One of the insane and convoluted subplots in South Dakota's insane and convoluted Senate race — which could be the race that decides which party controls the Senate after Election Day — is a scandal involving the Republican candidate, Mike Rounds, who's the former governor of the state. The scandal became public last fall, after one of Rounds's former cabinet officials committed suicide. It turned out that he was facing a likely indictment for "diverting" (i.e., stealing) $550,000 in state funds when he killed himself.
Since then, it's become clear that there were massive conflicts of interest in the way Rounds' administration administered its EB-5 visa program, an obscure initiative that is designed to attract foreign capital to the United States but which is often criticized as an open invitation to corruption. And with just a few weeks left before the Senate election, the scandal has extended to Rounds' own actions as governor.
On October 21, it became clear that before Rounds left office, he found out that one of his Cabinet officials (the one who later committed suicide) was going to work for a consortium of EB-5 visa holders who'd invested in a shady beef plant. But that didn't stop Rounds from signing off on a big loan from the state to the beef plant — which the Cabinet official had proposed (and eventually went to the ex-official's own pockets).
The whole saga involves a bankruptcy, recruiting trips to China and Korea, some shady public-private partnerships, and millions of dollars pocketed from foreign investors. But at its center is the EB-5 visa — which lets immigrants come to the US and get green cards for putting hundreds of thousands of dollars into US businesses.
So what is an EB-5 visa?
The idea behind the EB-5 visa (which Congress created in 1990) is that if you are willing to invest a lot of money to create American jobs, you deserve to be a US citizen. So Congress set up a visa that let investors (and their families) come to the US for two years if they invested a certain amount of money in a business here, then get green cards if that business created enough jobs when the two years are up.
Anyone who's willing to put $1 million into any US business is eligible to apply for an EB-5 visa (although the government might not approve the investment plan). For investors willing to back a company in a rural area, or an area with high unemployment, the investment threshold for an EB-5 visa is lowered to $500,000.
Only 8,600 visas have gone out to investors since the program was invented in 1990, with about twice that number issued to spouses and children. But it's growing rapidly:
Where does job creation enter the picture?
When Congress set up the EB-5 program, they wanted to frame it as a job-creation initiative. So while an investor can get an initial EB-5 visa just by putting money into a US business, that visa only lasts two years.
At the end of two years, the government can give the investor (and family members) a green card — a much shorter wait than most immigrants have. But the investor can only get the green card if he or she can demonstrate that the investment resulted in the creation of at least ten American jobs in those two years. No job creation, no green card.
Isn't that a tremendous risk for the immigrants?
When an investor puts the money directly into a project, yes — he's on the hook for the number of jobs that particular project creates. That wasn't appealing to too many immigrants in the early 1990s. So after a few years, to keep immigrant investors from flying completely blind, Congress let EB-5 investment money go through middlemen.
The federal government allows entities in the US — typically private companies, but sometimes nonprofits or even state agencies — to apply to be "regional centers" for EB-5 visas. The regional centers pool immigrants' investments, and decide which projects to develop and fund.
There are a few benefits to this. First of all, the federal government has a lower bar for job creation when an EB-5 visa holder has invested through a regional center. The investor still needs to create 10 jobs in the two years he has the visa, but those don't all have to be with the company that he invested the money in. He also gets credit for "indirect" job creation — other jobs created as a result of that money. If an investor puts his money toward building an apartment building, for example, he also gets credit for jobs created by the businesses that rent out the ground floor.
Additionally, immigrants who direct their investments through regional centers don't have to monitor whether the projects they fund are creating jobs — the regional center is responsible for keeping track of that (though at the end of two years, it's still the immigrant who faces the consequences). And with regional centers, lots of smaller $500,000 investments can be bundled into much bigger projects.
It's unusual for states to run their own regional centers, but it's generally considered a safer way to protect immigrants' investments — Vermont, one of the most successful EB-5 programs in the country, keeps its regional center under state control. South Dakota's regional center also started out as a state agency in 2004, mostly investing in relatively small local dairies — and was considered a quiet EB-5 success story.
How did things turn bad?
Basically, over the past seven years, the EB-5 has become a much bigger deal. And South Dakota wanted some of the action.
During the financial crisis of 2007-2008, US businesses and local developers had a lot of trouble getting loans, and the capital that foreign investors could provide started to look mighty tempting. The EB-5 program started to expand rapidly as Americans started to recruit investors for it more aggressively: the government issued 800 EB-5 visas (counting both investors and their families) in 2007, and 6,600 in 2012. And most of that growth came from regional centers, which now represent the overwhelming majority of EB-5s.
But recruiters weren't always too honest with would-be immigrants. EB-5 investors tended to assume that the state or federal government was running the regional center that they gave their money to — and that the federal government was backing their investment. And recruiters tended to exaggerate the safety of investments, and the likelihood that an immigrant could turn an EB-5 visa into a green card.
Investors took the bait because they really wanted to get green cards, and because they believed that EB-5 investments were safer than they really were. And the federal agency that ran the program was an immigration agency, not a financial regulator. Its staff didn't have the expertise to tell a good business plan from a sketchy one, and weren't getting enough information to figure out how legitimate the claims of "indirect job creation" really were. One analyst called the EB-5 program circa 2011 "the Wild West."
That left a lot of room for fraud. Regional centers or people in Texas, New Orleans and Chicago have all been brought into court for EB-5-related fraud over the last few years. And then there's South Dakota.
What actually happened in South Dakota?
The director of South Dakota's regional center — a man by the name of Joop Bollen — was apparently envious of some of the flashier EB-5 programs. EB-5 analyst Michael Gibson wrote that:
When I met with Joop in 2008 he told me that he was tired of funding small time farm operations and wanted to capture some of the limelight and compete with the attention that the other prominent Regional Centers at that time (were) getting in the Chinese & Korean markets by funding larger, higher visibility projects.
So (as reporter David Montgomery of the Argus Leader has reported at length) Bollen decided to scale up. He created a private company called SDRC at the beginning of 2008. A few days later, Bollen — in his capacity as head of South Dakota's state-run regional center — signed a contract to co-manage the state's EB-5 program with SDRC, without disclosing that he owned SDRC.
SDRC didn't take investments itself. Instead, Bollen created at least fourteen different "South Dakota Investment Funds" — with each fund bundling together a handful of immigrants' $500,000 investments. Those funds invested in particular projects — after SDRC had skimmed $5,000 per investor off the top, and charged subsequent annual fees.
At the end of 2009, Bollen officially made the private company, SDRC, the state's certified EB-5 regional center — and immediately resigned his post in state government to run the company full-time.
At the end of 2010, when Gov. Rounds and his administration left office, the state secretary for tourism and economic development, Richard Benda, also went to work for SDRC — monitoring South Dakota's largest, highest-visibility project of all, a beef-packing plant called Northern Beef. Northern Beef got $100 million in investment from EB-5 visa holders — meaning up to 200 different investors and their families were counting on the plant to get them green cards.
After Benda agreed to take a job "monitoring" Northern Beef, but before he actually left his position in state government, he arranged for the state of South Dakota to give Northern Beef a $600,000 loan.
How was Mike Rounds involved?
Rounds, as governor, signed off on the $600,000 loan that his cabinet secretary Benda arranged. The question is whether Rounds knew, when he signed off on the loan to Northern Beef, that Benda was going to work for its investors.
A state audit of the scandal reported that it was Benda's fault for not disclosing his new job to the government before he left office — and not recusing himself from any decisions about the plant, like whether to loan it money, once he'd decided to go work for its investors. But on October 21, Rounds said that he did find out about Benda's new job before he left office — around the same time he signed off on the loan — and it didn't stop him from going through with giving Northern Beef more money.
The plant failed, spectacularly. In October 2012, the Northern Beef plant slaughtered its first cows; nine months later, the plant was bankrupt.
The federal government was already sniffing around the EB-5 program in South Dakota, and with the failure of Northern Beef its investigation got much more serious. Two months after Northern Beef failed, South Dakota abruptly cancelled its contract with the private contractor. An indictment against Benda, the former tourism secretary, had already been drafted when Benda killed himself in October 2013.
Has anything been done to fix the program in response to all this?
The federal government started an aggressive effort to clean up the EB-5 program in early 2013. Attorney Matt Kolodziej says that the former head of US Citizenship and Immigration Services, Alejandro Mayorkas (who's now deputy secretary of the Department of Homeland Security), took "extraordinary steps" to tighten oversight of the program and streamline the application processes for both immigrants and regional centers. The executives running regional centers are now subjected to background checks, just like the immigrant investors they're recruiting. And the agency has hired securities experts who can actually judge whether a business plan is legitimate, and whether it's likely to create American jobs.
It's not clear how quickly the South Dakota scandal would have been caught under the new oversight regime — or whether it would have been caught any sooner at all. And there's still very little accountability for regional centers. If a regional center's investments don't create any jobs, there's nothing the federal government can do to punish it — the immigrant investors who can't get green cards are the only ones who lose out.
The federal government is definitely putting more effort into making sure rich immigrants' EB-5 investments actually translate to job creation. But the program still puts an awful lot of money into the hands of middlemen, who might have their own agendas, while leaving would-be immigrants hoping for a green card with very uncertain prospects.
Correction: This post originally misidentified former South Dakota Secretary for Tourism and Economic Development, Richard Benda, as "Michael Benda."