H.R. 5992 Account Transparency Requirement

The Account Transparency Requirement proposed in Goodlatte and Conyers’ H.R. 5992 American Job Creation and Investment Promotion Reform Act of 2016 (see pages 64-72) is probably the most important new idea in the bill. Commentary on the bill has focused on suggestions that people don’t like (retrogression, set-asides), but we should also be discussing account transparency because it’s genuinely relevant to program integrity. I don’t see national security threats in EB-5, but misappropriation of funds shielded by lack of transparency is a live problem — the major factor in most SEC enforcement actions so far on EB-5 offerings.  H.R. 5992 may not become law, but any EB-5 bill that does get passed will certainly have the words “reform” or “integrity” in the title, and we should be working to refine relevant and effective integrity provisions.  Let’s consider H.R. 5992’s account transparency proposal, the impact it would have if enacted, and how it might be improved.

Summary of the Account Transparency Requirement Proposed by H.R. 5992

  1. A new commercial enterprise (NCE) must place each EB-5 investor’s funds in a “separate account” with the following characteristics:
      • The account contains only pooled investment funds of EB-5 investors for a single project
      • The account is at an insured US financial institution
      • At least one signatory on the account is an independent third party with a position such as a bank officer, broker-dealer, attorney, or CPA

    A job-creating enterprise that’s affiliated with the NCE must likewise hold investor funds in a separate account satisfying the above requirements. The proposal does not place requirements on accounts for an unaffiliated JCE.

  2. Funds may only be transferred out of the NCE account for one of the following purposes:
    • Refund an investor’s investment
    • Transfer to another account that also meets the above qualifications for a separate account
    • Transfer to a job-creating entity
    • Deploy funds in the project for which they were intended
  3. The following oversight and reporting is required:
    • Whenever the NCE accepts investor funds into its account, it must immediately send a notice to the investor, the regional center, and USCIS that contains this account information: contact info for the financial institution, the name of the independent signatory, and access to view the account balance online on an on-going basis.
    • Whenever the NCE transfers funds out of the NCE account, the transfer must have prior written approval from the independent signatory, and the NCE must immediately send a notice to the investor, the regional center, and USCIS that specifies the amount and destination of the transfer.
    • When an affiliated JCE deploys funds into a project, the independent signatory or another attorney, broker-dealer, or CPA has 30 days to “verify that the funds were deployed in the project for which they were intended,” and notify the investor, regional center, and USCIS accordingly.

Analysis and Links

I wrote up some thoughts on the AT proposal, but I’m demoting them to a comment on this post because I’m more interested in what other people think. What’s the perspective from lawyers who specialize in securities law issues? How would H.R. 5992’s Account Transparency Requirement work for large NCEs that already implement fund administration and independent fiduciaries? How would it work for small businesses using EB-5, and direct EB-5 cases? Do investors and their advisors see effective protections in this proposal? What’s the perspective from regulators and receivers working to sort out past misappropriation cases? How could the AT proposal be better directed toward the ultimate account transparency goals of deterrence, detection, and discovery and recovery? What are the best protections we can afford, for investors and for the healthy future of the program?

Articles on H.R. 5992 Account Transparency Requirement

  • Gary Friedland and Jeanne Calderon of NYU have started the conversation with a detailed analysis of the H.R. 5992 Account Transparency Requirement in “EB-5 2.0: Can Account Transparency Save the Program?”  (October 6, 2016 draft). They describe the background that underlies the need for an AT requirement, unpack the H.R. 5992 proposal point by point and discuss its goals and implications, and suggest areas for further discussion and improvement. A few of my takeaways from the article and subsequent emails with Dr. Friedland: For improved effectiveness, the AT proposal might further define the role and duties of the third party signatory and verifier, bolster account transparency by adding account balance reconciliation to the Regional Center’s Form I-924A annual report, consider expanding the scope of reports to be provided to investors in an NCE (e.g. quarterly account statements, notice of transfer of funds from other investors in the NCE, a copy of the Regional Center’s Form I-924A filing), and craft AT requirements for the special cases of small EB-5 projects and direct EB-5.
  • I hope to link to other topical articles here soon.

Other relevant content

  • Assuming that the people drafting the H.R. 5992 Account Transparency Requirement were primarily motivated to avoid another Jay Peak situation, I made a chart (as best I could, based on detail in the legal complaints and news reports) that illustrates how and where exactly money got misappropriated in a Jay Peake project. Here is my simplified chart of where the money went (or see Vermont DFR for the complete, complicated picture). In my chart, related party transactions, single signatories, and multiple layers in the flow of funds stand out as fault lines. The chart also shows why it’s necessary to do more than watch funds safely out the door of the NCE account.
  • Angelo Paparelli’s article All Checks but No Balances — The Systemic Failure to Protect EB-5 Investors (June 24, 2016) diagnoses a lack of meaningful oversight in EB-5 and defines a role for independent fiduciaries representing investors.
  • Ron Klasko’s article Attention Receivers and Litigators: EB-5 Investors Are Not Your Typical Clients (July 11, 2016) addresses the unique position and interests of EB-5 investors when problems arise in an investment project.
  • The EB5 Diligence webinar on Structural Weaknesses in Path America’s Offering (September 12, 2015) considers controls and procedures that might have averted the self-dealing and misappropriation that happened in the Path America case. The discussion is important because it could apply as well to other SEC EB-5 actions, most of which similarly involve related-party scenarios.

About Suzanne (www.lucidtext.com)
Suzanne Lazicki is a business plan writer, EB-5 expert, and founder of Lucid Professional Writing. Contact me at suzanne@lucidtext.com (626) 660-4030.

One Response to H.R. 5992 Account Transparency Requirement

  1. Thoughts on the H.R. 5992 AT Proposal
    Granting that “Account Transparency Requirement” is an idea whose time has come, and that needs to be in EB-5 legislation, here are the weaknesses that I see in the specific AT proposal in H.R. 5992.

    • The AT proposal relies on reporting, but it does not require USCIS, regional centers, or investors to take any action on the notices that NCEs would be required to send them. USCIS is already snowed under by petition paperwork, reviews most submissions at least a year after they’re filed, and could not possibly monitor a new and constant blizzard of account transfer notices. Thus reporting to USCIS likely wouldn’t promote early detection, and at best would build a record that could be mined in the future in case of enforcement actions. Any integrity measure that depends on USCIS time and resources for its implementation is a weak measure. This leaves regional centers and investors in the real-time watchdog role – their rightful role, though they may or may not fill it. NCE account transparency could be very helpful for independent and conscientious regional center sponsors like Vermont (which didn’t catch Jay Peak problems partly just because it was hard for them to get information), irrelevant for the majority of RCs that also manage the NCE and so know and control the NCE account details anyhow, and cold comfort in the case of the hands-off rent-a-center-types motivated to avoid oversight duties. Account transparency could be very valuable for investors, but mixed motives could limit their watchdog role. The average EB-5 investor cares first about the success of her immigration petition, and this is powerful motivation not to rock her own boat. The Jay Peak misappropriation case was called by an investor whistleblower, but significantly that investor already had his permanent green card and little to lose from delegitimizing the NCE and finding problems with the use of his investment. Investors still in the immigration process face a more complicated choice when noticing red flags.
    • The AT proposal apparently (sensibly) tries to avoid the weeds of payment for individual project costs by tracking EB-5 funds only until they get deployed in a project. But the proposal seemingly falls in the weeds anyhow because it doesn’t recognize that deployment usually happens over time, not all in one blow, and that “the project” often is the JCE (most regional center cases) or the NCE itself (all direct EB-5 cases).
    • The AT proposal overdoes the goal of separateness. An NCE account should indeed be exclusively dedicated to EB-5 investment for a specific project, to avoid commingling with funds for other purposes. But a regional center investment is by definition a pooled investment. What’s the point (not to mention practicality) of distinguishing EB-5 Investor A’s contributions from other EB-5 funds in the same NCE, so as to separately track and report on Investment A through the JCE and to deployment? Shouldn’t the EB-5 investment in a given NCE for a single project be treated as a pool, and all EB-5 investors in that NCE be treated as a group for reporting purposes? Further, why require an affiliated JCE to keep separate accounts for EB-5 and non-EB-5 financing for the same project?
    • The AT proposal would slow but not block bad actors. Were I a bad actor NCE, I would open an NCE account with my unrelated shyster lawyer friend as signatory and verifier (H.R. 5992 doesn’t specify sanctions if you accidently approve or report wrong things, I’ll reassure him), put my own report of account balances online (H.R. 5992 doesn’t specify that the online access has to be direct to the financial institution, and doesn’t require disclosing the account name), choose a regional center that doesn’t think license-renting comes with hefty oversight responsibilities, do most of my misappropriation at the project level (H.R. 5992 doesn’t follow what happens to funds once they’re in the project), and report whatever I like in transfer notices (assuming USCIS won’t have time to look at them, investors won’t have resources to investigate them, and in any case H.R. 5992 doesn’t specify sanctions for me if I fudge AT requirements). No kind of business deals would get done if they were required to be 100% fraud-proof – that would be too expensive. I applaud the AT proposal for not going too far, making EB-5 deals impossible. But it might afford to go a little further with the safety measures.

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