Report: Surge in Chinese investments raise fraud risks

WASHINGTON (AP) - A surge in investment from China is overwhelming U.S. and state agencies and raising the risk of "outright investor fraud," according to a report out Thursday from a federal watchdog.

The U.S.-China Economic and Security Review Commission report raises questions about America's EB-5 visa program, which grants green cards to foreigners in return for investments of $1 million - or just $500,000 in high-unemployment areas. Local government officials are supposed to vet the investors and their projects.

"The program has been flooded by Chinese applicants," the report found. "Instances of fraud and lax regulation have cast doubt on the ability of local authorities to screen Chinese EB-5 investors properly."

Started 24 years ago, the EB-5 has only recently begun to attract intense interest in China, where investors and business owners are worried about a cooling economy and a crackdown on corruption. Many are also eager to take advantage of a strengthening U.S. economic recovery.

The United States issued 6,895 EB-5 visas to Chinese citizens in 2013, up from less than 2,500 in 2011. Chinese accounted for 85 percent of EB-5 visas issued last year through August, up from 14 percent in 2007.

Many foreign investors seek help from 617 Immigrant Investor Regional Centers nationwide to identify projects that qualify for the visa program. The investors are often under the mistaken impression that the centers are sponsored by the government. In fact, although they need government approval to get the "regional center" designation, they are private, for-profit operations. The Securities and Exchange Commission and the U.S. Citizenship and Immigration Services have jointly said they have no "view on the quality" of the investments the centers are promoting.

The loosely regulated system is vulnerable to fraud, the U.S.-China Commission report says. Its cites the case of a real estate developer indicted last year on charges of duping 290 Chinese investors into sinking money into a fraudulent $912 million hotel complex outside Chicago. In South Dakota, a state official committed suicide in 2013 after coming under investigation for mismanaging Chinese and South Korean EB-5 investment funds connected to a failed beef-packing plant.

The commission report notes that local governments have "an incentive not to screen Chinese EB-5 investors too rigorously. They can fill an important gap by investing in impoverished areas that domestic investors avoid."

The report calls for the EB-5 system to be scaled back or for the approval process to be improved.

The report was written by commission researchers Iacob Koch-Weser and Garland Ditz. The commission, created by Congress in 2000 to monitor the national security implications of the U.S.-China economic relationship, is publishing the report "to promote greater public understanding" but does not necessarily endorse its findings.

Chinese direct investment in the United States has risen from virtually nothing before 2010 to more than $10 billion in each of the last two years, according to the Rhodium Group consultancy.

Published: Fri, Feb 27, 2015