March 8, 2017

Panel One Witnesses:

Senator Chuck Grassley (R-IA), Chair of the Senate Judiciary Committee

Senator Patrick Leahy (D-VT), President Pro Tempore

Panel Two Witnesses:

Rebecca Gambler, Homeland Security and Justice Team, U.S. Government Accountability Office

Sam Walls III, Managing Director, Pine State Regional Center

Angelique Brunner, Founder and President, EB5 Capital

Dekonti Mends-Cole, Director of Policy, Center for Community Progress

David North, Fellow, Fellow, Center for Immigration Studies

The House Judiciary Committee convened a hearing discussing the proposed rule from the Department of Homeland Security (DHS) on the EB-5 program. The hearing hosted two panels of witnesses, the first with U.S. Senators Chuck Grassley (R-IA) and Patrick Leahy (D-VT). Both senators outline their perceived issues with the EB-5 program and their efforts to reform the program in the past. Senator Grassley referred to the program as a producer of “rampant waste, fraud and abuse.” Senator Leahy echoed his statement, calling the program “a magnet for fraud.” Both Senators stressed their belief that the program had drifted from the original intent when Congress established the program in 1990. This theme was reverberated throughout the hearing by witnesses and members alike. The pair closed their testimony by calling the DHS’ proposed reforms an encouraging sign.

Throughout the hearing various witnesses and members emphasized a similar list of issues with the program. It began with the need to raise the minimum investment level. The two tier investment minimums have not changed since the program was created in 1990 and every witness underscored this issue. The second issue developed out of the structure of the two tier system. The lower tier was formed to create a financial incentive to invest in two categories, rural areas or distressed areas, referred to as Targeted Employment Areas (TEA) by offering a lower threshold of investment in that tier. However, over time the $500,000 lower tier has become the rule and not the exception as intended. Through census “gerrymandering,” according to witnesses and members, applicants have created TEAs in affluent areas. Using various numbers of census tracts (permanent statistical subdivisions of a county or entity) program participants manipulated the system and qualified for the lower tier investment tier of $500,000 versus the “normal” million dollar tier. This manipulation had created a disparity between rural/distressed areas funds and funds going into affluent areas.

Chairman Bob Goodlatte (R-VA), attempted to illustrate the gerrymandering and disparity in funds in his opening statement. He used the advertisements for a luxury condominium complex, Hudson Yards, which had received EB-5 money and is pricing condos at around the seven million dollar point, as an example of how the program had shifted away from the original purpose. Chairman Goodlatte cited a Government Accountability Office (GAO) report which showed that 90% percent of the investment funds in the report’s sample went to areas that had unemployment levels in the range of 0-6%, when TEAs are required to have unemployment levels that are 150% higher than the national average. Goodlatte ended his remarks by citing former Homeland Security Secretary Jeh Johnson’s efforts and the DHS proposed rule as positive ventures. The proposed rule would increase the minimum investment level to 1.35 million dollars and, in his opinion, take great steps to address the gerrymandering occurring with TEAs.

Ranking Member John Conyers (D-MI) echoed Chairman Goodlatte in the issues that infect the EB-5 program and called for productive and efficient reforms. Ranking Member Conyers emphasized the gerrymandering concern and the resulting consequences of funds being directed towards affluent areas instead of areas such as Ranking Member Conyers’s district, which is the second poorest in the nation. Conyers referred to the proposed reforms from DHS as encouraging sign but said that Congress would need to enact legislative reforms and that he would not support reauthorization of the program in its current status which is due to expire in April. This was a sentiment shared by a number of other members.

Rebecca Gambler of the GAO expanded on the GAO report on the EB-5 program and the problems that the report discovered. She discussed the statistics Chairman Goodlatte had highlighted and added on to the faults by turning to the issue that many investors are able to claim jobs that are not the direct result of the investment. She also mentioned the fact that the great majority of the projects were in real estate such as hotels, resorts, commercial and residential property developments. Chairman Goodlatte later in questioning inquired about this, since real estate only takes up 6% of the U.S. economy and yet encompasses 75% of EB-5 projects. Gambler said that question would require additional investigation but it was centered on where funds were available.

Sam Walls III of the Pine State Regional Center was able to provide an example of a rural success story. Pine State Regional Center creates partnerships with banks and businesses expanding in the state of Arkansas. He cited a steel manufacturing plant which was built with EB-5 funds as an example of a TEA with success as it employs locals at wages and benefits far better than those available in the local job market. Mr. Walls throughout his testimony referred to the program as having drifted away from congressional intent and that rural investment is undercapitalized. Chairman Goodlatte inquired to the incentive for rural communities, which Mr. Walls stated was difficult for rural areas to attract funds despite the incentive tier.

Angelique Brunner, of EB-5 Capital, a regional center headquartered in Maryland discussed her work to revitalize the District of Columbia. She urged members to focus on legislative reform and to address regulatory reform later. In a break with the rest of the panel of witnesses, Ms. Brunner stated that she believed they should remove the two tier system. Her argument rested on the failure of the incentive mechanism the tier system had created. The lower tier had been created as an exception but the usage of the EB-5 program had shown the exception had “swallowed” the rule. She added that the rural areas or TEAs should not have to accept less money to incentivize people to invest in their areas and Congress should find another mechanism to incentivize investors, possibly a fast tracking of applications or set aside visas.

Dekonti Mends-Cole, Director of Policy at the Center for Community Progress, presented examples of urban programs in TEAs. She described the exodus of people from older industrial areas such as Detroit and need for investments in those areas. She argued for a redefinition of Targeted Employment Areas (TEA) with a nod to population for urban areas and an eye on census tracts which were being used to inflate unemployment numbers in areas investors planned to build. Ranking Member Conyers asked about the nature of the projects in Detroit. Mends-Cole responded that vacant buildings have attracted developers and food deserts have been successful projects.

David North of the Center for Immigration Studies was more skeptical of the EB-5 program as a whole but agreed with the sentiments of the panel. His testimony focused on the various ways the program is abused by investors. His conclusion was that the DHS reforms were productive but should add a clause that any jobs created should be only for U.S. residents, citing examples of foreign workers being brought in.

Several members inquired of the vetting process for the investors and if malicious individuals were able to maintain U.S. visas. Gambler was unable to expand on the basic vetting they do but offered to answer the question more fully with additional information to the members at a later date. Many members were concerned over the nature of “selling citizenship” as Rep. Darrell Issa (R-CA) called it. There were a few members who objected to the EB-5 program as a whole and declared that the United States should focus on bringing American capital back to the U.S and not attracting foreign investors. Nevertheless the issue was widely embraced by members of both sides and there is clear bipartisan support for DHS’ reforms, which many perceived it to be a step towards legislative reform.