap-visa program. The Heuers sent a fax, and soon they were in the Hofbrauhaus in Munich, eating weiss wurst and listening to Mike Meier, an AIS representing, deliver his spiel. "We asked questions, we made a list," says Mr. Heuer. "What I really couldn't figure out was how you can get this kind of visa, which costs $500,000, when you only have to pay $125,000. Mike Meier said the law of this visa allowed very much "Creativity," Mrs. Heuer interjects.

"No, flexibility," says Mr. Heuer. "Very much flexibility." A Complex Arrangement

Pared down to basics by lawyers in and out of the INS, here is a generic sketch of the way the investments worked:

Anywhere from 10 to 100 foreigners join a limited partnership, each chipping in $125,000 in cash. The visa company lops a fee off the top -about 15% - and flushes out a young American enterprise (or a dying one) in need of investors. The foreigners sign promissory notes, pledging the enterprise another $375,000 over time. The INS endorses the arrangement and dispenses the green cards.

But the cards carry conditions. In two years, the INS will look again, to see if the enterprise is still on its feet - just as it does when a foreigner marries a U.S. citizen; the INS checks back two years later to make sure the marriage was real.

For two years, then, the foreigners make small payments into their partnership every few months, keeping their involvement active. The terms of the agreement also guarantee them small, regular returns. The returns typically happen to equal the payments. The partnership, meanwhile, doesn't just shove money into its enterprise. The terms require it to keep cash reserves to pay off any partners who want to sell back their shares.

Two years go by. The INS lifts its conditions on the partners' green cards. Then one huge final installment on the promissory note comes due - the "balloon payment." At that very moment, the partners exercise their option to sell their shares back to the partnership, popping the balloon. Depending on the visa company's fees and how much money it took to keep the enterprise going, the partners might even get some money back.

As legal permanent residents, they can then go on with their lives. It's exactly as if they married Americans, made the best of it for two years, got past the infamous INS green card interview and went straight out and got a divorcé.

After the Heuers left the Hotbrauhaus, they joined an AIS partnership with the similar profile. They never learned much about the company it bought into, except that it was someplace in Louisiana. They never expected it to net them a cent of profit. "What we wanted to get out of it," Mrs. Heuer says, "was a green card."

A Matter of Disclosure

The Heuers weren't naive, and neither were AIS nor its imitators. An AIS vice president, Andrew Palmer, freely admits that its strategy was to find feeble American companies and put them on a slow cash drip. If they expired after two years, fine.

"This was an effort to provide a service, make an investment and get people green cards," he says. "Normally, the investment is liquidated." As one lawyer defending the technique later told an administrative panel: "If anybody suggests that this is a wonderful investment" with a goal beyond getting them lawful, permanent residence, "they're lying and they're crazy; they're brain damaged, all right?'

Brain damaged may not be a fair way to describe the INS, but naive could fit. Its staff folded most of these features into the official rules, including balloon payments and promissory notes. A 1993 INS opinion said it was "entirely appropriate" to let investors sell out the instant their green cards went permanent. Technically, it was possible to apply for the visa while ponying up less than $125,000, even no cash at all.

"AIS filed cases to see what was acceptable to the INS," says William Cook, an AIS lawyer and himself a former INS general counsel. "When things were approved, they would redesign their program to fit. Much has been made about how aggressive the programs were, and the implication was that as they got more aggressive, they got more fraudulent. The reality is it was not the companies leading the INS. It was the other way around. They took their lead from the INS. Everything criticized by the service was approved by the service before it was widely marketed."

"Did it make business sense?" asks David Hirson, a California lawyer unrelated to AIS. "No. Was it disclosed up front to all parties concerned? Yes."

Have Visas, Will Award Them

In a famously close-fisted agency, having 10,000 visas lying around may have led to an uncommon laxity. In any case, the prospect of nailing a green card fast and cheap made the investor visa newly appealing. For AIS and others, business took off. AIS clinched two-dozen deals for about 600 investors plus their families. Some promoters did market direct investments of the full $500,000 to $1 million. Others, however, jumped in with even deeper discounts than AIS offered. In 1997, the INS approved 1,110 new petitions - and then the State Department called time out.

The INS routinely passes approved petitions to U.S. consulates; consulates issue the visas. In the spring of 1997, AIS noticed that three petitions were stuck in Tokyo. An AIS memo, furnished by the company, says a 'ice consul there was alleging, "that AIS may be engaged in criminal activity and facilitates illegal conduct." AIS demanded a retraction and an apology. Instead, more challenges flew in from consuls in Taiwan, Hong Kong and China.

No strangers to deceit, the consuls first wanted to know if the foreigners truly had the capital to back their notes - and if so, could it be cashed and carried to the U.S. to deliver on a $375,000 promise. Promoters, the consuls sensed, had pushed every INS concession to its limit; green cards were going for too little money, and too little of that was going into American businesses. Mostly, though, they were as dazed as the clerks at the INS by what struck many as legalistic gobbledygook.

"We would get 5inch stacks of documents," says an official overseas who asks not to be named. "We're not accountants. We're trying to apply practical standards. So the lawyer comes in and says there's promissory notes, there's this, there's that. Yeah? So? What's your point?"

The only point clear to the consuls was how to react: Refuse the visas, and ship those stacks of paper back to America.

A Rough Landing

Where they finally landed on David Martin's desk. Mr. Martin, a law professor, was then INS general counsel. He took a close look at the plans, and what he saw weren't, to him, capital investments. They looked to him like bonds: Fixed interest o'er a fixed period with a money back guarantee. Only a fraction of the $500,000 was forked up; parked in banks and dribbled into job creation, only a fraction of that was ever placed at real risk.

Mr. Martin wrote a memo. The INS, it said, "lacked sufficient empirical or theoretical knowledge of business practice" to realize that it had been taken for a ride. Its clerks "simply failed" to see that the investment plans were debts posing as equities. "With its increased knowledge," Mr. Martin wrote, "it is now clear to the service that the programs discussed above violate existing law."

In December 1997, the memo was issued for internal INS use. In January 1998, on visas granted by a less particular American consul in Germany, the Heuers arrived in Fredericksburg.

Another party of Germans founded the town in 1846, having been flimflammed out of an investment by a fake French nobleman. The Heuers had heard that Fredericksburg was still German. At a 15-year distance, it's as German as a cow town gone touristy can be. On Main Street, stores selling wind chimes alternate with beer halls. The German Heritage Commission supplies them all with German signs.

"They bread their jagerschnitzel here and you ne'er bread a jagerschnitzel in Germany~" Doris Heuer says, but she and Wilfried were content to rent a frame house under a pecan tree, down the street from the Hagels, the Jenschkes and the Jeunkes. In February, AIS sent them a "welcome letter' that said, "We hope your journey to your new life is a pleasant one..."

The family settled in to wait two years before the INS lifted the conditions on their green cards. They would live on the $43,000 a year Chick-Fil-A paid to rent their patch in North Carolina. Then they would sell it, buy a campground or a bed-and-breakfast, and at last go into business for themselves. It would be 10 months before the Heuers learned what the INS had concluded a month earlier that the conditions on their green cards would ne'er be lifted.

After the general counsel filed his memo, U.S. consuls kicked back every INS-approved petition they hadn't acted on. An INS team reviewed them, denied 170, and sent several to its appeals office for full-length opinions. Handed down last summer, they banned fixed returns, reserve funds, redemption guarantees and off-the-top fees. Foreign investors, the opinions said, must show that they ha~ the money up front, acquired it legally, and can convert it to dollars easily. They must present "comprehensive and credible" plans to create jobs. Partnerships, in effect, were through. Visas would be awarded solely to direct investors, pure and simple.

And the INS also claimed the right to revoke every green card its clerks had issued because they didn't have a clue what they were doing. Investors who had cleared the two-year hurdle would be spared. But when it came time to review conditional green cards, the Heuers and those like them would get no mercy.

"It was a lot easier to deal with people who hadn't moved." David Martin says now; he has left his job as INS genera counsel and gone back to teaching. "After I left, there was a lot of discussion on whether room could be found for people who'd moved and were still in the conditional period. I don't know how that came out." Mr. Martin is told. "Well," says. "It's a genuine human dilemma."

Home, But for How Long?

In their 1991 Jeep, Doris Heuer has driven her husband across town to work. Fredericksburg Elementary stands a story high, facing a hay field. Mr. Heuer follows the school's wide, waxed halls to the nurse's office; Judy Mayo has something for him: a sheaf of letters from the staff~ addressed to the governor.

"We all want him to stay," says Ms. Mayo after Mr. Heuer takes the sheaf to the copier. "He gets down on his hands and knees and scrubs a commode like a jeweler would shine a precious jewel." She shakes a thermometer and slips it under a child's tongue. "Why is it that a man like this, who pays to come here, has to fight so hard to stay? Any student in this school would understand. Why the INS has such a difficult time with it is beyond me."

Mr. Heuer returns with an amazed grin. In one letter, language teacher Susie Jaksik has written: "Wilfried is the epitome of the type of immigrant who helped build our country to its present great stature.... Help my students to keep their sense of pride when they say every day, "with liberty and justice for all."

"So much help," says Mr. Heuer, hurrying along the hall. "We have never experienced such a thing." At the custodian's closet, he says, "Please excuse me now. I must prepare my vacuum cleaner."

The Heuers are passing this winter pondering their choices. They won't run to Canada, or join an AIS lawsuit against the INS, or risk $500,000 on a home-building deal, as AIS has proposed. AIS has lost their trust. They aren't even sure what it did with their money.

"We believe there is a business," says Mrs. Heuer, but her husband says, "The jobs, the real jobs - that's our concern."

They needn't worry about that. According to AIS, the Heuers' partnership invested in Corporate Personnel Services Inc., or CPSI, on Bayou Lafounche in Larose, La. Lyle Degelos a small business consultant who introduced the companies, picks up a phone in New Orleans.

"They do recruitment," Mr. Degelos says of CPSl’s business. "They provide environmental personnel - the bottom side of the waste-management employment requirement." Garbage collectors. CPS I hires out over 1,000 of them on contract in "eight or 10 states," says Mr. Degelos. "They're large. Getting larger."

It turn out that AIS didn't invest only in failures. CPSI is in the black, Mr. Degelos says. "Its growth was greatly assisted by money received from AIS. " How much money? "A substantial amount. Over $100,000. It was just a godsend. My word, it's a success story, and AIS had a very significant part to play in it."

Despite several requests and written permission from the Heuers AIS has not provided documentation for the investment. However, it did tell the Heuers that their partnership has 10 members. Mr. Cook, the AIS lawyer, says it follows the usual pattern. That would mean, he says, it took in $1.25 million in cash, plus $3.75 million in promissory notes. Each investor would have wound up contributing all of $10,000 to an agency that "creates" jobs by recruiting garbage collectors on contract for sanitation companies. The rest of the money would have gone for AIS flees, Mr. Cook says, or is sitting in a trust account.

"We were counting on $280,000 more," says Mr. Degelos. "We're apparently not going to get it, for reasons not known to me."

On Main Street in Fredericksburg, the Heuers are about to eat a meal at a place called the Auslander. They have hired their own lawyer now, exploring ways to stay in the U.S. temporarily.

"I don't think we can be happy again in Germany, knowing how it is here," Mrs. Heuer says. "It's so exciting. It's real life."

She glances at the menu.

"Sauerbraten sandwich? Have you ever heard of that?"

"For heaven's sake," says Mr. Heuer.

She orders chicken salad. He takes the "Mexican Fiesta."

Also, reading the below 9th Circuit case should give you an idea on how some of the EB-5 cases which got caught up in the USCIS' sudden change of rules were ultimately resolved.