Caspiano

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To Jeh Charles Johnson

Secretary,

Department of Homeland Security

Mr. Secretary,

This letter is in response to a request by the Department of Homeland Security (DHS) for

comments regarding its proposed regulatory changes, as outlined on the Advanced Notice of

Proposed Rule Making (ANPRM) published on January 11, 2017 in the Federal Register at 82 FR

3211. In particular, we address our comments to the questions posed under section III, topic B

of the ANPRM, titled “Safeguards for Monitoring and Oversight”.

To begin with please allow us to say that we commend the DHS and the United States

Citizenship and Immigration Services (USCIS) for acknowledging and addressing four very

significant areas in the existing Regulations that need attention, and for which tremendous

opportunities for improvement exist. Since its inception, the EB-5 visa program has played a

significant role in the growth of the U.S. economy, and with the emergence of more global

economy, such a role will continue to increase. Therefore, we believe it is very timely that DHS

and the USCIS have taken on the task of reviewing the existing rules, and addressing those that

may have some potential deficiencies. We feel honored to be allowed to contribute to this

great effort.

Our comments, as reflected in this communication, arise from our professional experience as forensic accountants, with direct experience in serving stakeholders of all levels in the EB-5 program (and other immigration-based investment programs). We have been engaged in investigation of many EB-5 program investees, predominately in the construction industry, among others. In these engagements, we have discovered many instances of fraud, some culminating in criminal investigations or prosecutions by the government. Accordingly, our comments are geared towards the financial safety and accountability aspects of the ANPRM, discussed in the section identified above.

Safeguards for Monitoring and Oversite

As the ANPRM correctly states, the existing regulations would benefit from “additional

safeguards to ensure that all regional centers (1) use immigrant investor funds to promote

economic growth, and (2) protect against the misuse of such funds.” The DHS and the USCIS

have undoubtedly analyzed data that supports this assertion. Because the ANPRM does not

disclose specific data in support of this assertion, we will point so some anecdotal observations

of our own as support for our agreement with this assertion, and for the effort we have put into

drafting these comments.

In our professional experience, the existing safeguards and monitoring requirements imposed

on the Regional Centers are ineffective. While the Regional Centers are charged with certain

minimum due diligence in oversight of the new commercial enterprises (NCEs) or job-creating

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entities (JCEs), developers, construction companies, etc., they do not have the necessary

enforceable authority to do an effective job in performing such oversight.

Furthermore, the existing regulations do little to require the NCEs and JCEs themselves to

provide a transparent system of accounting and reporting that would allow meaningful

oversight by the Regional Centers, investors, and other stakeholders. As a result, the oversight

activities of the Regional Centers are more in the nature of formalities. There is no real-time,

effective monitoring of the activities of the enterprises trusted with the invested funds of the

applicants.

As a result of the lack of transparency and enforceable oversight responsibility discussed above,

we have observed a great deal of misuse, misappropriation, or outright fraud and

embezzlement with respect to the invested funds associated with the EB-5 program. Quite

often, the oversight carried out by the Regional Centers and the investors themselves cannot

detect misuse of funds in a timely manner because of the lack of transparency discussed above.

In addition, there are undisclosed common interests between the Regional Centers and the

firms involved in the application of the invested funds (e.g. the developers). Such conflicts of

interest create a disincentive to the Regional Center for pursuing a rigorous monitoring of the

targeted investment activities, and in some cases to turn a blind eye to indications of fraud and

misappropriation. Attempts to mitigate the misuse of funds and fraud, and to seek justice

against the perpetrators and make the investors whole can often fail because the improprieties

are discovered too late, evidence is destroyed, the funds have been diverted, or the

perpetrators have disappeared by the time an enforceable investigation begins.

The solution offered to stakeholders who can afford it is to enroll the service of an accounting

firm to perform some monitoring at the enterprise/entity level. The drafters of these

comments have experience in such engagements. They are often extremely costly to the

stakeholder using these services. More importantly, such monitoring is also presently

ineffective in detecting fraud in a timely manner. Until the fraud is discovered and the matter is

pursued through legal action in court, the entity involved has a great degree of control over the

information and records released to the firm charged with the monitoring effort. As a result,

the fraud is often discovered long after it has already occurred, and the best the firm can do is

help the injured party to mitigate or minimize some of its losses. Many EB-5 applications fail

because of this.

Aside from the social considerations and the stigma associated with the injustice to the

investors and applicants in these situations, this type of failure in a government-sponsored

program is bound to have disastrous economic consequences. The perceived risk of loss and

misappropriation serves as a deterrent to many successful foreign investors from applying for

an EB-5 visa. This is bound to have a detrimental effect on the U.S. economy, both directly and

indirectly.

As reflected below in our responses to specific questions asked in this section of the ANPRM,

we believe it is possible to prevent such misuses to a great degree. The current technology

makes it possible to monitor the activities of an NCE or a JCE in real time, in great detail, using

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some existing application platforms or developing platforms specifically tailored for this type of

monitoring. Furthermore, the use of data analytics allows for an effective means of analyzing

and using this information to detect indications of fraud, and to prevent such fraud. This

technology exists today. It is readily available for widespread implementation. The reason such

monitoring has not taken place is that there are not enforceable rules for providing sufficient

transparency by those NCEs, JCEs, and developers to allow such monitoring to be implemented.

For an effective monitoring to be possible, those enterprises would have to make available to

the Regional Center (or its delegates) and/ or to other stakeholders all of their books and

records, source documents, internal and external communications, and certain other data for

unrestricted inspection, starting at the moments transactions, activities, and discussions that

take place. As we have discussed, it is possible to design application platforms that would

analyze this type of information on an on-going basis, and alert the appropriate stakeholder(s)

of a potential misuse of funds or of the fiduciary duties of the relevant entity. Such potential

misuse can then be investigated immediately and prevented, saving an enormous cost down

the line in terms of investment losses, forensic investigation and litigation expenses.

Undoubtedly, imposing such duty of transparency on NCEs and JCEs, and of additional

monitoring by the Regional Centers by the regulations will cause additional burdens and costs

to both groups. However, we believe the benefits coming forth from such efforts would far

outweigh those costs. As the ANPRM wisely notes:

DHS understands that these and similar measures may be burdensome to

stakeholders, but believes that such requirements could improve the

regional center program by providing regional centers with the tools to

ensure that associated NCEs and JCEs comply with program requirements.

This would ensure only regional centers with effective oversight could

operate within the program. DHS believes that this would enhance the

program's integrity and ultimately benefit both regional centers and

investors by providing greater trust in the entities operating within the

program. (The ANPRM at 82 FR 3215 – emphasis added).

In addition, we note from the comments already submitted on this matter that many other

constituents share the same concerns, and share our view towards the necessity for greater

transparency by the investment enterprises and more strict monitoring and enforcement by the

regulatory bodies. We refer to the comments submitted by the Laborers’ International Union

of North America (LIUNA) on April 10,2017 as a lucid example, supporting the ideas we propose

in our comments. After citing several instances of fraud, misappropriation of fuds, illegal or

improper business practices, and refusal by the perpetuating entities to be held accountable,

and after expressing their utter frustration, the drafters of those comments recommend a very

strict regime of oversight and enforcement by the DHS. While we don’t necessarily agree that a

governmental entity should be burdened with the duty of monitoring, we believe with proper

regulatory enforcement such monitoring can be delegated to privately operated independent

third parties.

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We believe further support and justification for the ideas proposed in these comments can be

found in our answers to certain specific questions posed in the following section of the NPRM.

Response to Specific Questions:

Question 1: What would be the most effective and efficient way to add monitoring and

oversight requirements? Should such requirements be incorporated into the initial designation

stage, the exemplar stage, or throughout the period of the regional center's designation?

Response: We believe the most effective and efficient way would be to charge the regional

center with the responsibility of perpetual monitoring of the NCEs and JCEs within its

jurisdiction, and to hold it accountable for detecting and preventing misuse and fraud to the

extent such detection is possible given the existing tools and technology. These requirements

and responsibilities should be incorporated into the initial designation stage and should

continue throughout the regional center’s period of designation. However, as we have

discussed above, delegating such responsibility to the regional centers would only be practical if

the regulations also impose a duty of unfiltered and unrestricted transparency and

accountability on the NCEs, JCEs, and developers with respect to the monitoring efforts of the

regional center.

Question 2: What forms of monitoring and oversight of NCEs, JCEs, and investor funds are

regional centers currently utilizing as part of their best practices?

Response: Monitoring is the systematic and routine collection of data during project

implementation for the purpose of establishing whether a project is moving towards the set

objectives or project goals. Data is collected throughout the life cycle of the project.

There are several types of monitoring and they include:

1. Process monitoring/ physical progress monitoring

In process monitoring, routine data is collected and analyzed in order to establish whether the

project tasks and activities are leading towards the intended project results. It authenticates

the progress of the project towards the intended results. This kind of monitoring measures the

inputs, activities and outputs. In other words, process monitoring answers the questions “what

has been done so far, where, when and how has it been done?” Most of the data collected

during project implementation usually serves this kind of monitoring.

2. Assumption monitoring

Any project has its working assumptions which have to be clearly outlined in the project log

frame. These assumptions are those factors which might determine project success or failure,

but which the project has no control over. Assumption monitoring involves measuring these

factors which are external to the project. It is important to carry out assumption monitoring as

it may help to explain success or failure of a project

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3. Financial monitoring

As the name suggests, financial monitoring simply refers to monitoring project/ program

expenditure and comparing them with the budgets prepared at the planning stage. The use of

funds at the disposal of a program/project is crucial for ensuring there are no excesses or

wastages. Financial monitoring is also important for accountability and reporting purposes, as

well as for measuring financial efficiency (the maximization of outputs with minimal inputs).

Question 3: Do other entities associated with regional centers engage in monitoring and

oversight?

Response: Generally, no. Since it is not a legal requirement yet, there is no financially feasible

interest for the regional centers to hire another entity to carry out monitoring and oversight.

In some very rare cases, the foreign investors may hire or commission their own people to

carry out an initial and/or final audit on the investment project. However, no efforts have

been made to date in order to carry out true integrity monitoring and oversight on these

multi million dollar at-risk projects.

Question 4: What benefits, if any, would additional monitoring and oversight offer to regional

centers and to immigrant investors?

Response: We believe we have discussed the benefits of additional monitoring at length in our

prelude to these questions. If done timely, properly, thoroughly, and with the necessary

transparency, this additional monitoring would not only counter and prevent many, if not most,

instances of misuse of the investor’s funds, but more significantly, would act as a great

deterrent against the potential perpetrators of such abuse even contemplating their schemes.

Needless to say, such effective fraud prevention would promote trust among foreign investors

and greatly enhance their prospects of success. Such monitoring would also benefit the

regional centers because it would make it much easier and less costly to prevent fraud and

misappropriation of investment funds.

Question 5: What types of documentation would be appropriate for regional centers to submit

to establish that they will have an adequate monitoring and oversight process in place upon

designation?

Response: This question is difficult to answer with great precision at this stage. The required

documentation should reflect the tools available at the time. In general, the regional center

should document what tools and applications it is using to monitor the NCEs’ and JCEs’, and the

degree and frequency of such monitoring. The regional center should also document instances

where it has discovered or suspected fraud or misuse, and the actions it has taken to prevent or

counteract such fraud or misuse. The degree of precision and detail with which the regional

center provides such documentation is likely to evolve as the financial reporting industry

evolves to provide more effective monitoring tools.

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Question 6: What measures, if any, have regional centers put in place to identify conflicts of

interest by regional center participants? What requirements for identification and disclosure of

conflicts of interest would be appropriate in the regional center context?

Response: Regional Centers to date have done very little investigation and due diligence into

their foreign investor counterparts in order to avoid any conflicts of interest. Because the

primary goal of regional centers is to solicit the greatest number of investment dollars

possible, they are not interested in where the investor has come from or what are the

investor's prior political or economic affiliations and whether those affiliations create a

conflict of interest. In essence, if the investor has the funds readily available for transfer, the

regional center accepts those funds, and the project begins. There needs to be a third party

that carries out basic due diligence, similar to the way investment banking works. There

should be an accreditation process for the individual investors that qualify them to begin

dealings with the regional centers; otherwise a host of potential conflicts are overlooked in

the process.

Question 7: What investment and other economic impacts could be expected from the

establishment of new monitoring and oversight requirements?

Response: We foresee two tremendous benefits to the investment community and the U.S.

economy as a result of implementing additional monitoring requirements, especially if those

changes reflect some of the ideas we have proposed in these comments. First, as discussed

above, and as the ANPRM itself acknowledges (as quoted above), the additional monitoring

would create a safe investment environment, elicit more trust from successful and wealthy

investors, which would lead to more investment in the U.S. economy. Furthermore, as a result

of effective monitoring, such investments would be more likely to be successful, creating more

jobs and more wealth in our nation. Second, with the requirement for a more thorough and

timely monitoring, an incentive would be created for technology firms to invest in development

of more effective software and platforms that makes such monitoring possible. This could

possibly lead to the development of a whole new sub-industry – that of developing anti-fraud,

financial monitoring platforms. The technology and capability for developing such platforms

already exists. However, without required monitoring activities that require the use of such

platforms, the software developers do not have sufficient incentive to invest in them. The

requirements in the EB-5 program could be the impetus for launching such anti-fraud

platforms. Once developed, these platforms can be adapted for use in other industries or

programs.

Question 8: What data and information should USCIS consider affirmatively disclosing to

increase transparency in the EB-5 program?

Response: One good source of such information is a report prepared by the Association of

Certified Fraud Examiners (ACFE), titled “Report to the Nations on Occupational Fraud and

Abuse” (Attachment 1). We have enclosed a copy of this report to these comments for your

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reference. This is but one of the many reports by professional associations, all echoing our

position in these comments.

The above source contains a flow chart depicting the various mechanisms through which fraud

can occur within an organization. This flow chart is referred to as the “fraud tree” and can be

found on page 11 of the report. As it can be seen in this chart, there are many possible avenues

through which funds and assets of an organization can be misappropriated and funneled to

unauthorized, improper channels, to the detriment of the organization’s stakeholders. Any

effort to establish effective monitoring must envision and address the possibility of fraud

through all of these channels.

Many professionals have proposed the establishment of a “third party fund administration”. In

essence, this would involve entrusting an independent party to the safekeeping of the invested

funds prior to their commitment to a specific project, and rigorously monitoring this third party.

There is even a commercial platform that facilitates this type of monitoring. While we agree

that this is a useful and effective procedure, we believe that by itself it would not be sufficient.

Such an effort would only monitor the pre-commitment funds, usually cash held in an escrow

account. As the “fraud tree” discussed above suggests, there are many other ways fraud can be

committed beside misappropriation of cash. As stated above, monitoring and prevention of

fraud necessitates a comprehensive look at all potential sources of fraud.

Question 9: What additional costs would stakeholders incur in setting up and maintaining a

monitoring and oversight process?

Response: The level of financial cost to the stakeholders would depend in large part to the

level of monitoring required by the new rules. Monitoring and transparency, as would be

required by the regime we have envisioned in these comments would carry a price tag. The

regional center would have to invest in developing, buying, or licensing the technology to do

the ongoing monitoring of the NCEs and JCEs, or to pay another party to perform such

monitoring. The NCEs and JCEs would have to incur the additional costs of compliance with the

transparency requirements. In the instances where fraud (or potential or pending fraud) is

detected or suspected, investigative costs would have to be incurred to effect the appropriate

protection. Both the regional centers and the NCEs and JCEs may pass on some or all of those

costs to the foreign investors in the form of additional fees, additional invested funds, or a

smaller return on investment. As we have discussed above, the benefit of these additional

efforts and safeguards to all stakeholders would far outweigh their costs.

Question 10: Would an additional filing fee or additional costs to regional centers in preparing

documentation for separate filings be too burdensome to support or justify the suggested initial

filing framework?

Response: The answer to this question is outside the scope of our experience and expertise.

We do not believe the response to this question would have a significant effect on the validity

of the ideas we have discussed in these comments.

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Question 11: Would any of the potential changes described above either deter or incentivize

participation in the program, or directly affect the viability of certain types of investment

projects? If so, how could USCIS best measure the likely effects?

Response: Based on our anecdotal experience, we strongly believe the potential change we

have proposed would greatly encourage and incentivize participation by foreign investors. It

may deter some domestic firms from acting as, or facilitating the creation of, NCEs and JCEs

because of the perceived additional burdens of complying with the new rules. However, we

believe a significant portion of those providers who would be deterred by the new rules would

potentially be the dishonest investment firms and companies who typically cause the problems

associated with misuse of investor funds. We are not aware of a methodology to estimate the

degree by which investment would decrease by imposition of new monitoring and safeguarding

rules. However, the quality and integrity of the projects would rise significantly, and would

comport with the reputation of the US economy as a leader in innovation and efficiency. It is

time that EB5 becomes a true investment banking function. Our nation’s reputation is at risk

when we leave billions of dollars to be circulated without true oversight and regulation. We

believe that the best strategy would be to prescribe these monitoring measures as part of a

pilot program and then measure the results after a test period.

Question 12: Would any of the potential changes described above impact small entities? If so,

how? Please provide data to support your response. Please identify any alternative policy

proposals or other recommendations that would accomplish some or all of the goals identified

above, while mitigating impacts on small entities.

Response: Because of the lower level of internal controls inherent in a smaller company, the

monitoring activities may be harder to implement in those small companies. That said, the

lower internal control in a smaller company is all the more reason for requirements for

monitoring with respect to those smaller investments. Perhaps a different set of requirements

can be proposed for companies of less than a particular size that is sensitive to the limited

staffing and resources of those companies, and the type of documentation kept in those small

firms. Perhaps a foreign investor choosing to invest his or her funds in a small company should

be expected to pay more in monitoring fees to defray some of the burden from the small

company. However, if you look at the industry as a whole, a majority of the foreign investment

dollars are going to the top 1% regional centers because they have a larger marketing budget

and are thus free to do whatever they want to solicit most of the investment dollars. In many

cases, these top regional centers use foreign investors’ money to solicit even more investment

money instead of investing it in the proposed project as planned, absent any regulation or third

party oversight. This puts smaller entities at a great disadvantage for promoting their projects

on an equal footing and must be addressed by creating a mandate for third party monitoring.

We submit these comments with respect to the areas of our specific concern, hoping to bring to

light some of the issues we have observed in our own professional experience and to offer

solutions based on what we have found useful in our own practices. We would be happy to

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respond to any follow-up questions, or to engage in a discussion to clarify any of the above

comments and suggestions.

Respectfully submitted,

Brian Aryai, CPA, CIA, CFE, CFF, PI

Rob Razani, CPA, MST

Audly Bell, CPA, CIA

Mahdi Ghandhari, MBA

Robin Cyrus, IT advisor

Nima Sadeghian