A couple of weeks ago, the Corporate Whistleblower Center, an American advocacy group, launched a striking appeal: it asked for information about malfeasance with EB-5 visas — or residency deals that are handed out to wealthy foreign investors if they fund development projects.
“We know that Chinese broker middlemen are accepting bribes or kickbacks to steer clients to specific US real estate projects,” the appeal went, citing “overbuilt luxury apartment markets on the US West Coast [and] franchise motel projects” among the areas of particular suspicion.
It is not clear (yet) whether whistleblowers answered the call. But the appeal highlights a peculiar saga now bubbling around the White House that investors — and political pundits — should watch, not least because it shows the seamy and contradictory way that government regulation can work, particularly in the world of real estate.
First, however, a bit of history. The EB-5 visa programme was created back in 1990, supposedly to bring finance to deprived US regions; it enables non-American investors to receive a visa if they invest $500,000 or more in economic projects which create at least 10 jobs.
During much of its 27-year existence, the programme has only attracted sporadic public attention. But it shot into the spotlight five months ago, when it emerged that Nicole Meyer, the sister of Jared Kushner, Donald Trump’s son-in-law and adviser, was trying to raise finance in China for Kushner buildings in Jersey City by pledging EB-5 visas to wealthy Chinese.
Ms Meyer’s presentation in China featured a shot of the president.
This sparked outrage. So much so that Kushner Companies subsequently announced it would not use EB-5 financing for Jersey City.
But the political furore about the Kushners obscured an important point: their sales pitch was not remotely unusual. Far from it. Away from the spotlight, the EB-5 programme has quietly been exploding in importance in the past decade, as real estate developers of all stripes have raised many billions of dollars for projects which seem to have little — or nothing — to do with economic “distress”. Projects funded by Chinese and Indian developers include Pacific Park in Brooklyn, the New York Wheel in Staten Island, the Hudson Yards in Manhattan and developments in Florida and California.
This horrifies some observers, who say the programme has turned into a visa-for-sale system. This year Dianne Feinstein, a Democratic senator, and Chuck Grassley, a Republican, drafted bipartisan legislation calling for the end of EB-5.
But the real estate industry retorts that the programme is simply a way to plug a funding gap that has been created by the government itself. One reason developers have been rushing to use the EB-5 programme in recent years is that financial reforms introduced after the 2008 financial crisis have made it difficult for banks to extend large real estate loans. If it was not for the dearth of financing, the argument goes, developers would not be using this system, which is old-fashioned and inefficient — quite aside from the political risk of making pitches to wealthy Chinese.
To some degree, this is self-serving. But not entirely: the post-crisis reforms have indeed made it harder for the real estate world to raise finance in a rational manner. So what is badly needed now is for the US government to initiate a review of EB-5 and the wider impact of the post-crisis reforms, to devise a more sensible — and transparent — financing system.
And, as luck would have it, Congress has the perfect opportunity to do this right now since the legal framework that supports EB-5 is part of a so-called continuing resolution that must be renewed in December, or expire. Indeed, Mr Grassley is already working with Republican colleagues to draft a
But don’t bet on Congress taking this sensible — overdue — step. Most lawmakers have little appetite for grappling with this now. Nor does the White House. On the contrary, soon after his inauguration, Mr Trump, the former real estate developer, signed an executive order granting a short-term extension to the EB-5 programme.
So the most likely scenario is that EB-5 will simply stagger on, as symbol of the unintended — and sometimes murky — consequences that can materialise when badly drafted government rules become entangled with entrepreneurs and power. Unless, of course, another big EB-5 scandal arises to put the programme back in the political spotlight. All eyes on that corporate whistleblowing group.