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REPORT TO THE NATIONS O N O C C U P A T I O N A L F R A U D A N D A B U S E

2016 GLOBAL FRAUD STUDY

2 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

Letter from the President

In 1996, Dr. Joseph T. Wells, CFE, CPA, founder and Chairman of the ACFE, directed the publication of the first Report

to the Nation on Occupational Fraud and Abuse. That study was a truly groundbreaking effort. Analyzing actual case in-

formation provided by Certified Fraud Examiners, the report presented statistical data on the cost of occupational fraud,

the perpetrators, the victims, and the various methods used to commit these crimes. This was the first study of its kind,

and the findings in the 1996 report serve as the foundation for much of what we now know about how occupational

fraud and abuse affects organizations.

It might be hard for some readers to understand or recall just how little we knew about occupational fraud twenty years

ago, but until the release of the first report, there was virtually no statistical information available on the cost, frequency,

methodology, or any other aspect of occupational fraud. Those who worked in the fraud examination field knew the

problem was huge, but no one could say precisely how large, and this made it very difficult to explain to organizations

and clients what a tremendous threat they faced.

If there is one great contribution the Report to the Nations has made to the anti-fraud community, it has been in helping

to raise the general level of awareness about fraud risk. We now live in a world where virtually all business and gov-

ernment organizations understand that fraud is a threat they must deal with. That was most certainly not the case in

1996. The challenge of preventing and detecting these crimes is still formidable, but recognizing the threat is the first

step, and we are honored to know that information contained in the past eight editions of the report has been used by

anti-fraud professionals throughout the world to educate their employers and clients.

On behalf of the ACFE, I am proud to present the 2016 edition of the Report to the Nations, our ninth and most exten-

sive study to date. I believe the information contained in this report will be of great value to anti-fraud practitioners,

business leaders, government officials, academics, the media, and anyone else with an interest in understanding the

tremendous economic threat posed by occupational fraud.

James D. Ratley, CFE

President

Association of Certified Fraud Examiners

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 3

Contents Executive Summary ................................. 4

Introduction .............................................. 6

The Cost of Occupational Fraud .............. 8 Projecting Total Fraud Losses Based on Imperfect Data ���� 8

The Fraud Costs We Know �������������������������������������������������� 8

Distribution of Losses ��������������������������������������������������������� 9

How Occupational Fraud Is Committed ....10 Overlap of Fraud Schemes ������������������������������������������������ 13

Asset Misappropriation Sub-Schemes ����������������������������� 14

Scheme Types by Region �������������������������������������������������� 14

Corruption Cases by Region ��������������������������������������� 16

Duration of Fraud Schemes ���������������������������������������������� 17

Concealment of Fraud Schemes ��������������������������������������� 19

Detection of Fraud Schemes ................. 20 Initial Detection of Occupational Frauds ��������������������������� 20

Initial Detection of Frauds in Small Organizations ������������ 22

Detection Method by Region �������������������������������������������� 23

Median Loss and Median Duration by Detection Method �� 25

Source of Tips ������������������������������������������������������������������� 26

Impact of Hotlines ������������������������������������������������������������� 27

Formal Reporting Mechanism Used by Whistleblower ���� 28

Party to Whom Whistleblower Initially Reported ������������� 29

Victim Organizations .............................. 30 Type of Organization ��������������������������������������������������������� 30

Level of Government Organization ������������������������������� 31

Size of Organization ���������������������������������������������������������� 32

Methods of Fraud in Small Businesses ������������������������ 33

Industry of Organization ���������������������������������������������������� 34

Schemes by Industry ���������������������������������������������������� 36

Corruption Cases by Industry ��������������������������������������� 37

Anti-Fraud Controls at the Victim Organization ���������������� 38

Anti-Fraud Controls at Small Businesses ���������������������� 39

Anti-Fraud Controls by Region �������������������������������������� 40

Effectiveness of Controls ���������������������������������������������� 43

Background Checks ������������������������������������������������������ 45

Internal Control Weaknesses That Contributed to Fraud �� 46

Perpetrators ............................................ 48 Perpetrator’s Position �������������������������������������������������������� 48

Position of Perpetrator Based on Region ���������������������� 50

Perpetrator’s Tenure ���������������������������������������������������������� 54

Perpetrator’s Department ������������������������������������������������� 55

Schemes Based on Perpetrator’s Department ������������� 56

Perpetrator’s Gender ��������������������������������������������������������� 57

Perpetrator’s Gender Based on Region ������������������������ 57

Median Loss Based on Gender ������������������������������������ 58

Position of Perpetrator Based on Gender ��������������������� 58

Perpetrator’s Age �������������������������������������������������������������� 60

Perpetrator’s Education Level ������������������������������������������� 61

The Impact of Collusion ���������������������������������������������������� 62

Collusion Based on Perpetrators’ Relationship to Victim ��� 63

Perpetrator’s Criminal and Employment History �������������� 66

Perpetrator’s Criminal Background ������������������������������� 66

Perpetrator’s Employment History ������������������������������� 67

Behavioral Red Flags Displayed by Perpetrators �������������� 68

Behavioral Red Flags Based on Perpetrator’s Position �� 69

Behavioral Red Flags Based on Scheme Type ������������� 70

Behavioral Red Flags Based on Perpetrator’s Gender ��� 71

Non-Fraud-Related Misconduct ���������������������������������������� 72

Human Resources-Related Red Flags ������������������������������ 73

Case Results ........................................... 74 Criminal Prosecutions ������������������������������������������������������� 74

Civil Suits ��������������������������������������������������������������������������� 76

Recovery of Losses ����������������������������������������������������������� 77

Action Taken Against Perpetrator �������������������������������������� 78

Fines Against Victim Organization ������������������������������������ 78

Methodology .......................................... 80 Analysis Methodology ������������������������������������������������������ 81

Who Provided the Data? ��������������������������������������������������� 81

Primary Occupation ������������������������������������������������������� 81

Nature of Fraud Examination Role �������������������������������� 82

Experience �������������������������������������������������������������������� 82

Appendix ................................................ 84

Index of Figures ...................................... 86

Fraud Prevention Checklist .................... 88

Glossary of Terminology ........................ 90

About the ACFE ...................................... 91

4 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

Executive Summary • The CFEs who participated in our survey estimated that

the typical organization loses 5% of revenues in a given

year as a result of fraud.

• The total loss caused by the cases in our study

exceeded $6.3 billion, with an average loss per case

of $2.7 million.

• The median loss for all cases in our study was

$150,000, with 23.2% of cases causing losses of

$1 million or more.

• Asset misappropriation was by far the most common

form of occupational fraud, occurring in more than

83% of cases, but causing the smallest median loss of

$125,000. Financial statement fraud was on the other

end of the spectrum, occurring in less than 10% of

cases but causing a median loss of $975,000. Corrup-

tion cases fell in the middle, with 35.4% of cases and a

median loss of $200,000.

• Among the various forms of asset misappropriation,

billing schemes and check tampering schemes posed

the greatest risk based on their relative frequency and

median loss.

• The longer a fraud lasted, the greater the financial

damage it caused. While the median duration of the

frauds in our study was 18 months, the losses rose as

the duration increased. At the extreme end, schemes

that lasted more than five years caused a median loss

of $850,000.

• In 94.5% of the cases in our study, the perpetrator took

some efforts to conceal the fraud. The most common

concealment methods were creating and altering

physical documents.

• The most common detection method in our study was

tips (39.1% of cases), but organizations that had re-

porting hotlines were much more likely to detect fraud

through tips than organizations without hotlines (47.3%

compared to 28.2%, respectively).

• When fraud was uncovered through active detection

methods, such as surveillance and monitoring or

account reconciliation, the median loss and median

duration of the schemes were lower than when the

schemes were detected through passive methods, such

as notification by police or by accidental discovery.

• In cases detected by tip at organizations with formal

fraud reporting mechanisms, telephone hotlines were

the most commonly used method (39.5%). However,

tips submitted via email (34.1%) and web-based or

online form (23.5%) combined to make reporting more

common through the Internet than by telephone.

• Whistleblowers were most likely to report fraud to their

direct supervisors (20.6% of cases) or company

executives (18%).

• Approximately two-thirds of the cases reported to us

targeted privately held or publicly owned companies.

These for-profit organizations suffered the largest

median losses among the types of organizations

analyzed, at $180,000 and $178,000, respectively.

• Of the cases involving a government victim, those

that occurred at the federal level reported the highest

median loss ($194,000), compared to state or provincial

($100,000) and local entities ($80,000).

• The median loss suffered by small organizations (those

with fewer than 100 employees) was the same as that in-

curred by the largest organizations (those with more than

10,000 employees). However, this type of loss is likely to

have a much greater impact on smaller organizations.

• Organizations of different sizes tend to have different

fraud risks. Corruption was more prevalent in larger or-

ganizations, while check tampering, skimming, payroll,

and cash larceny schemes were twice as common in

small organizations as in larger organizations.

$6.3 BILLION IN TOTAL LOSSES

23%

of cases caused losses of $1 million or more

median loss per case 150,000$

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 5

• The banking and financial services, government and

public administration, and manufacturing industries

were the most represented sectors in the fraud cases

we examined.

• Although mining and wholesale trade had the fewest

cases of any industry in our study, those industries

reported the greatest median losses of $500,000 and

$450,000, respectively.

• As in previous studies, external audits of the financial

statements were the most commonly implemented

anti-fraud control; nearly 82% of the organizations in

our study underwent independent audits. Similarly,

81.1% of organizations had a code of conduct in place

at the time the fraud occurred.

• Small organizations had a significantly lower implemen-

tation rate of anti-fraud controls than large organiza-

tions. This gap in fraud prevention and detection cover-

age leaves small organizations extremely susceptible to

frauds that can cause significant damage to their

limited resources.

• While the implementation rates of anti-fraud controls

varied by geographical region, several controls—exter-

nal audits of the financial statements, code of conduct,

and management certification of the financial state-

ments—were consistently among the most commonly

implemented across organizations in all locations.

• The presence of anti-fraud controls was correlated

with both lower fraud losses and quicker detection. We

compared organizations that had specific anti-fraud

controls in place against organizations lacking those

controls and found that where controls were present,

fraud losses were 14.3%–54% lower and frauds were

detected 33.3%–50% more quickly.

• The most prominent organizational weakness that con-

tributed to the frauds in our study was a lack of internal

controls, which was cited in 29.3% of cases, followed

by an override of existing internal controls, which

contributed to just over 20% of cases.

• The perpetrator’s level of authority was strongly

correlated with the size of the fraud. The median loss

in a scheme committed by an owner/executive was

$703,000. This was more than four times higher than

the median loss caused by managers ($173,000) and

nearly 11 times higher than the loss caused by

employees ($65,000).

• More occupational frauds originated in the accounting

department (16.6%) than in any other business unit. Of

the frauds we analyzed, more than three-fourths were

committed by individuals working in seven key depart-

ments: accounting, operations, sales, executive/upper

management, customer service, purchasing,

and finance.

• The more individuals involved in an occupational fraud

scheme, the higher losses tended to be. The median

loss caused by a single perpetrator was $85,000. When

two people conspired, the median loss was $150,000;

three conspirators caused $220,000 in losses; four

caused $294,000; and for schemes with five or more

perpetrators, the median loss was $633,000.

• Fraud perpetrators tended to display behavioral warning

signs when they were engaged in their crimes. The most

common red flags were living beyond means, financial

difficulties, unusually close association with a vendor

or customer, excessive control issues, a general

“wheeler-dealer” attitude involving unscrupulous

behavior, and recent divorce or family problems. At

least one of these red flags was exhibited during the

fraud in 78.9% of cases.

• Most occupational fraudsters are first-time offenders.

Only 5.2% of perpetrators in this study had previously

been convicted of a fraud-related offense, and only 8.3%

had previously been fired by an employer for fraud-

related conduct.

• In 40.7% of cases, the victim organizations decided not

to refer their fraud cases to law enforcement, with fear

of bad publicity being the most-cited reason.

• Of the cases in our study, 23.1% resulted in a civil suit,

and 80.8% of such completed suits led to either a

judgment for the victim or a settlement.

• In our study, 8.4% of the victim organizations were

fined as a result of the fraud. The proportion of victim

organizations fined was highest in the Western Europe

(15.6%), Southern Asia (13.6%), and Asia-Pacific

(11.7%) regions.

6 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

Introduction

Organizations face numerous risks to their success;

economic risk, disaster risk, supply-chain risk, regulatory

risk, and technology risk all affect organizations in differ-

ent ways and to varying degrees. While fraud risk is just

one of the many entries on this list, it is universally faced

by all business and government entities. Any organiza-

tion with assets is in danger of those resources being

targeted by dishonest individuals. And, unfortunately,

a notable portion of that threat comes from the very

people who have been hired to carry out the organiza-

tion’s operations. It is this risk—the risk of occupational

fraud1—that the first Report to the Nation on Occupation-

al Fraud and Abuse was published in 1996 to explore.

In the twenty years since the inaugural report was re-

leased, our continuing research on these topics has not

only come to represent the largest collection of occupa-

tional fraud cases ever analyzed, but has also illuminated

1 Occupational fraud can be defined as “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.”

several notable trends in how such fraud is committed,

how it is detected, and how organizations combat this

threat. The stated goals of the 2016 report are the same

as those of its predecessors:

• To summarize the opinions of experts on the per-

centage of organizational revenue lost to fraud each

year

• To categorize the ways in which occupational fraud

occurs

• To analyze the characteristics of the individuals who

commit occupational fraud

• To examine the characteristics of the organizations

that are victimized by occupational fraud

This report contains an analysis of 2,410 cases of occu-

pational fraud that were investigated between January

2014 and October 2015. Figure 1 provides a summary

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 7

Introduction

of where these cases occurred,2 as well as the relative losses incurred by the victims in different geographical regions.

Readers should note that the number of cases in each region largely reflects the demographics of ACFE membership,

as that is the source of our data. Thus, this figure should not be interpreted to mean that occupational fraud is necessar-

ily more or less likely to occur in any particular region.

Figure 1: Geographical Location of Victim Organizations

Region Number of Cases Percent of Cases Median Loss(in U.S. dollars)

United States 1038 48.8% $120,000 Sub-Saharan Africa 285 13.4% $143,000 Asia-Pacific 221 10.4% $245,000 Latin America and the Caribbean 112 5.3% $174,000 Western Europe 110 5.2% $263,000 Eastern Europe and Western/Central Asia 98 4.6% $200,000 Southern Asia 98 4.6% $100,000 Canada 86 4.0% $154,000 Middle East and North Africa 79 3.7% $275,000

The findings presented in this report continue the ACFE’s mission of educating anti-fraud professionals, organizational

leaders, and the public at large about the threat of occupational fraud and how to effectively prevent and detect it. The

2016 report shows the continuation of numerous trends that we have identified during previous studies, provides in-

formation in several new areas, and highlights interesting ways that the occurrence of fraud has evolved over time and

varies across regions. We hope readers come away with a clear picture of how occupational fraud is perpetrated and

how it affects its victims, as well as the importance of proactive initiatives to combat this risk.

2 Geographical location was provided for 2,127 of the cases submitted; see the Appendix on page 84 for a detailed breakdown of these cases by country.

THIS REPORT CONTAINS AN ANALYSIS OF 2,410 CASES OF OCCUPATIONAL FRAUD THAT WERE INVESTIGATED BETWEEN JANUARY 2014 AND OCTOBER 2015. THE FRAUDS IN THIS STUDY TOOK PLACE IN 114 DIFFERENT COUNTRIES THROUGHOUT THE WORLD.

8 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

The Cost of Occupational Fraud

Anti-fraud professionals, business managers, govern-

ment and regulatory agencies, and the media each

have a vested interest in assessing the total amount of

money lost to fraud each year. While many studies have

attempted to determine the extent of fraud’s financial

impact, the challenges in arriving at the true total cost of

fraud are numerous. It is impossible to know exactly how

much fraud goes undetected or unreported, and even

calculations based solely on known fraud cases are likely

to be underestimated, as many victims downplay or mis-

calculate the amount of damage. Nonetheless, attempts

to determine the cost of fraud are important, because

understanding the size of the problem brings attention to

its impact, enables organizations to quantify their fraud

risk, and helps management make educated decisions

about investing in anti-fraud resources and programs.

Projecting Total Fraud Losses Based on Imperfect Data To help measure the financial damage caused by fraud,

we asked the CFEs who participated in our study to

provide us with their best estimate, based on their

experience, of what percentage of revenues the typical

organization loses in a given year as a result of fraud. The

median estimate was that fraud costs organizations 5%

of revenues each year. As one way to illustrate the mag-

nitude of this estimate, applying this percentage to the

2014 estimated Gross World Product of $74.16 trillion re-

sults in a projected potential total fraud loss of up to $3.7

trillion worldwide.3 The limitation of this type of estimate

is that it is based solely on the opinions of our survey

participants and not on any specific data about actual

fraud losses. However, the estimate comes from the

collective knowledge of thousands of CFEs who together

have tens of thousands of years’ experience in the

anti-fraud field. Given the impossibility of obtaining loss

data on all frauds, including those that are undetected or

unreported, this group likely has as much understand-

ing about the harm fraud causes as any other resource

available.4

The Fraud Costs We Know But the primary purpose of this study is not to make esti-

mates; our goal is to collect and report actual case data.

In terms of hard numbers, the total loss caused by the

3 https://www.cia.gov/library/publications/the-world-factbook/geos/xx.html (retrieved March 4, 2016)

4 This 5% estimate is further supported by Jim Gee and Mark Button’s report The Financial Cost of Fraud 2015 (www.pkf.com/media/31640/PKF-The-financial-cost-of-fraud-2015.pdf), which reviews numerous fraud cost calculations computed by various organizations and arrives at an average fraud cost to organizations of 5.6%.

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 9

The Cost of Occupational Fraud

2,410 cases of occupational fraud in our study exceeded $6.3 billion.5 This is an enormous sum, especially considering

these cases represent just a tiny sliver of the thousands, or even millions, of frauds that likely took place throughout the

world during the period of our survey (January 2014 through October 2015). We cannot determine from this number

what global fraud losses truly are, but we can be confident those losses dwarf the known $6.3 billion, most likely by a

factor of hundreds or even thousands. In addition, this $6.3 billion total only reflects direct losses suffered by the victim

organizations; it does not include indirect costs, such as reputational harm or loss of stakeholder relationships, so the

true total loss represented by these cases is likely much higher.

Distribution of Losses Figure 2 shows the overall distribution of the dollar losses caused by the cases in our study; while approximately 54%

caused less than $200,000 in damage, more than 23% resulted in a loss of at least $1 million.

Figure 2: Distribution of Dollar Losses

0%

10%

20%

30%

40%

50%

60%

2012

2014

2016

$1,000,000 or More

$800,000– $999,999

$600,000– $799,999

$400,000– $599,999

$200,000– $399,999

Less than $200,000

55.5%54.4%53.6%

12.8% 11.8% 11.5%

5.7% 6.6% 6.1% 3.5% 3.4% 3.5%

20.6% 21.9%

23.2%

1.9% 1.8% 2.1%

D O L L A R L O S S

P E

R C

E N

T O

F C

A S

E S

The overall average, or mean, loss caused by the frauds in this study was $2.7 million.6 However, throughout this report

we use median calculations, rather than the mean, when we report losses. Because the extremely large cases included

in our study tend to skew the mean losses disproportionately upward, we believe the median loss better represents a

typical fraud case. The median loss for all cases in our study was $150,000, with a quartile distribution as follows:

25th Percentile 50th Percentile 75th Percentile

$30,000 $150,000 $800,000

Even viewing the losses reported to us through a conservative lens, a typical loss of $150,000 per fraud can be dev-

astating to many organizations, especially when combined with the indirect fallout that often accompanies a fraud

scheme. Through this study, we hope to provide readers from all backgrounds—in the anti-fraud profession, in orga-

nizational management, in government and regulatory capacities, and in the media—an understanding of not only the

potential scale of fraud’s impact, but also the damage suffered by its organizational victims and their stakeholders.

5 The total losses represented in our study were actually significantly higher than $6.3 billion. However, our survey results included a few cases with losses so large that including them in the total loss figure may have enabled them to be identified. In order to avoid compromising the confidentiality of our survey participants, we have winsorized the top and bottom 1% of the data used in this total loss calculation (i.e., assigned all cases in the top 1% and bottom 1% the same value as the 99th and 1st percentile, respectively). While including those cases would increase the total loss amount figure substantially, we believe it prudent to both ensure these cases remain unidentified and conservatively report loss amounts.

6 As with the total loss figure above, the top and bottom 1% of the data were winsorized for purposes of this calculation.

10 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

How Occupational Fraud Is Committed

As part of our ongoing research into the methods used to

commit fraud, the ACFE has developed the Occupational

Fraud and Abuse Classification System, also known as

the Fraud Tree. As reflected in the Fraud Tree graphic

shown in Figure 3, there are three primary categories of

occupational fraud: asset misappropriation, corruption,

and financial statement fraud.7 Each of these categories

is broken down into several subcategories.

7 For definitions of each of these scheme types, please see the Glossary of Terminology on page 90.

The Fraud Tree’s genesis was in the first ACFE Report to the Na- tion on Occupational Fraud and Abuse, published in 1996. While analyzing the cases reported to us during our inaugural study on occupational fraud, we noted several patterns in the ways occu- pational fraud is committed. By organizing the cases according to these patterns, we discovered that almost all occupational fraud schemes fall into specific categories that target different functions and operations within a business or government entity. Based on these categories, we created a full classification system of occu-

pational fraud schemes to help organizations understand their fraud risks and develop targeted anti-fraud controls.

The ACFE has made minor modifications to the Fraud Tree since its inception to improve its organizational structure and more closely align it with the thousands of cases analyzed over our two decades of research. For example:

• In 2012, we reorganized the schemes that target cash by adding a category called Theft of Cash Receipts, placing Skim- ming and Cash Larceny as sub-categories of this new group,

The Evolution of the Fraud Tree

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 11

How Occupational Fraud Is Committed

Figure 3: Occupational Fraud and Abuse Classification System (Fraud Tree)

Corruption

Conflicts of Interest

Cash

Theft of Cash on Hand

Theft of Cash Receipts

Fraudulent Disbursements

Inventory and All Other Assets

Purchasing Schemes

Sales Schemes

Bid Rigging

Skimming Cash Larceny

Misuse Larceny

Asset Requisitions

and Transfers

False Sales and Shipping

Purchasing and Receiving

Unconcealed Larceny

Sales

Unrecorded Write-Off Schemes

Lapping Schemes

Unconcealed

Understated

Receivables Refunds and Other

Billing Schemes

Payroll Schemes

Expense Reimbursement

Schemes

Check Tampering

Register Disbursements

Forged Maker False Voids

False RefundsForged Endorsement

Authorized Maker

Altered Payee

Mischaracterized Expenses

Ghost Employee

Commission Schemes

Overstated Expenses

Fictitious Expenses

Multiple Reimbursements

Falsified Wages

Shell Company

Non- Accomplice

Vendor

Personal Purchases

Invoice Kickbacks

Timing Differences

Fictitious Revenues

Improper Asset

Valuations

Concealed Liabilities and

Expenses

Timing Differences

Understated Revenues

Improper Asset

Valuations

Overstated Liabilities and

Expenses

Improper Disclosures

Improper Disclosures

Illegal Gratuities Economic ExtortionBribery Net Worth/ Net Income

Overstatements

Net Worth/ Net Income

Understatements

Asset Misappropriation

Financial Statement Fraud

and adding another category for Theft of Cash on Hand. This change was intended to better classify the different operational points at which cash can be misappropriated from the victim organization (i.e., at receipt, when kept on hand, or during a disbursement transaction).

• Also in 2012, we renamed and refocused the category that cur- rently appears as Financial Statement Fraud to better reflect the fact that all the schemes in this category involve some form of falsified or manipulated financial statements.

• This year, we modified the second-level category names that

appear under Financial Statement Fraud to clarify that these schemes affect the overall reported financial position and re- sults (i.e., the net worth and net income) of the organization, rather than just the reported assets or revenue.

Even with these minor changes, however, the general structure of the Fraud Tree still holds, twenty years after its creation. This con- sistency reflects the notion that, while fraudsters embrace technol- ogy and devise new variations on schemes, the mechanisms and approaches employed by occupational fraud perpetrators fall into clear, time-tested categories.

12 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

How Occupational Fraud Is Committed

Asset misappropriation is by far the most common of the three primary categories of occupational fraud, consistently

occurring in more than 83% of all cases reported to us (see Figure 4). These schemes tend to cause the lowest losses

of the three categories, with a median loss of $125,000 per scheme. On the opposite end of the spectrum is financial

statement fraud, which was involved in less than 10% of the cases in our study, but which caused a median loss of

$975,000. Corruption schemes fall in the middle in terms of both frequency and losses. Approximately 35% of the cases

we analyzed involved corruption, and these schemes caused a median loss of $200,000.

Figure 4: Occupational Frauds by Category—Frequency

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

2012 2014

2016

Financial Statement Fraud

Corruption

Asset Misappropriation

T Y

P E

O F

F R

A U

D

P E R C E N T O F C A S E S

83.5%

85.4%

86.7%

35.4%

33.4%

36.8%

9.6%

9.0%

7.6%

Figure 5: Occupational Frauds by Category—Median Loss

T Y

P E

O F

F R

A U

D

M E D I A N L O S S

$0 $500,000 $1,000,000 $1,500,000 $2,000,000

Financial Statement Fraud

Corruption

Asset Misappropriation

2016

2014

2012

$125,000

$130,000

$120,000

$200,000

$250,000

$200,000

$975,000

$1,000,000

$1,000,000

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 13

How Occupational Fraud Is Committed

Overlap of Fraud Schemes Many fraudsters do not limit themselves to a single type of fraud; they steal from their employers wherever the oppor-

tunity presents itself. Thus, many of the cases reported to us involved more than one of the three primary categories

of occupational fraud. Figure 6 shows the overlap of those categories in the cases we reviewed. Of the 2,284 cases in

which the respondent identified the scheme type(s), 727—or 31.8%—involved more than one major fraud category. The

most common combination was asset misappropriation and corruption, which were co-perpetrated in 23.6% of cases.

In 3.8% of cases, the perpetrator committed all three categories of fraud.

Figure 6: Overlap of Fraud Schemes

6.6% 2.9% Asset Misappropriation Only

57.2%

Asset Misappropriation and Corruption

23.6%

Corruption Only 9.0%

All Three Categories 3.8%

Asset Misappropriation and Financial Statement Fraud

3.4%

Financial Statement Fraud Only

2.0% Corruption and Financial

Statement Fraud 1.0%

14 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

How Occupational Fraud Is Committed

Asset Misappropriation Sub-Schemes Because such a high percentage of cases (83.5%) involved asset misappropriation, we expanded our analyses of these

cases by examining the frequency and median loss of the principal asset misappropriation sub-schemes.8 Figure 7

reflects the relative risks posed by each of these sub-schemes, with billing schemes being the most common (22.2% of

all cases) and check tampering9 being the most costly (median loss of $158,000).

Figure 7: Frequency and Median Loss of Asset Misappropriation Sub-Schemes

0% 5% 10% 15% 20% 25% $0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

$180,000

Less Risk More Risk

Register Disbursements $30,000 (2.7%)

Cash Larceny $90,000 (8.4%)

Cash on Hand $25,000 (11.5%)

Payroll $90,000 (8.5%)

Check Tampering $158,000 (11.4%)

Skimming $53,000 (11.9%)

Expense Reimbursements $40,000 (14.0%)

Non-Cash $70,000 (19.2%)

Billing $100,000 (22.2%)

M E

D IA

N L

O S

S

P E R C E N T O F C A S E S

Scheme Types by Region To help organizations in different regions throughout the world benchmark their fraud occurrences and manage their

fraud risks, we analyzed the prevalence of different forms of fraud in each geographic region (this analysis includes the

nine asset misappropriation sub-schemes, as well as corruption and financial statement fraud). The results are reflect-

ed in Figures 8–16. In every region, corruption was one of the two most common scheme types, with either billing

schemes or non-cash misappropriations taking the other top spot.

Figure 9: Scheme Types by Region— Sub-Saharan Africa

Scheme Number of Cases Percent of Cases

Corruption 138 48.4% Billing 53 18.6% Non-Cash 50 17.5% Cash on Hand 47 16.5% Skimming 42 14.7% Cash Larceny 34 11.9% Check Tampering 33 11.6% Expense Reimbursements 26 9.1% Financial Statement Fraud 16 5.6% Payroll 11 3.9% Register Disbursements 7 2.5%

Figure 8: Scheme Types by Region— United States

Scheme Number of Cases Percent of Cases

Billing 289 27.8% Corruption 258 24.9% Non-Cash 174 16.8% Skimming 167 16.1% Expense Reimbursements 164 15.8% Check Tampering 154 14.8% Payroll 131 12.6% Cash on Hand 125 12.0% Cash Larceny 102 9.8% Financial Statement Fraud 93 9.0% Register Disbursements 29 2.8%

8 For definitions of each of these sub-scheme types, please see the Glossary of Terminology on page 90.

9 For purposes of this report, the term check tampering includes manipulation of payments made via both paper-based checks and electronic payment methods.

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 15

How Occupational Fraud Is Committed

Figure 10: Scheme Types by Region— Asia-Pacific

Scheme Number of Cases Percent of Cases

Corruption 107 48.4% Non-Cash 49 22.2% Billing 45 20.4% Expense Reimbursements 40 18.1% Financial Statement Fraud 24 10.9% Cash on Hand 23 10.4% Check Tampering 22 10.0% Skimming 20 9.0% Cash Larceny 17 7.7% Register Disbursements 10 4.5% Payroll 6 2.7%

Figure 11: Scheme Types by Region— Latin America and the Caribbean

Scheme Number of Cases Percent of Cases

Corruption 51 45.5% Non-Cash 26 23.2% Billing 23 20.5% Financial Statement Fraud 17 15.2% Expense Reimbursements 16 14.3% Check Tampering 14 12.5% Skimming 10 8.9% Payroll 9 8.0% Cash on Hand 7 6.3% Cash Larceny 3 2.7% Register Disbursements 1 0.9%

Figure 12: Scheme Types by Region— Western Europe

Scheme Number of Cases Percent of Cases

Corruption 44 40.0% Non-Cash 28 25.5% Billing 21 19.1% Expense Reimbursements 20 18.2% Financial Statement Fraud 19 17.3% Cash on Hand 10 9.1% Check Tampering 9 8.2% Payroll 9 8.2% Cash Larceny 4 3.6% Skimming 4 3.6% Register Disbursements 3 2.7%

Figure 13: Scheme Types by Region— Eastern Europe and Western/Central Asia

Scheme Number of Cases Percent of Cases

Corruption 54 55.1% Non-Cash 18 18.4% Billing 18 18.4% Financial Statement Fraud 17 17.3% Cash on Hand 10 10.2% Expense Reimbursements 10 10.2% Cash Larceny 7 7.1% Payroll 6 6.1% Check Tampering 4 4.1% Register Disbursements 3 3.1% Skimming 2 2.0%

Figure 14: Scheme Types by Region— Southern Asia

Scheme Number of Cases Percent of Cases

Corruption 66 67.3% Non-Cash 22 22.4% Expense Reimbursements 14 14.3% Billing 12 12.2% Cash on Hand 9 9.2% Financial Statement Fraud 8 8.2% Cash Larceny 7 7.1% Skimming 7 7.1% Check Tampering 4 4.1% Payroll 4 4.1% Register Disbursements 2 2.0%

Figure 15: Scheme Types by Region— Canada

Scheme Number of Cases Percent of Cases

Billing 25 29.1% Corruption 23 26.7% Expense Reimbursements 15 17.4% Non-Cash 14 16.3% Financial Statement Fraud 11 12.8% Cash on Hand 10 11.6% Check Tampering 10 11.6% Skimming 10 11.6% Cash Larceny 9 10.5% Payroll 9 10.5% Register Disbursements 5 5.8%

16 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

How Occupational Fraud Is Committed

Corruption Cases by Region Corruption is a global problem. It is not limited to any particular region, and it affects organizations of all sizes, types,

and industries, regardless of whether their operations cross jurisdictional lines. Nonetheless, there are certain places in

the world where corruption is a greater risk than in others. We analyzed the corruption cases reported to us by region to

highlight the relative risk of corruption worldwide (see Figure 17). Southern Asia had the largest percentage of reported

corruption cases in our study, followed by the Middle East and North Africa. However, because this illustration reflects

only those cases reported to us by the CFEs who took part in our survey, it is important to note that our data does not

necessarily reflect the total amount of corruption that occurs in each region.

Figure 17: Frequency and Median Loss of Corruption Cases by Region*

$150,000

$285,000

$300,000

$200,000

$500,000 $112,000

United States

Canada

Latin American and the Caribbean Sub-Saharan Africa

Asia-Pacific

Southern Asia

Middle East and North Africa

Western Europe

Eastern Europe and Western/Central Asia

$400,000

$200,000

$250,000

45.5%

24.9%

26.7% 40.0%

57.0%

55.1%

67.3%

48.4%

48.4%

*For each region, the percentage shown indicates the proportion of cases in the region that involved corruption, and the dollar figure represents median loss for the corruption cases in the region.

Figure 16: Scheme Types by Region— Middle East and North Africa

Scheme Number of Cases Percent of Cases

Corruption 45 57.0% Non-Cash 21 26.6% Cash on Hand 15 19.0% Billing 12 15.2% Expense Reimbursements 9 11.4% Skimming 9 11.4% Check Tampering 6 7.6% Financial Statement Fraud 5 6.3% Cash Larceny 4 5.1% Payroll 2 2.5% Register Disbursements 1 1.3%

IN EVERY REGION, CORRUPTION WAS ONE OF THE TWO MOST COMMON SCHEME TYPES.

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 17

How Occupational Fraud Is Committed

Duration of Fraud Schemes In addition to the type of scheme perpetrated, the loss caused by a fraud is also a function of how long it lasts before

being detected. As shown in Figure 18, the longer perpetrators are able to go undetected, the more financial harm

they are able to cause. The good news is that many fraud losses are mitigated by early detection, as more than one-

quarter of cases were uncovered in the first six months. However, the median duration of the frauds in our study was

18 months, and more than 32% lasted at least two years before they were discovered.

Figure 18: Frequency and Median Loss Based on Duration of Fraud

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

$900,000

More than 60 Months

49–60 Months

37–48 Months

25–36 Months

19–24 Months

13–18 Months

7–12 Months

6 Months or Less

0%

5%

10%

15%

20%

25%

30%

D U R A T I O N O F S C H E M E

M E

D IA

N L

O S

S P

E R

C E

N T

O F

C A

S E

S

$45,000

$100,000

$150,000 $150,000

$300,000

$350,000

$738,000

$850,000 26.4%

18.9%

8.5%

14.0%

12.0%

6.3% 6.0%

7.8%

Percent of CasesMedian Loss

THE LONGER AN OCCUPATIONAL FRAUD SCHEME GOES UNDETECTED, THE GREATER LOSSES TEND TO BE.

THE MEDIAN DURATION OF THE FRAUDS IN OUR STUDY WAS 18 MONTHS.

NEARLY ONE-THIRD OF FRAUDS LASTED AT LEAST TWO YEARS BEFORE THEY WERE DETECTED.

18 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

How Occupational Fraud Is Committed

We also examined the median duration of the different types of frauds. As seen in Figure 19, the typical cash register

disbursement scheme was uncovered the most quickly, with a median duration of 13 months. In contrast, payroll, check

tampering, financial statement fraud, expense reimbursements, and billing schemes all lasted a median of two years

before being detected.

Figure 19: Median Duration of Fraud Based on Scheme Type

S C

H E

M E

T Y

P E

M E D I A N M O N T H S T O D E T E C T I O N

0 5 10 15 20 25 30 35 40

2012

2014

2016

Register Disbursements

Non-Cash

Cash on Hand

Corruption

Cash Larceny

Skimming

Billing

Expense Reimbursements

Financial Statement Fraud

Check Tampering

Payroll

30

24 24 24

24 24 24

22 18

24

18 20

18

18

18

18 19

15

15

18

12 12

12

13 14

24 24

24

24 24 24

26

36

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 19

How Occupational Fraud Is Committed

Concealment of Fraud Schemes For the first time in this study, we asked survey respondents what steps the fraudsters took to conceal their schemes.

Interestingly, the frequency of various concealment methods did not vary much based on the type of fraud perpetrated.

Creating and altering physical documents were the most common concealment methods for all three categories,

though the creation of fraudulent documents was slightly more common in corruption cases. Additionally, we found

that the vast majority of fraudsters proactively attempted to conceal their schemes; only 5.5% of respondents noted

that the perpetrator did not take any steps to hide the fraud.

Figure 20: Concealment Method by Scheme Type

0% 10% 20% 30% 40% 50% 60% 70%

Financial Statement Fraud

Corruption

Asset Misappropriation

No Concealment Method

Other

Deleted Journal Entries

Altered Journal Entries

Deleted Transactions in the Accounting System

Deleted Electronic Documents or Files

Altered Account Reconciliations

Altered Account Balances in the Accounting System

Created Fraudulent Journal Entries

Created Fraudulent Electronic Documents or Files

Altered Electronic Documents or Files

Destroyed Physical Documents

Created Fraudulent Transactions in the Accounting System

Altered Transactions in the Accounting System

Altered Physical Documents

Created Fraudulent Physical Documents 50.7%

60.7% 52.9%

49.3% 52.9% 52.9%

37.9% 36.4%

42.2%

38.4% 42.9%

39.8%

29.2% 35.0%

37.7%

33.8% 30.0%

36.1%

32.4% 30.7%

32.8%

30.6% 27.9%

30.3%

31.5% 30.7%

29.5%

24.2% 25.7%

27.0%

22.8% 24.3% 24.2%

17.4% 20.0%

18.9%

16.9% 17.9%

16.8%

11.9% 12.9%

11.9%

11.4% 12.1%

9.0%

6.4% 7.9%

5.3%

C O

N C

E A

L M

E N

T M

E T

H O

D

P E R C E N T O F C A S E S

20 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

Detection of Fraud Schemes

Most fraudsters do not undertake their schemes ex-

pecting they will get caught. When people choose to

engage in occupational fraud, they typically know that

they are risking their careers, reputations, and freedom

by engaging in such misconduct. Therefore, increasing

the likelihood that a scheme will be detected is a pillar of

fraud prevention.

In addition to identifying patterns in how fraud is commit-

ted, we analyzed how occupational fraud schemes were

initially detected. The overall frequency with which each de-

tection method uncovered a fraud was generally consistent

with previous reports, though we found that the frequency

tended to vary based on an organization’s size and location.

Also, by examining the relationship between detec-

tion methods and other factors, we identified ways for

anti-fraud professionals to enhance fraud detection at

their own or their clients’ organizations. For instance, by

comparing the magnitude and duration of fraud schemes

to the detection method, we determined that some

detection methods tend to be associated with less costly

frauds. Additionally, we found evidence that organiza-

tions can benefit from being proactive in detecting fraud.

Initial Detection of Occupational Frauds Figure 21 shows the overall frequency of how schemes

were initially detected, including a comparison from our

2014 and 2012 reports. As in previous years, tips were

the most common detection method by a wide margin,

accounting for 39.1% of cases. In the 2016 data, internal

audit (16.5%) edged out management review (13.4%) as

the second-most common detection method.

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 21

Detection of Fraud Schemes

Figure 21: Initial Detection of Occupational Frauds

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

2012

2014

2016

Confession

IT Controls

Surveillance/Monitoring

Notified by Law Enforcement

External Audit

Document Examination

Other

Account Reconciliation

By Accident

Management Review

Internal Audit

Tip

D E

T E

C T

IO N

M E

T H

O D

P E R C E N T O F C A S E S

39.1% 42.2%

43.3%

16.5% 14.1% 14.4%

13.4% 16.0%

14.6%

5.6% 6.8% 7.0%

5.5% 6.6%

4.8%

5.5% 0.5% 1.1%

3.8% 4.2% 4.1%

3.8% 3.0% 3.3%

2.4% 2.2%

3.0%

1.9% 2.6%

1.9%

1.3% 1.1% 1.1%

1.3%

1.5% 0.8%

22 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

Detection of Fraud Schemes

Initial Detection of Frauds in Small Organizations Our data shows that detection methods varied substantially between small organizations (i.e., those with fewer than 100

employees) and larger organizations. The starkest variation occurred with tips; small and larger organizations detected

fraud via tip in 29.6% and 43.5% of cases, respectively. Similarly, internal audit was the detection method for 12% of

cases at small organizations but 18.6% at larger organizations.

One possible explanation for these disparities is that the controls and procedures an organization has in place affect

how fraud schemes are caught. Figure 48 on page 39 shows that most small organizations do not have a reporting

hotline (25.7%), while the majority of larger organizations do (74.1%). Internal audit departments are also less likely

to exist at smaller organizations than at larger ones (38.6% and 88.3%, respectively). In place of tips, small organiza-

tions tend to detect more frauds through management review, account reconciliation, accident, external audit, and

document examination.

Figure 22: Detection Method by Size of Victim Organization

0% 10% 20% 30% 40% 50%

100+ Employees

<100 Employees

IT Controls

Confession

Surveillance/Monitoring

Notified by Law Enforcement

Document Examination

External Audit

By Accident

Other

Account Reconciliation

Internal Audit

Management Review

Tip

D E

T E

C T

IO N

M E

T H

O D

P E R C E N T O F C A S E S

1.3% 1.1%

1.8% 1.0%

2.2% 1.9%

3.5% 1.9%

5.4% 3.1%

6.4% 2.6%

7.3% 4.8%

7.7% 4.3%

8.3% 4.4%

12.0% 18.6%

14.5% 12.7%

29.6% 43.5%

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 23

Detection of Fraud Schemes

Detection Method by Region Each of the following tables shows initial detection methods for a particular geographic region. While tips are consis-

tently the top detection method in every region, they are especially common in Southern Asia (53.1% of cases),

Eastern Europe and Western/Central Asia (47.4%), and Asia-Pacific (45.2%). Internal audit was the second-most-

common initial detection method in every region except Canada and the United States, where management review

came in second.

Figure 23: Detection Method by Region— United States

Detection Method Percent of Cases

Tip 37.0% Management Review 14.3% Internal Audit 14.1% By Accident 7.2% Account Reconciliation 6.1% Other 5.5% Document Examination 4.8% External Audit 4.0% Notified by Law Enforcement 2.5% Surveillance/Monitoring 1.9% IT Controls 1.5% Confession 1.2%

Figure 26: Detection Method by Region— Latin America and the Caribbean

Detection Method Percent of Cases

Tip 36.9% Internal Audit 19.8% Management Review 17.1% Other 8.1% Account Reconciliation 4.5% By Accident 3.6% Document Examination 2.7% External Audit 2.7% Surveillance/Monitoring 2.7% Confession 1.8% Notified by Law Enforcement 0.0% IT Controls 0.0%

Figure 24: Detection Method by Region— Sub-Saharan Africa

Detection Method Percent of Cases

Tip 37.3% Internal Audit 16.2% Management Review 10.2% Account Reconciliation 7.4% By Accident 5.3% Other 4.9% Document Examination 4.9% External Audit 4.9% IT Controls 3.2% Notified by Law Enforcement 2.1% Surveillance/Monitoring 2.1% Confession 1.4%

Figure 25: Detection Method by Region— Asia-Pacific

Detection Method Percent of Cases

Tip 45.2% Internal Audit 15.8% Management Review 13.1% External Audit 5.9% Account Reconciliation 5.0% Notified by Law Enforcement 4.5% Other 4.1% By Accident 2.7% Document Examination 1.4% Surveillance/Monitoring 0.9% IT Controls 0.9% Confession 0.5%

24 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

Detection of Fraud Schemes

Figure 29: Detection Method by Region— Southern Asia

Detection Method Percent of Cases

Tip 53.1% Internal Audit 21.9% Management Review 9.4% Account Reconciliation 5.2% By Accident 4.2% Surveillance/Monitoring 3.1% Other 1.0% External Audit 1.0% Confession 1.0% Document Examination 0.0% Notified by Law Enforcement 0.0% IT Controls 0.0%

Figure 27: Detection Method by Region— Western Europe

Detection Method Percent of Cases

Tip 40.9% Internal Audit 16.4% Management Review 11.8% Other 8.2% Document Examination 4.5% External Audit 4.5% By Accident 3.6% Surveillance/Monitoring 3.6% Notified by Law Enforcement 2.7% Account Reconciliation 1.8% Confession 1.8% IT Controls 0.0%

Figure 28: Detection Method by Region— Eastern Europe and Western/Central Asia

Detection Method Percent of Cases

Tip 47.4% Internal Audit 20.6% Management Review 12.4% Other 6.2% Account Reconciliation 4.1% By Accident 2.1% Confession 2.1% Document Examination 1.0% External Audit 1.0% Notified by Law Enforcement 1.0% Surveillance/Monitoring 1.0% IT Controls 1.0%

Figure 30: Detection Method by Region— Canada

Detection Method Percent of Cases

Tip 32.6% Management Review 20.9% Internal Audit 16.3% Other 9.3% By Accident 7.0% Account Reconciliation 3.5% Document Examination 3.5% External Audit 2.3% Notified by Law Enforcement 2.3% IT Controls 1.2% Confession 1.2% Surveillance/Monitoring 0.0%

Figure 31: Detection Method by Region— Middle East and North Africa

Detection Method Percent of Cases

Tip 39.2% Internal Audit 25.3% Management Review 11.4% Account Reconciliation 5.1% Other 5.1% By Accident 3.8% Document Examination 3.8% Surveillance/Monitoring 3.8% External Audit 1.3% Notified by Law Enforcement 1.3% IT Controls 0.0% Confession 0.0%

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 25

Detection of Fraud Schemes

Median Loss and Median Duration by Detection Method Our data suggests a relationship between the manner in which fraud is initially detected and the amount of financial

harm the scheme causes. Figure 32 illustrates the relationship among the detection method, median loss, and median

duration of occupational frauds. The detection methods are organized left-to-right in ascending order of duration, and

the circles represent the size of the median loss. Additionally, the data points are color coded to indicate whether the

detection method is primarily active, passive, or potentially active or passive.

An active detection method involves a deliberate search for misconduct at the direction of someone within the organi-

zation or an internal control or process that is instrumental in searching for fraud. In contrast, passive detection occurs

when the organization learns of the fraud by accident, confession, or unsolicited notification by another party. Some de-

tection methods could potentially be active or passive, depending on the circumstances. For example, tips might often

be passive, but organizations that effectively promote reporting mechanisms actively cultivate such tips. Additionally,

while the typical external audit is not primarily designed to look for fraud, an organization might procure an external

audit in response to a suspected fraud, so external audits could be considered either active or passive, depending on

the circumstances.

Our data shows that, generally speaking, frauds that are detected through active methods tend to be caught sooner and

cause smaller losses than frauds that are detected passively. Of all detection methods, notification by law enforcement

had both the highest associated median loss ($1 million) and longest median duration (36 months). Of the active detec-

tion methods, the highest median loss (for IT controls) was $150,000, while the longest median duration (for manage-

ment review) was 18 months.

Thus, organizations might be able to reduce the duration and cost of fraud by implementing controls or processes that

will increase the likelihood of active detection, such as active management review, attentive account reconciliation, and

surveillance or monitoring techniques.

Figure 32: Median Loss and Median Duration by Detection Method

0

5

10

15

20

25

30

35

40

45

Notified by Police

By Accident

External Audit

Management Review

TipDocument Examination

ConfessionInternal Audit

Account Reconciliation

IT Controls

Surveillance/ Monitoring

M E

D IA

N M

O N

T H

S T

O D

E T

E C

T IO

N

D E T E C T I O N M E T H O D

$48,000 6 Months

$150,000 6 Months

$85,000 12 Months

$100,000 12 Months

$104,000 12 Months

$147,000 17 Months

$135,000 18 Months

$470,000 24 Months

$250,000 24 Months

$1,000,000 36 Months

Active Detection Methods Potentially Active or Passive Detection Methods Passive Detection Methods

$500,000 12 Months

26 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

Detection of Fraud Schemes

Source of Tips As tips are the most common detection method (see Figure 21 on page 21), it is helpful to know who is likely to report

fraud to the organization. Employees, who provided 51.5% of tips, are generally the focus of reporting mechanisms

at most organizations. However, anti-fraud professionals should remember that more than 40% of all tips came from

non-employees. Customers (17.8%), vendors (9.9%), and other parties were significant sources of tips. Thus, some

organizations might cultivate more tips by promoting fraud reporting mechanisms to multiple audiences.

Additionally, 14% of tips came from anonymous sources. Some jurisdictions restrict organizations from promoting

anonymous reporting mechanisms, but organizations who choose not to have them risk losing sources who are not

comfortable revealing their identity.

Figure 33: Source of Tips

Employee 51.5%

Customer 17.8%

Anonymous 14.0%

Other 12.6%

Vendor 9.9%

Shareholder/ Owner 2.7%

Competitor 1.6%

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 27

Detection of Fraud Schemes

Impact of Hotlines One way to determine the effectiveness of reporting hotlines is to compare the percentage of cases that were initially

detected via tip in organizations with and without hotlines. Figure 34 shows that while tips were the most common

detection method regardless of whether a hotline was in place, schemes were detected by tip in 47.3% of cases at

organizations that had hotlines, but in only 28.2% of cases at organizations without them.

Figure 34: Impact of Hotlines

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Organizations Without Hotlines

Organizations With Hotlines

Confession

Notified by Law Enforcement

External Audit

IT Controls

Surveillance/Monitoring

Document Examination

Other

By Accident

Account Reconciliation

Management Review

Internal Audit

Tip

D E

T E

C T

IO N

M E

T H

O D

P E R C E N T O F C A S E S

47.3% 28.2%

18.4% 13.4%

12.1% 15.4%

3.9% 8.1%

3.9% 7.8%

3.1% 9.1%

2.7% 5.3%

2.0% 1.8%

2.0% 0.5%

1.8% 6.1%

1.8% 2.6%

0.9% 1.8%

MORE THAN 40% OF ALL TIPS CAME FROM NON-EMPLOYEES, SUCH AS CUSTOMERS AND VENDORS.

PERCENT OF CASES DETECTED BY TIP

47% 28%

With Hotlines

Without Hotlines

28 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

Detection of Fraud Schemes

Formal Reporting Mechanism Used by Whistleblower Our research has consistently established tips as a major source for detecting fraud, and the presence of hotlines can have

a substantial impact on reporting (see Figure 34 on page 27). To understand how tips are received, we asked respondents to

specify the formal reporting mechanism(s) used by the whistleblower. Figure 35 shows that while telephone hotlines are the

most common (39.5% of tips received), more than half of complaints were submitted via the Internet (i.e., email and Web-

based or online forms combined). The data suggests that organizations might benefit from offering multiple channels for

reporting fraud.

Figure 35: Formal Reporting Mechanism Used by Whistleblower

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Fax

Other

Mailed Letter/Form

Web-Based/Online Form

Email

Telephone Hotline

F O

R M

A L

R E

P O

R T

IN G

M E

C H

A N

IS M

U S

E D

P E R C E N T O F T I P S

16.7%

9.8%

1.5%

39.5%

34.1%

23.5%

WHISTLEBLOWERS REPORT FRAUD THROUGH A NUMBER OF DIFFERENT CHANNELS, SUCH AS TO A DIRECT SUPERVISOR, COMPANY EXECUTIVE, OR A FRAUD INVESTIGATION TEAM.

More than half of whistleblowers used internet-based reporting

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 29

Detection of Fraud Schemes

Party to Whom Whistleblower Initially Reported A question that frequently emerges when organizations develop and promote reporting mechanisms is: Who should

receive reports about fraud? To help provide some insight into this issue, we asked our survey participants to whom

the whistleblowers in their cases reported their suspicions. Figure 36 shows that whistleblowers’ direct supervisors

were the party most commonly reported to (20.6%). Additionally, executives (18%), fraud investigation teams (13.1%),

and internal audit departments (12.3%) each received a significant number of whistleblower reports. In reviewing the

“other” category, many of the survey responses indicated that human resources or the owner of the organization were

the party to whom the fraud was reported.

Figure 36: Party to Whom Whistleblower Initially Reported

0% 5% 10% 15% 20% 25%

In-House Counsel

External Audit

Board or Audit Committee

Law Enforcement or Regulator

Coworker

Internal Audit

Fraud Investigation Team

Executive

Other

Direct Supervisor

P A

R T

Y R

E P

O R

T E

D T

O

P E R C E N T O F T I P S

18.8%

18.0%

13.1%

12.3%

9.9%

7.4%

6.6%

2.4%

1.8%

20.6%

Figure 37: Top Three Parties to Whom Tips Were Reported Based on Perpetrator’s Department

Operations Accounting Sales Customer Service Purchasing Finance Executive/Upper Management

Direct Supervisor (25.3%)

Executive (38.0%)

Direct Supervisor (26.4%)

Direct Supervisor (28.6%)

Executive (26.7%)

Direct Supervisor (21.1%)

Board or Audit Committee

(22.2%)

Internal Audit (18.6%)

Direct Supervisor (27.1%)

Executive (20.8%)

Coworker (23.8%)

External Audit (26.7%)

Coworker (21.1%)

Law Enforcement or Regulator

(20.4%)

Fraud Investigation

Team or Executive (Both 15.7%)

Fraud Investigation

Team (10.1%)

Fraud Investigation

Team (17.0%)

Internal Audit (16.7%)

Direct Supervisor or Fraud

Investigation Team

(Both 16.7%)

Executive (21.1%)

Executive (18.5%)

Our findings indicate that the party to whom whistleblowers re- port tends to differ based on the perpetrator’s department. Figure 37 includes the top three parties reported to for each department that made up 5% or more of the total responses. Throughout the organization, direct supervisors or executives are common parties who receive tips. However, when perpetrators were executives or in upper management, whistleblowers were most likely to report to

the board of directors or audit committee (22.2%) and second-most likely to report to law enforcement (20.4%). One explanation for this trend could be fear of retaliation from executives, making internal reporting to a direct supervisor risky. Additionally, reporting to inter- nal audit was common when perpetrators worked in departments typically made up of junior staff, such as operations (18.6%) and customer services (16.7%), but not in other departments.

Whistleblower Reports Vary Based on Department Where Fraud Occurs

30 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

Victim Organizations

As part of our survey, we asked respondents to provide

demographic information regarding the victim organi-

zation, such as entity type, size, and industry. Using this

data, we analyzed the frequency and median loss of

fraud cases at various categories of victim organizations,

as well as the types of schemes committed within differ-

ent industries.

Additionally, we asked respondents what mechanisms

the organization had in place to fight fraud when the

scheme occurred. From these responses, we looked

more closely at controls by victim size and region. This

information enabled us to explore whether the presence

of specific anti-fraud controls corresponded with trends

in median fraud losses and the time it took to detect

schemes in organizations.

Type of Organization Figure 38 depicts both the median loss and percent

of cases based on the type of organization that was

victimized. Privately held and publicly owned companies

combined represented two-thirds of the cases reported

to us. These organizations also suffered the greatest me-

dian losses ($180,000 and $178,000, respectively), which

is consistent with our previous studies.

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 31

Victim Organizations

Figure 38: Type of Victim Organization—Frequency and Median Loss

$0

$40,000

$80,000

$120,000

$160,000

$200,000

OtherNot-for-Profit Government Public Company Private Company 0%

10%

20%

30%

40%

T Y P E O F V I C T I M O R G A N I Z A T I O N

M E

D IA

N L

O S

S P

E R

C E

N T

O F

C A

S E

S

$180,000 $178,000

$109,000

$92,000 $100,000

37.7%

28.6%

18.7%

10.1% 5.0%

Percent of CasesMedian Loss

Level of Government Organization Because different levels of government vary in their operations and resources available to fight fraud, we further

analyzed the government organizations that were victimized by the frauds in our study. Figure 39 shows the frequency

of schemes for each level of government, as well as their respective median losses. Local, state/provincial, and federal

governments accounted for approximately the same amount of cases (around 30% each). However, the highest median

losses occurred at the federal level ($194,000); median losses at the state/provincial and local levels were significantly

smaller ($100,000 and $80,000, respectively).

Figure 39: Level of Government—Frequency and Median Loss

$0

$40,000

$80,000

$120,000

$160,000

$200,000

OtherFederalState/ProvincialLocal 0%

5%

10%

15%

20%

25%

30%

35%

L E V E L O F G O V E R N M E N T

M E

D IA

N L

O S

S

P E

R C

E N

T O

F G

O V

E R

N M

E N

T V

IC T

IM O

R G

A N

IZ A

T IO

N S

$80,000

$100,000

$194,000

$62,000

32.3% 31.3%

30.1%

10.1%

6.3%

Percent of Government Victim OrganizationsMedian Loss

32 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

Victim Organizations

Size of Organization Small organizations (defined as organizations with fewer than 100 employees for purposes of this report) were the most

common victims in our study, at approximately 30%, while large organizations (those with more than 10,000 employ-

ees) accounted for the fewest cases, at 20.5%. Although both categories of organizations suffered a median loss of

$150,000, it is important to consider that small businesses would likely feel the impact of such a loss much more than

large organizations.

Figure 40: Size of Victim Organization—Frequency

0% 5% 10% 15% 20% 25% 30% 35%

2016

2014

201210,000+

1,000–9,999

100–999

<100

N U

M B

E R

O F

E M

P L

O Y

E E

S

P E R C E N T O F C A S E S

30.1% 28.8%

31.8%

21.7% 23.6%

19.5%

27.7% 27.9% 28.1%

20.5% 19.8%

20.6%

Figure 41: Size of Victim Organization—Median Loss

$0 $40,000 $80,000 $120,000 $160,000 $200,000

2012

2014 2016

10,000+

1,000–9,999

100–999

<100

N U

M B

E R

O F

E M

P L

O Y

E E

S

M E D I A N L O S S

$150,000 $154,000

$147,000

$186,000 $128,000

$100,000 $100,000 $100,000

$150,000 $160,000

$140,000

$150,000

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 33

Victim Organizations

Methods of Fraud in Small Businesses Figure 42 illustrates which fraud schemes small businesses were most susceptible to and which schemes occurred

more often in larger organizations. Corruption was more prevalent in larger organizations (40.2% of cases) than in small

businesses (29.9% of cases). In contrast, check tampering, skimming, payroll, and cash larceny schemes all occurred

over twice as frequently in small businesses as in larger organizations.

Figure 42: Scheme Type by Size of Victim Organization

0% 10% 20% 30% 40% 50%

100+ Employees

<100 Employees

Register Disbursements

Financial Statement Fraud

Cash Larceny

Payroll

Cash on Hand

Expense Reimbursements

Non-Cash

Skimming

Check Tampering

Billing

Corruption

S C

H E

M E

T Y

P E

P E R C E N T O F C A S E S

29.9% 40.2%

27.1% 20.9%

20.1% 8.4%

19.9% 8.9%

18.8%

16.7% 13.9%

16.4%

14.0% 6.3%

13.5% 6.5%

12.1% 8.8%

3.7% 2.3%

19.3%

10.3%

34 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

Victim Organizations

Industry of Organization Figure 43 categorizes the cases reported to us by industry of the victim organization and Figure 44 displays the median

loss of the various industries. Banking and financial services, government and public administration, and manufacturing

were the most represented sectors in the fraud cases we examined. Conversely, industries with the lowest frequency of

fraud cases included communications and publishing, mining, and wholesale trade. While this data shows the distribu-

tion of cases from our survey, it does not necessarily suggest that certain industries are more at risk of fraud than oth-

ers. Our data was collected through a survey of Certified Fraud Examiners (CFEs), so this distribution primarily reflects

the industries for which CFEs typically provide services.

Figure 43: Industry of Victim Organizations

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% Communications and Publishing

Mining Wholesale Trade

Arts, Entertainment, and Recreation Utilities

Real Estate Agriculture, Forestry, Fishing, and Hunting

Religious, Charitable, or Social Services Services (Professional) Telecommunications

Transportation and Warehousing Services (Other)

Oil and Gas Technology Insurance

Construction Retail

Education Health Care

Other Manufacturing

Government and Public Administration Banking and Financial Services

IN D

U S

T R

Y

P E R C E N T O F C A S E S

16.8%

10.5%

8.8%

7.0%

6.6%

6.0%

4.8%

3.9%

3.9%

3.4%

3.4%

3.2%

3.1%

2.8%

2.7%

2.4%

2.0%

1.9%

1.8%

1.7%

1.6%

0.9%

0.7%

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 35

Victim Organizations

Although mining and wholesale trade had among the fewest cases of any industry, those industries suffered the

greatest median losses at $500,000 and $450,000, respectively. Other industries with significant median losses included

professional services; agriculture, forestry, fishing, and hunting; and oil and gas. Banking and financial services report-

ed the highest number of cases and had a median loss of $192,000. Other highly represented industries with middle-

of-the-road median losses included manufacturing ($194,000), health care ($120,000), and government and public

administration ($133,000). The education sector had the smallest median loss of $62,000, but a significant number of

reported cases.

Figure 44: Industry of Victim Organizations (Sorted by Median Loss)

Industry Number of Cases Percent of Cases Median Loss

Mining 20 0.9% $500,000 Wholesale Trade 36 1.6% $450,000 Services (Professional) 60 2.7% $310,000 Agriculture, Forestry, Fishing, and Hunting 44 2.0% $300,000 Oil and Gas 74 3.4% $275,000 Construction 86 3.9% $259,000 Technology 74 3.4% $235,000 Communications and Publishing 16 0.7% $225,000 Real Estate 41 1.9% $200,000 Manufacturing 192 8.8% $194,000 Telecommunications 62 2.8% $194,000 Banking and Financial Services 368 16.8% $192,000 Transportation and Warehousing 68 3.1% $143,000 Government and Public Administration 229 10.5% $133,000 Health Care 144 6.6% $120,000 Insurance 85 3.9% $107,000 Utilitities 40 1.8% $102,000 Other 153 7.0% $100,000 Services (Other) 70 3.2% $100,000 Retail 104 4.8% $85,000 Religious, Charitable, or Social Services 52 2.4% $82,000 Arts, Entertainment, and Recreation 37 1.7% $75,000 Education 132 6.0% $62,000

36 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

Victim Organizations

Schemes by Industry Figure 45 is a heat map that represents the frequency of schemes in each industry that had at least 50 reported cases.

Boxes are shaded based on the respective level of occurrence, with red boxes indicating extremely high-frequency

risks and light yellow denoting the least common schemes. Billing, corruption, and non-cash misappropriation schemes

were among the most common types of fraud in several industries. Conversely, certain schemes tended to be particu-

larly high-risk in specific industries, such as skimming in educational organizations or check tampering in professional

services firms and religious or charitable organizations.

Figure 45: Frequency of Schemes Based on Industry

In du

st ry

/S ch

em e

B an

ki ng

a nd

Fi

na nc

ia l S

er vi

ce s

G ov

er nm

en t a

nd

Pu bl

ic A

dm in

is tr

at io

n

M an

uf ac

tu rin

g

H ea

lth C

ar e

Ed uc

at io

n

Re ta

il

Co ns

tru ct

io n

In su

ra nc

e

Oi l a

nd G

as

Te ch

no lo

gy

Se rv

ic es

(O th

er )

Tr an

sp or

ta tio

n an

d W

ar eh

ou si

ng

Te le

co m

m un

ic at

io ns

Se rv

ic es

(P

ro fe

ss io

na l)

Re lig

io us

, C ha

rit ab

le ,

or S

oc ia

l S er

vi ce

s

Cases 368 229 192 144 132 104 86 85 74 74 70 68 62 60 52

Billing 9.5% 25.3% 32.8% 31.3% 34.1% 15.4% 27.9% 17.6% 20.3% 29.7% 22.9% 22.1% 12.9% 26.7% 25.0%

Cash Larceny 11.1% 7.9% 5.2% 9.7% 13.6% 12.5% 8.1% 4.7% 4.1% 5.4% 15.7% 4.4% 1.6% 13.3% 9.6%

Cash on Hand 17.9% 10.5% 8.3% 11.1% 17.4% 11.5% 7.0% 4.7% 9.5% 8.1% 22.9% 5.9% 4.8% 20.0% 13.5%

Check Tampering

9.5% 9.2% 13.5% 14.6% 7.6% 9.6% 10.5% 17.6% 4.1% 5.4% 18.6% 10.3% 6.5% 31.7% 25.0%

Corruption 37.5% 38.4% 48.4% 30.6% 31.8% 32.7% 36.0% 28.2% 48.6% 44.6% 28.6% 51.5% 41.9% 16.7% 28.8%

Expense Reimbursements

5.4% 15.7% 22.9% 20.1% 15.9% 8.7% 20.9% 9.4% 10.8% 27.0% 12.9% 8.8% 19.4% 16.7% 25.0%

Financial Statement Fraud

12.0% 7.9% 10.9% 13.2% 5.3% 5.8% 17.4% 7.1% 6.8% 12.2% 17.1% 5.9% 9.7% 11.7% 3.8%

Non-Cash 10.6% 14.8% 30.2% 13.2% 17.4% 32.7% 22.1% 5.9% 17.6% 18.9% 22.9% 29.4% 38.7% 10.0% 13.5%

Payroll 3.8% 13.5% 11.5% 9.7% 7.6% 3.8% 16.3% 5.9% 8.1% 2.7% 11.4% 7.4% 3.2% 11.7% 13.5%

Register Disbursements

2.7% 1.7% 5.7% 2.1% 1.5% 8.7% 1.2% 0.0% 0.0% 1.4% 5.7% 2.9% 3.2% 1.7% 1.9%

Skimming 6.8% 14.0% 8.3% 12.5% 25.0% 17.3% 15.1% 10.6% 8.1% 5.4% 21.4% 11.8% 6.5% 18.3% 19.2%

Less Risk More Risk

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 37

Victim Organizations

Corruption Cases by Industry Figure 46 displays the total number of cases in each industry, along with the percentage of those cases categorized as

corruption schemes. Although mining only had 20 total cases reported, 11 of those cases (55%) involved corruption,

which was the highest percent of corruption cases in any industry. Other industries with fairly high proportions of

corruption schemes included the transportation and warehousing, oil and gas, and manufacturing sectors. In contrast,

professional services (e.g., medical, legal, and accounting services) reported the fewest number of corruption cases,

with only 16.7% of cases.

Figure 46: Corruption Cases by Industry

Industry Total Number of Cases Number of

Corruption Cases Percent of Cases

Involving Corruption

Mining 20 11 55.0% Transportation and Warehousing 68 35 51.5% Oil and Gas 74 36 48.6% Manufacturing 192 93 48.4% Technology 74 33 44.6% Telecommunications 62 26 41.9% Wholesale Trade 36 15 41.7% Government and Public Administration 229 88 38.4% Banking and Financial Services 368 138 37.5% Communications and Publishing 16 6 37.5% Other 153 57 37.3% Agriculture, Forestry, Fishing, and Hunting 44 16 36.4% Construction 86 31 36.0% Utilities 40 14 35.0% Real Estate 41 14 34.1% Retail 104 34 32.7% Education 132 42 31.8% Health Care 144 44 30.6% Arts, Entertainment, and Recreation 37 11 29.7% Religious, Charitable, or Social Services 52 15 28.8% Services (Other) 70 20 28.6% Insurance 85 24 28.2% Services (Professional) 60 10 16.7%

38 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

Victim Organizations

Anti-Fraud Controls at the Victim Organization While the presence of internal controls does not provide guaranteed protection against fraud, it can help to both

mitigate losses and deter some potential fraudsters by enhancing the perception of detection. Consequently, enacting

internal controls specifically designed to prevent and detect fraud is a vital part of a fraud risk management program.

Many organizations find it useful to benchmark their anti-fraud controls against their peers, both in terms of what

mechanisms are being employed and the effectiveness of those approaches. To help with this endeavor, we asked

respondents about the anti-fraud controls in place at the victim organization at the time the fraud occurred. As shown

in Figure 47, almost 82% of victim organizations underwent external audits of their financial statements by independent

audit firms. Despite being the most common anti-fraud control analyzed, such audits are not designed specifically to

find fraud and were responsible for detecting less than 4% of the frauds in our study (see Figure 21 on page 21). Con-

versely, hotlines were only present in 60.1% of the victim organizations, and yet we know that tips are consistently and

overwhelmingly the most common method by which frauds are detected.

Figure 47: Frequency of Anti-Fraud Controls

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Rewards for Whistleblowers

Job Rotation/Mandatory Vacation Proactive Data Monitoring/Analysis

Surprise Audits Formal Fraud Risk Assessments

Dedicated Fraud Department, Function, or Team Anti-Fraud Policy

Fraud Training for Managers/Executives Fraud Training for Employees Employee Support Programs

Hotline Independent Audit Committee

Management Review External Audit of ICOFR

Management Certification of F/S Internal Audit Department

Code of Conduct External Audit of F/S

36.7%

12.1%

19.4%

P E R C E N T O F C A S E S

A N

T I-

F R

A U

D C

O N

T R

O L

41.2%

37.8%

39.3%

51.6%

49.6%

51.3%

56.1%

60.1%

62.5%

64.7%

67.6%

71.9%

73.7%

81.1%

81.7%

The following key applies to Figures 47 and 48:

External Audit of F/S = Independent External Audits of the Organization’s Financial Statements

Management Certification of F/S = Management Certification of the Organization’s Financial Statements

External Audit of ICOFR = Independent External Audits of the Organization’s Internal Controls Over Financial Reporting

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 39

Victim Organizations

Anti-Fraud Controls at Small Businesses When it comes to fighting fraud, many small businesses face an uphill battle. These entities not only incur losses as

large as bigger organizations (see Figure 41 on page 32), but they typically have fewer resources with which to combat

this threat. The combination of these factors leaves small businesses particularly vulnerable to occupational fraud. In

addition, the working environment and limited staff size in many small businesses often relies upon, and even requires,

an increased level of trust among the individuals performing daily operational tasks. As most anti-fraud professionals

know, trust is not an internal control. In fact, trust in the wrong person can lead to disaster.

Figure 48 illustrates the frequency with which small businesses enact anti-fraud controls, compared to their larger coun-

terparts. While it is understandable that small businesses do not have the resources necessary to invest in some of the

more expensive internal controls noted, several controls—such as a code of conduct, management review procedures,

and fraud training for staff members—can be implemented with minimal investment. Small businesses are uniquely

susceptible to fraud in many ways, but there are opportunities for improvement in the measures they use to mitigate

this risk.

Figure 48: Frequency of Anti-Fraud Controls by Size of Victim Organization

0% 20% 40% 60% 80% 100%

<100 Employees

+100 EmployeesRewards for Whistleblowers

Job Rotation/Mandatory Vacation

Proactive Data Monitoring/Analysis

Surprise Audits

Formal Fraud Risk Assessments

Dedicated Fraud Department, Function, or Team

Employee Support Programs

Anti-Fraud Policy

Fraud Training for Managers/Executives

Fraud Training for Employees

Hotline

Management Review

Independent Audit Committee

External Audit of ICOFR

Management Certification of F/S

Internal Audit Department

Code of Conduct

External Audit of F/S 56.2% 94.2% 53.8%

91.3%

38.6% 88.3%

43.2%

37.1%

83.7%

79.9%

76.9% 28.0%

74.6%

59.7%

40.4%

74.1% 25.7%

61.9% 23.6%

22.8% 62.6%

23.7%

55.6% 27.6%

15.7% 51.5%

49.2% 15.8%

43.8%

45.8% 18.0%

17.9%

23.1% 10.0%

7.2% 13.5%

A N

T I-

F R

A U

D C

O N

T R

O L

P E R C E N T O F C A S E S

40 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

Victim Organizations

Anti-Fraud Controls by Region Regional variations in the implemen-

tation rates of anti-fraud controls

provide both an interesting perspective

regarding what organizations around

the world are doing to manage fraud

risk and helpful benchmarks for orga-

nizations’ anti-fraud programs. Figures

50–58 reflect the frequency of anti-fraud

controls reported in the cases based on

the geographical region of the victim

organization.

For all regions, external audits of the

financial statements, code of conduct,

and management certification of the fi-

nancial statements were among the five

most common controls. Internal audit

departments also ranked among the

top five for all regions except Canada,

where it was the sixth most common

control. On the opposite end of the

spectrum, both job rotation/mandatory

vacations and rewards for whistleblow-

ers were at the very bottom of the list

for every region.

In addition to this consistency, there

were also some notable differences in

the implementation rates of controls in

the different jurisdictions. For exam-

ple, employee support programs are

among the most common controls in

Canada and the United States (with

implementation rates of 77% and 66%,

respectively), but were among the least

common controls in Southern Asia,

Eastern Europe and Western/Central

Asia, and the Middle East and North

Africa. And while rewards for whis-

tleblowers was the least common con-

trol across all regions, the implementa-

tion rate varied widely—from just 1.1%

of organizations in Eastern Europe and

Western/Central Asia to about 20% of

organizations in both Southern Asia

and Sub-Saharan Africa.

Trends in the Implementation of Anti-Fraud Controls The general implementation rates of anti-fraud controls have remained notably consistent throughout our studies, although we have seen a slight uptick in the prevalence of each control over the last six years.* The most notable changes have been in the implementation rates of hotlines and fraud training for employ- ees, which have increased approximately 9% and 8%, respectively, since 2010.

On the other end of the spectrum, the percentage of organizations that under- go external audits of their financial statements has remained relatively flat, with less than a 1% increase over the same period.

Figure 49: Change in Implementation Rates of Anti-Fraud Controls

Control 2010

Implementation Rate

2016 Implementation

Rate

Change from

2010–2016

Hotline 51.2% 60.1% 8.9% Fraud Training for Employees

44.0% 51.6% 7.6%

Anti-Fraud Policy 42.8% 49.6% 6.8% Code of Conduct 74.8% 81.1% 6.3% Management Review 58.8% 64.7% 5.9% Surprise Audits 32.3% 37.8% 5.6% Fraud Training for Managers/Executives

46.2% 51.3% 5.2%

Independent Audit Committee

58.4% 62.5% 4.1%

Management Certification of Financial Statements

67.9% 71.9% 4.0%

Rewards for Whistleblowers

8.6% 12.1% 3.5%

Job Rotation/ Mandatory Vacation

16.6% 19.4% 2.8%

External Audit of Internal Controls over Financial Reporting

65.4% 67.6% 2.2%

Employee Support Programs

54.6% 56.1% 1.5%

External Audit of Financial Statements

80.9% 81.7% 0.8%

*For this analysis, we only included those controls with categories that have been con- sistently included in our studies since 2010. Formal fraud risk assessments and proactive data monitoring/analysis were added to our study in 2012 and 2014, respectively. And prior to 2014, internal audit department and dedicated fraud department, function, or team were combined into a single control category. Thus, these controls are omitted from the table above.

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 41

Victim Organizations

Figure 50: Frequency of Anti-Fraud Controls— United States

Control Percent of Cases

Code of Conduct 74.6% External Audit of Financial Statements 74.2% Employee Support Programs 66.0% Management Certification of Financial Statements

64.1%

Internal Audit Department 61.4% External Audit of Internal Controls over Financial Reporting

59.8%

Management Review 57.3% Hotline 54.5% Independent Audit Committee 53.8% Fraud Training for Managers/Executives 50.5% Fraud Training for Employees 49.3% Anti-Fraud Policy 45.2% Formal Fraud Risk Assessments 36.5% Dedicated Fraud Department, Function, or Team

36.4%

Proactive Data Monitoring/Analysis 35.5% Surprise Audits 31.8% Job Rotation/Mandatory Vacation 16.1% Rewards for Whistleblowers 12.7%

Figure 52: Frequency of Anti-Fraud Controls— Asia-Pacific

Control Percent of Cases

External Audit of Financial Statements 88.2% Code of Conduct 85.2% Internal Audit Department 83.6% Management Certification of Financial Statements

80.2%

External Audit of Internal Controls over Financial Reporting

74.5%

Management Review 72.3% Independent Audit Committee 68.1% Hotline 65.7% Fraud Training for Employees 53.3% Fraud Training for Managers/Executives 50.8% Employee Support Programs 48.3% Anti-Fraud Policy 46.8% Dedicated Fraud Department, Function, or Team

44.4%

Surprise Audits 41.8% Proactive Data Monitoring/Analysis 34.4% Formal Fraud Risk Assessments 32.6% Job Rotation/Mandatory Vacation 24.6% Rewards for Whistleblowers 7.8%

Figure 51: Frequency of Anti-Fraud Controls— Sub-Saharan Africa

Control Percent of Cases

Code of Conduct 91.9% Internal Audit Department 91.6% External Audit of Financial Statements 88.8% Management Certification of Financial Statements

79.9%

External Audit of Internal Controls over Financial Reporting

77.6%

Management Review 70.8% Independent Audit Committee 69.6% Hotline 67.7% Anti-Fraud Policy 59.2% Fraud Training for Employees 55.0% Fraud Training for Managers/Executives 55.0% Surprise Audits 52.8% Employee Support Programs 50.9% Formal Fraud Risk Assessments 48.2% Dedicated Fraud Department, Function, or Team

47.7%

Proactive Data Monitoring/Analysis 38.5% Job Rotation/Mandatory Vacation 27.8% Rewards for Whistleblowers 20.0%

Figure 53: Frequency of Anti-Fraud Controls— Latin American and the Caribbean

Control Percent of Cases

Code of Conduct 84.8% External Audit of Financial Statements 82.2% Internal Audit Department 80.7% Management Certification of Financial Statements

70.3%

Hotline 68.5% Management Review 68.0% Independent Audit Committee 67.6% External Audit of Internal Controls over Financial Reporting

66.7%

Fraud Training for Employees 54.4% Fraud Training for Managers/Executives 53.9% Anti-Fraud Policy 51.0% Employee Support Programs 46.1% Dedicated Fraud Department, Function, or Team

44.0%

Formal Fraud Risk Assessments 38.1% Surprise Audits 31.0% Proactive Data Monitoring/Analysis 26.7% Job Rotation/Mandatory Vacation 17.0% Rewards for Whistleblowers 6.1%

42 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

Victim Organizations

Figure 54: Frequency of Anti-Fraud Controls— Western Europe

Control Percent of Cases

External Audit of Financial Statements 88.8% Code of Conduct 83.7% Internal Audit Department 80.7% Management Certification of Financial Statements

76.9%

External Audit of Internal Controls over Financial Reporting

75.8%

Independent Audit Committee 75.7% Management Review 74.7% Hotline 63.8% Anti-Fraud Policy 54.9% Fraud Training for Employees 54.4% Fraud Training for Managers/Executives 52.5% Employee Support Programs 51.2% Formal Fraud Risk Assessments 49.0% Dedicated Fraud Department, Function, or Team

45.8%

Proactive Data Monitoring/Analysis 37.1% Surprise Audits 27.4% Job Rotation/Mandatory Vacation 17.7% Rewards for Whistleblowers 6.1%

Figure 56: Frequency of Anti-Fraud Controls— Southern Asia

Control Percent of Cases

External Audit of Financial Statements 96.5% Internal Audit Department 94.7% Management Certification of Financial Statements

91.6%

Code of Conduct 89.0% External Audit of Internal Controls over Financial Reporting

86.7%

Independent Audit Committee 82.6% Management Review 79.8% Hotline 70.5% Fraud Training for Managers/Executives 61.2% Anti-Fraud Policy 58.1% Surprise Audits 57.1% Fraud Training for Employees 54.9% Dedicated Fraud Department, Function, or Team

53.8%

Proactive Data Monitoring/Analysis 44.7% Formal Fraud Risk Assessments 44.6% Employee Support Programs 34.6% Job Rotation/Mandatory Vacation 23.5% Rewards for Whistleblowers 20.3%

Figure 55: Frequency of Anti-Fraud Controls— Eastern Europe and Western/Central Asia

Control Percent of Cases

Code of Conduct 90.9% External Audit of Financial Statements 88.2% Internal Audit Department 82.8% Management Certification of Financial Statements

75.0%

Independent Audit Committee 70.3% Management Review 70.1% External Audit of Internal Controls over Financial Reporting

69.4%

Hotline 65.6% Anti-Fraud Policy 61.4% Fraud Training for Employees 60.5% Fraud Training for Managers/Executives 56.8% Dedicated Fraud Department, Function, or Team

50.0%

Formal Fraud Risk Assessments 45.3% Proactive Data Monitoring/Analysis 39.0% Surprise Audits 35.3% Employee Support Programs 28.6% Job Rotation/Mandatory Vacation 17.6% Rewards for Whistleblowers 1.1%

Figure 57: Frequency of Anti-Fraud Controls— Canada

Control Percent of Cases

External Audit of Financial Statements 83.3% Management Certification of Financial Statements

79.7%

Code of Conduct 79.2% Employee Support Programs 77.0% External Audit of Internal Controls over Financial Reporting

65.8%

Internal Audit Department 64.7% Management Review 61.5% Independent Audit Committee 59.2% Hotline 52.5% Anti-Fraud Policy 39.0% Dedicated Fraud Department, Function, or Team

38.6%

Fraud Training for Employees 38.0% Proactive Data Monitoring/Analysis 37.2% Formal Fraud Risk Assessments 35.5% Fraud Training for Managers/Executives 35.4% Surprise Audits 31.1% Job Rotation/Mandatory Vacation 16.2% Rewards for Whistleblowers 8.0%

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 43

Victim Organizations

Control Percent of Cases

External Audit of Financial Statements 95.9% Internal Audit Department 90.9% Management Certification of Financial Statements

82.4%

Code of Conduct 81.1% External Audit of Internal Controls over Financial Reporting

80.6%

Independent Audit Committee 75.7% Management Review 73.2% Hotline 62.2% Surprise Audits 61.6% Anti-Fraud Policy 50.7% Fraud Training for Employees 47.9% Proactive Data Monitoring/Analysis 46.5% Dedicated Fraud Department, Function, or Team

44.6%

Fraud Training for Managers/Executives 44.4% Formal Fraud Risk Assessments 41.7% Employee Support Programs 25.4% Job Rotation/Mandatory Vacation 24.6% Rewards for Whistleblowers 14.9%

Effectiveness of Controls While the presence of anti-fraud controls helps deter some potential frauds, measuring the preventive value of individ-

ual controls is extremely difficult, if not impossible. However, anti-fraud professionals often need to make a business

case to management for additional resources to address fraud risks. To help illustrate the potential return on investment

for individual anti-fraud controls, we have examined the comparative median fraud loss and time to detection for frauds

in organizations based on whether they had each of the 18 anti-fraud controls in place at the time the fraud occurred

(see Figures 59 and 60 on page 44).

Across the board, the presence of anti-fraud controls was correlated with lower losses and quicker fraud detection.

The 36.7% of victim organizations that were using proactive data monitoring and analysis techniques as part of their

anti-fraud program suffered fraud losses that were 54% lower and detected the frauds in half the time compared to

organizations that did not use this technique. Management review and the presence of a hotline were both similarly

correlated with regard to lower losses (50% reduction) and decreased time to detect the scheme (50% reduction), and

most of the other controls showed similar reductions, as well.

The two controls that most stood out in these comparisons, however, were external audits of the financial statements

(which was the most implemented control) and rewards for whistleblowers (which was the least implemented control).

These two controls fell toward the bottom of the list with regard to both measures of effectiveness. While they were

correlated with lower fraud losses and durations, the correlation was notably smaller for both measures than the other

controls analyzed.

Figure 58: Frequency of Anti-Fraud Controls— Middle East and North Africa

46+54+Q

THE PRESENCE OF ANTI-FRAUD CONTROLS WAS CORRELATED WITH LOWER LOSSES AND QUICKER FRAUD DETECTION.

PROACTIVE DATA MONITORING was associated with 54% lower losses and frauds detected in half the time.

$

$

$ $

44 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

Victim Organizations

Figure 59: Median Loss Based on Presence of Anti-Fraud Controls

Control Percent of Cases Control in

Place Control Not

in Place Percent

Reduction

Proactive Data Monitoring/Analysis 36.7% $92,000 $200,000 54.0% Management Review 64.7% $100,000 $200,000 50.0% Hotline 60.1% $100,000 $200,000 50.0% Management Certification of Financial Statements 71.9% $104,000 $205,000 49.3% Surprise Audits 37.8% $100,000 $195,000 48.7% Dedicated Fraud Department, Function, or Team 41.2% $100,000 $192,000 47.9% Job Rotation/Mandatory Vacation 19.4% $89,000 $170,000 47.6% External Audit of Internal Controls over Financial Reporting 67.6% $105,000 $200,000 47.5% Fraud Training for Managers/Executives 51.3% $100,000 $190,000 47.4% Fraud Training for Employees 51.6% $100,000 $188,000 46.8% Formal Fraud Risk Assessments 39.3% $100,000 $187,000 46.5% Employee Support Programs 56.1% $100,000 $183,000 45.4% Anti-Fraud Policy 49.6% $100,000 $175,000 42.9% Internal Audit Department 73.7% $123,000 $215,000 42.8% Code of Conduct 81.1% $120,000 $200,000 40.0% Rewards for Whistleblowers 12.1% $100,000 $163,000 38.7% Independent Audit Committee 62.5% $114,000 $180,000 36.7% External Audit of Financial Statements 81.7% $150,000 $175,000 14.3%

Figure 60: Median Duration of Fraud Based on Presence of Anti-Fraud Controls

Control Percent of Cases Control in Place

Control Not in Place

Percent Reduction

Surprise Audits 37.8% 12 Months 24 Months 50.0% Proactive Data Monitoring/Analysis 36.7% 12 Months 24 Months 50.0% Dedicated Fraud Department, Function, or Team 41.2% 12 Months 24 Months 50.0% Hotline 60.1% 12 Months 24 Months 50.0% Formal Fraud Risk Assessments 39.3% 12 Months 24 Months 50.0% Management Review 64.7% 12 Months 24 Months 50.0% Independent Audit Committee 62.5% 12 Months 24 Months 50.0% Internal Audit Department 73.7% 12 Months 24 Months 50.0% External Audit of Internal Controls over Financial Reporting 67.6% 12 Months 24 Months 50.0% Management Certification of Financial Statements 71.9% 12 Months 24 Months 50.0% Code of Conduct 81.1% 13 Months 24 Months 45.8% Job Rotation/Mandatory Vacation 19.4% 10 Months 18 Months 44.4% Anti-Fraud Policy 49.6% 12 Months 21 Months 42.9% Fraud Training for Employees 51.6% 12 Months 20 Months 40.0% Fraud Training for Managers/Executives 51.3% 12 Months 20 Months 40.0% Rewards for Whistleblowers 12.1% 11 Months 18 Months 38.9% External Audit of Financial Statements 81.7% 15 Months 24 Months 37.5% Employee Support Programs 56.1% 12 Months 18 Months 33.3%

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 45

Victim Organizations

Background Checks We also asked survey respondents whether the victim organization ran a background check on the perpetrator before

he or she was hired. The responses were fairly evenly split, with approximately 51% of organizations having conducted

background checks and about 49% not having done so.

More than 88% of the background checks conducted did not reveal any prior misconduct or red flags, which under-

scores our findings that the majority of perpetrators are not career criminals—that is, they are usually first-time offenders

(see Figure 92 on page 66 and Figure 93 on page 67) and typically do not take a job with the intention to defraud their

employer. However, roughly 11% of the background checks conducted did uncover at least one red flag (e.g., prior

criminal activity, employment issues, or financial problems) regarding the perpetrator—meaning that the organizations

who hired these individuals knew or should have known about potential issues but hired the person anyway.

Figure 61: Background Check Run on Perpetrator Before Being Hired

6.6% 2.9%

Yes 50.9%

No 49.1%

Background Check Did Not Reveal Red Flag(s)

88.8%

Background Check Revealed Red Flag(s)

11.2%

46 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

Victim Organizations

Of the background checks that were run, most included checks of the perpetrators’ employment and criminal history

(80% and 73.5%, respectively). Additionally, more than half (57.8%) included a check of the future perpetrators’ refer-

ences, and nearly 50% involved an education verification.

Figure 62: Type(s) of Background Checks Run on Perpetrator Before Being Hired

Employment History

Criminal Checks

Reference Checks

Education Verification

Credit Checks

Other

80.0%

73.5%

57.8%

49.6% 38.1% 4.1%

Internal Control Weaknesses That Contributed to Fraud Even in hindsight it can be difficult to pinpoint the exact system breakdowns that allowed a fraud to occur. However,

learning from past incidents of fraud is necessary to better prevent and detect fraud schemes in the future. Consequent-

ly, we asked survey respondents for their perspective on the internal control weaknesses at the victim organization that

contributed to the fraudster’s ability to perpetrate the scheme. Their responses are shown in Figure 63. More than 29%

cited a clear lack of internal controls as the primary issue, with another 20.3% stating that internal controls were present

but had been overridden by the perpetrator.

Figure 63: Primary Internal Control Weakness Observed by CFE

6.6% 2.9% Override of Existing

Internal Controls 20.3%

Lack of Management Review 19.4%

Lack of Competent Personnel in Oversight Roles

6.4%

Other 5.9%

Lack of Employee Fraud Education

2.0%

Lack of Clear Lines of Authority

1.6%

Lack of Internal Controls 29.3%

Lack of Reporting Mechanism 0.5%

Poor Tone at the Top 10.4%

Lack of Independent Checks/Audits

4.2%

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 47

Victim Organizations

We also wanted to see whether the internal control weaknesses varied by the type of fraud scheme perpetrated. Our

findings, shown in Figure 64, are interesting, if not surprising. Organizations that lacked internal controls were more

susceptible to asset misappropriation schemes, while corruption schemes more often involved an override of existing

controls. Further, a poor tone at the top was much more likely to contribute to a financial statement fraud scheme than

either of the other two categories of occupational fraud.

Figure 64: Primary Internal Control Weakness by Scheme Type

0% 5% 10% 15% 20% 25% 30% 35%

Financial Statement Fraud

Corruption

Asset Misappropriation

Lack of Reporting Mechanism

Lack of Clear Lines of Authority

Lack of Employee Fraud Education

Lack of Independent Checks/Audits

Other

Lack of Competent Personnel in Oversight Roles

Poor Tone at the Top

Override of Existing Internal Controls

Lack of Management Review

Lack of Internal Controls

M O

S T

I M

P O

R T

A N

T C

O N

T R

IB U

T IN

G F

A C

T O

R

P E R C E N T O F C A S E S

30.3%

20.3%

20.1%

9.5%

6.1%

4.1% 4.1% 4.1%

0.9%

0.9%

23.4%

15.0%

22.5%

16.9%

6.8% 6.0% 5.9%

6.9% 6.9%

1.8%

1.4%

0.4%

23.9%

17.0%

17.4%

22.9%

1.9%

2.1%

0.5% 0.0%

CONTROL WEAKNESSES IN ORGANIZATIONS OFTEN DIRECTLY CONTRIBUTE TO FRAUD.

top 3 control weaknesses that contributed to fraud

LACK OF INTERNAL CONTROLS

override of existing internal controls

lack of management review

29+71+Q20+80+Q19+81+Q 29% 20% 19%

48 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

Perpetrators

We asked participants to provide information about the

fraudsters they investigated, including factors related to

the perpetrator’s employment (level of authority, depart-

ment, and tenure at the victim organization) and general

demographic information (age, gender, and education

level).10 We also compared cases with single perpetrators

to those involving collusion among two or more people.

Finally, we asked respondents to tell us about various be-

havioral red flags and prior misconduct that might have

been warning signs of fraudulent conduct.

10 In cases where more than one fraudster was involved, the data on perpetrators relates to the principal perpetrator, which we defined as the person who worked for the victim organization and who was the primary culprit.

Perpetrator’s Position Since the first edition of the report in 1996, the perpetra-

tor’s level of authority has been strongly correlated with

the size of the fraud, and that was true again in our 2016

data. Only 18.9% of frauds in our current study were

committed by owners/executives, but the median loss

in these cases was $703,000. Employees and managers

were much more likely to commit occupational fraud, but

as Figure 65 shows, the losses in these schemes were

much lower—though still substantial. The correlation

between authority and loss most likely occurs because

high-level fraudsters tend to have greater access to their

organizations’ assets than lower-level employees, as well

as a better ability to evade or override anti-fraud controls.

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 49

Perpetrators

Figure 65: Position of Perpetrator—Frequency and Median Loss

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

OtherOwner/ExecutiveManagerEmployee 0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

P O S I T I O N O F P E R P E T R A T O R

M E

D IA

N L

O S

S P

E R

C E

N T

O F

C A

S E

S

$65,000

$173,000

18.9%

$703,000

$104,000

40.9%

36.8%

3.4%

Percent of CasesMedian Loss

Figure 66 shows a correlation between the fraudster’s level of authority and the duration of the occupational fraud

scheme. Because high-level fraudsters are generally better equipped to override or circumvent anti-fraud controls, we

would expect their schemes to be harder to detect, and thus to last longer. The typical fraud committed by an employee

in our study lasted one year before it was detected, whereas the typical fraud committed by an owner/executive lasted

twice as long. Frauds committed by managers had a median duration of 18 months.

Figure 66: Median Duration of Fraud Based on Position

Position Median Months to Detect

Employee 12 Manager 18 Owner/Executive 24 Other 18

50 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

Perpetrators

Position of Perpetrator Based on Region Figures 67–75 show the frequency and median loss of occupational fraud schemes sorted by perpetrator position in

each geographical region of our study. Generally speaking, this data follows the trend from the global dataset; in every

region, losses rose along with authority.

Figure 67: Frequency and Median Loss Based on Position of Perpetrator—United States

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

Owner/ExecutiveManagerEmployee 0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

P O S I T I O N O F P E R P E T R A T O R

M E

D IA

N L

O S

S P

E R

C E

N T

O F

C A

S E

S

$54,000

$150,000

$500,00045.3%

31.1%

19.9%

Percent of CasesMedian Loss

Figure 68: Frequency and Median Loss Based on Position of Perpetrator—Sub-Saharan Africa

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

Owner/ExecutiveManagerEmployee 0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

P O S I T I O N O F P E R P E T R A T O R

M E

D IA

N L

O S

S P

E R

C E

N T

O F

C A

S E

S$100,000

$147,000

$400,000

43.8% 40.8%

13.5%

Percent of CasesMedian Loss

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 51

Perpetrators

Figure 69: Frequency and Median Loss Based on Position of Perpetrator—Asia-Pacific

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

Owner/ExecutiveManagerEmployee 0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

P O S I T I O N O F P E R P E T R A T O R

M E

D IA

N L

O S

S P

E R

C E

N T

O F

C A

S E

S

$78,000

$350,000

$1,125,000

33.6%

42.1%

20.6%

Percent of CasesMedian Loss

Figure 70: Frequency and Median Loss Based on Position of Perpetrator—Latin America and the Caribbean

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

$1,600,000

$1,800,000

$2,000,000

Owner/ExecutiveManagerEmployee 0%

5%

10%

15%

20%

25%

30%

35%

40%

P O S I T I O N O F P E R P E T R A T O R

M E

D IA

N L

O S

S P

E R

C E

N T

O F

C A

S E

S

$50,000

$250,000

$1,850,000

35.1% 36.0%

25.2%

Percent of CasesMedian Loss

52 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

Perpetrators

Figure 71: Frequency and Median Loss Based on Position of Perpetrator—Western Europe

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

$1,600,000

Owner/ExecutiveManagerEmployee 0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

P O S I T I O N O F P E R P E T R A T O R

M E

D IA

N L

O S

S P

E R

C E

N T

O F

C A

S E

S

$178,000 $220,000

$1,350,000

30.8%

43.0%

23.4%

Percent of CasesMedian Loss

Figure 72: Frequency and Median Loss Based on Position of Perpetrator—Eastern Europe and Western/ Central Asia

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

Owner/ExecutiveManagerEmployee 0%

5%

10%

15%

20%

25%

30%

35%

40%

P O S I T I O N O F P E R P E T R A T O R

M E

D IA

N L

O S

S P

E R

C E

N T

O F

C A

S E

S

$50,000 $116,000

$1,000,000 34.4% 37.8%

24.4%

Percent of CasesMedian Loss

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 53

Perpetrators

Figure 73: Frequency and Median Loss Based on Position of Perpetrator—Southern Asia

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

Owner/ExecutiveManagerEmployee 0%

10%

20%

30%

40%

50%

60%

70%

P O S I T I O N O F P E R P E T R A T O R

M E

D IA

N L

O S

S P

E R

C E

N T

O F

C A

S E

S

$75,000

$96,000

$300,000

26.9%

62.4%

7.5%

Percent of CasesMedian Loss

Figure 74: Frequency and Median Loss Based on Position of Perpetrator—Canada

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

$900,000

Owner/ExecutiveManagerEmployee 0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

P O S I T I O N O F P E R P E T R A T O R

M E

D IA

N L

O S

S P

E R

C E

N T

O F

C A

S E

S

$110,000

$175,000

$835,00045.1%

30.5%

19.5%

Percent of CasesMedian Loss

54 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

Perpetrators

Figure 75: Frequency and Median Loss Based on Position of Perpetrator—Middle East and North Africa

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

$1,600,000

Owner/ExecutiveManagerEmployee 0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

P O S I T I O N O F P E R P E T R A T O R

M E

D IA

N L

O S

S P

E R

C E

N T

O F

C A

S E

S

$200,000

$308,000

$1,500,000

36.6%

42.3%

16.9%

Percent of CasesMedian Loss

Perpetrator’s Tenure In addition to the correlation between fraud losses and the fraudster’s level of authority, fraud losses also tend to in-

crease the longer a fraudster has worked for the victim organization, as shown in Figure 76. Perpetrators with between

six and ten years’ tenure caused a median loss of $210,000, and those with more than ten years’ tenure caused a median

fraud loss of $250,000. In cases where the fraudster had been employed by the victim for five years or fewer, losses were

significantly lower. At least in part, this trend reflects the fraudster’s position of authority. As shown in Figure 65 on page

49, employees generally cause much smaller losses than managers or executives. Approximately one-half of the fraud-

sters with five or fewer years of tenure were classified as employees, whereas less than one-third of the fraudsters with

six or more years of tenure were employees. In other words, people who stay at an organization for a long period of time

often move up to higher levels of authority, which in turn gives them the opportunity to commit larger frauds.

Figure 76: Tenure of Perpetrator—Frequency and Median Loss

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

More than 10 Years6–10 Years1–5 YearsLess than 1 Year 0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

T E N U R E O F P E R P E T R A T O R

M E

D IA

N L

O S

S P

E R

C E

N T

O F

C A

S E

S

$49,000

$100,000

42.4%

$210,000

$250,000

8.2%

22.9%

26.5%

Percent of CasesMedian Loss

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 55

Perpetrators

Perpetrator’s Department Figure 77 shows where fraudsters worked within the victim organizations in our study. The height of each bubble along

the vertical axis represents the percentage of frauds that originated in each department, and the size of the bubble

represents the median loss for those frauds. For example, we see that more frauds came from the accounting depart-

ment (16.6%) than anywhere else and that the median loss in those cases ($197,000) was slightly larger than the typical

scheme. Fraudsters who worked as executives or upper management, conversely, caused much larger losses than

anyone else ($850,000) and accounted for about 11% of all cases.

Overall, a little more than three-fourths (76%) of occupational frauds came from seven key departments: accounting,

operations, sales, executive/upper management, customer service, purchasing, and finance.

Figure 77: Department of Perpetrator—Frequency and Median Loss

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Ac co

un tin

g

Op era

tio ns

Sa les

Ex ecu

tiv e/U

pp er

M an

ag em

en t

Cu sto

me r S

erv ice

Ot he

r

Pu rch

asi ng

Fin an

ce

W are

ho us

ing /In

ve nt

or yIT

M an

ufa ctu

rin g a

nd Pr

od uc

tio n

M ark

eti ng

/P ub

lic R

ela tio

ns

Hu ma

n R eso

ur ces

Bo ard

of D

ire cto

rs

Re sea

rch an

d D ev

elo pm

en t

Le ga

l

In ter

na l A

ud it*

*Internal Audit category had insufficient responses for median loss calculation.

P E

R C

E N

T O

F C

A S

E S

D E P A R T M E N T O F P E R P E T R A T O R

$170,000 0.9%

0.3%

$76,000 1.0%

$360,000 1.2% $44,000

1.2% $80,000

2.1%

$188,000 2.2%

$200,000 2.8%

$123,000 4.1%

$234,000 4.5%

$150,000 7.7%

$45,000 9.0%

$100,000 8.2%

$850,000 10.9%

$100,000 12.4%

$105,000 14.9% $197,000

16.6%

Median Loss

56 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

Perpetrators

Schemes Based on Perpetrator’s Department Figure 78 shows how frequently various types of occupational fraud were committed within different departments. We

analyzed all departments that had at least 75 reported cases to show what types of fraud might present the greatest

risk within different areas of a typical organization. Boxes are shaded based on the respective level of occurrence, with

red boxes indicating extremely high-frequency risks and light yellow denoting the least common schemes. Corruption

accounted for at least 20% of cases in every department, but was a particularly high risk in purchasing (68.9% of cases)

and executive/upper management (50.9%). Billing schemes rated as a significant risk in five departments, including ex-

ecutive/upper management, where they accounted for 36.8% of cases. This data may be helpful in developing effective

risk-based anti-fraud controls that are tailored to specific departments or functions within an organization.

Figure 78: Frequency of Schemes Based on Perpetrator’s Department

Department/ Scheme Accounting Operations Sales

Executive/Upper Management

Customer Service Purchasing Finance

Warehousing/ Inventory

Cases 348 312 260 228 189 161 94 86

Billing 27.0% 21.5% 14.2% 36.8% 9.5% 25.5% 24.5% 9.3% Cash Larceny 14.9% 7.7% 8.1% 10.1% 14.3% 3.7% 18.1% 0.0% Cash on Hand 15.5% 13.8% 6.5% 12.3% 18.5% 13.0% 22.3% 5.8% Check Tampering

30.5% 9.3% 2.7% 13.6% 7.4% 6.2% 24.5% 1.2%

Corruption 21.6% 34.9% 34.6% 50.9% 25.4% 68.9% 37.2% 32.6% Expense Reimbursements

15.8% 12.2% 14.2% 23.7% 5.8% 14.9% 14.9% 3.5%

Financial Statement Fraud

12.9% 5.4% 7.3% 30.3% 3.7% 3.1% 23.4% 9.3%

Non-Cash 7.2% 19.6% 20.4% 24.6% 16.4% 18.6% 13.8% 57.0% Payroll 21.6% 6.4% 1.5% 10.1% 3.7% 5.0% 7.4% 2.3% Register Disbursements

3.2% 4.2% 5.0% 1.8% 3.2% 4.3% 3.2% 0.0%

Skimming 17.5% 12.8% 11.9% 11.8% 16.9% 7.5% 12.8% 5.8%

Less Risk More Risk

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 57

Perpetrators

Perpetrator’s Gender Among the cases in our 2016 study, 69% of fraud perpetrators were male and 31% were female. This is consistent with

gender distributions we have encountered in past studies; females have been responsible for between 30% and 35%

of frauds in every study since we began collecting global data (see Figure 79). To some extent, this probably reflects

the labor force itself. Men make up a larger portion of the global workforce than women, so we might expect them to

commit a larger portion of occupational frauds.11 However, workforce participation does not account for all the gender

differences in occupational fraud. Our study also explored how the perpetrator’s gender correlates with differences in

loss, scheme type, and behavioral indicators of fraud (see pages 58–59 and 71).

Figure 79: Gender of Perpetrator—Frequency

31+69+A 2016

Male 69.0%

Female 31.0%

33+67+A 2014

Male 66.8%

Female 33.2%

35+65+A 2012

Male 65.0%

Female 35.0%

Perpetrator’s Gender Based on Region Figure 80 shows the gender distribution of fraud perpetrators based on the region in which the fraud occurred. The largest

imbalance was in Southern Asia, where nearly 97% of fraudsters were male, while the United States had the most even

distribution between males and females: men accounted for 55.7% of frauds, and women were responsible for 44.3%.

Figure 80: Gender of Perpetrator Based on Region

0% 20% 40% 60% 80% 100%

Female

Male United States

Canada

Asia-Pacific

Eastern Europe and Western/Central Asia

Western Europe

Sub-Saharan Africa

Latin America and the Caribbean

Middle East and North Africa

Southern Asia

R E

G IO

N

P E R C E N T O F C A S E S

96.8% 3.2%

90.3% 9.7%

88.2% 11.8%

82.3% 17.7%

79.2% 20.8%

79.1% 20.9%

73.1% 26.9%

64.6% 35.4%

55.7% 44.3%

11 A 2013 report by the World Bank estimated that females make up 40% of the global labor force. The World Bank, Gender at Work: A Companion to the World Development Report on Jobs (www.worldbank.org/content/dam/Worldbank/Event/Gender/GenderAtWork_web2.pdf)

58 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

Perpetrators

Median Loss Based on Gender Males not only are responsible for a larger number of frauds than females, but they also generally cause larger losses.

In our 2016 data, the median loss caused by a male fraudster was $187,000, while the median loss caused by a female

was $100,000. As Figure 81 shows, we have consistently seen a large gap between male and female median fraud

losses.

Figure 81: Gender of Perpetrator—Median Loss

$0

$50,000

$100,000

$150,000

$200,000

$250,000

2012

2014

2016

MaleFemale

M E

D IA

N L

O S

S

G E N D E R O F P E R P E T R A T O R

$91,000 $83,000

$100,000

$200,000 $185,000 $187,000

Position of Perpetrator Based on Gender One possible explanation for the gender disparity in fraud losses could be related to position of authority. As shown in

Figure 65 on page 49, higher levels of authority are correlated with larger fraud losses (e.g., owner/executives tend to

commit larger frauds than managers, and managers tend to commit larger frauds than employees). As Figure 82 shows,

the proportion of male fraudsters increases as we move up the organizational chart. Only 58.9% of employee-level

fraudsters were male, but that figure rose to 73% among managers and 83% among owner/executives. Given this dis-

tribution, we would expect the median fraud loss for males to be quite a bit higher than for females.

Figure 82: Position of Perpetrator Based on Gender

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Female

Male Owner/Executive

Manager

Employee

P O

S IT

IO N

O F

P E

R P

E T

R A

T O

R

P E R C E N T O F C A S E S

58.9% 41.1%

73.0% 27.0%

83.0% 17.0%

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 59

Perpetrators

But interestingly, when we break this analysis down further to compare losses at each level of authority, males still tend

to cause significantly higher losses than females (see Figure 83). At the employee level, the median loss for a male

fraudster was $72,000 versus $55,000 for a female; this represents a 30.9% increase. At the manager level, frauds com-

mitted by men were 18.6% larger than those committed by females, and at the owner/executive level, frauds by men

were 175% larger. This is comparable to our findings in 2014 and 2012.

Figure 83: Position of Perpetrator—Median Loss Based on Gender

$0 $200,000 $400,000 $600,000 $800,000 $1,000,000

Female

MaleOwner/Executive

Manager

Employee

P O

S IT

IO N

O F

P E

R P

E T

R A

T O

R

M E D I A N L O S S

$72,000

$55,000

$178,000

$300,000

$825,000

$150,000

In addition to differences in frequency and loss, our data also indicates a discrepancy in the types of fraud committed

by males and females. According to Figure 84, 43.9% of male perpetrators committed corruption and 12.6% committed

financial statement fraud. Conversely, only 22.6% of female perpetrators committed corruption and only 5.3% com-

mitted financial statement fraud. Corruption and financial statement fraud tend to cause much higher losses than asset

misappropriation (see Figure 5 on page 12), so this discrepancy in the type of fraud committed might also help explain

why frauds committed by males tend to be much larger.

Figure 84: Frequency of Schemes Based on Gender

0% 20% 40% 60% 80% 100%

Female

MaleFinancial Statement Fraud

Corruption

Asset Misappropriation

S C

H E

M E

T Y

P E

P E R C E N T O F C A S E S

81.8%

90.1%

43.9%

22.6%

12.6%

5.3%

60 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

Perpetrators

Perpetrator’s Age Figure 85 presents the frequency and median loss of fraud schemes based on the perpetrator’s age. The frequency

distribution shows that 55% of fraudsters were between the ages of 31 and 45. Losses, however, generally rose with the

age of the fraudster. Fewer than 3% of frauds were committed by people over the age of 60, but these cases had a me-

dian loss of $630,000, which was much higher than any other age range. Also, our data showed a line of demarcation

right around the age of 40. In all ranges at or below the age of 40, the highest median loss was $100,000. In all ranges

above the age of 40, the median loss was $250,000 or higher.

Figure 85: Age of Perpetrator—Frequency and Median Loss

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

>6056–6051–5546–5041–4536–4031–3526–30<26 0%

5%

10%

15%

20%

25%

A G E O F P E R P E T R A T O R

M E

D IA

N L

O S

S P

E R

C E

N T

O F

C A

S E

S

$15,000 $50,000

$100,000 $100,000

$250,000 $250,000 $280,000

$258,000

$630,000

4.6%

10.5%

15.6%

20.0% 19.4%

14.8%

8.2%

4.5%

2.5%

Percent of CasesMedian Loss

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 61

Perpetrators

Perpetrator’s Education Level Losses also tend to correlate with education, as shown in Figure 86. Fraud perpetrators with a university degree caused

a median loss of $200,000, and those with a postgraduate degree caused a median loss of $300,000. These figures were

significantly higher than the losses caused by less educated fraudsters. This discrepancy might be another factor that

is heavily influenced by the fraudster’s position of authority. More than 70% of those with university or postgraduate

degrees in our study were either managers or owner/executives, while those without a university degree were much

more likely to have lower-level jobs.

Figure 86: Education Level of Perpetrator—Frequency and Median Loss

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

Postgraduate DegreeUniversity DegreeSome UniversityHigh School Graduate or Less 0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

E D U C A T I O N L E V E L O F P E R P E T R A T O R

M E

D IA

N L

O S

S P

E R

C E

N T

O F

C A

S E

S$90,000 $120,000

47.3%

$200,000

$300,000

22.5%

16.5%

10.1% 13.2%

Percent of CasesMedian Loss

62 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

Perpetrators

The Impact of Collusion Nearly half of the cases in our study involved multiple perpetrators colluding with one another to commit fraud, and the

greater the number of fraudsters involved, the higher losses tended to be (see Figure 87).

Figure 87: Number of Perpetrators—Frequency and Median Loss

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

Five or MoreFour�reeTwoOne 0%

10%

20%

30%

40%

50%

60%

N U M B E R O F P E R P E T R A T O R S

M E

D IA

N L

O S

S P

E R

C E

N T

O F

C A

S E

S

$85,000

$150,000

$220,000

$633,000

$294,000

52.9%

17.4%

10.6%

5.4%

13.7%

Percent of CasesMedian Loss

One possible reason for the increase in losses associated with multiple perpetrators is that many anti-fraud controls

work on the basis of separation of duties and independent checks. When multiple fraudsters work together, they might

be able to undermine the process of independently verifying transactions or other mechanisms designed to uncover

fraud. However, when we looked at the duration of frauds (see Figure 88), we found that schemes with multiple perpe-

trators did not last significantly longer than single-perpetrator frauds, which was also true in our 2014 study. That would

indicate that collusion schemes, while more costly, were not necessarily more difficult to detect.

Another explanation for the larger losses in schemes with multiple perpetrators could simply be that with more fraud-

sters involved, the perpetrators needed to steal more because their proceeds were being split more ways. In other

words, with more perpetrators expecting a payout, the conspirators needed to steal more to satisfy everyone involved

in the crime.

Figure 88: Median Duration of Fraud Based on Number of Perpetrators

Number Median Months to Detect

One 16 Two or More 18

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 63

Perpetrators

Collusion Based on Perpetrators’ Relationship to Victim Given the impact collusion appears to have on the size of occupational fraud, we wanted to see if this impact varied

based on who was colluding. Specifically, we compared frauds in which all the perpetrators worked for the victim orga-

nization to frauds in which an insider conspired with an outside accomplice at one of the victim’s customers or vendors.

We wanted to see if it was more common for insiders to conspire with one another or to work with an outside party,

and we also wanted to examine whether there were differences in the types of fraud committed or the size of the losses

depending on the group involved. As Figure 89 shows, insider collusion and third-party collusion were practically iden-

tical both in terms of frequency and median loss.

Figure 89: Collusion—Frequency and Median Loss Based on Perpetrators’ Relationship to Victim

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

Insiders and Outside AccomplicesMultiple InsidersSingle Insider 0%

10%

20%

30%

40%

50%

60%

N U M B E R O F P E R P E T R A T O R S

M E

D IA

N L

O S

S P

E R

C E

N T

O F

C A

S E

S

$85,000

$242,000 $250,000

55.8%

21.3%

10.1%

22.9%

Percent of CasesMedian Loss

64 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

Perpetrators

However, when we compared the schemes that were committed based on the perpetrators’ relationship to the victim,

we did find some differences. Obviously, corruption schemes were most common when an insider colluded with a

customer or vendor. We also found that financial statement fraud was much more likely to be committed by a group of

insiders than by a single individal or with the help of a customer or vendor. Non-cash misappropriations were also more

likely to be committed by multiple perpetrators than a lone individual.

Figure 90: Scheme Type Based on Perpetrators’ Relationship to Victim

0% 10% 20% 30% 40% 50% 60% 70% 80%

Insiders and Outside Accomplices

Multiple Insiders

Single Insider

Register Disbursements

Cash Larceny

Financial Statement Fraud

Payroll

Check Tampering

Skimming

Cash on Hand

Expense Reimbursements

Non-Cash

Billing

Corruption

S C

H E

M E

T Y

P E

P E R C E N T O F C A S E S

21.0%

24.7%

14.8%

16.2%

12.1%

15.1%

16.1% 10.1%

5.3%

10.6%

37.4%

20.2%

21.6%

17.4%

15.1% 9.8%

11.5%

8.9%

72.9%

22.5%

23.0%

10.1%

8.3%

4.2%

6.1% 19.1%

9.6%

9.6%

3.0% 2.8% 2.4%

9.6% 5.3%

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 65

Perpetrators

Finally, we examined how frauds were detected based on the perpetrators’ relationship to the victim. We expected to

see noticeable differences in this data because the way a single perpetrator conceals occupational fraud should differ

from the way a group of perpetrators conceal their crime. Generally speaking, a group of fraudsters would be in a much

better position to override controls, falsify independent checks, or verify fraudulent transactions. Because of this, we

expected that these schemes would tend to be detected by different means than frauds committed by individuals. With

regard to outside accomplices, we would expect that collusion with a customer or vendor would produce different red

flag indicators than other types of fraud, again leading to different forms of detection.

Our analysis did show some small differences in the way frauds were caught, based on the perpetrators’ relationship to

the victim, but generally speaking there was not a great deal of variation (see Figure 91). Frauds involving multiple per-

petrators were more likely to be caught by a tip than single-perpetrator schemes. Conversely, a perpetrator acting alone

was slightly more likely to be detected by standard internal controls (e.g., management review and account reconcillia-

tion) than multiple-perpetrator schemes. Otherwise, the means of detection did not appear to vary much regardless of

who or how many perpetrators were involved in the fraud.

Figure 91: Detection Method by Perpetrators’ Relationship to Victim

0% 10% 20% 30% 40% 50%

Insiders and Outside Accomplices

Multiple Insiders

Single Insider

Notified by Law Enforcement

Confession

IT Controls

Surveillance/Monitoring

External Audit

Document Examination

Other

Account Reconciliation

By Accident

Management Review

Internal Audit

Tip 37.1%

15.3% 15.8%

17.3%

14.5% 13.5%

10.7%

7.4% 4.0% 3.6%

7.0% 6.1%

2.7%

5.4% 5.0%

5.8%

4.7% 2.4% 2.7%

3.2% 4.5% 4.7%

1.7% 1.9%

2.9%

1.3% 0.9% 0.9%

1.3% 1.4%

0.4%

1.2% 2.6%

4.0%

41.8% 44.4%

D E

T E

C T

IO N

M E

T H

O D

P E R C E N T O F C A S E S

66 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

Perpetrators

Perpetrator’s Criminal and Employment History Perpetrator’s Criminal Background Only 5.2% of the fraudsters in our study had previously been convicted of a fraud-related offense (see Figure 92). This

has been a consistent finding since our first report in 1996; the vast majority of occupational fraudsters have no history

of fraud convictions.

Figure 92: Criminal Background of Perpetrator

6.6% 2.9%

Other 2.3%

Charged But Not Convicted 5.5%

Had Prior Convictions 5.2%

Never Charged or Convicted

88.3%

THE VAST MAJORITY OF OCCUPATIONAL FRAUDSTERS ARE FIRST-TIME OFFENDERS.

among perpetrators in our study, only

were convicted of a prior fraud-related offense

were fired for fraud-related conduct by a previous employer

5+95+Q 8+92+Q5% 8%

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 67

Perpetrators

Perpetrator’s Employment History As shown in Figure 93, approximately 83% of occupational fraudsters had never been terminated or punished for

any form of fraud-related conduct prior to the crimes in this study. Thus, in terms of both criminal and employment

history, most people who commit occupational fraud are likely first-time offenders. Readers should note, however, that

according to Figure 100 on page 75, about 40% of fraud cases in our study were never referred to law enforcement,

and according to Figure 106 on page 78, a significant number of perpetrators either received no punishment from their

employers, were permitted to resign, or entered into settlement agreements (which typically are confidential). There-

fore, it is very likely that the actual number of perpetrators with a history of fraud-related conduct is higher than what

can be identified through conviction reports and employment background records.

Figure 93: Employment Background of Perpetrator

6.6% 2.9%

Other 2.3%

Previously Terminated 8.3%

Previously Punished 8.7%

Never Punished or Terminated

82.5%

68 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

Perpetrators

Behavioral Red Flags Displayed by Perpetrators We presented survey respondents with a list of 17 common behavioral red flags associated with occupational fraud and

asked them to tell us which, if any, of these warning signs had been displayed by the perpetrator before the fraud was

detected. In more than 91% of cases, at least one behavioral red flag was identified prior to detection, and in 57% of

cases two or more red flags were seen.

Figure 94 shows the frequency of behavioral red flags in our 2016 data. As that chart illustrates, the six most common

behavioral red flags were: (1) living beyond means; (2) financial difficulties; (3) unusually close association with a

vendor or customer; (4) a general “wheeler-dealer” attitude involving shrewd or unscrupulous behavior; (5) excessive

control issues or unwillingness to share duties; and (6) recent divorce or family problems. Approximately 79% of the

perpetrators in our study displayed at least one of these six red flags during their schemes.

What is even more notable is how consistent the distribution of red flags has been over time. The six most common red

flags shown in Figure 94 have also been the six most common red flags in every report since 2008, when we first began

tracking this data.

Figure 94: Behavioral Red Flags Displayed by Perpetrators

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Instability in Life Circumstances

Complained About Lack of Authority

Excessive Family/Peer Pressure for Success

Other

Past Legal Problems

Social Isolation

Past Employment-Related Problems

Excessive Pressure from Within Organization

Refusal to Take Vacations

No Behavioral Red Flags

Complained About Inadequate Pay

Addiction Problems

Irritability, Suspiciousness, or Defensiveness

Divorce/Family Problems

Control Issues, Unwillingness to Share Duties

Wheeler-Dealer Attitude

Unusually Close Association with Vendor/Customer

Financial Difficulties

Living Beyond Means

B E

H A

V IO

R A

L R

E D

F L

A G

P E R C E N T O F C A S E S

45.8%

30.0%

20.1%

15.3%

15.3%

13.4%

12.3%

10.0%

9.0%

8.8%

7.8%

7.0%

6.8%

5.9%

5.6%

5.5%

5.1%

4.4%

4.3%

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 69

Perpetrators

Behavioral Red Flags Based on Perpetrator’s Position Figure 95 shows the distribution of behavioral red flags based on the perpetrator’s level of authority. The purpose of

this chart is to show how individuals at different levels within an organization might have different motivations or ratio-

nalizations for committing fraud. For instance, approximately 38% of all employee fraudsters were undergoing financial

difficulties at the time of their frauds, but this red flag was not nearly as common for higher-level perpetrators. Manag-

ers were much more likely than the other two groups to have an unusually close association with a vendor or customer,

and fraudsters at the owner/executive level were significantly more likely to have a “wheeler-dealer” attitude involving

shrewd or unscrupulous behavior.

Figure 95: Behavioral Red Flags Based on Perpetrator’s Position

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Owner/Executive

Manager

Employee

Instability in Life Circumstances

Complained About Lack of Authority

Excessive Family/Peer Pressure for Success

Other

Past Legal Problems

Social Isolation

Past Employment- Related Problems

Excessive Pressure from Within Organization

Refusal to Take Vacations

No Behavioral Red Flags

Complained About Inadequate Pay

Addiction Problems

Irritability, Suspiciousness, or Defensiveness

Divorce/Family Problems

Control Issues, Unwillingness to Share Duties

Wheeler-Dealer Attitude

Unusually Close Association with Vendor/Customer

Financial Difficulties

Living Beyond Means 44.4%

47.2% 47.6%

38.1%

22.2%

27.8% 21.0%

12.7%

9.9% 19.1%

21.0%

9.7%

28.0% 14.8%

14.4% 14.1%

11.5%

9.1% 15.3% 15.9%

10.2% 9.9%

8.4%

9.9% 10.2%

6.3%

8.5% 7.6%

11.5%

7.3% 8.9%

6.1%

5.0% 8.0%

9.5%

6.9% 7.6%

5.8%

7.3% 5.2%

5.3% 3.7%

9.2%

4.2%

5.2%

7.8%

4.3% 4.7%

8.1%

4.8% 5.5%

5.2%

2.3%

6.2% 3.4%

2.3%

B E

H A

V IO

R A

L R

E D

F L

A G

P E R C E N T O F C A S E S

25.2%

70 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

Perpetrators

Behavioral Red Flags Based on Scheme Type In Figure 96 we analyzed behavioral red flags based on the type of fraud that was committed. Not surprisingly, those

who engaged in corruption were much more likely than other fraudsters to have an unusually close association with a

vendor or customer. Individuals who committed financial statement fraud had experienced excessive pressure to per-

form within their organizations in almost one-fifth of cases—much more than in either corruption or asset misappropri-

ation schemes. And those who committed asset misappropriation were more likely to be experiencing known financial

difficulties. Regardless of the type of fraud committed, living beyond means remained the most common behavioral red

flag, occurring in nearly half of the cases in each category.

Figure 96: Behavioral Red Flags Based on Scheme Type

0% 10% 20% 30% 40% 50% 60%

Financial Statement Fraud

Corruption

Asset Misappropriation

Instability in Life Circumstances

Complianed About Lack of Authority

Excessive Family/Peer Pressure for Success

Other

Past Legal Problems

Social Isolation

Past Employment- Related Problems

Excessive Pressure from Within Organization

Refusal to Take Vacations

No Behavioral Red Flags

Complained About Inadequate Pay

Addiction Problems

Irritability, Suspiciousness, or Defensiveness

Divorce/Family Problems

Control Issues, Unwillingness to Share Duties

Wheeler-Dealer Attitude

Unusually Close Association with Vendor/Customer

Financial Difficulties

Living Beyond Means 48.7% 48.6% 48.5%

32.4%

23.5%

37.5% 14.0%

18.3%

15.0% 20.7%

24.0%

16.0%

17.5% 15.9%

12.8% 14.4%

17.5%

14.4% 10.6% 11.0%

11.2% 6.8%

13.0%

9.6% 9.8%

5.5%

8.3% 8.1%

9.0%

5.8% 9.8%

18.0%

8.0% 6.8%

9.5%

7.1% 5.9%

3.5%

6.3% 5.7%

4.5%

5.3% 6.8%

6.0%

5.4% 6.1%

7.0%

6.0% 4.4%

7.0%

4.4% 4.7% 4.5%

4.5% 3.0% 3.5%

B E

H A

V IO

R A

L R

E D

F L

A G

P E R C E N T O F C A S E S

23.8%

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 71

Perpetrators

Behavioral Red Flags Based on Perpetrator’s Gender On page 59, we discussed differences in fraud schemes that are associated with the gender of the perpetrator, and in

Figure 97 we analyzed how behavioral red flags differ between men and women. Women were much more likely than

men to commit fraud based on factors relating to financial need or life circumstances, such as general financial difficul-

ties, divorce or family problems, and addiction issues. Men were much more often seen as having improper relation-

ships with vendors or customers or evidencing a “wheeler-dealer” attitude involving generally unscrupulous or shrewd

behavior.

Figure 97: Behavioral Red Flags Based on Perpetrator’s Gender

0% 10% 20% 30% 40% 50% 60%

Female

Male

Instability in Life Circumstances

Complained About Lack of Authority

Excessive Family/Peer Pressure for Success

Other

Past Legal Problems

Social Isolation

Past Employment-Related Problems

Excessive Pressure from Within Organization

Refusal to Take Vacations

No Behavioral Red Flags

Complained About Inadequate Pay

Addiction Problems

Irritability, Suspiciousness, or Defensiveness

Divorce/Family Problems

Control Issues, Unwillingness to Share Duties

Wheeler-Dealer Attitude

Unusually Close Association with Vendor/Customer

Financial Difficulties

Living Beyond Means 45.2%47.9% 24.7%

41.5%

23.7% 12.0%

19.8%

19.0%

6.1%

11.8%

13.8%

20.5% 10.1%

6.5%

12.7%

9.2%

9.4%

9.3%

12.2%

8.9%

7.5%

7.9%

10.6%

5.2%

7.3% 6.1%

5.7% 6.3%

5.3% 6.3%

4.5%

5.1% 5.4%

4.8% 3.8%

6.1%

3.7% 5.6%

B E

H A

V IO

R A

L R

E D

F L

A G

P E R C E N T O F C A S E S

72 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

Perpetrators

Non-Fraud-Related Misconduct To determine if there was a relationship between occupational fraud and other forms of workplace misconduct, we pre-

sented survey participants with a list of common workplace violations and asked them to identify any that the perpetra-

tor had engaged in prior to or during the time of the fraud. As Figure 98 shows, nearly 40% of fraudsters had engaged

in some form of non-fraud workplace violation. Among the cases where a violation was identified, bullying or intimida-

tion was the most common, followed by excessive absenteeism and excessive tardiness.

Figure 98: Non-Fraud-Related Misconduct

6.6% 2.9%

Non-Fraud-Related Misconduct

38.2%

No Misconduct Identified 61.8%

Excessive Absenteeism 11.6%

Excessive Tardiness 10.2%

Excessive Internet Browsing 7.0%

Other 3.1%

Visiting Inappropriate Internet Sites

3.2%

Sexual Harassment 3.2%

Bullying or Intimidation 18.0%

Breakdown of Non-Fraud-Related Misconduct (% of All Cases)

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 73

Perpetrators

Human Resources-Related Red Flags In addition to workplace violations, we also asked survey participants if the perpetrators had encountered any negative

human resources-related events (such as poor performance evaluations, loss of pay or benefits, fear of job loss, etc.)

prior to or during the time of the frauds. These types of events can cause financial stress or resentment toward the

employer, both of which are factors commonly associated with occupational fraud.

In more than 63% of cases, no HR-related red flag was identified (see Figure 99). However, in 12.2% of cases, the fraud

perpetrator had experienced fear of job loss, and in 10.1% the perpetrator had received poor performance evaluations.

Figure 99: Human Resources-Related Red Flags

6.6% 2.9%

HR-Related Red Flags 36.7%

No Red Flags Identified 63.4%

Poor Performance Evaluations 10.1%

Other 8.4%

Actual Job Loss 8.1%

Cut in Benefits 2.6%

Demotion 2.4%

Cut in Pay 3.3%

Involuntary Cut in Hours 1.1%

Fear of Job Loss 12.2%

Breakdown of Human Resources-Related Red Flags (% of All Cases)

74 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

Case Results

We asked respondents about the outcome of the cases

they investigated, including whether the victim orga-

nizations referred cases for prosecution, whether they

pursued a civil suit, and the underlying reasons for those

decisions. Additionally, we asked respondents to provide

information about punishment against the principal per-

petrator and penalties against the victim organization.

Criminal Prosecutions Over the last three reports, the percentage of cases re-

ferred to law enforcement declined slightly, from 65.2%

in 2012 to 59.3% in 2016. In addition, the cases referred

for prosecution tended to involve higher losses; the me-

dian loss in cases referred for criminal prosecution was

$230,000 compared to $71,000 in cases not referred.

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 75

Case Results

Figure 100: Cases Referred to Law Enforcement

0% 20% 40% 60% 80% 100%

Not Referred

Referred 2012

2014

2016

P E R C E N T O F C A S E S

59.3% 40.7%

60.9% 39.1%

65.2% 34.8%

Of the victim organizations that referred cases for prosecution, the results of those criminal actions for the past three

reports are shown in Figure 101 (cases that are still pending were not included in this analysis). While the percentage

of defendants who pleaded guilty or no contest has remained about the same over time, the rate of cases in which au-

thorities declined to prosecute dropped from 19.2% in 2012 to 13.3% in 2016. Combining guilty pleas and convictions

at trial, 76.4% of cases submitted for prosecution resulted in a finding of guilt in 2016, while 2.3% of such prosecutions

ended in acquittal. Although the percentage of cases referred to prosecution decreased gradually from the 2012 report

to the 2016 version (see Figure 100), the percentage of cases that prosecutors successfully pursued increased.

Figure 101: Results of Cases Referred to Law Enforcement

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Acquitted

Other

Declined to Prosecute

Convicted at Trial

Pleaded Guilty/No Contest

2012

2014

2016

55.6% 7.2%

56.5% 15.4%

56.8% 13.3%

16.4% 19.2%

1.5%

18.2%

0.9%

9.0%

19.6% 8.1%

2.3%

P E R C E N T O F C A S E S

76 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

Case Results

Regarding cases that management did not to refer to law enforcement, we asked our respondents to provide the rea-

son(s) why. As in the previous two reports, the top three reasons for declining to refer were fear of bad publicity (39%),

internal discipline considered sufficient (35.5%), and the parties reached a private settlement (23.3%).

Figure 102: Reason(s) Case Not Referred to Law Enforcement

0% 10% 20% 30% 40% 50%

2012

2014

2016

Perpetrator Disappeared

Civil Suit

Lack of Evidence

Other

Too Costly

Private Settlement

Internal Discipline Su�cient

Fear of Bad Publicity

R E

A S

O N

G IV

E N

F O

R N

O T

P R

O S

E C

U T

IN G

P E R C E N T O F C A S E S

39.0%

35.5%

23.3%

18.8%

15.6%

11.9%

4.2%

1.8%

34.7%

30.5%

21.3%

18.9%

13.1% 11.7%

11.0%

4.6%

0.6%

38.3%

33.3%

20.5%

14.5%

8.1%

3.3%

0.7%

Civil Suits We also asked respondents to report on cases that resulted in a civil lawsuit. Figure 103 shows that less than one-fourth

of occupational fraud cases resulted in a civil suit. This percentage has been fairly stable over the past three reports.

Figure 103: Cases Resulting in Civil Suit

0% 20% 40% 60% 80% 100%

No Civil Suit

Civil Suit 2012

2014

2016

C IV

IL S

U IT

F IL

E D

P E R C E N T O F C A S E S

76.5%23.5%

77.8%22.2%

76.9%23.1%

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 77

Case Results

Following the occurrence of a fraud, the victim organization might pursue civil litigation to help collect stolen assets.

Figure 104 reveals a noticeable drop in judgments in favor of victim organizations in such civil suits—40.4% in the 2016

report, as opposed to 51.4% in the 2014 report. It appears that an increase in settlements mostly accounted for this

change, rising from 30.6% of cases in the 2014 report to 40.4% of cases in the 2016 report. Judgments in favor of the

suspect occurred in 14.9% of cases in the current data, with little change over the past three reports.

Figure 104: Results of Civil Suits

0% 20% 40% 60% 80% 100%

Judgment for Perpetrator Other

Settled Judgment for Victim

2012

2014

2016

49.4% 31.0% 14.9% 4.6%

40.4% 40.4% 14.9% 4.4%

51.4% 30.6% 13.9% 4.2%

P E R C E N T O F C A S E S

Recovery of Losses We asked respondents to provide the percentage of the loss that the victim organization recovered, and the results are

shown in Figure 105. The majority (58.1%) of victims had yet to recover any losses at the time of the survey, and only

12% of organizations had recovered all of their losses at that time. While many victims in our study might still be in the

process of recovering losses, the data shows that such efforts can take time and might never result in a full recovery.

Figure 105: Recovery of Victim Organization’s Losses

0% 10% 20% 30% 40% 50% 60% 70%

2012

2014

2016

100%

76–99%

51–75%

26–50%

1–25%

No Recovery

P E

R C

E N

T O

F L

O S

S R

E C

O V

E R

E D

P E R C E N T O F C A S E S

58.4% 48.7%

12.5% 11.7%

15.0%

8.9% 7.7% 8.1%

3.7% 5.1% 5.5%

4.8% 3.5%

6.9%

12.0% 13.6%

15.8%

58.1%

78 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

Case Results

Action Taken Against Perpetrator Beyond recovery of losses, punishing perpetrators of occupational fraud can be an important part of the victim orga-

nization’s fraud prevention program, as it sends a clear message about management’s anti-fraud stance. Figure 106

shows that termination was by far the most common punishment for occupational fraudsters (64.1% of cases). In some

instances, suspects received softer punishments, such as resignation (10%) or probation or suspension (8%). How best

to handle occupational fraud can vary depending on the circumstances and the best interests of the organization. Still, it

is interesting that 5.7% of suspected perpetrators received no punishment.

Figure 106: Action Taken Against Perpetrator

0% 10% 20% 30% 40% 50% 60% 70%

No Punishment

Probation or Suspension

Perpetrator Was No Longer With Organization

Permitted or Required Resignation

Settlement Agreement

Other

Termination

A C

T IO

N T

A K

E N

A G

A IN

S T

P E

R P

E T

R A

T O

R

P E R C E N T O F C A S E S

11.3%

10.7%

10.0%

8.3%

8.0%

5.7%

64.1%

Fines Against Victim Organization While we generally think of individual perpetrators being responsible for fraud, sometimes organizations are punished for

having inadequate controls or otherwise allowing the fraud to occur. For the first time, we asked respondents about fines

levied against the victim organization. Figure 107 shows that 8.4% of victim organizations were fined as a result of the fraud.

Figure 107: Fines Against Victim Organizations

6.6% 2.9%

Did Not Receive a Fine 91.6%

Received a Fine 8.4%

Adding Injury to Injury: Fine Amounts An additional fraud risk for many organizations is the potential that they will receive fines from authorities on top of any fraud losses. For the organizations in our study that received a monetary penalty:

of Fines Were Between $10,000 and $100,000

of Fines Were Between $100,000 and $1,000,000

of Fines Were More than $1,000,000

of Fines Were $10,000 or Less15%

31%

31%

22%

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 79

Case Results

In addition to looking at the overall rate of organizations fined as a result of occupational fraud, we also compared fines

regionally. Figure 108 shows the proportion of cases in each region that resulted in a fine against the victim organiza-

tion. Organizations in Western Europe had the highest proportion of fines (15.6%), while the Middle East and North

Africa had the lowest (1.5%).

Figure 108: Fines Against Victim Organizations by Region

United States

Canada

Latin American and the Caribbean

Sub-Saharan Africa

Asia-Pacific

Southern Asia

Middle East and North Africa

Western Europe

Eastern Europe and Western/Central Asia

5.3%

7.6%

3.9%

8.3%

1.5%

15.6%

13.6%

3.5%

11.7%

80 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

Methodology

The 2016 Report to the Nations on Occupational Fraud

and Abuse is based on the results of the 2015 Global

Fraud Survey, an online survey opened to 41,788 Certi-

fied Fraud Examiners (CFEs) from July 2015 to October

2015. As part of the survey, respondents were asked to

provide a detailed narrative of the single largest fraud

case they had investigated since January 2014. Addition-

ally, after completing the survey the first time, respon-

dents were provided the option to submit information

about a second case that they investigated.

Cases submitted were required to meet the following

four criteria:

1. The case must have involved occupational fraud

(defined as internal fraud, or fraud committed by a

person against the organization for which he or she

works).

2. The investigation must have occurred between Jan-

uary 2014 and the time of survey participation.

3. The investigation must have been complete at the

time of survey participation.

4. The respondent must have been reasonably sure

the perpetrator(s) was (were) identified.

Respondents were then presented with 81 questions to

answer regarding the particular details of the fraud case,

including information about the perpetrator, the victim

organization, and the methods of fraud employed, as

well as fraud trends in general. We received 7,497 total

responses to the survey, 2,410 of which were usable for

purposes of this report. The data contained herein is

based solely on the information provided in these 2,410

survey responses.

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 81

Methodology

Analysis Methodology In calculating the percentages discussed throughout this report, we used the total number of complete and relevant

responses for the question(s) being analyzed. Specifically, we excluded any blank responses or instances where the

participant indicated that he or she did not know the answer to a question. Consequently, the total number of cases

included in each analysis varies.

In addition, several survey questions allowed participants to select more than one answer. Therefore, the sum of per-

centages in many figures throughout the report exceeds 100%.

Unless otherwise indicated, all loss amounts discussed throughout the report are calculated using median loss rather

than mean, or average, loss. Average losses were skewed by a limited number of very high-dollar frauds. Using median

loss provides a more conservative—and we believe more accurate—picture of the typical impact of occupational

fraud schemes. Additionally, we excluded median loss calculations for categories for which there were fewer than 10

responses.

Because the direct losses caused by financial statement frauds are typically spread among numerous stakeholders,

obtaining an accurate estimate for this amount is extremely difficult. Consequently, for schemes involving financial

statement fraud, we asked survey participants to provide the gross amount of the financial statement misstatement

(over- or under-statement) involved in the scheme. All losses reported for financial statement frauds throughout this

report are based on those reported amounts.

Who Provided the Data? To provide context for the survey responses and to understand who investigates cases of occupational fraud, we asked

respondents to provide certain information about their professional experience and qualifications.

Primary Occupation More than one-third of survey respondents noted their primary occupation as fraud examiner/investigator, and another

quarter of respondents were internal auditors.

Figure 109: Primary Occupation of Survey Participants

0% 5% 10% 15% 20% 25% 30% 35% 40%

IT/Computer Forensics Specialist

Educator

Attorney

Bank Examiner

Private Investigator

Corporate Security and Loss Prevention

Other

Consultant

External/Independent Auditor

Law Enforcement

Governance, Risk, and Compliance Professional

Accounting/Finance Professional

Internal Auditor

Fraud Examiner/Investigator

P R

IM A

R Y

O C

C U

P A

T IO

N

P E R C E N T O F P A R T I C I P A N T S

35.6%

25.1%

9.6%

5.9%

5.5%

4.9%

3.7%

3.6%

2.9%

1.0%

0.7%

0.6%

0.6%

0.5%

82 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

Methodology

Nature of Fraud Examination Role In addition to the primary occupation, we asked respondents to provide information about the nature of their role

regarding fraud examinations. More than 55% of survey participants indicated that they worked in-house (i.e., conduct-

ed fraud examinations within a single company or agency); almost 26% worked for a professional services firm that

conducted fraud examinations on behalf of other companies, individuals, or agencies; and about 13% worked for a law

enforcement or government agency and conducted fraud examinations under the authority of that agency.

Figure 110: Nature of Survey Participants’ Fraud Examination Work

Other 5.8%

In-House Examiner

55.8%

Law Enforcement 12.7%

Professional Services Firm

25.7%

Experience Survey respondents had a median ten years of fraud examination experience, with just over 30% of respondents hav-

ing more than 15 years of experience in the fraud examination field.

Figure 111: Experience of Survey Participants

0%

5%

10%

15%

20%

25%

30%

35%

More than 20 Years16–20 Years11–15 Years6–10 Years5 Years or Fewer

Y E A R S I N F R A U D E X A M I N A T I O N F I E L D

P E

R C

E N

T O

F P

A R

T IC

IP A

N T

S

20.8%

17.7%

12.7%

17.4%

31.5%

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 83

Methodology

Respondents also provided information about the number of total fraud cases they worked on in the prior two years. As

reflected in Figure 112, approximately 23% of respondents investigated more than 20 cases, while about 43% investi-

gated five or fewer cases during that time.

Figure 112: Cases Investigated by Survey Participants

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

More than 20 Cases16–20 Cases11–15 Cases6–10 Cases5 or Fewer Cases

N U M B E R O F C A S E S I N V E S T I G A T E D I N P R I O R T W O Y E A R S

P E

R C

E N

T O

F P

A R

T IC

IP A

N T

S

43.3%

8.7%

5.9%

22.8%

19.2%

SURVEY RESPONDENTS HAD A MEDIAN TEN YEARS OF FRAUD EXAMINATION EXPERIENCE.

84 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

Appendix Figure 113: Breakdown of Geographic Regions by Country

Asia-Pacific (221 Cases)

Country Number of Cases

Australia 26 Cambodia 1 China 64 East Timor 2 Fiji 2 Indonesia 42 Japan 3 Laos 1 Malaysia 11 New Zealand 10 Philippines 29 Samoa 3 Singapore 14 Solomon Islands 1 South Korea 3 Taiwan 3 Thailand 4 Vietnam 2

Latin America and the Caribbean (112 Cases)

Antigua and Barbuda 2 Argentina 12 Bahamas 2 Barbados 1 Belize 1 Bolivia 1 Brazil 18 Chile 4 Colombia 14 Ecuador 2 Grenada 1 Guatemala 1 Honduras 1 Jamaica 2 Mexico 36 Nicaragua 1 Panama 2 Peru 4 Trinidad and Tobago 7

Eastern Europe and Western/Central Asia (98 Cases)

Country Number of Cases

Albania 1 Armenia 3 Bulgaria 5 Czech Republic 8 Hungary 2 Kazakhstan 5 Kosovo 1 Montenegro 2 Poland 8 Romania 11 Russia 21 Serbia 4 Slovakia 8 Slovenia 2 Turkey 15 Ukraine 2

Middle East and North Africa (79 Cases)

Algeria 1 Bahrain 3 Cyprus 3 Egypt 5 Israel 2 Jordan 2 Kuwait 4 Lebanon 5 Oman 7 Qatar 7 Saudi Arabia 13 United Arab Emirates 27

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 85

Sub-Saharan Africa (285 Cases)

Country Number of Cases

Angola 4 Botswana 2 Cameroon 2 Congo, Democratic Republic of the 4 Cote d'Ivoire (Ivory Coast) 2 Gabon 1 Gambia 1 Ghana 11 Kenya 41 Lesotho 1 Liberia 5 Malawi 3 Mali 1 Mauritania 2 Mauritius 4 Namibia 1 Nigeria 70 Senegal 3 Sierra Leone 1 Somalia 1 South Africa 87 South Sudan 1 Sudan 1 Swaziland 1 Tanzania 8 Uganda 11 Zambia 7 Zimbabwe 9

Southern Asia (98 Cases)

Country Number of Cases

Afghanistan 4 Bangladesh 4 India 77 Nepal 2 Pakistan 11

Western Europe (110 Cases)

Austria 4 Belgium 4 Denmark 2 Finland 3 France 7 Germany 15 Greece 7 Ireland 2 Italy 9 Netherlands 7 Portugal 5 Spain 6 Switzerland 9 United Kingdom 30

Reported Not Reported

Figure 114: Countries with Reported Cases

86 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

Index of Figures Age of Perpetrator Age of Perpetrator—Frequency and Median Loss �����������60

Anti-Fraud Controls Change in Implementation Rates of Anti-Fraud Controls �������������������������������������������������������40

Frequency of Anti-Fraud Controls �������������������������������������38

Frequency of Anti-Fraud Controls by Region ��������������������41

Frequency of Anti-Fraud Controls by Size of Victim Organization �����������������������������������������������39

Median Loss Based on Presence of Anti-Fraud Controls �����������������������������������������������������������44

Median Duration of Fraud Based on Presence of Anti-Fraud Controls ����������������������������������44

Primary Internal Control Weakness by Scheme Type �������47

Primary Internal Control Weakness Observed by CFE �����46

Behavioral Red Flags of Perpetrators Behavioral Red Flags Displayed by Perpetrators ��������������68

Behavioral Red Flags Based on Perpetrator’s Gender �����71

Behavioral Red Flags Based on Perpetrator’s Position�����69

Behavioral Red Flags Based on Scheme Type ������������������70

Human Resources-Related Red Flags ������������������������������73

Non-Fraud-Related Misconduct ����������������������������������������72

Case Results Action Taken Against Perpetrator ��������������������������������������78

Cases Referred to Law Enforcement ��������������������������������75

Cases Resulting in Civil Suit ����������������������������������������������76

Fines Against Victim Organizations ����������������������������������78

Fines Against Victim Organizations by Region �����������������79

Reason(s) Case Not Referred to Law Enforcement ����������76

Recovery of Victim Organization’s Losses ������������������������77

Results of Cases Referred to Law Enforcement ��������������75

Results of Civil Suits ���������������������������������������������������������77

Concealment of Fraud Schemes Concealment Method by Scheme Type ����������������������������19

Criminal and Employment Background of Perpetrator Background Check Run on Perpetrator Before Being Hired ������������������������������������������������������������45

Criminal Background of Perpetrator ���������������������������������66

Employment Background of Perpetrator ��������������������������67

Type(s) of Background Checks Run on Perpetrator Before Being Hired�����������������������������������������46

Demographics of Survey Participants Cases Investigated by Survey Participants �����������������������83

Experience of Survey Participants ������������������������������������82

Nature of Survey Participants’ Fraud Examination Work ���������������������������������������������������82

Primary Occupation of Survey Participants�����������������������81

Department of Perpetrator Department of Perpetrator— Frequency and Median Loss ���������������������������������������������55

Frequency of Schemes Based on Perpetrator’s Department ��������������������������������������������56

Detection Method Detection Method by Perpetrators’ Relationship to Victim �������������������������������������������������������65

Detection Method by Region ��������������������������������������������23

Detection Method by Size of Victim Organization������������22

Formal Reporting Mechanism Used by Whistleblower ����28

Impact of Hotlines �������������������������������������������������������������27

Initial Detection of Occupational Frauds ���������������������������21

Median Loss and Median Duration by Detection Method �����������������������������������������25

Party to Whom Whistleblower Initially Reported ��������������29

Source of Tips �������������������������������������������������������������������26

Top Three Parties to Whom Tips Were Reported Based on Perpetrator’s Department �����������������29

Distribution of Losses Distribution of Dollar Losses ����������������������������������������������� 9

Education Level of Perpetrator Education Level of Perpetrator— Frequency and Median Loss ���������������������������������������������61

Gender of Perpetrator Behavioral Red Flags Based on Perpetrator’s Gender �����71

Frequency of Schemes Based on Gender ������������������������59

Gender of Perpetrator Based on Region ���������������������������57

Gender of Perpetrator—Frequency ����������������������������������57

Gender of Perpetrator—Median Loss �������������������������������58

Position of Perpetrator Based on Gender �������������������������58

Position of Perpetrator—Median Loss Based on Gender ��������������������������������������������������������������59

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 87

Geographical Region of Victim Organization Breakdown of Geographic Regions by Country ���������������84

Countries with Reported Cases ����������������������������������������85

Detection Method by Region ��������������������������������������������23

Fines Against Victim Organizations by Region �����������������79

Frequency of Anti-Fraud Controls by Region ��������������������41

Frequency and Median Loss of Corruption Cases by Region ���������������������������������������������16

Gender of Perpetrator Based on Region ���������������������������57

Geographical Location of Victim Organizations ����������������7

Frequency and Median Loss Based on Position of Perpetrator by Region ��������������������������������50

Scheme Types by Region ��������������������������������������������������14

Industry of Victim Organization Corruption Cases by Industry �������������������������������������������37

Frequency of Schemes Based on Industry �����������������������36

Industry of Victim Organizations ���������������������������������������34

Industry of Victim Organizations (Sorted by Median Loss) ���������������������������������������������������35

Number of Perpetrators Median Duration of Fraud Based on Number of Perpetrators ����������������������������������������������������62

Number of Perpetrators—Frequency and Median Loss ���62

Perpetrators’ Relationship to Victim Collusion—Frequency and Median Loss Based on Perpetrators’ Relationship to Victim �����������������63

Detection Method by Perpetrators’ Relationship to Victim �������������������������������������������������������65

Scheme Type Based on Perpetrators’ Relationship to Victim �������������������������������������������������������64

Position of Perpetrators Behavioral Red Flags Based on Perpetrator’s Position�����69

Frequency and Median Loss Based on Position of Perpetrator by Region �������������������������������������50

Median Duration of Fraud Based on Position �������������������49

Position of Perpetrator—Frequency and Median Loss �����49

Position of Perpetrator Based on Gender �������������������������58

Position of Perpetrator—Median Loss Based on Gender ��������������������������������������������������������������59

Scheme Duration Frequency and Median Loss Based on Duration of Fraud ���������������������������������������������������������17

Median Loss and Median Duration by Detection Method ���25

Median Duration of Fraud Based on Number of Perpetrators ����������������������������������������������������62

Median Duration of Fraud Based on Position �������������������49

Median Duration of Fraud Based on Presence of Anti-Fraud Controls ���������������������������������������44

Median Duration of Fraud Based on Scheme Type ����������18

Scheme Type Behavioral Red Flags Based on Scheme Type ������������������70

Corruption Cases by Industry �������������������������������������������37

Concealment Method by Scheme Type ����������������������������19

Frequency and Median Loss of Asset Misappropriation Sub-Schemes ���������������������������������������14

Frequency and Median Loss of Corruption Cases by Region ���������������������������������������������16

Frequency of Schemes Based on Industry �����������������������36

Frequency of Schemes Based on Perpetrator’s Department �������������������������������������������������56

Frequency of Schemes Based on Gender ������������������������59

Median Duration of Fraud Based on Scheme Type ����������18

Occupational Fraud and Abuse Classification System (Fraud Tree) ������������������������������������11

Occupational Frauds by Category—Frequency ����������������12

Occupational Frauds by Category—Median Loss ������������12

Overlap of Fraud Schemes ������������������������������������������������13

Primary Internal Control Weakness by Scheme Type �������47

Scheme Type Based on Perpetrators’ Relationship to Victim �������������������������������������������������������64

Scheme Types by Region ��������������������������������������������������14

Scheme Type by Size of Victim Organization �������������������33

Size of Victim Organization Detection Method by Size of Victim Organization������������22

Frequency of Anti-Fraud Controls by Size of Victim Organization �����������������������������������������������39

Scheme Type by Size of Victim Organization �������������������33

Size of Victim Organization—Frequency ���������������������������32

Size of Victim Organization—Median Loss �����������������������32

Tenure of Perpetrator Tenure of Perpetrator—Frequency and Median Loss �������54

Type of Victim Organization Type of Victim Organization—Frequency and Median Loss ��31

Level of Government—Frequency and Median Loss �������31

88 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

Fraud Prevention Checklist The most cost-effective way to limit fraud losses is to prevent fraud from occurring. This checklist is designed to help

organizations test the effectiveness of their fraud prevention measures.

1. Is ongoing anti-fraud training provided to all employees of the organization?

❑ Do employees understand what constitutes fraud?

❑ Have the costs of fraud to the company and everyone in it — including lost profits, adverse publicity, job loss, and decreased morale and productivity — been made clear to employees?

❑ Do employees know where to seek advice when faced with uncertain ethical decisions, and do they believe that they can speak freely?

❑ Has a policy of zero-tolerance for fraud been communicated to employees through words and actions?

2. Is an effective fraud reporting mechanism in place?

❑ Have employees been taught how to communicate concerns about known or potential wrongdoing?

❑ Is there an anonymous reporting channel, such as a third-party hotline, available to employees?

❑ Do employees trust that they can report suspicious activity anonymously and/or confidentially and without fear of reprisal?

❑ Has it been made clear to employees that reports of suspicious activity will be promptly and thoroughly evaluated?

❑ Do reporting policies and mechanisms extend to vendors, customers and other outside parties?

3. To increase employees’ perception of detection, are the following proactive measures taken and publicized to

employees?

❑ Is possible fraudulent conduct aggressively sought out, rather than dealt with passively?

❑ Does the organization send the message that it actively seeks out fraudulent conduct through fraud assessment questioning by auditors?

❑ Are surprise fraud audits performed in addition to regularly scheduled audits?

❑ Is continuous auditing software used to detect fraud and, if so, has the use of such software been made known throughout the organization?

4. Is the management climate/tone at the top one of honesty and integrity?

❑ Are employees surveyed to determine the extent to which they believe management acts with honesty and integrity?

❑ Are performance goals realistic?

❑ Have fraud prevention goals been incorporated into the performance measures against which managers are evaluated and that are used to determine performance-related compensation?

❑ Has the organization established, implemented and tested a process for oversight of fraud risks by the board of directors or others charged with governance (e.g., the audit committee)?

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 89

5. Are fraud risk assessments performed to proactively identify and mitigate the company’s vulnerabilities to

internal and external fraud?

6. Are strong anti-fraud controls in place and operating effectively, including the following?

❑ Proper separation of duties

❑ Use of authorizations

❑ Physical safeguards

❑ Job rotations

❑ Mandatory vacations

7. Does the internal audit department, if one exists, have adequate resources and authority to operate effectively

and without undue influence from senior management?

8. Does the hiring policy include the following (where permitted by law)?

❑ Past employment verification

❑ Criminal and civil background checks

❑ Credit checks

❑ Drug screening

❑ Education verification

❑ References checks

9. Are employee support programs in place to assist employees struggling with addiction, mental/emotional

health, family or financial problems?

10. Is an open-door policy in place that allows employees to speak freely about pressures, providing management

the opportunity to alleviate such pressures before they become acute?

11. Are anonymous surveys conducted to assess employee morale?

90 REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE

Glossary of Terminology Asset misappropriation: A scheme in which an employee steals or misuses the employing organization’s resources

(e.g., theft of company cash, false billing schemes, or

inflated expense reports)

Billing scheme: A fraudulent disbursement scheme in which a person causes his or her employer to issue a

payment by submitting invoices for fictitious goods or

services, inflated invoices, or invoices for personal pur-

chases (e.g., employee creates a shell company and bills

employer for services not actually rendered; employee

purchases personal items and submits an invoice to em-

ployer for payment)

Cash larceny: A scheme in which an incoming payment is stolen from an organization after it has been recorded

on the organization’s books and records (e.g., employee

steals cash and checks from daily receipts before they can

be deposited in the bank)

Cash-on-hand misappropriations: A scheme in which the perpetrator misappropriates cash kept on hand at the

victim organization’s premises (e.g., employee steals cash

from a company vault)

Check tampering scheme: A fraudulent disbursement scheme in which a person steals his or her employer’s

funds by intercepting, forging, or altering a check or elec-

tronic payment drawn on one of the organization’s bank

accounts (e.g., employee steals blank company checks

and makes them out to himself or an accomplice; employ-

ee steals an outgoing check to a vendor and deposits it

into his or her own bank account)

Corruption: A scheme in which an employee misuses his or her influence in a business transaction in a way that

violates his or her duty to the employer in order to gain a

direct or indirect benefit (e.g., schemes involving bribery

or conflicts of interest)

Employee support programs: Programs that provide support and assistance to employees dealing with person-

al issues or challenges, such as counseling services for

drug, family, or financial problems

Expense reimbursements scheme: A fraudulent disburse- ment scheme in which an employee makes a claim for

reimbursement of fictitious or inflated business expenses

(e.g., employee files fraudulent expense report, claiming

personal travel, nonexistent meals)

Financial statement fraud: A scheme in which an em- ployee intentionally causes a misstatement or omission of

material information in the organization’s financial reports

(e.g., recording fictitious revenues, understating reported

expenses, or artificially inflating reported assets)

Hotline: A mechanism to report fraud or other violations, whether managed internally or by an external party

Management review: The process of management reviewing organizational controls, processes, accounts,

or transactions for adherence to company policies and

expectations

Non-cash misappropriations: Any scheme in which an employee steals or misuses non-cash assets of the

victim organization (e.g., employee steals inventory from

a warehouse or storeroom; employee steals or misuses

confidential customer financial information)

Occupational fraud: The use of one’s occupation for personal enrichment through the deliberate misuse or

misapplication of the employing organization’s resources

or assets

Payroll scheme: A fraudulent disbursement scheme in which an employee causes his or her employer to issue a

payment by making false claims for compensation (e.g.,

employee claims overtime for hours not worked; employ-

ee adds ghost employees to the payroll)

Primary perpetrator: The person who worked for the victim organization and who was reasonably confirmed as

the primary culprit in the case

Register disbursements scheme: A fraudulent disburse- ment scheme in which an employee makes false entries

on a cash register to conceal the fraudulent removal of

cash (e.g., employee fraudulently voids a sale on his or

her cash register and steals the cash)

Skimming: A scheme in which an incoming payment is stolen from an organization before it is recorded on the

organization’s books and records (e.g., employee accepts

payment from a customer but does not record the sale

and instead pockets the money)

About the ACFE

Founded in 1988 by Dr. Joseph T. Wells, CFE, CPA, the

ACFE is the world’s largest anti-fraud organization and

premier provider of anti-fraud training and education. To-

gether with more than 75,000 members in more than 150

countries, the ACFE is reducing business fraud world-

wide and providing the training and resources needed to

fight fraud more effectively.

The ACFE provides educational tools and practical

solutions for anti-fraud professionals through initiatives

including:

• Global conferences and seminars led by anti-fraud

experts

• Instructor-led, interactive professional training

• Comprehensive resources for fighting fraud,

including books, self-study courses and articles

• Leading anti-fraud publications, including Fraud

Magazine™, The Fraud Examiner and FraudInfo

• Local networking and support through more than

170 ACFE chapters worldwide

• Anti-fraud curriculum and educational tools for

colleges and universities

The positive effects of anti-fraud training are far-

reaching. Clearly, the best way to combat fraud is to

educate anyone engaged in fighting fraud on how to ef-

fectively prevent, detect and investigate it. By educating,

uniting and supporting the global anti-fraud community

with the tools to fight fraud more effectively, the ACFE is

reducing business fraud worldwide and inspiring public

confidence in the integrity and objectivity of the profes-

sion. The ACFE offers its members the opportunity for

professional certification. The Certified Fraud Examiner

(CFE) credential is preferred by businesses and govern-

ment entities around the world and indicates expertise in

fraud prevention and detection.

Membership Immediate access to world-class anti-fraud knowledge

and tools is a necessity in the fight against fraud.

Members of the ACFE include accountants, internal

auditors, fraud investigators, law enforcement officers,

lawyers, business leaders, risk/compliance professionals

and educators, all of whom have access to expert train-

ing, educational tools and resources. More than 75,000

members from all over the world have come to depend

on the ACFE for solutions to the challenges they face in

their professions. Whether their career is focused exclu-

sively on preventing and detecting fraudulent activities

or they just want to learn more about fraud, the ACFE

provides the essential tools and resources necessary for

anti-fraud professionals to accomplish their objectives.

To learn more, visit ACFE.com or call (800) 245-3321 / +1

(512) 478-9000.

Certified Fraud Examiners Certified Fraud Examiners (CFEs) are anti-fraud experts

who have demonstrated knowledge in four critical areas:

Financial Transactions and Fraud Schemes, Law, Investi-

gation, and Fraud Prevention and Deterrence. In support

of CFEs and the CFE credential, the ACFE:

• Provides bona fide qualifications for CFEs through

administration of the CFE Exam

• Requires CFEs to adhere to a strict code of profes-

sional conduct and ethics

• Serves as the global representative for CFEs to busi-

ness, government and academic institutions

• Provides leadership to inspire public confidence in

the integrity, objectivity and professionalism of CFEs

REPORT TO THE NATIONS ON OCCUPATIONAL FRAUD AND ABUSE 91

C E R T I F I E D F R A U D E X A M I N E R

© 2016 Association of Certified Fraud Examiners, Inc.

“ACFE,” “CFE,” “Certified Fraud Examiner,” “CFE Exam Prep Course,” “Fraud Magazine,” “Association of Certified Fraud Examiners,” “Report to the Nations,” the ACFE Seal, the ACFE Logo and related trademarks, names and logos are the property of the Association of Certified Fraud Examiners, Inc., and are registered and/or used in the U.S. and countries around the world.

GLOBAL HEADQUARTERS • THE GREGOR BUILDING 716 West Ave • Austin, TX 78701-2727 • USA Phone: (800) 245-3321 / +1 (512) 478-9000 Web: ACFE.com • [email protected]

U.S. Department of Commerce * Economics and Statistics Administration * Office of the Chief Economist

Estimating the Investment and Job Creation Impact of the EB-5 Program

Prepared by

U.S. Department of Commerce Economics and Statistics Administration

Office of the Chief Economist

for U.S. Department of Homeland Security

U.S. Citizenship and Immigration Services Immigrant Investor Program Office

January 2017

U.S. Department of Commerce * Economics and Statistics Administration * Office of the Chief Economist

AUTHORS

Office of the Chief Economist

David K. Henry, Supervisor Regional Development Section

[email protected]

Sandra D. Cooke-Hull Economist

[email protected]

Jacqueline Savukinas Economist

[email protected]

Alis Asadurian Economist

[email protected]

Nicholas Chiumenti Intern

U.S. Department of Commerce * Economics and Statistics Administration * Office of the Chief Economist

TABLE OF CONTENTS Executive Summary .......................................................................................................................... 1 Introduction ...................................................................................................................................... 5 Overview of the EB-5 Program ......................................................................................................... 6 Methodology Summary .................................................................................................................... 8

Economic Impact Analyses and Data Tabulations for Regional Center Projects ........................... 8 Estimation of Stand-Alone Investments ...................................................................................... 10

Investment and Job Creation from Active EB-5 Projects in FY2012 and FY2013 ......................... 11 Regional Center Projects-National Estimates ............................................................................. 11 Stand-Alone Investments ............................................................................................................. 12 Regional Center EB-5 Related Investment and Job Creation by State ........................................ 12

Settlement Locations of Immigrant Investors and Families, by State .......................................... 17 Conclusion ....................................................................................................................................... 18 Appendix ......................................................................................................................................... 19

Glossary of Terms ......................................................................................................................... 20 Appendix Tables for Maps 1-6 ..................................................................................................... 22

Table 1 Total Investment and Job Creation from Active EB-5 Projects, FY2012 and FY2013 ....... 11 Map 1 Number of EB-5 Projects FY2012 and FY2013 for Projects Administered Through Regional Centers .............................................................................................................. 13 Map 2 Number of EB-5 Investors FY2012 and FY2013 for Projects Administered Through Regional Centers .............................................................................................................. 13 Map 3 Total Investment in Millions of U.S. Dollars FY2012 and FY2013 for Projects Administered Through Regional Centers ......................................................................... 14 Map 4 Total EB-5 Investment in Millions of U.S. Dollars FY2012 and FY2013 for Projects Administered Through Regional Centers ......................................................................... 15 Map 5 Total Estimated Job Creation FY2012 and FY2013 for Projects Administered Through Regional Centers .............................................................................................................. 16 Map 6 Number of EB-5 Immigrant Investors and Family Members FY2009-FY2014 For Projects Administered Through Regional Centers ..................................................... 17

U.S. Department of Commerce * Economics and Statistics Administration * Office of the Chief Economist

Estimating the Investment and Job Creation Impact of the EB-5 Program P a g e | 1

U.S. Department of Commerce * Economics and Statistics Administration * Office of the Chief Economist

Estimating the Investment and Job Creation Impact of the EB-5 Program

EXECUTIVE SUMMARY

At the request of U.S. Citizenship and Immigration Services (USCIS) in the Department of Homeland Security (DHS), the Economics and Statistics Administration (ESA) of the Department of Commerce (DOC) conducted an assessment of the EB-5 program to determine its size and its contribution to the U.S. economy. To accomplish this, we examined individual projects that were active during a two-year period, FY2012 and FY2013, and compiled a new dataset that includes the number of EB-5 projects, the number of investors, the amount of EB-5 and non-EB-5 related investment spending and the resulting expected1 job creation. The EB-5 program provides two avenues for immigrant investors: the Stand-Alone process and the Regional Center process. In both cases, individual immigrant investors must make a minimum investment of $1 million, or $500,000 if the project is located in a “Targeted Employment Area” (TEA).2 Both avenues also require investment in a new commercial enterprise that will create or preserve a minimum number of jobs (10 jobs per investor). For Stand-Alone investors, the jobs must be direct jobs at the new commercial enterprise; for investors in Regional Centers, the jobs can be the total of direct, indirect, and induced employment as determined through regional economic models. The investment and job creation impacts of both avenues of EB-5 immigrant investor projects that were active in FY2012 and FY2013 were as follows:

National Estimates

• More than 11,000 immigrant investors provided $5.8 billion in capital, roughly 35% of the total investment ($16.7 billion), for 562 EB-5 related projects that were active in FY2012

1 Estimates were calculated using Economic Impact Analyses for projects filed on Form I-526 petitions by investors and exemplar petitions filed with Form I-924 Regional Center applications. The Form I-829 petitions that must be filed by the immigrant investor within the 90-day period immediately preceding the second anniversary of obtaining conditional permanent resident status generally include evidence of job creation from the completed project but these petitions were not available for us to use in our analysis. (See the Glossary for definitions.) 2 See the Glossary for a definition of Targeted Employment Area.

P a g e | 2 Estimating the Investment and Job Creation Impact of the EB-5 Program

U.S. Department of Commerce * Economics and Statistics Administration * Office of the Chief Economist

and FY2013. These projects were expected to create an estimated 174,039 jobs. (See Table 1).3

• The great majority of EB-5 investment and job creation occurs through Regional Centers.4 Economic Impact Analyses for the 134 projects active in FY2012 and FY2013 and operated through Regional Centers show that an estimated 169,759 jobs were expected to be created from total investment of $16.4 billion.

o The EB-5 immigrant investor portion of these capital investments was about 33% or $5.4 billion.

o The remaining $10.9 billion of investments came from non-EB-5 sources of capital (domestic and foreign). The non-EB-5 sources of capital included equity from project developers, commercial loans, and investment from other project participants.

o By including jobs associated with non-EB-5 investor sources of capital, a practice allowed by regulation5, we estimate that EB-5 projects that were active in FY2012 and FY2013 were expected to generate about 16 jobs for each of the immigrant investors associated with the program.

• In absolute terms, there were more active Stand-Alone projects (428) than Regional Center projects (134) during the time period that was the focus of our study. Stand-Alone projects are estimated to have resulted in at least $327 million in EB-5 investment and the expected creation of at least 4,280 jobs.

3 Since our results were based on active projects in FY2012 and FY2013 and the data do not identify the total active time period for each of the 134 Regional Center projects reviewed, or any schedule for when the jobs would be added, there was no way of providing annual counts of jobs created by the investments. 4 See the Glossary for a definition of Regional Center. 5 See 8 C.F.R. § 204.6(g)(2).

Table 1: Total Investment and Job Creation from Active EB-5 Projects, FY2012 and FY20131

(millions) Total EB-5 Non-EB5

Regional Center2 134 10,644 16,366$ 5,446$ 10,920$ 106,440 169,759

Stand-Alone3 428 428 327$ 327$ -$ 4,280 4,280

Total 562 11,072 16,693$ 5,773$ 10,920$ 110,720 174,039

2 Regional Center data were compiled from Economic Impact Analyses submitted by Regional Centers.

Source: ESA estimates based on Economic Impact Analyses submitted to USCIS and IPO investor data

3 Stand-Alone projects were estimated using the minimum investment amount per project depending on whether the project was located in a targeted ($500,000 minimum) or non-targeted ($1 million minimum) employment area.

Job Creation Estimate

Number of Projects

Number of Investors

Investment Spending Job Creation Requirement

1 Active EB-5 project selection was based on number of I-526s approved during FY2012 and FY2013. Active EB-5 projects include projects at various stages--beginning, ongoing and completed--during this period.

Estimating the Investment and Job Creation Impact of the EB-5 Program P a g e | 3

U.S. Department of Commerce * Economics and Statistics Administration * Office of the Chief Economist

State Level Estimates (Regional Center projects only)6

• During FY2012 and FY2013, the 134 active EB-5 Regional Center projects were located in 25 states and the District of Columbia, with the majority (about 65%) found in California, New York, Florida, Texas and Alabama.

• The ranking of states by number of investors differed slightly from the ranking by number of projects. Roughly three-quarters (73%) of the EB-5 investors invested in new commercial enterprises associated with Regional Center projects that were located in California, New York, Florida, Ohio and Pennsylvania. On average, the projects located in these states were very large projects with greater numbers of investors. Almost half of the total EB-5 investors invested in new commercial enterprises associated with Regional Center projects that were located in California and New York and each of these states had EB-5 capital investments greater than $1 billion.

• Total investment (EB-5 and non-EB-5), based on the location of the project, ranked highest in California, New York, Florida, Maryland and Nevada. These top five states accounted for over 80 percent of total investment. These same five states also ranked highest in terms of supplying the most non-EB-5 capital to projects.

• The greatest number of the estimated 169,759 jobs that were expected to be created by Regional Center projects active in FY2012 and FY2013 were associated with projects in California, New York, Florida, the District of Columbia and Maryland. These four states and the District of Columbia comprise 70 percent of total estimated job creation, with California accounting for 30 percent. Projects in California, New York and Florida were estimated to result in more than 10,000 jobs in each state.

6 Our analysis of the projects was at the study area or job impact level of geographic definition. We are only reporting state level impacts because the county or multiple county level of detail might necessarily reveal the project and associated internal business information.

P a g e | 4 Estimating the Investment and Job Creation Impact of the EB-5 Program

U.S. Department of Commerce * Economics and Statistics Administration * Office of the Chief Economist

Estimating the Investment and Job Creation Impact of the EB-5 Program P a g e | 5

U.S. Department of Commerce * Economics and Statistics Administration * Office of the Chief Economist

Estimating the Investment and Job Creation Impact of the EB-5 Program

INTRODUCTION U.S. Citizenship and Immigration Services (USCIS), part of the Department of Homeland Security (DHS), administers the employment-based “fifth preference” or EB-5 program. In 2013, the Office of the Inspector General (OIG) of the Department of Homeland Security released a report7 that raised concerns about the accuracy of USCIS estimates of the value or size (investment and job creation) of the EB-5 program. Based on these concerns, USCIS approached the Department of Commerce’s (DOC) Economics and Statistics Administration (ESA) to conduct a study of the level of investment that takes place through the program and job creation in the U.S. associated with these investments.8 Specifically, USCIS asked us to develop an objective measure of the economic benefits (a valuation) of the EB-5 program on the economy in the U.S. in terms of jobs created and incremental capital investment. This report lays out the process we used for developing estimates of the size of the EB-5 program, including the sources of data used, estimation methodology, and assumptions. It also includes detailed findings by state. We did not evaluate the effectiveness or operational efficiency of the EB-5 program. Although we had originally hoped to measure the induced effects of increased household spending in regions where the immigrant investors reside in the U.S., our report does not include these estimates due to a lack of data on the income of investors and their families. We were able to identify the immigrant investors’ location by state (See Map 6), but the lack of income data precluded further analysis of spending patterns. Finally, we note that the Government Accountability Office (GAO) recommended that when a true cost-benefit analysis of a program such as EB-5 cannot be conducted, it is desirable to at least enumerate the types of benefits and costs the program will generate.9 Our report was not intended to do a complete cost-benefit analysis, so GAO requested, and USCIS agreed that we should at least address some of the social costs associated with the program. However, we determined that the data required for 7 U.S. Department of Homeland Security, Office of the Inspector General, “United States Citizenship and Immigration Services’ Employment-Based Fifth Preference (EB-5) Regional Center Program,” December 2013. 8 In November 2014, a Memoranda of Agreement between the Department of Commerce/Economics and Statistics Administration (ESA) and the Department of Homeland Security/USCIS was put in place for ESA to report on and to provide evidence of how the EB-5 program affects the U.S. economy. Specifically, by using USCIS data on the EB-5 program, we were tasked to determine levels of investments and jobs created by immigrant investors participating in the program in FY2012 and FY2013. Originally, the analysis was to be done within one year. In November 2015, we requested a 3-month extension to the MOA primarily because of the length of time needed to extract data from paper based Economic Impact Analyses located at a USCIS storage facility. 9 U.S. Government Accountability Office, “Immigrant Investor Program: Additional Actions Needed to Better Assess Fraud Risks and Report Economic Benefits,” August 2015.

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conducting a meaningful analysis of the social costs of immigrant investors and their families was unavailable and, therefore, do not include such an analysis in our study.

OVERVIEW OF THE EB-5 PROGRAM10 Congress authorized the EB-5 program in 1990 in order to stimulate the economy through capital investment and job creation by foreign investors. The program provides a path for such investors and certain family members to obtain lawful permanent residence. Initially, there were only “Stand-Alone” investors, but in 1992, Congress, under Section 610 of Public Law 102-395, created the Immigrant Investor Program as a pilot project that would allow for the creation of “Regional Centers.” Both Stand-Alone and Regional Center investments allow investors to pool their funds. These investments allow the immigrant investor to become part of a lawful business entity, such as a limited partnership. Investors, whether Stand-Alone or through a Regional Center, first petition USCIS for EB-5 classification (via Form I-526). Upon admission or adjustment of status, they are allowed to enter the U.S. for two years as conditional permanent residents. The minimum qualifying EB-5 investment in the United States is $1 million. However, investors may invest as little as $500,000, if the project is located in an underserved geographical area called a Targeted Employment Area (TEA). The term TEA means, at the time of investment, a rural area or an area which has experienced unemployment of at least 150 percent of the national average rate. Immigrant investors are required to petition (via Form I-829) for removal of the conditions on their permanent resident status within 90 days before the second anniversary of obtaining that status. As part of this process, investors must prove, among other things that the new commercial enterprise into which they invested has preserved, created or can be expected to create within a “reasonable period of time” at least 10 new jobs. Once USCIS approves the I-829 petition,11 the conditions on permanent residence are removed. For Stand-Alone projects, USCIS measures job creation as direct hires in the new commercial enterprise funded through the EB-5 investment. It verifies the direct hire counts through documentation such as photocopies of relevant payroll and tax records, Form I-9 (employment eligibility verification) or other similar documents. For investments through the Regional Centers, USCIS measures job creation as not only direct employment, but also indirect and induced jobs. When the Regional Center is set up, it prepares, or hires outside experts to prepare, an Economic Impact Analysis (EIA) to estimate the number of

10 For additional information, see the USCIS website: https://www.uscis.gov/working-united-states/permanent- workers/employment-based-immigration-fifth-preference-eb-5/about-eb-5-visa. 11 The approval rate for I-829 petitions has increased over time and the vast majority of adjudicated I-829 petitions are approved. In 2015, 1,067 I-829 petitions were approved and only 11 were denied. https://www.uscis.gov/sites/default/files/USCIS/Resources/Reports%20and%20Studies/Immigration%20Forms%20D ata/Employment-based/I829_performancedata_fy2016_qtr2.pdf

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jobs that will be created from a particular project. Typically, the immigrant investor petitioners who invested in a new commercial enterprise associated with a given Regional Center project all use the same EIA to support their claim of job creation. USCIS provides policy guidance on estimating job creation.12 Our report provides an assessment of the impact of the EB-5 program by using data from EIAs to examine the aggregate investments made, the estimates of the number of jobs that were expected to be created by the investors and where the projects are located across the United States.

12 https://www.uscis.gov/sites/default/files/USCIS/Laws/Memoranda/2013/May/EB- 5%20Adjudications%20PM%20%28Approved%20as%20final%205-30-13%29.pdf

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METHODOLOGY SUMMARY Economic Impact Analyses and Data Tabulations for Regional Center Projects USCIS asked ESA to estimate the size of the EB-5 program based on investment levels and associated job creation. We conducted numerous reviews of the existing USCIS data (known as i- CLAIMS13) and worked with USCIS staff to determine whether the i-CLAIMS data could generate what would be needed for the impact analysis. We concluded that the i-CLAIMS data was not sufficient for our analysis. Instead, we built our own database for the Regional Center projects using the data provided in the EIAs that Regional Center investors submit to demonstrate that their project will lead to the required 10 jobs per investor.14 In most cases, the EIAs came from paper-based project files stored in the USCIS archive facility in Lee’s Summit, Missouri. USCIS may consider EIAs as “reasonable methodologies”15 to establish a job creation requirement of 10 jobs per investor. Since the EIA is done prior to project approval, it must forecast the number of jobs the project will create using relevant project-related data and economically or statistically valid forecasting tools. The Regional Center typically hires an economic consulting firm to conduct the EIA. The Regional Center supplies information to the consulting firm on types and amounts of spending, including construction spending (hard and soft) as well as spending for operations, if jobs are expected to be created, for example, from operating a new hospital or hotel. Hard construction costs include the cost of materials while soft construction costs include services rendered by architects, engineers and others. The majority of projects involve some type of construction of a new facility or renovation of an existing building (e.g., a hotel). Other types of projects include transportation infrastructure improvements, movie production, and auto parts manufacturing. Our Regional Center analysis focused on projects that were active in FY2012 and FY2013, so our project selection criteria began with reviewing a list of all projects including the number of approved I-526 petitions associated with the projects. We also had at our disposal I-526 petitions and the numbers of approvals for years before (FY2010 and FY2011) and after (FY2014). Our starting point was to rank the Regional Center projects by number of I-526 approvals in FY2012 and FY2013 and then to review the numbers of approvals in earlier and later years to give some indication of expected project activity in FY2012 and FY2013. Once this review of petition approvals was complete, we selected Regional Center projects that were expected to have the bulk of their activity in FY2012 and FY2013, and then requested that USCIS provide us with the approximately 200 EIAs for these projects. In the end, after eliminating duplicate project listings

13 i-CLAIMS is a database created by USCIS as an administrative tool to record the adjudication of I-924 applications and was not originally designed to store project data for economic analysis. 14 Jobs are measured as full-time jobs of at least 35 hours per week that are expected to last for two years or more. 15 See 8 C.F.R. 204.6(j)(4)(iii) and 8 C.F.R. 204.6(m)(7)(ii).

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U.S. Department of Commerce * Economics and Statistics Administration * Office of the Chief Economist

and multi-stage projects, we were left with 134 Regional Center projects that were active in FY2012 and FY2013.16 Economic consulting firms typically used a regional input-output model for the geographic area of the EB-5 project to determine job creation.17 The consultants apply relevant multipliers to EB-5 investment spending in order to estimate the direct, indirect and induced employment effects. Direct job creation includes jobs created at the entity itself, while indirect jobs are those created in industries that support or supply the industry of the entity. Induced jobs result from increased household spending by those who were hired for the direct or indirect jobs. We carefully evaluated EIAs from 25 of the largest projects (as measured by total investment spending) to determine the degree of consistency among the EIAs, adherence to USCIS policy guidance and use of accepted regional modeling practices.18 There were inconsistencies that led to both underestimates and overestimates of job creation, but we were unable to determine the net effect of the bias. Below are selected examples of issues that we found from our analysis of EIAs:19

• In some cases, not all the jobs were reported in the EIA because they were not needed to meet the minimum requirement of 10 jobs per investor. In these cases, there is an undercount of job creation.

• In other instances, there is likely an overestimation of job creation since double-counting resulted from the inappropriate use of multipliers. For example, sometimes architectural and engineering services are counted as soft construction costs when those services are already captured in the overall construction multiplier within the regional model.

• The practice of using separate multipliers in a construction project where the equipment in the structure is physically attached to the structure (such as stadium seating) and where the overall construction multiplier includes this type of equipment within the regional model. This practice led to an overestimate of investment impacts.

• Also, several EIAs estimated job creation from construction of a building, e.g., a hospital and then job creation from operations of the building. However, there were inconsistencies in the length of time and manner in which job creation from operations were estimated.

Since we lacked the necessary information to determine the extent to which EIA estimates were overestimated or underestimated, our analysis is based solely on the estimates as reported in the EIAs and related materials. Despite the issues associated with the EIAs, we believe that the data compiled from them provides a more robust database and basis for analysis than other studies that estimated the size and impact of the EB-5 program using, for example, the general or

16Individual EB-5 investments were well above $500,000 in 9 of the 134 active projects during FY2012 and FY2013 and thus we assume these projects were not located in a TEA. 17 RIMS II, IMPLAN, REMI and REDYN are the models typically used. RIMS II stands for the Regional Input Output Modelling System II created and maintained by the U.S. Department of Commerce. IMPLAN, REMI and REDYN are proprietary privately held regional models. 18 For the remaining 109 projects, we compiled and tabulated the relevant data, but did not record our comments about how the EIA was conducted or how the regional model(s) were used. 19 ESA is providing USCIS with specific cases where these issues and concerns were observed.

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‘ballpark’ estimates of aggregate capital investment and job creation totals in visa petition approvals provided in USCIS reporting. Within the past three years, USCIS has hired more economists, that has improved its ability to evaluate EB-5 applications/petitions and EIAs. USCIS has developed a process by which economists evaluate the EIAs using criteria established in USCIS regulations and policy memorandums to conduct an economic due diligence (EDD) report. The EDD contains a summary of the project and the economist’s evaluation of the EIA, such as evidence of transparency, appropriate use of multipliers, geographic area used for the job creation estimate, and the relevant timeframe. If an EIA is incomplete, the economist can request further evidence and re-evaluate the project. As a result of this process, future assessments of investments and jobs created by EB-5 projects should be more consistent methodologically with best practices in regional economic analysis. Estimation of Stand-Alone Investments

Immigrant investors in Stand-Alone projects are often either immigrant entrepreneurs starting a new business, part of a small pool of investors or investors in small businesses in the U.S. which may have failed without help from foreign investors. Like Regional Center investors, they must invest a minimum of $500,000 in TEAs or a minimum of $1 million in non-targeted employment areas. Stand-Alone EB-5 projects do not rely on an economic model for the count of jobs created. Each investor is required to document in its I-829 form (removal of conditions) using tax records, Form I-9, payroll records or other documents the jobs created or maintained. However, given the study timeframe of FY2012 and FY2013, the I-829s that would demonstrate job creation had not yet been filed by the time of our analysis. Because the I-829s were unavailable, USCIS instead provided us information on the Stand-Alone projects over FY2012 and FY2013 including the name of the new commercial enterprise funded by the investment and whether the enterprise was located in a TEA. We then estimated the contribution of each Stand-Alone project using the minimum investment of $1 million for each investor in a non-targeted employment area or $500,000 for projects in a TEA. Given that Stand- Alones do not rely on economic models as with Regional Center investments and the estimate of jobs when an I-526 is filed does not require the documentation such as that required for I-829 approval, we assume that each project would reach the minimum employment requirement of 10 jobs per investor. We acknowledge that some projects may have been successful and created more than 10 jobs per Stand-Alone investor and some may have fallen short and not met the minimum requirement of 10 jobs created. Since Stand-Alone projects comprise a small share of total EB-5 investment and job creation, this approach is not likely to change the overall conclusions discussed below. Total estimated Stand-Alone investments and job creation are provided in the following section.

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INVESTMENT AND JOB CREATION FROM ACTIVE EB-5 PROJECTS IN FY2012 AND FY2013

There were 562 active EB-5 projects throughout the U.S. in FY2012 and FY2013 that were supported by EB-5 investment. Over 11,000 immigrant investors invested $5.8 billion in new commercial enterprises associated with projects in 25 states and the District of Columbia. The projects were expected to generate an estimated 174,039 jobs. Immigrant investors supplied roughly 35% of the total funding of $16.7 billion (See Table 1). The vast majority of EB-5 investment spending was through Regional Centers (98%) while the remaining amount (2%) was through Stand-Alone operations. EB-5 program investments (investments from immigrant investors and non-EB-5 capital in EB-5 projects) account for between 0.5% and 1.6% of the flow of total foreign direct investment into the United States.20

Regional Center Projects – National Estimates As explained in the previous section, we collected data for each Regional Center project by reviewing EIAs that Regional Centers or investors associated with Regional Centers submitted to USCIS as part of the EB-5 application/petition process. We found that, using the data provided in the EIAs, an estimated 169,759 jobs were expected to be created from 134 projects operated through Regional Centers that involved 10,644 immigrant

20 ESA calculated the EB-5 program share using 2012 and 2013 total foreign direct investment into the U.S. data from the Department of Commerce’s Bureau of Economic Analysis. The range is provided since the non-EB-5 capital in EB- 5 projects is from a combination of domestic and foreign sources and that data was not available.

Table 1: Total Investment and Job Creation from Active EB-5 Projects, FY2012 and FY20131

(millions) Total EB-5 Non-EB5

Regional Center2 134 10,644 16,366$ 5,446$ 10,920$ 106,440 169,759

Stand-Alone3 428 428 327$ 327$ -$ 4,280 4,280

Total 562 11,072 16,693$ 5,773$ 10,920$ 110,720 174,039

2 Regional Center data were compiled from Economic Impact Analyses submitted by Regional Centers.

Source: ESA estimates based on Economic Impact Analyses submitted to USCIS and IPO investor data

3 Stand-Alone projects were estimated using the minimum investment amount per project depending on whether the project was located in a targeted ($500,000 minimum) or non-targeted ($1 million minimum) employment area.

Job Creation Estimate

Number of Projects

Number of Investors

Investment Spending Job Creation Requirement

1 Active EB-5 project selection was based on number of I-526s approved during FY2012 and FY2013. Active EB-5 projects include projects at various stages--beginning, ongoing and completed--during this period.

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investors, or about 16 jobs per investor (See Table 1).21 Total investment in these 134 projects was $16.4 billion; the immigrant investor share of these investments was about 33% or $5.4 billion. Non-EB-5 sources of capital investments in these projects were about $11 billion or approximately 67% of the investment funds in EB-5 projects. Thus, given the information provided in the EIAs, we conclude that for FY2012 and FY2013, the EB-5 program is expected to exceed its job creation requirement that each immigrant investor contribute capital to a new commercial enterprise that creates at least 10 full-time jobs. Stand-Alone Investments As described in the Methodology section, Stand-Alone investments can be located in TEAs and non-TEAs. There were 226 Stand-Alone projects over FY2012 and FY2013 not located in a TEA. By using the minimum of $1 million for each investor and 10 jobs per investor which we assume are eventually proven to have been created using employment records, we estimate total investment of at least $226 million with at least 2,260 jobs expected to be created or maintained. In addition, there were 202 Stand-Alone projects that were located in a TEA. Stand-Alone projects in TEAs require a minimum of $500,000 which provides an estimated $101 million in investment and 10 jobs per investor or 2,020 jobs created or maintained. In total, we estimate 428 Stand-Alone projects resulted in at least $327 million in direct EB-5 investment and the expected direct creation of at least 4,280 jobs (See Table 1). Regional Center EB-5 Related Investment and Job Creation by State22

The following series of maps display the number of investors, total investment, EB-5 and non-EB- 5 investment and job creation for Regional Center administered projects only.

Map 1 shows: • Twenty-five states and the District of Columbia had EB-5 projects. • The top five states where active projects occurred in FY2012 and FY2013—California, New

York, Florida, Texas and Alabama—accounted for about 65 percent of the 134 projects over the time span, with about 30 percent in California. The top five states were the only ones that had 7 or more projects each.

21The allowance of EB-5 investors to get credit for jobs created by non-EB-5 funding by USCIS has been a contentious issue. For a number of projects, the EB-5 portion of the total investment is much less than 33%. However, USCIS anecdotally cites a number of instances where funding for an entire project hinged on the participation of the EB-5 portion of the total investment. 22 See the appendices for state level data. The sum of state totals in the appendices may not add up to the total because of data from areas including but not limited to Puerto Rico and Guam. Maps include Regional Center data only because Stand-Alone data were not available by state.

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Map 2 shows: • The states23 that had the highest number of immigrant investors associated with active

projects in FY2012 and FY2013, accounting for about 75 percent of the total, were California, New York, Florida, Ohio and Pennsylvania. This ranking differs slightly from the number of projects, indicating that the projects in some of the top 5 states in Map 1 were very large and required relatively more investors.24

• California and New York together accounted for about 50 percent of the total 10,644 investors.

Map 3 shows: • Twenty-five states plus the District of Columbia had EB-5 related investments. • The largest total dollar amounts of investments were in California, New York, Florida,

Maryland and Nevada. California, New York, Florida and Maryland each had active projects in FY2012 and FY2013 with investments of over $1 billion. The top five states accounted for over 80 percent of total investment. These same five states also ranked

23 These figures do not represent which states investors reside in, as most investors do not reside in the United States at the time of their Form I-526 petition filing. 24 The number of immigrant investors was based on investor or investment data captured from individual EIAs. In a few cases, the EIA did not provide matching data—number of investors matched to levels of investments. In those few cases, we relied on the number of Form I-526 approvals that occurred in FY2012 and FY2013 and we may not have necessarily captured the number of EB-5 immigrant investors associated with those projects.

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highest in terms of supplying the most non-EB-5 capital to projects (not shown on the map).

• Fourteen states plus the District of Columbia each had EB-5 related investments of greater than $100 million.

Map 4 shows: • The top states with EB-5 investments (that is, the amount invested by immigrant investors

through the program) were California, New York, Florida, Ohio and Pennsylvania. These states accounted for over 70 percent of the $5.4 billion in investments made by immigrant investors in new commercial enterprises associated with active projects through Regional Centers in FY2012 and FY2013. California and New York each had EB-5 investments greater than $1 billion.

• In all, 25 states plus the District of Columbia had EB-5 investments in their states. Fifteen of these had EB-5 investments of less than $100 million.

• In three states—Ohio, Idaho and South Dakota—the EB-5 projects relied only on EB-5 investment and had no investments from non-EB-5 sources of capital.

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Map 5 shows: • The total number of jobs expected to be created through active projects associated with

Regional Centers in FY2012 and FY2013 is estimated to be 169,759. • California, New York, Florida, the District of Columbia and Maryland were the top 5 areas

in expected job creation, comprising about 70 percent of the total. California by itself accounted for about 30 percent of job creation. California, New York and Florida were the only states where expected job creation was greater than 10,000.

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U.S. Department of Commerce * Economics and Statistics Administration * Office of the Chief Economist

SETTLEMENT LOCATIONS OF IMMIGRANT INVESTORS AND FAMILIES, BY STATE

By using USCIS data on permanent addresses of immigrant investors at or near the time they filed to remove conditions on their permanent resident status, we were able to observe settlement patterns of these investors. As explained above, immigrant investors and family members who are admitted to the United States or adjust status on the basis of approved Form I-526 petitions live in the U.S. in a conditional permanent resident status for approximately two years. They then petition to have the conditions on their permanent residence removed and the petition is adjudicated. Map 625 below shows where almost 17,000 Regional Center investors and their families located based on approved Form I-829 petitions submitted to USCIS between FY2009 and FY2014.26

25 Settlement patterns of immigrant investors and their families in Map 6 are based on permanent addresses provided by petitioners on their submitted Form I-829. These data should not be compared with the numbers of EB- 5 investors by state in Map 2 which are based on EB-5 project location and not settlement location. 26 This data was only available to us from USCIS in a historical data file with investor locations from FY2009 to FY2014. These data are from a longer timeframe that capture many more investors and family members than during our study period, but it was not possible for us to limit the timeframe of this information to just FY2012 and FY2013.

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Map 6 shows: • The top five states where Regional Center EB-5 investors and families resided were

California, New York, Florida, New Jersey and Washington. California, with over 8,000 immigrant investors and family members, accounted for roughly half of the total and outpaced New York, the second largest home to EB-5 immigrants by a factor of 5. The top 10 states account for roughly 85 percent of all immigrant investors and families.

• Given the longer timeframe (FY2009 to FY2014) for which we have investor location data, we find that with the exception of Montana, every state (and the District of Columbia) has EB-5 related immigrants. The majority of immigrant investors and family members resided in coastal states.

CONCLUSION At the request of USCIS, ESA conducted a “valuation” of the EB-5 program. We developed a method based on the number of I-526 (immigrant investor petition) approvals to determine which of the projects in the USCIS EB-5 database were active in FY2012 and FY2013. After refining the list of active projects by Regional Center, we requested and obtained the Economic Impact Analyses (EIAs) associated with the projects. The purpose of this study was to provide an objective measurement of the economic impact of the EB-5 program on the U.S. economy in terms of expected jobs created and the capital invested. Consequently, we did not evaluate the effectiveness or operational efficiency of the EB-5 program or its administration. By using EB-5 investment and job creation estimates reported in EIAs for active projects over the two-year period of FY2012 and FY2013, we tabulated that there were 10,644 investors, total dollar value of investment of $16.4 billion and 169,759 expected jobs from 134 projects in EB-5 Regional Centers. We also tabulated 428 Stand-Alone investor projects during those two years that were expected to create or save 4,820 jobs. Active EB-5 projects, both those associated with Regional Centers and Stand-Alone projects resulted in an estimated 174,039 expected jobs— nearly 16 jobs per immigrant investor.

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APPENDIX

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GLOSSARY OF TERMS

EB-5 Program: EB-5 refers to the employment-based fifth preference visa category. This program is comprised of the Immigrant Investor (Regional Center) Program and the Stand-Alone program for alien entrepreneurs.

Economic Due Diligence (EDD): The review and examination of business plans, EIAs and, when appropriate, the organizational and transactional documents (subscription agreements, contracts, permits, loan documents, private placement memoranda, etc.) submitted by a Regional Center or investor by USCIS to ascertain compliance with USCIS regulations and policy.

Economic Impact Analysis (EIA): The report prepared by a Regional Center’s economists to demonstrate how the business plan submitted for an individual project will demonstrate how the Regional Center will promote economic growth and how a project will fulfill the requisite job creation for its immigrant investors.

Economics and Statistics Administration (ESA): ESA is the agency within the Department of Commerce that prepared this report.

Exemplar: The term “exemplar” refers to a sample Form I-526 petition, filed with a Form I-924 actual project proposal that contains copies of the commercial enterprise’s organizational and transactional documents, which USCIS will review to determine if they are in compliance with established EB-5 eligibility requirements.

Form I-526: This is the petition used by an alien entrepreneur to request classification as an immigrant under section 203(b)(5) of the Immigration and Nationality Act. If approved the alien entrepreneur may ultimately obtain a two-year conditional permanent residency in the United States.

Form I-9: This is the Employment Eligibility Verification form by which employers confirm the identity and authorization of individuals to work in the U.S.

Form I-924: This is the application used by a Regional Center in its initial application for designation as a Regional Center; to submit amendments to change its organizational structure or administration; and to submit new capital investment projects for USCIS review.

Form I-829: The alien entrepreneur must file this petition within the 90-day period immediately preceding the second anniversary of obtaining conditional permanent resident status. Immigrant entrepreneurs use this to petition for removal of the conditions on their permanent resident status and that of certain dependents. Evidence that the requisite jobs were preserved, created or will be created within a reasonable time must be presented in this petition.

Immigrant Investor Program Office (IPO): IPO is the component of USCIS responsible for the adjudication of all EB-5 applications and petitions and, in part, the development of policies regarding the EB-5 program.

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Job Creating Entity (JCE): A JCE is the entity that is mostly closely responsible for job creation. In some cases, a JCE and a New Commercial Enterprise (NCE) may be the same entity, where the NCE is most closely responsible for job creation. A JCE is the receiver of investment capital from immigrant investors, if the JCE and NCE are the same entity, or Regional Center-associated commercial enterprises.

New Commercial Enterprise (NCE): This is a commercial venture owned, at least in part, by one or more EB-5 investors. An NCE is formed by: the creation of a new business; the purchasing of an existing business and its simultaneous or subsequent restructuring or reorganization; or the expansion of an existing business through the investment of the required amount so that a substantial change (at least 40 percent increase) in the net worth or the number of employees results.

Regional Center: Any economic entity, public or private, which is involved with the promotion of economic growth, improved regional productivity, job creation and increased domestic capital investment. The organizers of an entity seeking the “Regional Center” designation from USCIS must submit and receive approval of a proposal, supported by economically or statistically valid forecasting tools.

Stand-Alone Investment: The investment made by one or more EB-5 investors whose investment is not made through a Regional Center. For these investors, only the direct (i.e., payroll) employment of qualified individuals can count towards the job creation requirement of ten jobs per EB-5 investor.

Targeted Employment Area (TEA): A TEA represents a particular geographic or political subdivision of a State that is either a rural area or an area of high unemployment (at least 150 percent of the national average). If an EB-5 investor invests in a TEA, the minimum capital investment is reduced from $1 million to $500,000.

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Appendix Table for Map 1: Number of EB-5 Projects, by State, FY2012 and FY2013

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U.S. Department of Commerce * Economics and Statistics Administration * Office of the Chief Economist

Appendix Table for Map 2: Number of Immigrant Investors, By State, FY2012 and FY2013

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U.S. Department of Commerce * Economics and Statistics Administration * Office of the Chief Economist

Appendix Table for Map 3: Total EB-5 Investment, by State, in Millions of Dollars, FY2012 and FY2013

Appendix Table for Map 4:

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U.S. Department of Commerce * Economics and Statistics Administration * Office of the Chief Economist

EB-5 Investment Only, by State, in Millions of Dollars, FY2012 and FY2013

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Appendix Table for Map 5: Job Creation, by State, FY2012 and FY2013

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U.S. Department of Commerce * Economics and Statistics Administration * Office of the Chief Economist

Appendix Table Map 6: Total Number of EB-5 Immigrant Investors and Their Families, by State

(FY2009-FY2014)

STATE/TERR ABBR Total No EB-5 Immigrants California CA 8,197 New York NY 1,492 Florida FL 1,140 New Jersey NJ 895 Washington WA 812 Massachusetts MA 690 Texas TX 587 Pennsylvania PA 343 Virginia VA 270 Georgia GA 256 Illinois IL 253 Maryland MD 202 Michigan MI 159 Hawaii HI 157 North Carolina NC 141 Arizona AZ 131 Ohio OH 128 Oregon OR 126 Connecticut CT 121 Nevada NV 94 Colorado CO 88 Indiana IN 74 Missouri MO 60 Wisconsin WI 52 South Dakota SD 48 Minnesota MN 46 Rhode Island RI 36 South Carolina SC 36 Kansas KS 33 District of Columbia DC 30 Tennessee TN 24 Iowa IA 22 Delaware DE 21 New Mexico NM 17 Nebraska NE 16 Oklahoma OK 16 Alabama AL 15 Utah UT 15 Idaho ID 13 Louisiana LA 13 New Hampshire NH 12 Kentucky KY 10 Vermont VT 7 Alaska AK 5 Maine ME 5 Mississippi MS 5 North Dakota ND 5 Arkansas AR 4 Wyoming WY 4 West Virginia WV 3 Montana MT 0 TOTAL 16,946

U.S. Department of Commerce * Economics and Statistics Administration * Office of the Chief Economist

U.S. Department of Commerce Economics and Statistics Administration

Office of the Chief Economist www.esa.doc.gov

U.S. Department of Commerce * Economics and Statistics Administration * Office of the Chief Economist

Estimating the Investment and Job Creation Impact of the EB-5 Program

Prepared by

U.S. Department of Commerce Economics and Statistics Administration

Office of the Chief Economist

for U.S. Department of Homeland Security

U.S. Citizenship and Immigration Services Immigrant Investor Program Office

January 2017

U.S. Department of Commerce * Economics and Statistics Administration * Office of the Chief Economist

AUTHORS

Office of the Chief Economist

David K. Henry, Supervisor Regional Development Section

[email protected]

Sandra D. Cooke-Hull Economist

[email protected]

Jacqueline Savukinas Economist

[email protected]

Alis Asadurian Economist

[email protected]

Nicholas Chiumenti Intern

U.S. Department of Commerce * Economics and Statistics Administration * Office of the Chief Economist

TABLE OF CONTENTS Executive Summary .......................................................................................................................... 1 Introduction ...................................................................................................................................... 5 Overview of the EB-5 Program ......................................................................................................... 6 Methodology Summary .................................................................................................................... 8

Economic Impact Analyses and Data Tabulations for Regional Center Projects ........................... 8 Estimation of Stand-Alone Investments ...................................................................................... 10

Investment and Job Creation from Active EB-5 Projects in FY2012 and FY2013 ......................... 11 Regional Center Projects-National Estimates ............................................................................. 11 Stand-Alone Investments ............................................................................................................. 12 Regional Center EB-5 Related Investment and Job Creation by State ........................................ 12

Settlement Locations of Immigrant Investors and Families, by State .......................................... 17 Conclusion ....................................................................................................................................... 18 Appendix ......................................................................................................................................... 19

Glossary of Terms ......................................................................................................................... 20 Appendix Tables for Maps 1-6 ..................................................................................................... 22

Table 1 Total Investment and Job Creation from Active EB-5 Projects, FY2012 and FY2013 ....... 11 Map 1 Number of EB-5 Projects FY2012 and FY2013 for Projects Administered Through Regional Centers .............................................................................................................. 13 Map 2 Number of EB-5 Investors FY2012 and FY2013 for Projects Administered Through Regional Centers .............................................................................................................. 13 Map 3 Total Investment in Millions of U.S. Dollars FY2012 and FY2013 for Projects Administered Through Regional Centers ......................................................................... 14 Map 4 Total EB-5 Investment in Millions of U.S. Dollars FY2012 and FY2013 for Projects Administered Through Regional Centers ......................................................................... 15 Map 5 Total Estimated Job Creation FY2012 and FY2013 for Projects Administered Through Regional Centers .............................................................................................................. 16 Map 6 Number of EB-5 Immigrant Investors and Family Members FY2009-FY2014 For Projects Administered Through Regional Centers ..................................................... 17

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Estimating the Investment and Job Creation Impact of the EB-5 Program

EXECUTIVE SUMMARY

At the request of U.S. Citizenship and Immigration Services (USCIS) in the Department of Homeland Security (DHS), the Economics and Statistics Administration (ESA) of the Department of Commerce (DOC) conducted an assessment of the EB-5 program to determine its size and its contribution to the U.S. economy. To accomplish this, we examined individual projects that were active during a two-year period, FY2012 and FY2013, and compiled a new dataset that includes the number of EB-5 projects, the number of investors, the amount of EB-5 and non-EB-5 related investment spending and the resulting expected1 job creation. The EB-5 program provides two avenues for immigrant investors: the Stand-Alone process and the Regional Center process. In both cases, individual immigrant investors must make a minimum investment of $1 million, or $500,000 if the project is located in a “Targeted Employment Area” (TEA).2 Both avenues also require investment in a new commercial enterprise that will create or preserve a minimum number of jobs (10 jobs per investor). For Stand-Alone investors, the jobs must be direct jobs at the new commercial enterprise; for investors in Regional Centers, the jobs can be the total of direct, indirect, and induced employment as determined through regional economic models. The investment and job creation impacts of both avenues of EB-5 immigrant investor projects that were active in FY2012 and FY2013 were as follows:

National Estimates

• More than 11,000 immigrant investors provided $5.8 billion in capital, roughly 35% of the total investment ($16.7 billion), for 562 EB-5 related projects that were active in FY2012

1 Estimates were calculated using Economic Impact Analyses for projects filed on Form I-526 petitions by investors and exemplar petitions filed with Form I-924 Regional Center applications. The Form I-829 petitions that must be filed by the immigrant investor within the 90-day period immediately preceding the second anniversary of obtaining conditional permanent resident status generally include evidence of job creation from the completed project but these petitions were not available for us to use in our analysis. (See the Glossary for definitions.) 2 See the Glossary for a definition of Targeted Employment Area.

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and FY2013. These projects were expected to create an estimated 174,039 jobs. (See Table 1).3

• The great majority of EB-5 investment and job creation occurs through Regional Centers.4 Economic Impact Analyses for the 134 projects active in FY2012 and FY2013 and operated through Regional Centers show that an estimated 169,759 jobs were expected to be created from total investment of $16.4 billion.

o The EB-5 immigrant investor portion of these capital investments was about 33% or $5.4 billion.

o The remaining $10.9 billion of investments came from non-EB-5 sources of capital (domestic and foreign). The non-EB-5 sources of capital included equity from project developers, commercial loans, and investment from other project participants.

o By including jobs associated with non-EB-5 investor sources of capital, a practice allowed by regulation5, we estimate that EB-5 projects that were active in FY2012 and FY2013 were expected to generate about 16 jobs for each of the immigrant investors associated with the program.

• In absolute terms, there were more active Stand-Alone projects (428) than Regional Center projects (134) during the time period that was the focus of our study. Stand-Alone projects are estimated to have resulted in at least $327 million in EB-5 investment and the expected creation of at least 4,280 jobs.

3 Since our results were based on active projects in FY2012 and FY2013 and the data do not identify the total active time period for each of the 134 Regional Center projects reviewed, or any schedule for when the jobs would be added, there was no way of providing annual counts of jobs created by the investments. 4 See the Glossary for a definition of Regional Center. 5 See 8 C.F.R. § 204.6(g)(2).

Table 1: Total Investment and Job Creation from Active EB-5 Projects, FY2012 and FY20131

(millions) Total EB-5 Non-EB5

Regional Center2 134 10,644 16,366$ 5,446$ 10,920$ 106,440 169,759

Stand-Alone3 428 428 327$ 327$ -$ 4,280 4,280

Total 562 11,072 16,693$ 5,773$ 10,920$ 110,720 174,039

2 Regional Center data were compiled from Economic Impact Analyses submitted by Regional Centers.

Source: ESA estimates based on Economic Impact Analyses submitted to USCIS and IPO investor data

3 Stand-Alone projects were estimated using the minimum investment amount per project depending on whether the project was located in a targeted ($500,000 minimum) or non-targeted ($1 million minimum) employment area.

Job Creation Estimate

Number of Projects

Number of Investors

Investment Spending Job Creation Requirement

1 Active EB-5 project selection was based on number of I-526s approved during FY2012 and FY2013. Active EB-5 projects include projects at various stages--beginning, ongoing and completed--during this period.

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State Level Estimates (Regional Center projects only)6

• During FY2012 and FY2013, the 134 active EB-5 Regional Center projects were located in 25 states and the District of Columbia, with the majority (about 65%) found in California, New York, Florida, Texas and Alabama.

• The ranking of states by number of investors differed slightly from the ranking by number of projects. Roughly three-quarters (73%) of the EB-5 investors invested in new commercial enterprises associated with Regional Center projects that were located in California, New York, Florida, Ohio and Pennsylvania. On average, the projects located in these states were very large projects with greater numbers of investors. Almost half of the total EB-5 investors invested in new commercial enterprises associated with Regional Center projects that were located in California and New York and each of these states had EB-5 capital investments greater than $1 billion.

• Total investment (EB-5 and non-EB-5), based on the location of the project, ranked highest in California, New York, Florida, Maryland and Nevada. These top five states accounted for over 80 percent of total investment. These same five states also ranked highest in terms of supplying the most non-EB-5 capital to projects.

• The greatest number of the estimated 169,759 jobs that were expected to be created by Regional Center projects active in FY2012 and FY2013 were associated with projects in California, New York, Florida, the District of Columbia and Maryland. These four states and the District of Columbia comprise 70 percent of total estimated job creation, with California accounting for 30 percent. Projects in California, New York and Florida were estimated to result in more than 10,000 jobs in each state.

6 Our analysis of the projects was at the study area or job impact level of geographic definition. We are only reporting state level impacts because the county or multiple county level of detail might necessarily reveal the project and associated internal business information.

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Estimating the Investment and Job Creation Impact of the EB-5 Program

INTRODUCTION U.S. Citizenship and Immigration Services (USCIS), part of the Department of Homeland Security (DHS), administers the employment-based “fifth preference” or EB-5 program. In 2013, the Office of the Inspector General (OIG) of the Department of Homeland Security released a report7 that raised concerns about the accuracy of USCIS estimates of the value or size (investment and job creation) of the EB-5 program. Based on these concerns, USCIS approached the Department of Commerce’s (DOC) Economics and Statistics Administration (ESA) to conduct a study of the level of investment that takes place through the program and job creation in the U.S. associated with these investments.8 Specifically, USCIS asked us to develop an objective measure of the economic benefits (a valuation) of the EB-5 program on the economy in the U.S. in terms of jobs created and incremental capital investment. This report lays out the process we used for developing estimates of the size of the EB-5 program, including the sources of data used, estimation methodology, and assumptions. It also includes detailed findings by state. We did not evaluate the effectiveness or operational efficiency of the EB-5 program. Although we had originally hoped to measure the induced effects of increased household spending in regions where the immigrant investors reside in the U.S., our report does not include these estimates due to a lack of data on the income of investors and their families. We were able to identify the immigrant investors’ location by state (See Map 6), but the lack of income data precluded further analysis of spending patterns. Finally, we note that the Government Accountability Office (GAO) recommended that when a true cost-benefit analysis of a program such as EB-5 cannot be conducted, it is desirable to at least enumerate the types of benefits and costs the program will generate.9 Our report was not intended to do a complete cost-benefit analysis, so GAO requested, and USCIS agreed that we should at least address some of the social costs associated with the program. However, we determined that the data required for 7 U.S. Department of Homeland Security, Office of the Inspector General, “United States Citizenship and Immigration Services’ Employment-Based Fifth Preference (EB-5) Regional Center Program,” December 2013. 8 In November 2014, a Memoranda of Agreement between the Department of Commerce/Economics and Statistics Administration (ESA) and the Department of Homeland Security/USCIS was put in place for ESA to report on and to provide evidence of how the EB-5 program affects the U.S. economy. Specifically, by using USCIS data on the EB-5 program, we were tasked to determine levels of investments and jobs created by immigrant investors participating in the program in FY2012 and FY2013. Originally, the analysis was to be done within one year. In November 2015, we requested a 3-month extension to the MOA primarily because of the length of time needed to extract data from paper based Economic Impact Analyses located at a USCIS storage facility. 9 U.S. Government Accountability Office, “Immigrant Investor Program: Additional Actions Needed to Better Assess Fraud Risks and Report Economic Benefits,” August 2015.

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conducting a meaningful analysis of the social costs of immigrant investors and their families was unavailable and, therefore, do not include such an analysis in our study.

OVERVIEW OF THE EB-5 PROGRAM10 Congress authorized the EB-5 program in 1990 in order to stimulate the economy through capital investment and job creation by foreign investors. The program provides a path for such investors and certain family members to obtain lawful permanent residence. Initially, there were only “Stand-Alone” investors, but in 1992, Congress, under Section 610 of Public Law 102-395, created the Immigrant Investor Program as a pilot project that would allow for the creation of “Regional Centers.” Both Stand-Alone and Regional Center investments allow investors to pool their funds. These investments allow the immigrant investor to become part of a lawful business entity, such as a limited partnership. Investors, whether Stand-Alone or through a Regional Center, first petition USCIS for EB-5 classification (via Form I-526). Upon admission or adjustment of status, they are allowed to enter the U.S. for two years as conditional permanent residents. The minimum qualifying EB-5 investment in the United States is $1 million. However, investors may invest as little as $500,000, if the project is located in an underserved geographical area called a Targeted Employment Area (TEA). The term TEA means, at the time of investment, a rural area or an area which has experienced unemployment of at least 150 percent of the national average rate. Immigrant investors are required to petition (via Form I-829) for removal of the conditions on their permanent resident status within 90 days before the second anniversary of obtaining that status. As part of this process, investors must prove, among other things that the new commercial enterprise into which they invested has preserved, created or can be expected to create within a “reasonable period of time” at least 10 new jobs. Once USCIS approves the I-829 petition,11 the conditions on permanent residence are removed. For Stand-Alone projects, USCIS measures job creation as direct hires in the new commercial enterprise funded through the EB-5 investment. It verifies the direct hire counts through documentation such as photocopies of relevant payroll and tax records, Form I-9 (employment eligibility verification) or other similar documents. For investments through the Regional Centers, USCIS measures job creation as not only direct employment, but also indirect and induced jobs. When the Regional Center is set up, it prepares, or hires outside experts to prepare, an Economic Impact Analysis (EIA) to estimate the number of

10 For additional information, see the USCIS website: https://www.uscis.gov/working-united-states/permanent- workers/employment-based-immigration-fifth-preference-eb-5/about-eb-5-visa. 11 The approval rate for I-829 petitions has increased over time and the vast majority of adjudicated I-829 petitions are approved. In 2015, 1,067 I-829 petitions were approved and only 11 were denied. https://www.uscis.gov/sites/default/files/USCIS/Resources/Reports%20and%20Studies/Immigration%20Forms%20D ata/Employment-based/I829_performancedata_fy2016_qtr2.pdf

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jobs that will be created from a particular project. Typically, the immigrant investor petitioners who invested in a new commercial enterprise associated with a given Regional Center project all use the same EIA to support their claim of job creation. USCIS provides policy guidance on estimating job creation.12 Our report provides an assessment of the impact of the EB-5 program by using data from EIAs to examine the aggregate investments made, the estimates of the number of jobs that were expected to be created by the investors and where the projects are located across the United States.

12 https://www.uscis.gov/sites/default/files/USCIS/Laws/Memoranda/2013/May/EB- 5%20Adjudications%20PM%20%28Approved%20as%20final%205-30-13%29.pdf

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METHODOLOGY SUMMARY Economic Impact Analyses and Data Tabulations for Regional Center Projects USCIS asked ESA to estimate the size of the EB-5 program based on investment levels and associated job creation. We conducted numerous reviews of the existing USCIS data (known as i- CLAIMS13) and worked with USCIS staff to determine whether the i-CLAIMS data could generate what would be needed for the impact analysis. We concluded that the i-CLAIMS data was not sufficient for our analysis. Instead, we built our own database for the Regional Center projects using the data provided in the EIAs that Regional Center investors submit to demonstrate that their project will lead to the required 10 jobs per investor.14 In most cases, the EIAs came from paper-based project files stored in the USCIS archive facility in Lee’s Summit, Missouri. USCIS may consider EIAs as “reasonable methodologies”15 to establish a job creation requirement of 10 jobs per investor. Since the EIA is done prior to project approval, it must forecast the number of jobs the project will create using relevant project-related data and economically or statistically valid forecasting tools. The Regional Center typically hires an economic consulting firm to conduct the EIA. The Regional Center supplies information to the consulting firm on types and amounts of spending, including construction spending (hard and soft) as well as spending for operations, if jobs are expected to be created, for example, from operating a new hospital or hotel. Hard construction costs include the cost of materials while soft construction costs include services rendered by architects, engineers and others. The majority of projects involve some type of construction of a new facility or renovation of an existing building (e.g., a hotel). Other types of projects include transportation infrastructure improvements, movie production, and auto parts manufacturing. Our Regional Center analysis focused on projects that were active in FY2012 and FY2013, so our project selection criteria began with reviewing a list of all projects including the number of approved I-526 petitions associated with the projects. We also had at our disposal I-526 petitions and the numbers of approvals for years before (FY2010 and FY2011) and after (FY2014). Our starting point was to rank the Regional Center projects by number of I-526 approvals in FY2012 and FY2013 and then to review the numbers of approvals in earlier and later years to give some indication of expected project activity in FY2012 and FY2013. Once this review of petition approvals was complete, we selected Regional Center projects that were expected to have the bulk of their activity in FY2012 and FY2013, and then requested that USCIS provide us with the approximately 200 EIAs for these projects. In the end, after eliminating duplicate project listings

13 i-CLAIMS is a database created by USCIS as an administrative tool to record the adjudication of I-924 applications and was not originally designed to store project data for economic analysis. 14 Jobs are measured as full-time jobs of at least 35 hours per week that are expected to last for two years or more. 15 See 8 C.F.R. 204.6(j)(4)(iii) and 8 C.F.R. 204.6(m)(7)(ii).

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and multi-stage projects, we were left with 134 Regional Center projects that were active in FY2012 and FY2013.16 Economic consulting firms typically used a regional input-output model for the geographic area of the EB-5 project to determine job creation.17 The consultants apply relevant multipliers to EB-5 investment spending in order to estimate the direct, indirect and induced employment effects. Direct job creation includes jobs created at the entity itself, while indirect jobs are those created in industries that support or supply the industry of the entity. Induced jobs result from increased household spending by those who were hired for the direct or indirect jobs. We carefully evaluated EIAs from 25 of the largest projects (as measured by total investment spending) to determine the degree of consistency among the EIAs, adherence to USCIS policy guidance and use of accepted regional modeling practices.18 There were inconsistencies that led to both underestimates and overestimates of job creation, but we were unable to determine the net effect of the bias. Below are selected examples of issues that we found from our analysis of EIAs:19

• In some cases, not all the jobs were reported in the EIA because they were not needed to meet the minimum requirement of 10 jobs per investor. In these cases, there is an undercount of job creation.

• In other instances, there is likely an overestimation of job creation since double-counting resulted from the inappropriate use of multipliers. For example, sometimes architectural and engineering services are counted as soft construction costs when those services are already captured in the overall construction multiplier within the regional model.

• The practice of using separate multipliers in a construction project where the equipment in the structure is physically attached to the structure (such as stadium seating) and where the overall construction multiplier includes this type of equipment within the regional model. This practice led to an overestimate of investment impacts.

• Also, several EIAs estimated job creation from construction of a building, e.g., a hospital and then job creation from operations of the building. However, there were inconsistencies in the length of time and manner in which job creation from operations were estimated.

Since we lacked the necessary information to determine the extent to which EIA estimates were overestimated or underestimated, our analysis is based solely on the estimates as reported in the EIAs and related materials. Despite the issues associated with the EIAs, we believe that the data compiled from them provides a more robust database and basis for analysis than other studies that estimated the size and impact of the EB-5 program using, for example, the general or

16Individual EB-5 investments were well above $500,000 in 9 of the 134 active projects during FY2012 and FY2013 and thus we assume these projects were not located in a TEA. 17 RIMS II, IMPLAN, REMI and REDYN are the models typically used. RIMS II stands for the Regional Input Output Modelling System II created and maintained by the U.S. Department of Commerce. IMPLAN, REMI and REDYN are proprietary privately held regional models. 18 For the remaining 109 projects, we compiled and tabulated the relevant data, but did not record our comments about how the EIA was conducted or how the regional model(s) were used. 19 ESA is providing USCIS with specific cases where these issues and concerns were observed.

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‘ballpark’ estimates of aggregate capital investment and job creation totals in visa petition approvals provided in USCIS reporting. Within the past three years, USCIS has hired more economists, that has improved its ability to evaluate EB-5 applications/petitions and EIAs. USCIS has developed a process by which economists evaluate the EIAs using criteria established in USCIS regulations and policy memorandums to conduct an economic due diligence (EDD) report. The EDD contains a summary of the project and the economist’s evaluation of the EIA, such as evidence of transparency, appropriate use of multipliers, geographic area used for the job creation estimate, and the relevant timeframe. If an EIA is incomplete, the economist can request further evidence and re-evaluate the project. As a result of this process, future assessments of investments and jobs created by EB-5 projects should be more consistent methodologically with best practices in regional economic analysis. Estimation of Stand-Alone Investments

Immigrant investors in Stand-Alone projects are often either immigrant entrepreneurs starting a new business, part of a small pool of investors or investors in small businesses in the U.S. which may have failed without help from foreign investors. Like Regional Center investors, they must invest a minimum of $500,000 in TEAs or a minimum of $1 million in non-targeted employment areas. Stand-Alone EB-5 projects do not rely on an economic model for the count of jobs created. Each investor is required to document in its I-829 form (removal of conditions) using tax records, Form I-9, payroll records or other documents the jobs created or maintained. However, given the study timeframe of FY2012 and FY2013, the I-829s that would demonstrate job creation had not yet been filed by the time of our analysis. Because the I-829s were unavailable, USCIS instead provided us information on the Stand-Alone projects over FY2012 and FY2013 including the name of the new commercial enterprise funded by the investment and whether the enterprise was located in a TEA. We then estimated the contribution of each Stand-Alone project using the minimum investment of $1 million for each investor in a non-targeted employment area or $500,000 for projects in a TEA. Given that Stand- Alones do not rely on economic models as with Regional Center investments and the estimate of jobs when an I-526 is filed does not require the documentation such as that required for I-829 approval, we assume that each project would reach the minimum employment requirement of 10 jobs per investor. We acknowledge that some projects may have been successful and created more than 10 jobs per Stand-Alone investor and some may have fallen short and not met the minimum requirement of 10 jobs created. Since Stand-Alone projects comprise a small share of total EB-5 investment and job creation, this approach is not likely to change the overall conclusions discussed below. Total estimated Stand-Alone investments and job creation are provided in the following section.

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INVESTMENT AND JOB CREATION FROM ACTIVE EB-5 PROJECTS IN FY2012 AND FY2013

There were 562 active EB-5 projects throughout the U.S. in FY2012 and FY2013 that were supported by EB-5 investment. Over 11,000 immigrant investors invested $5.8 billion in new commercial enterprises associated with projects in 25 states and the District of Columbia. The projects were expected to generate an estimated 174,039 jobs. Immigrant investors supplied roughly 35% of the total funding of $16.7 billion (See Table 1). The vast majority of EB-5 investment spending was through Regional Centers (98%) while the remaining amount (2%) was through Stand-Alone operations. EB-5 program investments (investments from immigrant investors and non-EB-5 capital in EB-5 projects) account for between 0.5% and 1.6% of the flow of total foreign direct investment into the United States.20

Regional Center Projects – National Estimates As explained in the previous section, we collected data for each Regional Center project by reviewing EIAs that Regional Centers or investors associated with Regional Centers submitted to USCIS as part of the EB-5 application/petition process. We found that, using the data provided in the EIAs, an estimated 169,759 jobs were expected to be created from 134 projects operated through Regional Centers that involved 10,644 immigrant

20 ESA calculated the EB-5 program share using 2012 and 2013 total foreign direct investment into the U.S. data from the Department of Commerce’s Bureau of Economic Analysis. The range is provided since the non-EB-5 capital in EB- 5 projects is from a combination of domestic and foreign sources and that data was not available.

Table 1: Total Investment and Job Creation from Active EB-5 Projects, FY2012 and FY20131

(millions) Total EB-5 Non-EB5

Regional Center2 134 10,644 16,366$ 5,446$ 10,920$ 106,440 169,759

Stand-Alone3 428 428 327$ 327$ -$ 4,280 4,280

Total 562 11,072 16,693$ 5,773$ 10,920$ 110,720 174,039

2 Regional Center data were compiled from Economic Impact Analyses submitted by Regional Centers.

Source: ESA estimates based on Economic Impact Analyses submitted to USCIS and IPO investor data

3 Stand-Alone projects were estimated using the minimum investment amount per project depending on whether the project was located in a targeted ($500,000 minimum) or non-targeted ($1 million minimum) employment area.

Job Creation Estimate

Number of Projects

Number of Investors

Investment Spending Job Creation Requirement

1 Active EB-5 project selection was based on number of I-526s approved during FY2012 and FY2013. Active EB-5 projects include projects at various stages--beginning, ongoing and completed--during this period.

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investors, or about 16 jobs per investor (See Table 1).21 Total investment in these 134 projects was $16.4 billion; the immigrant investor share of these investments was about 33% or $5.4 billion. Non-EB-5 sources of capital investments in these projects were about $11 billion or approximately 67% of the investment funds in EB-5 projects. Thus, given the information provided in the EIAs, we conclude that for FY2012 and FY2013, the EB-5 program is expected to exceed its job creation requirement that each immigrant investor contribute capital to a new commercial enterprise that creates at least 10 full-time jobs. Stand-Alone Investments As described in the Methodology section, Stand-Alone investments can be located in TEAs and non-TEAs. There were 226 Stand-Alone projects over FY2012 and FY2013 not located in a TEA. By using the minimum of $1 million for each investor and 10 jobs per investor which we assume are eventually proven to have been created using employment records, we estimate total investment of at least $226 million with at least 2,260 jobs expected to be created or maintained. In addition, there were 202 Stand-Alone projects that were located in a TEA. Stand-Alone projects in TEAs require a minimum of $500,000 which provides an estimated $101 million in investment and 10 jobs per investor or 2,020 jobs created or maintained. In total, we estimate 428 Stand-Alone projects resulted in at least $327 million in direct EB-5 investment and the expected direct creation of at least 4,280 jobs (See Table 1). Regional Center EB-5 Related Investment and Job Creation by State22

The following series of maps display the number of investors, total investment, EB-5 and non-EB- 5 investment and job creation for Regional Center administered projects only.

Map 1 shows: • Twenty-five states and the District of Columbia had EB-5 projects. • The top five states where active projects occurred in FY2012 and FY2013—California, New

York, Florida, Texas and Alabama—accounted for about 65 percent of the 134 projects over the time span, with about 30 percent in California. The top five states were the only ones that had 7 or more projects each.

21The allowance of EB-5 investors to get credit for jobs created by non-EB-5 funding by USCIS has been a contentious issue. For a number of projects, the EB-5 portion of the total investment is much less than 33%. However, USCIS anecdotally cites a number of instances where funding for an entire project hinged on the participation of the EB-5 portion of the total investment. 22 See the appendices for state level data. The sum of state totals in the appendices may not add up to the total because of data from areas including but not limited to Puerto Rico and Guam. Maps include Regional Center data only because Stand-Alone data were not available by state.

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Map 2 shows: • The states23 that had the highest number of immigrant investors associated with active

projects in FY2012 and FY2013, accounting for about 75 percent of the total, were California, New York, Florida, Ohio and Pennsylvania. This ranking differs slightly from the number of projects, indicating that the projects in some of the top 5 states in Map 1 were very large and required relatively more investors.24

• California and New York together accounted for about 50 percent of the total 10,644 investors.

Map 3 shows: • Twenty-five states plus the District of Columbia had EB-5 related investments. • The largest total dollar amounts of investments were in California, New York, Florida,

Maryland and Nevada. California, New York, Florida and Maryland each had active projects in FY2012 and FY2013 with investments of over $1 billion. The top five states accounted for over 80 percent of total investment. These same five states also ranked

23 These figures do not represent which states investors reside in, as most investors do not reside in the United States at the time of their Form I-526 petition filing. 24 The number of immigrant investors was based on investor or investment data captured from individual EIAs. In a few cases, the EIA did not provide matching data—number of investors matched to levels of investments. In those few cases, we relied on the number of Form I-526 approvals that occurred in FY2012 and FY2013 and we may not have necessarily captured the number of EB-5 immigrant investors associated with those projects.

Estimating the Investment and Job Creation Impact of the EB-5 Program P a g e | 15

U.S. Department of Commerce * Economics and Statistics Administration * Office of the Chief Economist

highest in terms of supplying the most non-EB-5 capital to projects (not shown on the map).

• Fourteen states plus the District of Columbia each had EB-5 related investments of greater than $100 million.

Map 4 shows: • The top states with EB-5 investments (that is, the amount invested by immigrant investors

through the program) were California, New York, Florida, Ohio and Pennsylvania. These states accounted for over 70 percent of the $5.4 billion in investments made by immigrant investors in new commercial enterprises associated with active projects through Regional Centers in FY2012 and FY2013. California and New York each had EB-5 investments greater than $1 billion.

• In all, 25 states plus the District of Columbia had EB-5 investments in their states. Fifteen of these had EB-5 investments of less than $100 million.

• In three states—Ohio, Idaho and South Dakota—the EB-5 projects relied only on EB-5 investment and had no investments from non-EB-5 sources of capital.

P a g e | 16 Estimating the Investment and Job Creation Impact of the EB-5 Program

U.S. Department of Commerce * Economics and Statistics Administration * Office of the Chief Economist

Map 5 shows: • The total number of jobs expected to be created through active projects associated with

Regional Centers in FY2012 and FY2013 is estimated to be 169,759. • California, New York, Florida, the District of Columbia and Maryland were the top 5 areas

in expected job creation, comprising about 70 percent of the total. California by itself accounted for about 30 percent of job creation. California, New York and Florida were the only states where expected job creation was greater than 10,000.

Estimating the Investment and Job Creation Impact of the EB-5 Program P a g e | 17

U.S. Department of Commerce * Economics and Statistics Administration * Office of the Chief Economist

SETTLEMENT LOCATIONS OF IMMIGRANT INVESTORS AND FAMILIES, BY STATE

By using USCIS data on permanent addresses of immigrant investors at or near the time they filed to remove conditions on their permanent resident status, we were able to observe settlement patterns of these investors. As explained above, immigrant investors and family members who are admitted to the United States or adjust status on the basis of approved Form I-526 petitions live in the U.S. in a conditional permanent resident status for approximately two years. They then petition to have the conditions on their permanent residence removed and the petition is adjudicated. Map 625 below shows where almost 17,000 Regional Center investors and their families located based on approved Form I-829 petitions submitted to USCIS between FY2009 and FY2014.26

25 Settlement patterns of immigrant investors and their families in Map 6 are based on permanent addresses provided by petitioners on their submitted Form I-829. These data should not be compared with the numbers of EB- 5 investors by state in Map 2 which are based on EB-5 project location and not settlement location. 26 This data was only available to us from USCIS in a historical data file with investor locations from FY2009 to FY2014. These data are from a longer timeframe that capture many more investors and family members than during our study period, but it was not possible for us to limit the timeframe of this information to just FY2012 and FY2013.

P a g e | 18 Estimating the Investment and Job Creation Impact of the EB-5 Program

U.S. Department of Commerce * Economics and Statistics Administration * Office of the Chief Economist

Map 6 shows: • The top five states where Regional Center EB-5 investors and families resided were

California, New York, Florida, New Jersey and Washington. California, with over 8,000 immigrant investors and family members, accounted for roughly half of the total and outpaced New York, the second largest home to EB-5 immigrants by a factor of 5. The top 10 states account for roughly 85 percent of all immigrant investors and families.

• Given the longer timeframe (FY2009 to FY2014) for which we have investor location data, we find that with the exception of Montana, every state (and the District of Columbia) has EB-5 related immigrants. The majority of immigrant investors and family members resided in coastal states.

CONCLUSION At the request of USCIS, ESA conducted a “valuation” of the EB-5 program. We developed a method based on the number of I-526 (immigrant investor petition) approvals to determine which of the projects in the USCIS EB-5 database were active in FY2012 and FY2013. After refining the list of active projects by Regional Center, we requested and obtained the Economic Impact Analyses (EIAs) associated with the projects. The purpose of this study was to provide an objective measurement of the economic impact of the EB-5 program on the U.S. economy in terms of expected jobs created and the capital invested. Consequently, we did not evaluate the effectiveness or operational efficiency of the EB-5 program or its administration. By using EB-5 investment and job creation estimates reported in EIAs for active projects over the two-year period of FY2012 and FY2013, we tabulated that there were 10,644 investors, total dollar value of investment of $16.4 billion and 169,759 expected jobs from 134 projects in EB-5 Regional Centers. We also tabulated 428 Stand-Alone investor projects during those two years that were expected to create or save 4,820 jobs. Active EB-5 projects, both those associated with Regional Centers and Stand-Alone projects resulted in an estimated 174,039 expected jobs— nearly 16 jobs per immigrant investor.

Estimating the Investment and Job Creation Impact of the EB-5 Program P a g e | 19

U.S. Department of Commerce * Economics and Statistics Administration * Office of the Chief Economist

APPENDIX

P a g e | 20 Estimating the Investment and Job Creation Impact of the EB-5 Program

U.S. Department of Commerce * Economics and Statistics Administration * Office of the Chief Economist

GLOSSARY OF TERMS

EB-5 Program: EB-5 refers to the employment-based fifth preference visa category. This program is comprised of the Immigrant Investor (Regional Center) Program and the Stand-Alone program for alien entrepreneurs.

Economic Due Diligence (EDD): The review and examination of business plans, EIAs and, when appropriate, the organizational and transactional documents (subscription agreements, contracts, permits, loan documents, private placement memoranda, etc.) submitted by a Regional Center or investor by USCIS to ascertain compliance with USCIS regulations and policy.

Economic Impact Analysis (EIA): The report prepared by a Regional Center’s economists to demonstrate how the business plan submitted for an individual project will demonstrate how the Regional Center will promote economic growth and how a project will fulfill the requisite job creation for its immigrant investors.

Economics and Statistics Administration (ESA): ESA is the agency within the Department of Commerce that prepared this report.

Exemplar: The term “exemplar” refers to a sample Form I-526 petition, filed with a Form I-924 actual project proposal that contains copies of the commercial enterprise’s organizational and transactional documents, which USCIS will review to determine if they are in compliance with established EB-5 eligibility requirements.

Form I-526: This is the petition used by an alien entrepreneur to request classification as an immigrant under section 203(b)(5) of the Immigration and Nationality Act. If approved the alien entrepreneur may ultimately obtain a two-year conditional permanent residency in the United States.

Form I-9: This is the Employment Eligibility Verification form by which employers confirm the identity and authorization of individuals to work in the U.S.

Form I-924: This is the application used by a Regional Center in its initial application for designation as a Regional Center; to submit amendments to change its organizational structure or administration; and to submit new capital investment projects for USCIS review.

Form I-829: The alien entrepreneur must file this petition within the 90-day period immediately preceding the second anniversary of obtaining conditional permanent resident status. Immigrant entrepreneurs use this to petition for removal of the conditions on their permanent resident status and that of certain dependents. Evidence that the requisite jobs were preserved, created or will be created within a reasonable time must be presented in this petition.

Immigrant Investor Program Office (IPO): IPO is the component of USCIS responsible for the adjudication of all EB-5 applications and petitions and, in part, the development of policies regarding the EB-5 program.

Estimating the Investment and Job Creation Impact of the EB-5 Program P a g e | 21

U.S. Department of Commerce * Economics and Statistics Administration * Office of the Chief Economist

Job Creating Entity (JCE): A JCE is the entity that is mostly closely responsible for job creation. In some cases, a JCE and a New Commercial Enterprise (NCE) may be the same entity, where the NCE is most closely responsible for job creation. A JCE is the receiver of investment capital from immigrant investors, if the JCE and NCE are the same entity, or Regional Center-associated commercial enterprises.

New Commercial Enterprise (NCE): This is a commercial venture owned, at least in part, by one or more EB-5 investors. An NCE is formed by: the creation of a new business; the purchasing of an existing business and its simultaneous or subsequent restructuring or reorganization; or the expansion of an existing business through the investment of the required amount so that a substantial change (at least 40 percent increase) in the net worth or the number of employees results.

Regional Center: Any economic entity, public or private, which is involved with the promotion of economic growth, improved regional productivity, job creation and increased domestic capital investment. The organizers of an entity seeking the “Regional Center” designation from USCIS must submit and receive approval of a proposal, supported by economically or statistically valid forecasting tools.

Stand-Alone Investment: The investment made by one or more EB-5 investors whose investment is not made through a Regional Center. For these investors, only the direct (i.e., payroll) employment of qualified individuals can count towards the job creation requirement of ten jobs per EB-5 investor.

Targeted Employment Area (TEA): A TEA represents a particular geographic or political subdivision of a State that is either a rural area or an area of high unemployment (at least 150 percent of the national average). If an EB-5 investor invests in a TEA, the minimum capital investment is reduced from $1 million to $500,000.

P a g e | 22 Estimating the Investment and Job Creation Impact of the EB-5 Program

U.S. Department of Commerce * Economics and Statistics Administration * Office of the Chief Economist

Appendix Table for Map 1: Number of EB-5 Projects, by State, FY2012 and FY2013

Estimating the Investment and Job Creation Impact of the EB-5 Program P a g e | 23

U.S. Department of Commerce * Economics and Statistics Administration * Office of the Chief Economist

Appendix Table for Map 2: Number of Immigrant Investors, By State, FY2012 and FY2013

P a g e | 24 Estimating the Investment and Job Creation Impact of the EB-5 Program

U.S. Department of Commerce * Economics and Statistics Administration * Office of the Chief Economist

Appendix Table for Map 3: Total EB-5 Investment, by State, in Millions of Dollars, FY2012 and FY2013

Appendix Table for Map 4:

Estimating the Investment and Job Creation Impact of the EB-5 Program P a g e | 25

U.S. Department of Commerce * Economics and Statistics Administration * Office of the Chief Economist

EB-5 Investment Only, by State, in Millions of Dollars, FY2012 and FY2013

P a g e | 26 Estimating the Investment and Job Creation Impact of the EB-5 Program

U.S. Department of Commerce * Economics and Statistics Administration * Office of the Chief Economist

Appendix Table for Map 5: Job Creation, by State, FY2012 and FY2013

Estimating the Investment and Job Creation Impact of the EB-5 Program P a g e | 27

U.S. Department of Commerce * Economics and Statistics Administration * Office of the Chief Economist

Appendix Table Map 6: Total Number of EB-5 Immigrant Investors and Their Families, by State

(FY2009-FY2014)

STATE/TERR ABBR Total No EB-5 Immigrants California CA 8,197 New York NY 1,492 Florida FL 1,140 New Jersey NJ 895 Washington WA 812 Massachusetts MA 690 Texas TX 587 Pennsylvania PA 343 Virginia VA 270 Georgia GA 256 Illinois IL 253 Maryland MD 202 Michigan MI 159 Hawaii HI 157 North Carolina NC 141 Arizona AZ 131 Ohio OH 128 Oregon OR 126 Connecticut CT 121 Nevada NV 94 Colorado CO 88 Indiana IN 74 Missouri MO 60 Wisconsin WI 52 South Dakota SD 48 Minnesota MN 46 Rhode Island RI 36 South Carolina SC 36 Kansas KS 33 District of Columbia DC 30 Tennessee TN 24 Iowa IA 22 Delaware DE 21 New Mexico NM 17 Nebraska NE 16 Oklahoma OK 16 Alabama AL 15 Utah UT 15 Idaho ID 13 Louisiana LA 13 New Hampshire NH 12 Kentucky KY 10 Vermont VT 7 Alaska AK 5 Maine ME 5 Mississippi MS 5 North Dakota ND 5 Arkansas AR 4 Wyoming WY 4 West Virginia WV 3 Montana MT 0 TOTAL 16,946

U.S. Department of Commerce * Economics and Statistics Administration * Office of the Chief Economist

U.S. Department of Commerce Economics and Statistics Administration

Office of the Chief Economist www.esa.doc.gov

Account reconciliation by accident

management review

internal audittip

external audit of financial statements

code of conduct

internal audit department

management certification of financial statements

external audit of internal controls over financial reporting

independent audit committee

management review

hotline

fraud training for employees

fraud training for managers/executives

anti-fraud policy

employee support programs

dedicated fraud department, function, or team

formal fraud risk assessments

surprise audits

proactive data monitoring/analysis

job rotation/mandatory vacation

rewards for whistleblowers

92%

91%

88%

84%

80%

77%

75%

74%

63%

62%

60%

56%

52%

49%

46%

44%

23%

14%

56%

54%

39%

43%

37%

28%

40%

26%

23%

24%

24%

28%

16%

16%

18%

18%

10%

7%

fraud in small business

150K 150K

30%

60%

of fraud cases occurred in small businesses (those with fewer than 100 employees)

of small-business fraud victims didn’t recover any

of their losses

small businesses suffered the same median fraud loss as organizations with 10,000+ employees

small businesses have fewer anti-fraud controls in place than large organizations, making them especially vulnerable to fraud

how small businesses detect fraud

30% 30% 15% 12% 8% 7%

20% 20%

19%

27%

non-cash misappropriation

corruptionbilling schemes

check tampering skimming

top fraud risks small businesses

for

Data from the ACFE’s 2016 Global Fraud Study, Report to the Nations on Occupational Fraud and Abuse.

Download the full report and view interactive graphs at ACFE.com/RTTN.

© 2016 Association of Certified Fraud Examiners, Inc. All rights reserved. “ACFE,” “CFE,” “Certified Fraud Examiner,” “Association of Certified Fraud Examiners,” “Report to the Nations,” the ACFE Logo and related trademarks, names and logos are the property of the Association of Certified Fraud Examiners, Inc., and are registered and/or used in the U.S. and countries around the world.

small businesses (<100 employees)

large businesses (100+ employees)

2016 EB-5 Industry Year in Review 2016 was an eventful year for the EB-5 industry, which crucially including two successful short-term reauthorizations of the Program. To put the year in perspective, IIUSA has compiled a "Year in Review" Timeline with important dates, links and happening that shaped industry activities and has led to where we are today. The first quarter of the year included several House and Senate oversight hearings on the EB-5 Program. IIUSA Executive Director Peter D. Joseph served as a witness in the April 13, 2016 Senate Judiciary Committee hearing. Later in April, IIUSA held another successful EB-5 Advocacy Conference in Washington, D.C. which brought over 400 industry stakeholders together for three days of networking, education and advocacy. The summer months were focused on building industry consensus on policy issues and bolstering the industry's negotiation capabilities in support of reauthorization of the Program with enhanced program integrity measures and maintaining effectiveness as an economic development tool. On the investor markets front, IIUSA increased its overseas visibility by participating in international conferences in Geneva, Shanghai, and Hong Kong and also produced its first-ever Investor Markets Report, giving members insight into emerging market trends across the globe. IIUSA helped garner additional public support for the EB-5 Program, including new and renewed resolutions from outside stakeholder groups like the U.S. Conference of Mayors, National Association of Counties, National Conference of State Legislatures and the Association of University Research Parks, to name a few. Positive media from coast to coast also enhanced our message of American job creation and community development. This year was one of great progress, setting the EB-5 industry up for a real reform and long-term reauthorization package in 2017. Without the continued support and engagement by our members, this progress would not be possible. We at IIUSA look forward to continuing to work with you all in the New Year!

Date Event

1/5 FINRA includes general solicitations under Regulation D in the EB-5 Program on its 2016 Regulatory and Examination Priorities Letter.

2/2 Senate Judiciary Committee holds hearing:​ ​The Failures and Future of the EB-5 Regional Center Program: Can it be Fixed?

2/11 House Judiciary Committee holds hearing: ​Is the Investor Visa Program an Underperforming Asset?

2/21 IIUSA Advocacy Coordinator, Nicole Merlene, presents at the National Association of Counties’ Community, Economic and Workforce Development Steering Committee: Economic and Workforce Development Joint Subcommittee meeting​.

4/2 The Congressional Research Service publishes a report:​ EB-5 Immigrant Investor Visa​ , which highlights the Program's history, requirements, petition process, admissibility, economic impact, policy issues, and legislation from the 114th Congress.

4/13 Senate Judiciary Committee holds hearing:​ ​The Distortion of EB-5 Targeted Employment Areas: Time to End the Abuse​ .​ IIUSA Executive Director, Peter D. Joseph, serves as a witness.

4/20-4/22 IIUSA​ ​successfully hosts the​ 9th Annual EB-5 Advocacy Conference and 11th Annual Membership Meeting​ in Washington, DC. The event brought over 400 attendees, 32 sponsors and 28 exhibitors together for three days of networking, education and advocacy.

4/25 USCIS hosts an EB-5 Stakeholder Listening Session to discuss minimum investment amounts, the TEA designation process, the regional center designation process, and indirect job creation methodologies.

5/12 IIUSA published the first-of-its kind ​EB-5 Investor Markets Report​ , a quantitative and qualitative analysis of established and emerging EB-5 investor markets. The report will be updated annually going forward.

6/1-3 IIUSA hosts Leadership Summit in Washington D.C. with the Board, President's Advisory Council, and committee chairs to find consensus on policy issues and strategic planning.

6/8 IIUSA Executive Director, Peter D. Joseph, presents at the Investment Migration Council (IMC) Investment Migration Forum in Geneva, Switzerland.

6/19-6/21 IIUSA staff represents the EB-5 industry at the SelectUSA summit for the third year in a row to promote the EB-5 Program to foreign direct investment professionals from around the globe.

6/27 The U.S. Conference of Mayors passes a ​resolution​ supporting the reauthorization of the EB-5 Regional Center Program for the 5th year in a row.

6/30 Senate Judiciary Committee holds hearing:​ Oversight of the Department of Homeland Security​ where Secretary Jeh Johnson reveals plans to publish regulations for public comment.

7/5 IIUSA joins the US Chamber of Commerce, Real Estate Roundtable, American Immigration Lawyers Association, and the EB-5 Investment Coalition in support of reauthorization of the Program with enhanced program integrity measures and maintaining effectiveness as an economic development tool.​Read More

7/8 The Association of University Research Parks passes a ​resolution ​of support of reauthorization of the EB-5 Regional Center Program.

7/22-25 The National Association of Counties passes a resolution of support of permanent authorization of the EB-5 Regional Center Program.

8/10 The National Conference of State Legislatures (NCSL) passes a ​resolution​ of support of permanent authorization of the EB-5 Regional Center Program.

9/12 Chairman Bob Goodlatte (R-VA-6) introduces ​H.R. 5992 ​American Job Creation and Investment Promotion Reform Act of 2016, co-sponsored by Ranking Member John Conyers (D-MI-13).

9/13 IIUSA Joins EB-5 Industry Stakeholder Groups in Sending ​Letter​ to Congress Regarding H.R. 5992, the American Job Creation and Investment Promotion Reform Act

9/15 IIUSA Executive Director, Peter D. Joseph Publishes Op-Ed in the Huffington Post “EB-5 Reform: Keep The Jobs, Fix The Problems” ​Read More

9/29 A Continuing Resolution (CR) extends the EB-5 Regional Center Program until December 9, 2016.

10/10-11 IIUSA Hosts the ​6th Annual EB-5 Industry Forum​ in Los Angeles, CA. the Forum featured 350 attendees, 38 sponsors and 23 exhibitors and an agenda that included 3 general symposium discussions, breakout sessions covering hot-topics for regional centers and investors, and due diligence and case studies seminars. The conference also featured Guest of Honor speakers from Congress, SEC, USCIS and DOS.

10/21 The Government Accountability Office releases a study examining the use of targeted employment areas in the EB-5 Program.

11/7 IUSA Executive Director, Peter D. Joseph, represents the EB-5 Regional Center industry at the Investment Immigration Summit East Asia series in Hong Kong.

11/17 IIUSA joins the US Chamber of Commerce, Real Estate Roundtable, American Immigration Lawyers Association, and the EB-5 Investment Coalition in support of reauthorization during the lame duck session.​Read More

11/24 IIUSA Executive Director, Peter D. Joseph, present at the American Immigration Lawyers Association (AILA). Mr. Joseph presented on program extension and congressional reform, new agency developments and trends and prospects and implications of the potential sunset of the EB-5 Program.

11/25 The Department of Homeland Security updates the unified regulatory agenda to include EB-5 regulation release at the start of 2017.

12/9 The EB-5 Regional Center Program gets a clean extension by being included in the continuing resolution (CR) that funds the federal government.

EB-5 Immigrant Investor Visa

Carla N. Argueta

Analyst in Immigration Policy

Alison Siskin

Specialist in Immigration Policy

April 22, 2016

Congressional Research Service

7-5700

www.crs.gov

R44475

EB-5 Immigrant Investor Visa

Congressional Research Service

Summary The immigrant investor visa was created in 1990 to benefit the U.S. economy through

employment creation and an influx of foreign capital into the United States. The visa is also

referred to as the EB-5 visa because it is the fifth employment preference immigrant visa

category. The EB-5 visa provides lawful permanent residence (i.e., LPR status) to foreign

nationals who invest a specified amount of capital in a new commercial enterprise in the United

States and create at least 10 jobs. The foreign nationals must invest $1,000,000, or $500,000 if

they invest in a rural area or an area with high unemployment (referred to as targeted employment

areas or TEAs).

There are approximately 10,000 visas available annually for foreign national investors and their

family members (7.1% of the worldwide employment-based visas are allotted to immigrant

investors and their derivatives). In FY2015, there were 9,764 EB-5 visas used, with 93% going to

investors from Asia. More specifically, 84% were granted to investors from China and 3% were

granted to those from Vietnam.

In general, an individual receiving an EB-5 visa is granted conditional residence status. After

approximately two years the foreign national must apply to remove the conditionality (i.e.,

convert to full-LPR status). If the foreign national has met the visa requirements (i.e., invested

and sustained the required money and created the required jobs), the foreign national receives full

LPR status. If the foreign national investor has not met the requirements or does not apply to have

the conditional status removed, his or her conditional LPR status is terminated, and, generally, the

foreign national is required to leave the United States, or will be placed in removal proceedings.

In 1992, Congress established the Regional Center (Pilot) Program, which created an additional

pathway to LPR status through the EB-5 visa category. Regional centers are “any economic unit,

public or private, which [are] involved with the promotion of economic growth, including

increased export sales, improved regional productivity, job creation, and increased domestic

capital investment.” The program allows foreign national investors to pool their investment in a

regional center to fund a broad range of projects within a specific geographic area. The

investment requirement for regional center investors is the same as for standard EB-5 investors.

As the use of EB-5 visas has grown, so has the use of the Regional Center Program. In FY2014,

97% of all EB-5 visas were issued based on investments in regional centers. Unlike the standard

EB-5 visa category, which does not expire, the Regional Center Program is set to expire on

September 30, 2016.

Different policy issues surrounding the EB-5 visa have been debated. Proponents of the EB-5 visa

contend that providing visas to foreign investors benefits the U.S. economy, in light of the

potential economic growth and job creation it can create. Others argue that the EB-5 visa allows

wealthy individuals to buy their way into the United States.

In addition, some EB-5 stakeholders have voiced concerns over the delays in processing EB-5

applications and possible effects on investors and time sensitive projects. Furthermore, some have

questioned whether U.S. Citizen and Immigration Services (USCIS) has the expertise to

administer the EB-5 program, given its embedded business components. The Department of

Homeland Security’s Office of the Inspector General (DHS OIG) has recommended that USCIS

work with other federal agencies that do have such expertise, while USCIS has reported that it

has taken steps internally to address this issue. USCIS has also struggled to measure the efficacy

of the EB-5 category (e.g., its economic impact). USCIS methodology for reporting investments

and jobs created has been called into question by both the DHS OIG and the U.S. Government

Accountability Office (GAO).

EB-5 Immigrant Investor Visa

Congressional Research Service

Furthermore, some have highlighted possible fraud and threats to national security that the visa

category presents. In comparison to other immigrant visas, the EB-5 visa faces additional risks of

fraud that stem from its investment components. Such risks are associated with the difficulty in

verifying that investors’ funds are obtained lawfully and the visa’s potential for large monetary

gains, which could motivate individuals to take advantage of investors and can make the visa

susceptible to the appearance of favoritism. USCIS has reported improvements in its fraud

detection but also feels certain statutory limitations have restricted what it can do. Additionally,

GAO believes that improved data collection by USCIS could assist in detecting fraud and keeping

visa holders and regional centers accountable.

Lastly, the authority of states to designate TEAs has raised concerns. Some have pointed to the

inconsistency in TEA designation practices across states and how it could allow for possible

gerrymandering (i.e., all development occurs in an area that by itself would not be considered a

TEA). Others contend that the current regulations allow states to determine what area fits their

economic needs and allow for the accommodation of commuting patterns.

In addition to the issues discussed above, Congress may consider whether the Regional Center

Program should be allowed to expire, be reauthorized, or made permanent, given its expiration on

September 30, 2016. In addition, Congress may consider whether any modifications should be

made to the EB-5 visa category or the Regional Center Program. Legislation has been introduced

in the 114 th Congress that would, among other provisions, amend the program to try to address

concerns about fraud, and change the manner in which TEAs are determined. Other bills would

create an EB-5-like visa category for foreign national entrepreneurs who do not have their own

capital but have received capital from qualified sources, such as venture capitalists.

EB-5 Immigrant Investor Visa

Congressional Research Service

Contents

Overview ......................................................................................................................................... 1

EB-5 Classification Requirements .................................................................................................. 2

Investment of Capital ................................................................................................................ 3 A New Commercial Enterprise ................................................................................................. 3 Job Creation .............................................................................................................................. 4

Regional Center Program ................................................................................................................ 4

What is a Regional Center? ....................................................................................................... 5

The EB-5 Petition Process ............................................................................................................... 7

EB-5 Admissions ............................................................................................................................ 11

Economic Impact ........................................................................................................................... 14

Policy Issues .................................................................................................................................. 16

Application and Petition Processing ....................................................................................... 16 USCIS Expertise ..................................................................................................................... 16 Measuring Economic Impacts ................................................................................................. 17 Fraud and Security Risks ........................................................................................................ 19 Data Collection........................................................................................................................ 21 Targeted Employment Area (TEA) Determinations ................................................................ 22

Legislation in the 114 th Congress .................................................................................................. 23

Proposed Changes to the Regional Center Program ............................................................... 23 Proposed General Changes ..................................................................................................... 24

Target Employment Areas ................................................................................................. 24 Potential New Programs .......................................................................................................... 24

Figures

Figure 1. Immigrant Investor (EB-5) Visas Issued and Adjustments of Status,

FY2004-FY2015 .......................................................................................................................... 7

Figure 2. EB-5 Admissions Granted to New Arrivals or through Adjustment of Status,

FY2004-FY2013 .......................................................................................................................... 9

Figure 3. Form I-526 and Form I-829 Application Denial Rates, FY1994-FY2015 ...................... 11

Figure 4. EB-5 Admissions, FY1994-FY2013 .............................................................................. 12

Figure 5. EB-5 Visas Issued and Adjustments of Status by Country, FY2004-FY2015 ............... 14

Table A-1. EB-5 Visas Issued and Adjustments of Status, FY2004-FY2015 ................................ 26

Tables

Table 1. Comparison of the Two EB-5 Pathways ............................................................................ 5

Table 2. EB-5 Visas Issued and Adjustments of Status by Country in FY2015 ............................ 13

EB-5 Immigrant Investor Visa

Congressional Research Service

Appendixes

Appendix. Additional EB-5 Visa Data .......................................................................................... 26

Contacts

Author Contact Information .......................................................................................................... 28

EB-5 Immigrant Investor Visa

Congressional Research Service 1

Overview Congress created several nonimmigrant and immigrant visa categories as a way to increase

investment and job creation in the United States. 1 There are two nonimmigrant investor visa

categories, the E-1 visa for treaty traders and the E-2 visa for treaty investors. 2 For immigrants,

there is one investor visa category, the EB-5 visa, which is the fifth employment preference

immigrant visa category. 3 The EB-5 visa was created through the Immigration Act of 1990 (P.L.

101-649). The goal of the EB-5 category is to attract new foreign capital investment to the United

States and generate employment. 4 The category provides individual foreign national investors and

their derivatives 5 lawful permanent residence (LPR)

6 in the United States when they invest a

specified amount of capital in a new commercial enterprise that creates at least 10 jobs. 7

In general, individuals receiving EB-5 visas are granted a conditional residence status. After

approximately two years they must apply to remove the conditionality from their residency status.

If they have met the visa requirements (i.e., invested and sustained the required money and

created the required jobs), the foreign national receives full LPR status. If the foreign national

investor has not met the requirements or does not apply to have the conditional status removed,

his or her conditional LPR status is terminated, and, generally, the foreign national is required to

leave the United States, or will be placed in removal proceedings.

Some Members of Congress contended during discussions around the creation of the visa that

potential immigrants would be “buying their way in” to the United States. Others maintained that

the program’s requirements would protect its integrity. 8 The Senate Judiciary Committee report

on the originating legislation stated that it “is intended to provide new employment for U.S.

workers and to infuse new capital into the country, not to provide immigrant visas to wealthy

individuals.” 9

In 1992, Congress created the Regional Center Program, 10

an additional pathway for foreign

national investors to obtain an EB-5 visa. Unlike the EB-5 visa category, which does not expire,

the Regional Center Program is temporary and is scheduled to expire on September 30, 2016. By

investing through a regional center, foreign national investors are subject to different

requirements pertaining to the measure of job creation, and are unlikely to be involved in the

1 Immigrants are foreign nationals who are admitted to the United States to live and work permanently. Nonimmigrants

are foreign nationals who are admitted to the United States for a specific purpose and a specified period of time. 2 For more information, see CRS Report RL33844, Foreign Investor Visas: Policies and Issues. 3 Immigration and Nationality Act (INA) §203(b)(5). For more on the employment preference immigration system, see

CRS Report R42866, Permanent Legal Immigration to the United States: Policy Overview. 4 INA §203(b)(5); 8 U.S.C. §1153(b)(5). 5 Spouses and children who accompany or later follow qualifying or principal immigrants are referred to as derivative

immigrants. For the purposes of EB-5, a derivative refers to spouses and unmarried children less than 21 years of age. 6 An LPR is a foreign national who has been admitted to live permanently in the United States and to possibly become

a citizen when those requirements are met. 7 Under certain circumstances, the preservation of existing jobs can count towards the job creation. 8 C.F.R.

204.6(j)(4)(ii). 8 For debate on this issue, see 136 Congressional Record S7768-75 (July 12, 1990). 9 S.Rept.101-55, p. 21. 10 As enacted in 1992 (P.L. 102-395 §610), the program was known as the Regional Center Pilot Program. During the

most recent reauthorization of the program in 2012 (P.L. 112-176), the name was changed to the Regional Center

Program.

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management of the commercial enterprise. For each fiscal year, approximately 7.1% (roughly

10,000) of the total employment-based visas (140,000) are available for EB-5 investors and their

derivatives, of which 3,000 are reserved for entrepreneurs investing in “targeted employment

areas” (TEA), 11

and 3,000 are reserved for those participating in the Regional Center Program. 12

The upcoming expiration date of the Regional Center Program has renewed congressional focus

on the EB-5 visa category. Questions include whether the Regional Center Program should be

extended or made permanent, and if so should it be modified, or should it be allowed to expire.

There are additional concerns that Congress may consider with respect to the EB-5 visa category

as a whole. For example, the required amounts of capital have not changed since the program was

created in 1990. This has raised questions about whether the amounts should be adjusted, and

what effect increasing the amounts would have on the number of applicants. Some have also

raised concerns about fraud in the program, 13

including possible national security concerns. 14

Thus, Congress may choose to evaluate the oversight of the EB-5 category and the fraud

detection mechanisms used during EB-5 adjudications. Other issues that have been raised include

the capacity of U.S. Citizenship and Immigration Service (USCIS, part of the Department of

Homeland Security (DHS)) to handle the complexity of regional center designations and EB-5

petition adjudications, the need for more data collection, the measurement of the visa’s economic

impacts, and state determinations of targeted employment areas.

This report begins with a discussion of the EB-5 visa’s requirements and an overview of the

Regional Center Program. It then provides information on the EB-5 application (petition) process,

admissions, and the economic impacts of the visa. Next, the report reviews policy issues

surrounding the visa and the Regional Center Program, specifically application processing,

USCIS expertise, the measurement of economic impacts, fraud and security risks, data collection,

and the determination of targeted employment areas. The report concludes with a summary of

current legislation on the EB-5 visa and the Regional Center Program in the 114 th Congress. The

Appendix provides additional data on the visa.

EB-5 Classification Requirements The EB-5 visa classification for foreign investors is based on three components: (1) investment of

capital, (2) a new commercial enterprise, and (3) job creation. Currently, there are two different

pathways for lawful permanent resident (LPR) status through the EB-5 visa category, the standard

visa and the Regional Center Program. The overwhelming majority of investors invest through

the Regional Center Program. 15

Both pathways have the same requirements with respect to the

amount of capital required to be invested and the minimum number of jobs to be created, but they

differ in the measure of job creation. In addition, the role of the investor in the enterprise tends to

differ between the two pathways.

11 For the definition of a TEA, see “Investment of Capital.” 12 INA §203(b)(5) and §203. Note that a regional center’s defined area may be in a TEA, so the set asides are not

mutually exclusive. 13 U.S. Government Accountability Office (GAO), Immigrant Investor Program: Additional Actions Needed to Better

Assess Fraud Risks and Report Economic Benefits, GAO-15-696, August 2015. 14 Letter from Senator Charles E. Grassley to John Sandweg, Acting Director U.S. Immigration and Customs

Enforcement, December 12, 2013. 15 In FY2014, approximately 97% of investors entered through the Regional Center Program. U.S. Department of State,

Report of the Visa Office, Table V, Part 3; 2014.

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Investment of Capital

A foreign national must invest at least $1,000,000 in a new commercial enterprise to qualify for

the EB-5 visa. If the immigrant decides to invest in a designated “targeted employment area,”

(TEA) the required minimum is $500,000. For both investment pathways, capital can include

non-cash contributions, 16

but the immigrant investor must establish that he/she is the legal owner

of the capital and that it was obtained through lawful means. Additionally, the entire investment

must be “at risk” for the purpose of generating a return. 17

What is a targeted employment area (TEA)?

A TEA is defined under statute as either a rural area (any area outside of a metropolitan statistical area, as designated

by the Office of Management and Budget or outside a town or city with 20,000 or more people) or an area

experiencing unemployment at 150% of the national average. USCIS defers to state governments in determining if a

geographic or political subdivision should be designated as a TEA based on the unemployment rate. Under a May

2013 USCIS policy memorandum, to qualify as a rural area for the purposes of a TEA designation, the area must be

outside of a metropolitan statistical area and outside a town or city with 20,000 or more people.

A New Commercial Enterprise

A commercial enterprise is “any for-profit activity formed for the ongoing conduct of lawful

business,” such as a sole proprietorship, partnership, holding company, joint venture, corporation,

business trust, or other publicly or privately owned entity. 18

A new commercial enterprise is one

established after November 29, 1990. If the commercial enterprise was established before

November 29, 1990, the immigrant investor’s capital must have been used to expand or

restructure/reorganize the enterprise. 19

Applicants are also allowed to invest funds in “troubled

businesses.” 20

The immigrant investor must be engaged in the management of the commercial

enterprise through policy formation, daily managerial responsibilities, or direct management. 21

16 Capital will be valued at its fair market value in U.S. dollars. 8 C.F.R. §204.6(e). 17 “At risk” means immigrant investors cannot be guaranteed the return of any part of their investment or a rate of

return on their investment. There must be a risk of loss and chance for gain. The investor may receive a return on the

investment during or after the conditional residence period, as long as before or during the conditional residence period

or before required jobs are created the return is not a portion of the principal investment and was not guaranteed to the

investor. U.S. Department of Homeland Security, U.S. Citizenship and Immigration Services, EB-5 Adjudications

Policy, Policy Memorandum PM-602-0083, Washington, DC, May 30, 2013. 18 8 C.F.R. §204.6(e). 19 For more information, see 8 C.F.R. §204.6(h). 20 A troubled business is one that has been in existence for at least two years and has experienced a net loss equal to or

at least 20% of its net worth in the 12- or 24-month period prior to the immigrant investor’s filing of Form I-526,

Petition by Alien Entrepreneur. 8 C.F.R. §204.6(e). 21 “If the foreign national investor is a limited partner and the limited partnership agreement provides the investor with

certain rights, powers, and duties normally granted to limited partners under the Uniform Limited Partnership Act, the

immigrant investor will be considered sufficiently engaged in the management of the new commercial enterprise.” U.S.

Department of Homeland Security, U.S. Citizenship and Immigration Services, EB-5 Adjudications Policy, Policy

Memorandum PM-602-0083, Washington, DC, May 30, 2013; p. 12.

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Job Creation

In order to meet the requirements for the EB-5 visa, the foreign national’s investment capital must

create a minimum of 10 jobs in the new commercial enterprise. 22

The EB-5 visa has three

different measures of job creation.

1. If an immigrant invests in a troubled business, directly or through a regional

center, rather than creating new jobs, he/she can show that they have preserved

jobs for at least two years, in lieu of creating new jobs. 23

2. Investments made in a new commercial enterprise in a non-regional center

context must create 10 jobs within the commercial enterprise. (Such jobs are

called direct or payroll jobs.)

3. For new commercial enterprises located within a regional center, the 10 new jobs

required can be created directly or indirectly (i.e., employees not working

directly for the commercial enterprise). 24

Regional Center Program The Regional Center Program was originally authorized in the Departments of Commerce,

Justice, and State, the Judiciary, and Related Agencies Appropriations Act in 1992. 25

Since its

creation, the program has been reauthorized several times and is set to expire on September 30,

2016. 26

The program was established as a pilot to achieve the economic growth and job creation

goals of the immigrant investor statute 27

by encouraging immigrants to invest in commercial

enterprises located within economic units known as “regional centers.” In order to receive

investment from foreign nationals wishing to obtain EB-5 status, a regional center must be

designated as such by USCIS. Regional centers are intended to provide a coordinated focus of

foreign investment toward specific geographic regions (see section entitled “What is a Regional

Center?” for a detailed discussion). In other words, regional centers pool the investments of

multiple EB-5 investors. 28

The Regional Center Program differs from the standard EB-5 visa 29

in three ways (Table 1). First,

although both pathways require individual investors to create at least 10 jobs, in the regional

22 The position must be full-time, meaning at least 35 hours a week, and be held by a qualifying employee (U.S. citizen,

LPR, or other work-authorized migrant), meaning an individual legally able to work in the United States. Jobs are also

expected to last two years and cannot be intermittent, temporary, seasonal, or transient in nature. 8 C.F.R. §204.6(j)(4). 23 8 C.F.R. §204.6(j)(4)(ii). 24 Indirect jobs are held outside of the new commercial enterprise but are created as a result of the new commercial

enterprise. For example, they can include persons employed by the producers of materials/inputs for the immigrant

investor’s enterprise. “Reasonable” economic methodologies must be used to demonstrate indirect job creation. 8

C.F.R. §204.6 (m)(l)(7). 25 P.L. 102-395 §610 (October 6, 1992). 26 Section 116 of P.L. 105-119 extended the Regional Center Program’s reauthorization from 5 years to 7 years, and

Section 402 of P.L. 106-396 further extended it to 10 years. Section 548 of P.L. 108-156 extended the program to

FY2008, Section 548 of P.L. 111-83 extended it to FY2012, and Section 1 of P.L. 112-176 extended it through

FY2015. Section 131 of P.L. 114-53 extended the program to December 11, 2015; P.L. 114-96 extended it to

December 16, 2015; and P.L. 114-100 extended it to December 22, 2015. Lastly, Division F, Section 575 of P.L. 114-

113 extended the program to September 30, 2016. 27 8 U.S.C. §1153(b)(5) and 8 U.S.C. §1153 note. 28 Pooled investments can also include investments from non EB-5 investors, such as U.S. citizens. 29 “Standard EB-5 visa” refers to investors that obtain an EB-5 visa through the regular EB-5 visa process rather than

(continued...)

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center context indirect job creation 30

may be counted instead of or in addition to direct job

creation. Second, unlike the standard EB-5 visa, foreign nationals investing in a regional center

are unlikely to be involved in the management and daily activities of the commercial enterprise.

Third, the EB-5 visa category is permanent, while the Regional Center Program is temporary. As

previously mentioned, the program is set to expire on September 30, 2016.

Table 1. Comparison of the Two EB-5 Pathways

Standard EB-5 Visa Regional Center Program

Required capital investment is $1 million, or $500,000 in

a targeted employment area.

Same.

Foreign national receives conditional LPR status and after

approximately two years must apply to have the

conditions removed or leave the country.

Same.

To have the conditions removed, among other

requirements, the immigrant investor must show that

he/she created or can be expected to create within a

reasonable time 10 full-time jobs for U.S. citizens, LPRs,

or other work-authorized aliens. Employment must be

direct (i.e., employees working for the commercial

enterprise).a

Same but the employment can be indirect (i.e., employees

not working for the new commercial enterprise).

Investor tends to be involved in daily operations of

enterprise.

Investor tends not to be involved in the daily operation of

the enterprise.

Visa category is permanent. Does not expire. Program is temporary; set to expire September 30, 2016.

Source: CRS analysis of Immigration and Nationality Act §203(b)(5) and §610 of P.L. 102-395

a. These jobs are sometimes referred to as payroll jobs.

Foreign nationals may invest in any of the regional centers that are currently approved to qualify

for their conditional LPR status. Also, investments may be both within a regional center and a

TEA. Although a regional center does not have to be in a TEA, almost all foreign nationals

applying for EB-5 status invest with regional centers whose defined boundaries constitute a

TEA. 31

(See Figure 1.)

What is a Regional Center?

Regional centers are defined as “any economic unit, public or private, which is involved with the

promotion of economic growth, including increased export sales, improved regional productivity,

job creation, and increased domestic capital investment.” 32

More simply, the term “regional

(...continued)

by investing in a regional center. Individuals using either pathway, the standard EB-5 visa or the Regional Center

Program, can obtain an EB-5 visa. USCIS refers to the standard EB-5 visa as the basic EB-5 program. 30 Indirect job creation refers to jobs a regional center estimates to create indirectly through revenues generated from

increased exports, improved regional productivity, job creation, or increased domestic capital investment. 31 The Regional Center designation requires that applicants show how their proposed program will focus on a

geographic region; promote economic growth through increased export sales, if applicable; promote improved regional

productivity; create a minimum of 10 jobs directly or indirectly per investor; increase domestic capital investment; be

promoted and publicized to prospective investors; have a positive impact on the regional or national economy through

increased household earnings; and generate a greater demand for business services, utilities maintenance and repair,

and construction jobs both in and around the center. 8 C.F.R. §204.6(m)(3). 32 8 C.F.R. §204.6 (e).

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center” refers to an entity (often a limited partnership or a limited liability corporation) where

investment from multiple foreign nationals can be pooled to fund a broad range of projects within

a specific geographic area. 33

Regional centers can be privately owned, publicly owned (operated

by a city, county, state, or economic development agency), or a public-private partnership. 34

There

are many different models for regional centers, such as the lending model, where the new

commercial enterprise is a lending entity that provides loans to those (e.g., U.S. citizens) seeking

funding for business activities, such as new construction or expansions of their operations. 35

Regional centers can also use an equity model, where pooled EB-5 investments are used to

purchase equity stakes in a project company (i.e., job-creating entity). In addition, regional

centers have been created for direct investment to build a variety of projects, such as hotels, a ski

resort, convention centers, arenas, and retail and mixed use developments. Certain state (e.g.,

Hawaii) and local governments have also established their own regional centers.

Since the inception of the Regional Center Program in 1992, the number of USCIS-approved

regional centers has increased substantially. From FY2007 to FY2009, it rose more than three-

fold, from 11 to 72. 36

As of January 4, 2016, there were 790 approved regional centers across the

United States. 37

However, not all regional centers have received investment from foreign

nationals wishing to immigrate under the EB-5 visa category. Additionally, as of January 5, 2016,

USCIS had terminated the participation of 39 regional centers from the Regional Center

Program. 38

In the last decade, the use of regional centers among immigrant investors has also grown

substantially. Figure 1 displays the distribution of EB-5 grantees investing through (1) the

standard program in a non-TEA, (2) the standard program in a TEA, and (3) through a regional

center. The proportion of immigrant investors using regional centers, specifically those in a TEA,

has been increasing, especially since FY2007. 39

In FY2006, investments in regional centers in a

TEA were responsible for approximately 12% of the visas used; by FY2014 they represented 97%

of the visas used.

33 Investment pools can also include funds from non-EB-5 investors (e.g., U.S. citizens). In addition, approximately

20% of those receiving LPR status from an investment under the standard EB-5 category are involved in pooled

investments. Personal conversation with staff from USCIS’ Immigrant Investor Program Office, April 8, 2016. 34 For a fuller discussion of regional center public-private partnerships, see Lazaro Zamora and Theresa Cardinal

Brown, EB-5 Program: Success, Challenges, and Opportunities for States and Localities, Bipartisan Policy Center,

Washington, DC, September 2015. 35 The growth of and preference for the loan model may be driven by the fact that many investors’ primary motive is to

qualify for LPR status and recover their investment. Jeanne Calderon and Gary Friedland, EB-5 Capital Project

Database: Revisited and Expanded, NYU Stern School of Business, Center for Real Estate Finance Research, New

York, NY, March 29, 2016, p. 9. 36 U.S. Citizenship and Immigration Services, Number of Approved EB5 Regional Centers Fiscal Year(s): 2007 – 2012,

https://www.uscis.gov/sites/default/files/USCIS/Resources/Reports%20and%20Studies/

Immigration%20Forms%20Data/Employment-based/I526_I924_I829_performancedata_qtr43.pdf. 37 For a list of approved regional centers, see U.S. Citizenship and Immigration Services, Immigrant Investor Regional

Centers, http://www.uscis.gov/working-united-states/permanent-workers/employment-based-immigration-fifth-

preference-eb-5/immigrant-investor-regional-centers. 38 Termination results when a regional center fails to submit Form I-924A to demonstrate continued eligibility or it fails

to promote economic growth as required. For a list of terminated regional centers, see U.S. Citizenship and

Immigration Services, Terminated Regional Centers, http://www.uscis.gov/working-united-states/permanent-workers/

employment-based-immigration-fifth-preference-eb-5/eb-5-immigrant-investor-process/terminated-regional-centers. 39 For exact figures, see the Appendix.

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Figure 1. Immigrant Investor (EB-5) Visas Issued and Adjustments of Status,

FY2004-FY2015

Source: U.S. Department of State, Report of the Visa Office, Table V Immigrant Visas Issued and Adjustments of

Status Subject to Numerical Limitations (by Foreign State of Chargeability), Part 3; multiple years.

Notes: EB-5 Standard represents those receiving EB-5 visa classification on the basis of investment of at least

$1,000,000 in a non-TEA area that is not associated with a regional center. EB-5 Standard TEA represents

those who have received EB-5 visa classification through investment in a targeted employment area (TEA) that is

not associated with a regional center. Regional Center represents those who received EB-5 visa classification

based on investment in a regional center in both TEAs and non-TEAs. CRS presents those receiving EB-5 visa

classifications based on investment in TEA and non-TEA regional centers together because the number of visa

numbers issued based on investment in non-TEA regional centers was relatively low, ranging from 0 to 11 from

FY2004 to FY2015.

The EB-5 Petition Process The EB-5 petition/application process, which is largely administered by USCIS, requires various

steps before an individual can obtain his/her full (i.e., unconditional) LPR status. 40

Individuals

who are admitted to the United States on the basis of EB-5 visas are granted a conditional

resident status. 41

After approximately two years they can apply to remove the conditionality if

40 See U.S. Citizenship and Immigration Services, EB-5 Immigrant Investor Process, http://www.uscis.gov/working-

united-states/permanent-workers/employment-based-immigration-fifth-preference-eb-5/eb-5-immigrant-investor-

process. Accessed by CRS on December 4, 2015. 41 Conditional resident status is lawful resident status conditional on the immigrant meeting certain requirements. INA

§216A.

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they have met the visa requirements (i.e., invested and sustained the required investment and

created the required jobs).

For a foreign national investor, the first step of the process consists of filing USCIS Form I-526,

Immigrant Petition by Alien Entrepreneur. At this point, a foreign national has to prove that

he/she meets the requirements for EB-5 classification, including that the capital being invested

came from a legitimate source, and that he/she has presented a valid business plan or showed that

the investment will go to a USCIS-certified regional center. Once the I-526 is approved, the

foreign national would need to obtain a visa from the Department of State (DOS) to enter the

United States if he/she is not currently in the country, or adjust status 42

with USCIS if he/she is. 43

Individuals not in the United States file Form DS-260 Application for Immigrant Visa and Alien

Registration with DOS and individuals within the United States file Form I-485 Application to

Register Permanent Residence or Adjust Status with USCIS. At this stage, DOS and USCIS also

check that the foreign national is not inadmissible under the grounds of inadmissibility of the

Immigration and Nationality Act (INA). 44

Those who adjust status within the United States

receive their conditional residence once the I-485 is approved. Those who receive a visa from

DOS receive their conditional residence once they are admitted into the United States.

In FY2004, the number of EB-5 visas granted to new arrivals (60) and the number granted to

those who adjusted their status (69) were roughly equal. This ratio has shifted as the growth in

visas granted to new arrivals outpaced the number granted to those who adjusted their status, as

seen in Figure 2. As a result, by FY2014 visas to new arrivals accounted for 86% of EB-5

admissions.

42 “Adjustment of status is the process by which an eligible individual already in the United States can get permanent

resident status (a green card) without having to return to their home country to complete visa processing.” U.S.

Citizenship and Immigration Services, Adjustment of Status, https://www.uscis.gov/green-card/green-card-processes-

and-procedures/adjustment-status. 43 A visa number must be available for the foreign national to apply for the visa or to adjust status. 44 The grounds of inadmissibility include criminal, national security, health, and indigence grounds as well as past

violations of immigration law. INA §212(a). See also CRS Report R41104, Immigration Visa Issuances and Grounds

for Exclusion: Policy and Trends.

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Figure 2. EB-5 Admissions Granted to New Arrivals or through Adjustment of

Status, FY2004-FY2013

Source: CRS presentation of data from the U.S. Department of Homeland Security, Yearbook of Immigration

Statistics, multiple years.

Notes: New Arrivals refers to individuals who obtained an EB-5 visa from DOS outside the United States.

Adjustment of Status refers to individuals who applied for an EB-5 visa number from within the United States

and adjusted their status with USCIS.

An investor can petition to remove the conditional status after approximately two years by filing

Form I-829 Petition by Entrepreneur to Remove Conditions on Permanent Resident Status. 45

If

the I-829 is approved, the conditionality on the residency of the immigrant investor and his/her

derivative family members is removed. 46

If the investor did not meet the requirements to adjust to

full LPR status, the investor (and his/her family members who immigrated together) must depart

from the United States or adjust to another immigration status. USCIS will issue a notice-to-

appear (NTA) 47

to foreign nationals who do not apply to have the conditional status removed or

who are denied adjustment to full LPR status.

Petition denial rates have fallen significantly since the early 2000s, as displayed in Figure 3. For

the I-526, the denial rate fell from 82% in FY2001 to 11% in FY2015. For the I-829, the rate fell

45 The I-829 form instructions state that an investor can petition to remove the conditions within the 90-day period

immediately preceding the second anniversary of obtaining his/her conditional permanent resident status. 46 U.S. Citizenship and Immigration Services, EB-5 Immigrant Investor Process, June 25, 2014, http://www.uscis.gov/

working-united-states/permanent-workers/employment-based-immigration-fifth-preference-eb-5/eb-5-immigrant-

investor-process. 47 This document starts the removal process.

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from 52% in FY2000 to 1% in FY2015. It is likely that the large increase and then decrease in

denials is due in part to the altered interpretations by the former Immigration and Naturalization

Service (INS) of the EB-5 requirements that took place in late 1997 and 1998. In December 1997,

the INS General Counsel’s office issued a legal opinion discussing the legality of certain business

arrangements for EB-5 purposes. Then during 1998, INS issued four precedential decisions that

restricted eligibility for the EB-5 category overall. 48

Among other changes, these decisions barred

previously acceptable investment mechanisms (e.g., pooled investment), increased the

documentation required to show lawful sources of funds, and changed the rules for determining

that investment occurs in a TEA. The INS applied these decisions retroactively. In 2002, the 21 st

Century Department of Justice Appropriations Act (P.L. 107-273) provided remedies for those

affected by INS’ 1998 decisions by allowing investors affected by the retroactive changes to

apply to re-establish eligibility for an EB-5 visa.

At the end of FY2015, there were 17,367 pending I-526 petitions and 4,049 pending I-829

petitions. 49

As of January 31, 2016, the processing times were 16.3 months for the I-526 and 16.9

months for the I-829. 50

48 In 1998, the INS Administrative Appeals Office (AAO) issued four precedential decisions on the EB-5 visa category.

The decisions were Matter of Soffici, (A76 472 614 June 30, 1998); Matter of Izumii, (A76 426 873 July 13, 1998);

Matter of Ho, (WAC-98-072-50493 July 31, 1998); and Matter of Hsiung, (A76 854 232 July 31, 1998). The decisions

impacted several program requirements, including what constitutes an “adequate business plan,” what can be

considered as capital to meet the required investment amount, and what are permissible types of investments and

business arrangements to qualify for an EB-5 visa. These decisions came shortly after—and contradicted—a December

1997 opinion issued by the INS General Counsel’s office that discussed the legality of certain business arrangements

for EB-5 purposes. The contradiction and new rules caused uncertainty among foreign national investors and

immigration lawyers. “AAO Designated Two More Immigrant Investor Decisions,” Interpreter Releases, vol. 75, no.

37 (September 28, 1998), p. 1337. 49 U.S. Citizenship and Immigration Services, Performance Analysis System (PAS), September 2015. 50 U.S. Citizenship and Immigration Services, USCIS Processing Time Information for the Immigrant Investor

Program Office, March 14, 2016, https://egov.uscis.gov/cris/processingTimesDisplay.do;jsessionid=abcrm_xl28-

KgfTv5_Mpv. Accessed by CRS on April 5, 2016.

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Figure 3. Form I-526 and Form I-829 Application Denial Rates, FY1994-FY2015

Source: CRS analysis of data from the U.S. Department of Homeland Security, U.S. Citizenship and Immigration

Services, Performance Analysis System (PAS), January 2015.

Notes: Immigrant investors file Form I-526 to obtain EB-5 classification. As conditional LPRs, they file Form I-

829 to remove the conditionality from the residency status. Denial rates are calculated by dividing the number of

denied petitions (applications) in a year by the sum of the approved and denied petitions in the same year.

EB-5 Admissions Each year approximately 10,000 EB-5 visas are available for investors and their derivatives.

51 In

the program’s early years only a small percentage of available EB-5 visas were being utilized, 52

with the exception of a rise in FY1997. Although numerous possible explanations for the overall

low admission levels in earlier years exist, the notable drop in admissions in FY1998 and FY1999

is due in part to the altered interpretations by the former INS of the qualifying requirements that

took place in 1998. In 2002, in addition to providing remedies for some of those affected by INS’

51 Derivatives are counted against the numerical limit for the category. 52 A 2005 report from the U.S. Government Accountability Office (GAO) listed a number of contributing factors to the

low participation rates, including the rigorous nature of the LPR investor application process and qualifying

requirements, the lack of expertise among adjudicators, uncertainty regarding adjudication outcomes, negative media

attention on the LPR investor program, lack of clear statutory guidance, and the lack of timely application processing

and adjudication. A 2005 law journal article on investor visas suggested that the two-year conditional status of the visa

and the alternate (and less expensive) pathways for LPR status often dissuaded potential investors from pursuing LPR

investor visas. U.S. Government Accountability Office, Immigrant Investors: Small Number of Participants Attributed

to Pending Regulations and Other Factors, GAO-05-256, April 2005, pp. 8-11; and Stanley Mailman and Stephen

Yale-Loehr, “Immigrant Investor Green Cards: Rise of the Phoenix?” New York Law Journal, April 25, 2005.

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1998 decisions, P.L. 107-273 provided some clarification of the requirements in order to promote

an increase in petitions. Possibly as a result, after FY2003 there were substantial increases in EB-

5 visa admissions. 53

From FY2003 to FY2005, the number of EB-5 visas issued grew five-fold

(from 64 to 346), and then increased by seven-fold by FY2010 (to 2,480). From FY2010 to

FY2013, the number of EB-5 visas issued increased again by nearly three-fold (to 8,543) (Figure

4).

As the allotment for EB-5 visas includes derivatives, the total number of immigrants admitted

through the investor visa program does not reflect the actual number of investors. On average,

individual immigrant investors (principal investors) accounted for approximately one-third of all

those granted EB-5 visas. 54

On average, each investor has had approximately two derivatives

granted conditional LPR status along with them over the time period examined.

Figure 4. EB-5 Admissions, FY1994-FY2013

Source: CRS presentation of data from the DHS Office of Immigration Statistics, Yearbook of Immigration

Statistics; multiple years.

Notes: The actual number of available visas for FY2014 was more than 10,000 due to a “roll-down” of unused

visas from other employment-based LPR visa categories. For more information on “roll-downs,” see CRS Report

R42866, Permanent Legal Immigration to the United States: Policy Overview.

Table 2 lists the top 10 EB-5 visa receiving countries in FY2014. China ranks at the top of

investor visa recipient countries, with its citizens accounting for approximately 84% (8,156) of all

53 In this section, visas issued includes adjustments of status. 54 CRS calculation using data from the U.S. Department of Homeland Security Office of Immigration Statistics,

Yearbook of Immigration Statistics; multiple years.

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EB-5 visas granted in FY2015. 55

With respect to other EB-5 visa recipient countries in FY2015,

Vietnam had the second largest number of EB-5 visas granted, at approximately 3% (280), and

Taiwan had the third largest amount of visas at approximately 1% (139). 56

Table 2. EB-5 Visas Issued and Adjustments of Status by Country in FY2015

Top 10 Countries

Country Visas % Total of EB-5 Visas

China

Vietnam

Taiwan

South Korea

India

Russia

Great Britain

Mexico

Venezuela

Iran

8,156

280

139

116

111

88

80

77

72

62

83.5%

2.9%

1.4%

1.2%

1.1%

0.9%

0.8%

0.8%

0.7%

0.6%

All Other

Countries

583 6.0%

Source: U.S. Department of State, Report of the Visa Office, Table V Immigrant Visas Issued and Adjustments of

Status Subject to Numerical Limitations (by Foreign State of Chargeability), Part 3; 2015.

Notes: Visas issued represents visa granted to individuals outside of the United States. Adjustments of Status

represents individuals already in the United States who adjusted their status. This table represents the sum of these two groups. For FY2004 to FY2014 data on EB-5 visas issued and adjustments of status for each of the top

10 countries, see the Appendix.

From FY2009 to FY2014, China has experienced the greatest growth in EB-5 visas issued, as

illustrated in Figure 5. China was granted 1,970 in FY2009 and 9,128 in FY2014 (though the

number decreased to 8,156 visas in FY2015). 57

In addition, for FY2014 the maximum number of

visas available for Chinese applicants was reached in August 2014. 58

Furthermore, there is a

backlog in processing EB-5 visas. As of April 2016, the Department of State was processing visas

for Chinese applicants whose petitions had been approved in February 2014. 59

55 U.S. Department of State, Report of the Visa Office, Table V Immigrant Visas Issued and Adjustments of Status

Subject to Numerical Limitations (by Foreign State of Chargeability), Part 3; 2015. 56 Ibid. 57 The INA establishes that each country can receive no more than 7% of the worldwide level of visas. For more

information see CRS Report R42866, Permanent Legal Immigration to the United States: Policy Overview. 58 U.S. Department of State: Visa Services, Effective Immediately Saturday, August 23, 2014 the China Employment

Fifth (EB-5) Preference Category Has Become “Unavailable” for the Remainder of FY-2014, August 23, 2014. 59 Department of State, Visa Bulletin for April 2016, Washington, DC, March 9, 2016, p. 4, http://www.travel.state.gov/

content/dam/visas/Bulletins/visabulletin_April2016.pdf.

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Figure 5. EB-5 Visas Issued and Adjustments of Status by Country, FY2004-FY2015

Source: CRS presentation of data from the U.S. Department of State, Report of the Visa Office, Table V

Immigrant Visas Issued and Adjustments of Status Subject to Numerical Limitations by Foreign State of

Chargeability), Part 3; multiple years.

Notes: Visas issued represents visa granted to individuals outside of the United States. Adjustments of Status

represents individuals already in the United States who adjusted their status. This table represents the sum of

these two groups. China was the top EB-5 visa receiving country in FY2015. Other Top 10 represents the

aggregate number of EB-5 visas from the countries with the second to the tenth highest number of visas issued

or adjustments of status in FY2015. For data on each of the top 10 EB-5 visa receiving countries, see the

Appendix.

Economic Impact Measurement of the EB-5’s economic impact on the U.S. economy has resulted in a wide variety

of estimates. The EB-5 visa category was created as a way to increase investment and job creation

in the U.S. economy. In 2010, USCIS commissioned ICF International, a private consulting firm,

to estimate the impact of EB-5 investments on the U.S. economy. 60

The study used a sample of

immigrants whose initial investment occurred between 2001 and 2006. 61

It found that EB-5

investments and the economic activity that resulted from them added $700 million to the U.S.

gross domestic product (GDP), with the real estate industry sector experiencing the largest

60 ICF International, Study of the United States Immigrant Investor Pilot Program (EB-5), May 18, 2010,

http://www.uscis.gov/sites/default/files/USCIS/Resources/Reports%20and%20Studies/EB-5/EB5-Report-2010.pdf. 61 Ibid. For this study, USCIS lacked comprehensive data on the entire visa population, preventing the study from

determining how representative its sample was for all investors.

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impact. This study also found that the visa helped create an estimated 12,000 annual jobs in the

United States. The study also estimated that the EB-5 visa classification allowed the federal

government to accrue an additional $100 million, and state and local governments, an additional

$62 million in tax revenue. 62

Additionally, USCIS commissioned the U.S. Department of

Commerce to conduct a new study on the visa’s economic impacts. 63

USCIS has also reported its estimates of the visa’s creation of investment and jobs. The agency

stated that from FY1990 to FY2014, the EB-5 visa has generated more than $11.2 billion in

investments and at least 73,730 jobs. 64

Additionally, USCIS reported in February 2016, that as of

October 1, 2012, at least $8.7 billion was invested in the U.S. economy and an estimated 35,140

jobs were created through EB-5 visa investments. 65

Other non-federal organizations, some of which were commissioned by advocacy organizations,

have conducted their own economic analysis of the visa’s economic impacts. In 2014, the

Brookings Institution estimated that the EB-5 visa created 85,500 full-time jobs and contributed

$5 billion in direct investment to the United States since its inception. 66

A 2015 report by U.S.

Policy Metrics/Hamilton Place Strategies, commissioned by the EB-5 Investment Coalition (an

advocacy organization for EB-5), estimated that from 2005 to 2013 the EB-5 visa generated a

minimum of $5.2 billion in investment. 67

The study also noted that in 2013 alone, the visa

brought in at least $1.6 billion in investment and, assuming each investment’s minimum

requirement was met, created 31,000 jobs. 68

Invest in the USA (an EB-5 trade association)

commissioned the Alward Institute for Collaborative Science to conduct a peer reviewed study on

the impacts of the EB-5 visa. They estimated that EB-5 associated regional center spending

contributed $3.58 billion to the U.S. GDP and created over 41,000 jobs in FY2013. 69

These 2013

estimates of EB-5 investments into the economy represent less than 0.1% of the U.S.’s $16.7

trillion GDP. 70

62 Ibid. 63 U.S. Citizenship and Immigration Services, staff briefing for CRS, September 9, 2015. 64 U.S. Congress, House Committee on the Judiciary, Is the Investor Visa an Under Performing Asset? testimony of

Rebecca Gambler, Director of Homeland Security and Justice at the U.S. Government Accountability Office, 114th

Cong., 2nd sess., February 11, 2016. 65 The estimated amount of money invested in the U.S. economy was based on the number of EB-5 petitions approved

and the number of jobs created was based on the number of approvals of Form I-829. U.S. Congress, Senate Committee

on the Judiciary, The Failures and Future of the EB-5 Regional Center Program: Can it be Fixed? testimony of

Nicholas Colucci, Chief of the Office of Immigrant Investor Program,114th Cong., 2nd sess., February 2, 2016. 66 Audrey Singer and Camille Glades, Improving the EB-5 Investor Visa Program: International Financing for U.S.

Regional Economic Development, Brookings-Rockefeller, Project on State and Metropolitan Innovation, February

2014. 67 Steven McMillin, Michael Solon, and Matt McDonald, Harnessing Private Capital for Job Creation: An Analysis of

the EB-5 Program, U.S. Policy Metrics & Hamilton Place Strategies, June 2015, http://eb5coalition.org/analysis-of-the-

eb-5-program.pdf. 68 Ibid. 69 David Kay, The Economic Impact and Contribution of the EB-5 Immigration Program, Alward Institute for

Collaborative Science, Cornelius, NC, May 2015. 70 The U.S. GDP in 2015 was $17.9 trillion. GDPs are given in 2016 current dollars. U.S. Department of Commerce

Bureau of Economic Analysis, National Economic Accounts: Current-Dollar and “Real” Gross Domestic Product,

February 26, 2016, http://www.bea.gov/national/index.htm#gdp.

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Policy Issues In recent years, efforts have been made by USCIS to promote investment by foreigners in the

United States economy and to close perceived loopholes for visa exploitation. 71

Some of the

issues that have been discussed are the processing of applications, USCIS’ expertise and ability to

oversee the EB-5 visa, the need for accurate measurement of the visa’s economic impact, fraud

and security concerns, and TEA determinations. The following sections review these issues and,

where applicable, discuss changes USCIS has made to address them.

Application and Petition Processing

An on-going issue within the EB-5 program is the processing times for EB-5 applications (both

for the regional center designation and the petitions for foreign national investors), and the impact

of these potential delays on the investors and project developers. 72

As of January 31, 2016, the

application adjudication times were 13.6 months to apply for EB-5 status (Form I-526), 16.9

months to remove conditionality from LPR status (Form I-829), and 9 months to apply to become

a regional center (Form I-924). 73

Stakeholders have complained that the time period from

applying for a regional center designation to actually receiving investment (currently

approximately 22.6 months) is too long which can negatively impact investment projects. EB-5

stakeholders have also stated that USCIS needs to adjudicate EB-5 and regional center

applications in a more predictable manner, noting that the EB-5 program faces competition from

other countries with more predictable and speedy immigrant investor program. The USCIS

Ombudsman 74

has made recommendations make the EB-5 adjudication process more transparent,

consistent, and timely. 75

USCIS Expertise

In drawing attention to some of the issues with the EB-5 visa, some have called into question

whether USCIS is the right agency to manage the visa classification or whether USCIS should be

71 In 2013, USCIS released new internal guidance regarding the adjudication of EB-5 petitions. In addition, in the past

three years, USCIS has filled new positions (e.g., economist, accountant) to help adjudicate petitions for regional center

designations. Department of Homeland Security, U.S. Citizenship and Immigration Services, EB-5 Adjudications

Policy, Policy Memorandum PM-602-0083, Washington, DC, May 30, 2013. 72 For example, see Office of the Citizenship and Immigration Services Ombudsman, EB-5 Immigrant Investor

Program Stakeholder Meeting, Executive Summary, Washington, DC, March 5, 2013. See also Office of the

Citizenship and Immigration Services Ombudsman, Employment Creation Immigrant Visa (EB-5) Program

Recommendations, Department of Homeland Security, Washington, DC, March 18, 2009. 73 Reportedly, the USCIS Immigrant Investor Program Office (IPO) is continuing to expand its staff and expects to

increase staff from 113 to 171 people by the end of FY2016. During a February 2016 stakeholders’ meeting, USCIS

stated that senior adjudicators are training many junior adjudicators to handle complex cases, and as a result, processing

times may decrease in the future. Nicholas Colucci, “February 3, 2016 Stakeholder Engagement,” IPO Chief Nicholas

Colucci’s Remarks, Washington, DC, February 3, 2016. For processing times, see+

U.S. Citizenship and Immigration Services, USCIS Processing Time Information for the Immigrant Investor Program

Office, March 14, 2016, https://egov.uscis.gov/cris/processingTimesDisplay.do;jsessionid=abcrm_xl28-KgfTv5_Mpv.

Accessed by CRS on April 5, 2016. 74 The office and the position of the USCIS Ombudsman were created in the Homeland Security Act of 2002 (P.L. 107-

296, §452). They are independent of USCIS and are tasked with providing individual case assistance, as well as making

recommendations to improve USCIS’s administration of immigration benefits. 75 Office of the Citizenship and Immigration Services Ombudsman, EB-5 Immigrant Investor Program Stakeholder

Meeting, Executive Summary, Washington, DC, March 5, 2013.

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required to consult or partner with other agencies regarding its EB-5 responsibilities. In taking on

the EB-5 program and the Regional Center Program, the INS mission of providing immigration

and naturalization services was extended. Notably, the EB-5 program involves complexities

including analysis of business plans and economic forecasting models which require specialized

expertise. Some lawmakers were aware while creating the EB-5 program that the INS did not

have all the expertise needed to implement the visa category and recommended the agency work

with other agencies that have the necessary skills. 76

Even after the creation of USCIS in 2003,

there were still concerns about whether that agency had the expertise to adjudicate EB-5 petitions.

For example, in 2013, the Department of Homeland Security Office of Inspector General (DHS

OIG) suggested that USCIS improve its coordination with the Department of Commerce, the

Department of Labor’s Bureau of Labor Statistics, and the Securities and Exchange Commission

in order to leverage their expertise to its advantage during the adjudication process. 77

The Government Accountability Office (GAO) reported improvements in USCIS’s economic

analysis of EB-5 applications that resulted from its hiring of an additional 22 economists to

review business plans, economic analysis, and organizational documents for regional center

projects. 78

As of February 2016, the Immigrant Investor Program Office (IPO) was staffed with

110 employees, which included 60 adjudication officers, 28 economists, and 22 additional staff

responsible for the direct support and management of the program. 79

USCIS also updated and

enhanced its employee training curriculum, which currently includes ongoing training, in order to

improve consistency in adjudication process and compliance with statutes, regulations, and

policies. 80

Measuring Economic Impacts

In the past, USCIS has estimated the EB-5’s impact through calculating total job creation and

foreign investment. This was done by multiplying the number of EB-5 visas granted by the visa

category’s minimum requirements ($500,000 investment and 10 jobs created). 81

DHS OIG and

GAO reported that these estimates of the program’s impact could lead to either understatement or

overstatement of certain economic benefits. For example, some investors create more than 10

jobs and/or invest over $500,000. Using visa minimums would therefore underestimate their

76 Statement of Senator Alan Simpson, Senate Debate on Conference Report for the Immigration Act of 1990,

Congressional Record, vol. 136 (October 26, 1990), pp. S17106-01. 77 U.S. Department of Homeland Security Office of Inspector General, United States Citizenship and Immigration

Services: Employment-Based Fifth Preference (EB-5) Regional Center Program, OIG-14-19, December 2013. 78 U.S. Government Accountability Office (GAO), Immigrant Investor Program Additional Actions Needed to Better

Assess Fraud Risks and Report Economic Benefit, GAO-15-696, August 2015. 79 IPO staffing numbers do not include Fraud Detection and National Security (FDNS) and Office of the Chief Counsel

employees. USCIS also stated that they are working to fill vacancies to reach their FY2016 authorized staffing level of

171 employees. U.S. Congress, Senate Committee on the Judiciary, The Failures and Future of the EB-5 Regional

Center Program: Can it be Fixed? testimony of Nicholas Colucci, Chief of the Office of Immigrant Investor

Program,114th Cong., 2nd sess., February 2, 2016. 80 U.S. Government Accountability Office (GAO), Immigrant Investor Program Additional Actions Needed to Better

Assess Fraud Risks and Report Economic Benefit, GAO-15-696, August 2015. 81 Through its different application forms, USCIS requests information that could be used to make these estimations

more accurate. For example, Form I-526 asks investors to report their initial investment, and Form I-829 requires

investors to report the number of new jobs created or jobs they expect to be created. Furthermore, USCIS states that it

plans to develop a data system that will enable it to track and report data immigrant investors report in FY2017. U.S.

Congress, House Committee on the Judiciary, Is the Investor Visa an Under Performing Asset? testimony of Rebecca

Gambler, Director of Homeland Security and Justice at the U.S. Government Accountability Office, 114th Cong., 2nd

sess., February 11, 2016.

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impact and would not accurately capture the investors’ true contribution to the economy.

Additionally, the underlying assumptions in these estimations are that each approved visa was

actually used and that all foreign investors fulfilled their capital and job creation requirements. If

that assumption does not hold, USCIS could therefore be overestimating the impact of the

program. USCIS’ lack of comprehensive, longitudinal studies on the economic impact of regional

centers could also limit its ability to measure impact over time or any impacts that may manifest

later. Though such research would be beneficial to understanding the program’s impact, USCIS is

not mandated by statute to develop comprehensive assessments of the overall benefits of the

investor visa program. 82

In 2013, a DHS OIG report stated that “USCIS is unable to demonstrate the benefits of foreign

investment into the U.S. economy.” 83

The report identified how USCIS’ limited authority had

played a part in the agency’s inability to accurately measure the impact of the EB-5 visa. For

example, in a regional center context, where foreign funds contribute to an investment pool that

also contains funds from non-EB-5 investors (e.g. U.S. citizens), EB-5 investors can take credit

for all jobs created, regardless of the proportion of the investment pool that was actually

contributed by EB-5 investors or which investment in the pool was primarily responsible for the

job creation. 84

In other words, all the jobs created by the project funded by EB-5 and non-EB-5

investors are credited to EB-5 investors, not only the pro-rated portion that represents the amount

of EB-5 investment. 85

Therefore, in these situations USCIS does not have the ability to determine

if EB-5 investors were responsible for the creation of jobs, making it difficult for the agency to

fully capture the economic impact of the program.

Since FY2013, USCIS economists have been provided with data from the Regional Input-Output

Modeling System (RIMS II) 86

to estimate job creation. USCIS and Department of Commerce

economists and industry and academic experts consider RIMS II to be a valid method to verify

job creation estimates. 87

GAO noted that “RIMS II data is a reasonable methodology to verify job

creation as permitted in law and program regulation.” 88

As of FY2015, Immigrant Investor

Program Office (IPO) managers estimate that 95% of EB-5 program petitioners used economic

models to estimate job creation and 90% of them used RIMS II in their applications to USCIS. 89

82 U.S. Government Accountability Office (GAO), Immigrant Investor Program Additional Actions Needed to Better

Assess Fraud Risks and Report Economic Benefit, GAO-15-696, August 2015. 83 U.S. Department of Homeland Security Office of Inspector General, United States Citizenship and Immigration

Services: Employment-Based Fifth Preference (EB-5) Regional Center Program, OIG-14-19, December 2013. 84 8 C.F.R. §204.6(g)(2). 85 For example, although only 6% of the total capital raised for a condominium project in Miami, Florida, came from

EB-5 investors, 100% of the job creation was allocated to the EB-5 investors. Jeanne Calderon and Gary Friedland, EB-

5 Capital Project Database: Revisited and Expanded, NYU Stern School of Business, Center for Real Estate Finance

Research, New York, NY, March 29, 2016, p. 6. 86 The RIMS II system was created by the U.S. Department of Commerce’s Bureau of Economic Analysis, which is

used both in the private and public sectors. By providing detailed geographic and industry information on the project or

program, RIMS II can “estimate total impact of the project or program on regional output, earnings, and employment.”

U.S. Department of Commerce’s Bureau of Economic Analysis, Regional Multipliers from the Regional Input-Output

Modeling System (RIMS II): A Brief Description, February 2015. 87 U.S. Government Accountability Office, Immigrant Investor Program Additional Actions Needed to Better Assess

Fraud Risks and Report Economic Benefit, GAO-15-696, August 2015. 88 Ibid. 89 Ibid.

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However, RIMS II cannot determine the location of jobs created, therefore making it difficult to

know whether jobs are created in TEAs. 90

Fraud and Security Risks

In comparison to other immigration visas, GAO found that EB-5 faces the risk of fraud in three

unique respects that stem from its investment components. 91

First, immigrant investors must

provide evidence that their investment funds were obtained through lawful means. It can be

difficult, however, for USCIS to verify the sources, especially with the use of overseas counterfeit

documentation or self-reporting that cannot always be verified with foreign banks.

Second, the potential for large financial gains through the EB-5 visa may motivate regional center

operators and intermediaries 92

to take advantage of foreign investors. Some immigrant investors

primarily interested in the immigration benefits of EB-5 may accept lower rates of return or may

not adequately research an investment decision. U.S. Securities and Exchange Commission (SEC)

officials reported over 100 tips, complaints, and referrals on possible security fraud violations

concerning the EB-5 visa from January 2013 to January 2015, and just over half were referred for

further investigation. 93

Furthermore, from February 2013 to December 2015, SEC filed 19 cases

involving EB-5 offerings, of which almost half involved fraud allegations. 94

Lastly, the EB-5 visa classification is susceptible to the appearance of favoritism and special

access. A DHS OIG report identified the risk of internal and external influence on the EB-5 visa,

listing USCIS’ lack of protocols to document inquiries, decision making, and responses to

external parties who inquired about EB-5 activities as a key issue. 95

In March 2015, DHS OIG

released a report prompted by USCIS employee complaints on the management of the EB-5

visa. 96

After the report’s issuance, the DHS Secretary asked Congress to help increase the security

and integrity of the visa. USCIS subsequently issued a new ethics and integrity protocol for EB-5

that addresses application processing and stakeholder communication. 97

90 U.S. Congress, House Committee on the Judiciary, Is the Investor Visa an Under Performing Asset? testimony of

Rebecca Gambler, Director of Homeland Security and Justice at the U.S. Government Accountability Office, 114th

Cong., 2nd sess., February 11, 2016. 91 U.S. Government Accountability Office, Immigrant Investor Program Additional Actions Needed to Better Assess

Fraud Risks and Report Economic Benefit, GAO-15-696, August 2015. 92 Regional center operators and intermediaries can include the individual who created the regional center, the

individual who manages or oversees the regional center, or the individual who connected or recruited the foreign

investor to invest in a certain regional center. 93 Ibid. 94 U.S. Congress, Senate Committee on the Judiciary, The Failures and Future of the EB-5 Regional Center Program:

Can it be Fixed? testimony of Stephen L. Cohen, Associate Director of U.S. Securities and Exchange Commission’s

Division of Enforcement, 114th Cong., 2nd sess., February 2, 2016. 95 U.S. Department of Homeland Security Office of Inspector General, United States Citizenship and Immigration

Services: Employment-Based Fifth Preference (EB-5) Regional Center Program, OIG-14-19, December 2013. 96 The report found that then-Director of USCIS and current Deputy Secretary of DHS Alejandro Mayorkas had

“communicated with stakeholders on substantive issues, outside of the normal adjudicatory process and intervened with

the career USCIS staff in ways that benefited stakeholders.” U.S. Department of Homeland Security Office of Inspector

General, Investigation into Employee Complaints about Management of U.S. Citizenship and Immigration Services’

EB-5 Program, March 2015. 97 U.S. Department of Homeland Security, Ethics and Integrity: Protocols for Processing EB-5 Immigrant Investor

Visa Petitions and EB-5 Regional Center Applications, Including Stakeholder Communications, April 30, 2015.

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With respect to regional centers, when there is a risk to national security or fraud is found, USCIS

opines that it lacks explicit statutory authority to deny or terminate centers. 98

For example,

USCIS can deny immigration benefits to individual immigrants who are considered to be a

national security threat, 99

but the agency has interpreted the Immigration and Nationality Act

(INA) as not being applicable to regional centers because they are pooling funds from investors

rather than seeking an immigrant benefit or visa. 100

Furthermore, USCIS lacks the authority to

deny or terminate a regional center’s participation in EB-5 based solely on fraud or national

security concerns. Such participation can only be terminated if the regional center fails to submit

required information or it is no longer promoting economic growth. 101

USCIS officials have noted

that this statutory limitation is a “major challenge and requires a significant amount of time to

link findings [of fraud or national security concerns] to the statutory criteria,” for terminating a

regional center. 102

USCIS has conducted risk assessments to identify, analyze, and establish solutions for issues

surrounding fraud. In 2015, in response to congressional and USCIS requests, the DHS Office of

Intelligence and Analysis updated the EB-5 visa’s 2012 risk assessment in a classified report. 103

In

addition to conducting risk assessments on an “as needed” basis, USCIS reported to GAO that it

conducts regular oversight work and collaborates with other enforcement agencies that may

uncover fraud, such as the Federal Bureau of Investigation (FBI), Securities and Exchange

Commission (SEC), and Immigration and Customs Enforcement’s (ICE’s) Homeland Security

Investigations (HSI). EB-5 fraud risks are always evolving, and more opportunities for fraud exist

with increasing numbers of visas being granted. GAO noted that “planned regular or updated

future risk assessments could help better position USCIS to identify, evaluate, and address fraud

risks given the potential for changing conditions.” DHS officials have stated that they plan to

complete a risk assessment by September 2016 and to continue to conduct at least one annually. 104

A 2013 Homeland Security Investigations (HSI) memorandum requested by DHS

105 assessed EB-

5’s vulnerabilities, specifically “concerns that this particular visa program [EB-5] may be abused

by Iranian operatives to infiltrate the United States.” 106

The memo, which used data from 2012,

identified seven main areas of vulnerability with the visa: export of sensitive technology and

economic espionage, use of force by foreign government agents and espionage, use by terrorists,

investment fraud by regional centers, investment fraud by investors, fraud conspiracies by

98 U.S. Government Accountability Office, Immigrant Investor Program Additional Actions Needed to Better Assess

Fraud Risks and Report Economic Benefit, GAO-15-696, August 2015; and U.S. Department of Homeland Security

Office of Inspector General, United States Citizenship and Immigration Services: Employment-Based Fifth Preference

(EB-5) Regional Center Program, OIG-14-19, December 2013. 99 INA §212(a)(3). 100 U.S. Department of Homeland Security Office of Inspector General, United States Citizenship and Immigration

Services: Employment-Based Fifth Preference (EB-5) Regional Center Program, OIG-14-19, December 2013. 101 8 C.F.R. §204.6(m)(6). 102 U.S. Government Accountability Office, Immigrant Investor Program Additional Actions Needed to Better Assess

Fraud Risks and Report Economic Benefit, GAO-15-696, August 2015. 103 Ibid. 104 U.S. Congress, House Committee on the Judiciary, Is the Investor Visa an Under Performing Asset? testimony of

Rebecca Gambler, Director of Homeland Security and Justice at the U.S. Government Accountability Office, 114th

Cong., 2nd sess., February 11, 2016. 105 U.S. Department of Homeland Security, Request for Information Implications of ICE Case Against Procurement

Agent, no. 66820. 106 U.S. Immigration and Customs Enforcement, Homeland Security Investigations, EB-5 Program Questions from

DHS Secretary, updated memorandum.

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investors and regional centers, and illicit finance and money laundering. The memo noted EB-5

petitioners are not required to “establish significant and verifiable background for program

eligibility,” creating a national security risk. It found there are “no safeguards that can be put in

place that will ensure the integrity of the program.” 107

Nonetheless, this memo was written before

the creation of the Immigrant Investor Program Office (IPO), and these risks may have been

addressed.

GAO noted that USCIS restructured and centralized the EB-5 visa by moving its California

operations to Washington, DC, in an effort to increase the agency’s fraud detection and response

capabilities. 108

This has also allowed USCIS to expand the scope of its background checks and

increase the number of databases against which it checks petitioners and applicants. In that same

year, USCIS also established a fraud specialist unit within its Fraud Detection and National

Security (FDNS) unit specifically for the EB-5 visa. FDNS also reported hiring more fraud

specialists with skillsets particularly critical to fraud prevention. 109

FDNS has also begun to

provide specialized fraud training for employees and has implemented an “EB-5 University” that

provides monthly presentations on different fraud-related topics relevant to the adjudication

process. USCIS has improved its communication and collaboration with law enforcement

agencies such as the SEC, ICE, HSI, and the FBI, to whom it refers cases of potential fraud,

criminal activity, or national security threats. 110

The SEC has also worked to educate EB-5

investors through its Office of Investor Education and Advocacy (OIEA). 111

Data Collection

GAO has identified limitations in USCIS’ collection of information. Addressing these could assist

in its assessment and detection of fraud. For example, USCIS relies heavily on paper-based

documentation and does not fully transfer information into their electronic databases or do so in a

standardized manner. 112

These practices can make it difficult to search for certain information,

especially when attempting to identify fraud through the tracking of irregularities or trends.

USCIS expects to implement a new program, the Electronic Immigration System (USCIS ELIS),

which aims to improve the collection of applicant information through electronic forms. 113

107 Ibid. 108 U.S. Government Accountability Office, Immigrant Investor Program Additional Actions Needed to Better Assess

Fraud Risks and Report Economic Benefit, GAO-15-696, August 2015. 109 As of January 2016, EB-5’s FDNS division included 22 full-time equivalent staff and 18 of those positions were

filled. U.S. Congress, House Committee on the Judiciary, Is the Investor Visa an Under Performing Asset? testimony

of Rebecca Gambler, Director of Homeland Security and Justice at the U.S. Government Accountability Office, 114th

Cong., 2nd sess., February 11, 2016. 110 U.S. Government Accountability Office, Immigrant Investor Program Additional Actions Needed to Better Assess

Fraud Risks and Report Economic Benefit, GAO-15-696, August 2015. 111 In 2013, OIEA and USCIS issued a joint “Investor Alert” on SEC’s website to warn investors of potential

investment scams. U.S. Congress, Senate Committee on the Judiciary, The Failures and Future of the EB-5 Regional

Center Program: Can it be Fixed? testimony of Stephen L. Cohen, Associate Director of U.S. Securities and Exchange

Commission’s Division of Enforcement, 114th Cong., 2nd sess., February 2, 2016. 112 For example, databases do not require that all information on paper forms be entered; certain input, such as an

applicant’s name from the I-924 form, is optional. U.S. Government Accountability Office, Immigrant Investor

Program Additional Actions Needed to Better Assess Fraud Risks and Report Economic Benefit, GAO-15-696, August

2015. 113 Additionally, USCIS reports that it plans to revise forms I-924, I-924A, I-526, and I-829 in order to capture more

information from applicants. U.S. Congress, House Committee on the Judiciary, Is the Investor Visa an Under

Performing Asset? testimony of Rebecca Gambler, Director of Homeland Security and Justice at the U.S. Government

Accountability Office, 114th Cong., 2nd sess., February 11, 2016.

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Congressional Research Service 22

However, as of March 2016, only two of approximately 90 types of immigration forms were

available for on-line filing, and it is estimated that the system will be completed in 2019 (over

four years later than expected). 114

Though they are limited in number and scope, FDNS does currently conduct site visits to projects

that IPO staff has found to be of material concern. GAO reported that USCIS, SEC, and HSI

officials and members of the national industry association representing regional centers agreed

that expanding site visits would increase the program’s integrity. USCIS reports that they plan on

expanding their random site visit program to the EB-5 program in FY2016. 115

Moreover, USCIS is required by statute to interview immigrant investors within 90 days of

submitting Form I-829, but the agency also has the authority to waive that requirement. 116

Interviews can be a method to collect corroborating information on whether investors meet

program requirements and whether the project may involve fraud. GAO reported that USCIS

believes that interviews at the I-829 stage could provide important information and expects to

begin conducting them in the near future. 117

At this time, USCIS has not conducted any

interviews with immigrant investors submitting the I-829 petition. However, reportedly USCIS is

finalizing its I-829 interview process and plans to begin conducting interviews in the third quarter

of FY2016. 118

Targeted Employment Area (TEA) Determinations

As noted above, a majority of investments made in the EB-5 program are being directed to

targeted employment areas (TEA). The reduced capital investment minimum required for

immigrant investors in TEAs was meant to increase investment in areas of greater need. 119

State

governments may designate a TEA by identifying a particular geographic or political subdivision

as an area of high unemployment (at least 150% of the national average rate). 120

USCIS defers to

the state to determine a high unemployment TEA’s geographical or political subdivision

boundaries but can review the state’s methodologies and data.

State designation of TEAs due to high unemployment has been criticized as lenient, without clear

direction, and inconsistent across states. 121

For instance, USCIS’ deference to states’

determinations of the boundaries for high unemployment TEAs has allowed for variation across

states in how they designate such an area. 122

Furthermore, TEAs can be created through the

114 DHS Office of Inspector General, USCIS Automation of Immigration Benefits Processing Remains Ineffective, OIG-

16-48, March 9, 2016. 115 U.S. Congress, Senate Committee on the Judiciary, The Failures and Future of the EB-5 Regional Center Program:

Can it be Fixed? testimony of Nicholas Colucci, Chief of the Office of Immigrant Investor Program,114th Cong., 2nd

sess., February 2, 2016. 116 8 U.S.C. §1186b(c)(1)(B) (INA interview requirement); 8 U.S.C. §1186b(d)(3) (discretionary waiver authority). 117 U.S. Government Accountability Office, Immigrant Investor Program: Additional Actions Needed to Better Assess

Fraud Risks and Report Economic Benefits, GAO-15-696, August 2015. 118 Personal Conversation with staff from USCIS’ Immigrant Investor Program Office, April 8, 2016. 119 U.S. Citizenship and Immigration Services, EB-5 Adjudications Policy, Policy Memorandum PM-602-0083,

Washington, DC, May 30, 2013. 120 8 C.F.R. 204.6(i). 121 See U.S. Congress, House Committee on the Judiciary, Is the Investor Visa and Underperforming Asset?, 114th

Cong., 2nd sess., February 11, 2016 and U.S. Congress, Senate Committee on the Judiciary, The Failures and Future of

the EB-5 Regional Center Program: Can it be Fixed?, 114th Cong., 2nd sess., February 2, 2016. 122 Paul Scheuren, A Comparison of States’ Approaches to Targeted Employment Area Certification, Regional Center

Business Journal, March 2010.

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linking of several census tracts, therefore allowing wealthier tracts linked to tracts with high

unemployment to form a TEA. 123

Some believe that this practice can accommodate commuting

patterns and provide states with the choice as to what area fits their economic needs. 124

Others

have contended that this allows for gerrymandering and permits developers to obtain the TEA

designation without actually developing and directly investing in the neediest areas. 125

Legislation in the 114th Congress As previously mentioned, in December 2015 the Regional Center Program was reauthorized

through September 30, 2016, by the Consolidated Appropriations Act of 2016 (P.L. 114-113). The

pending expiration of the program renewed attention on it and legislation has been introduced in

the 114 th Congress related to the EB-5 visa category. The following bills would modify the

Regional Center Program and the EB-5 visa in general: the American Entrepreneurship and

Investment Act (H.R. 616), the EB-JOBS Act (H.R. 3370), the EB-5 Integrity Act (H.R. 4530/S.

2415), and American Job Creation and Investment Promotion Reform Act of 2015 (S. 1501). In

addition, H.R. 3370 and the Jobs in America Act (H.R. 3987) would create a new visa category,

similar to the EB-5 category, for foreign national entrepreneurs. On February 2, 2016, the Senate

Judiciary Committee held a hearing on the Regional Center Program and S. 1501; however, none

of the other bills have received action.

Proposed Changes to the Regional Center Program

Several of the bills (H.R. 4530/S. 2415, H.R. 3370, S. 1501) would seek to place more controls

and requirements on regional centers, including delineating application requirements, establishing

a sanction system, expanding reporting requirements, and prohibiting persons who have been

convicted of certain crimes from participating in a regional center. In addition, H.R. 4530/S. 2415

and S. 1501 would create an EB-5 Integrity Fund in the Treasury, from fees on regional centers

and those applying for a regional center designation to fund oversight of regional centers.

Similarly, H.R. 3370 would create an EB-5 fund to administer and operate the program. H.R.

3370, H.R. 4560/S. 2415, and S. 1501 would also expand DHS’s authority to terminate a regional

center designation.

H.R. 4530/S. 2415 and S. 1501 would create rules and mandate the establishment of channels

through which applicants (or their representatives) for a regional center designation or LPR status

could discuss case-specific information. 126

S. 1501 would require USCIS to set fees for the

applications at a level so that they would be adjudicated in a statutorily specified period of time,

establish premium processing for regional center designation applications, and allow DHS to

prioritize petitions filed under the Regional Center Program over all other immigrant petitions.

123 For example, a regional center project that consists of building the Beverly Hills Waldorf Astoria located in Beverly

Hills California qualifies as a TEA. Jeanne Calderon and Gary Friedland, EB-5 Capital Project Database: Revisited

and Expanded, NYU Stern School of Business, Center for Real Estate Finance Research, New York, NY, March 29,

2016, p. 7. 124 Lazaro Zamora and Theresa Cardinal Brown, EB-5 Program: Success, Challenges, and Opportunities for States and

Localities, Bipartisan Policy Center, Washington, DC, September 2015. 125 For examples, see Patrick McGeehan and Kirk Semple, “Rules Stretched as Green Cards Go to Investors,” The New

York Times, December 18, 2011. 126 These protocols would be similar to ones established by USCIC in 2015. U.S. Department of Homeland Security,

Ethics and Integrity: Protocols for Processing EB-5 Immigrant Investor Visa Petitions and EB-5 Regional Center

Applications, Including Stakeholder Communications, April 30, 2015.

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H.R. 616 would set maximum processing times of 180 days for regional center application

determinations and immigrant investor petitions. H.R. 3370 would establish premium processing

for foreign national investors applying for EB-5 status.

H.R. 4530/S. 2415 and S. 1501 would specify how an investor demonstrates that the investment

capital was obtained from a “lawful source through lawful means,” and set procedures for how

foreign national investors are to be treated if the regional center in which they were investing lost

its designation. Lastly, H.R. 616, H.R. 3370, H.R. 4560, and S. 2415 would permanently

authorize the Regional Center Program, while S. 1501 would extend its authorization to

September 30, 2020.

Proposed General Changes

H.R. 3370 and S. 1501 would increase capital investment minimums and tie the investment

minimum amounts to the Consumer Price Index (CPI-U). S. 1501 would allow a foreign national

who has invested the requisite capital for at least 24 months before being admitted to the United

States to receive full LPR status (i.e., not conditional status). H.R. 616 and H.R. 3370 would

allow the Secretary of DHS to delegate some authority for the administration of the EB-5

category to the Department of Commerce. In addition, H.R. 616 would remove derivatives from

the numerical limitations imposed on the EB-5 visa and eliminate the visa category’s per-country

quotas.

Target Employment Areas

With respect to TEAs, H.R. 3370 would expand the definition of a TEA to include a county that

has had at least a 20% decrease in population since 1970, an area established for the purpose of a

state or federal economic development incentive program, and an area within the geographic

boundaries of any military installation closed pursuant to a base closure law. 127

The bill would

also provide an allocation of visas for the different types of TEAs. S. 1501 would change the

manner in which a TEA is defined, including providing a methodology for determining high

unemployment areas for the purposes of designating a TEA. Like S. 1501, H.R. 616 would

increase the number of visas set aside for TEAs from 3,000 to 5,000; but it would specify that

TEA designations by the states are to be granted deference by DHS.

Potential New Programs

H.R. 3370 would create a new visa category (EB-6) similar to the EB-5 category for foreign

nationals who (1) wish to start a new commercial enterprise with a specified amount of money

from qualified investors or venture capital funds; or (2) have already started and are managing a

new commercial enterprise that employs a specified number of persons. 128

H.R. 3987 would

create a new visa category (EB-6) for foreign nationals who have received investment to start a

new commercial enterprise, and for foreign nationals on H-1B visas 129

who have an advanced

degree in science, technology, engineering, or math (STEM) and meet other requirements. Similar

127 10 U.S.C. §101(a)(17). 128 H.R. 3370 would also recreate a new LPR visa (EB-7) for nonimmigrant treaty investors holding an E-2 visa who

(1) have maintained such status for at least 10 years, and (2) created at least 5 jobs for at least 10 years. 129 H-1B visas allow for the temporary admission of foreign nationals to work in professional specialty occupations.

For more on this visa category, see CRS Report RL30498, Immigration: Legislative Issues on Nonimmigrant

Professional Specialty (H-1B) Workers.

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Congressional Research Service 25

to the EB-5 category, under H.R. 3370 and H.R. 3987, the entrepreneurs would initially receive

conditional LPR status, and after two years they would need to have created a certain number of

jobs to be converted to full LPR status. Under H.R. 3370, the EB-5 visa would be exempt from

the numerical limits.

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Appendix. Additional EB-5 Visa Data

Table A-1. EB-5 Visas Issued and Adjustments of Status, FY2004-FY2015

(Number of Visas)

Fiscal Year EB-5 Standard EB-5 TEA

Regional

Center

Regional

Center TEA Total EB-5

2004 58 68 0 0 126

2005 132 216 0 1 349

2006 194 512 0 96 802

2007 149 470 1 173 793

2008 149 239 0 1,055 1,443

2009 282 410 7 3,519 4,218

2010 324 239 1 1,321 1,885

2011 230 152 5 3,076 3,463

2012 159 164 5 7,312 7,640

2013 243 227 7 8,087 8,564

2014 161 155 1 10,375 10,692

2015 64 92 11 9,597 9,764

Source: U.S. Department of State, Report of the Visa Office, Table V Immigrant Visas Issued and Adjustments of

Status Subject to Numerical Limitations (by Foreign State of Chargeability), Part 3; multiple years.

Notes: Visas issued represents visa granted to individuals outside of the United States. Adjustments of Status

represents individuals already in the United States who adjusted their status. This table represents the sum of

these two groups. The actual number of available visas for FY2014 was more than 10,000 due to a “roll-down”

of unused visas from other employment-based LPR visa categories. For more information on “roll-downs,” see

CRS Report R42866, Permanent Legal Immigration to the United States: Policy Overview. EB-5 Standard represents

those receiving an EB-5 visa number based in an investment of at least $1,000,000 in a non-TEA area. EB-5 TEA

represents those receiving an EB-5 visa number based on an investment in a targeted employment area (TEA). Regional Center represents those receiving an EB-5 visa classification based on investment in a regional center

in a non-TEA area. Regional Center TEA represents those who received an EB-5 visa number based on

investment in a regional center in a TEA. EB-5 Total represents total visas issued and adjustments of status.

These numbers differ from the number of EB-5 visa admissions (as seen in Table 4) because some individuals

who are issued visas ultimately do not use them to enter the United States.

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Table A-2. Form I-526 and Form I-829 Petition Adjudications, FY1994-FY2015

I-526 Petitions I-829 Petitions

Fiscal Year Received Approved Denied Pending Received Approved Denied Pending

1994 513 407 82 — 24 15 1 —

1995 417 291 109 — 130 111 10 —

1996 801 616 122 — 287 344 53 —

1997 1,496 1,110 141 — 877 718 135 —

1998 1,368 358 290 — 469 104 13 —

1999 650 141 1,558 — 384 86 24 —

2000 384 167 270 — 384 30 33 —

2001 585 44 207 — 143 52 114 —

2002 255 69 217 — 194 198 174 —

2003 255 132 194 — 139 36 66 —

2004 247 131 159 — 123 217 93 —

2005 332 187 156 — 39 206 132 —

2006 486 344 132 — 89 108 108 —

2007 776 485 149 — 194 117 52 —

2008 1,258 644 120 853 391 161 69 454

2009 1,031 1,265 208 514 437 350 57 735

2010 1,953 1,369 165 1,125 768 274 56 1,167

2011 3,805 1,571 372 3,347 2,345 1,067 46 2,395

2012 6,041 3,677 957 5,018 712 736 60 1,013

2013 6,346 3,699 943 7,131 1,217 844 44 1,345

2014 10,923 4,925 1,169 12,453 2,516 1,603 178 2,075

2015 14,373 8,756 1,051 17,367 2,767 1,067 11 4,049

Source: CRS representation of data from the U.S. Department of Homeland Security, U.S. Citizenship and

Immigration Service, Performance Analysis System (PAS), multiple years.

Notes: Some petitions approved or denied may have been received in previous periods. Petitions Received

are new petitions received and entered into a case-tracking system during the reporting period. Petitions

Approved are those approved in that reporting period. Petitions Denied are those denied, terminated, or withdrawn during the reporting period. Petitions Pending are those awaiting a decision at the end of the

reporting period. USCIS did not publicly report petitions pending until FY2008. (—) represents data unavailable.

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Table A-3. EB-5 Issued and Adjustments of Status by Countries, FY2004-FY2015

Top 10 Countries

Country 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

China 16 44 96 110 360 1,979 772 2,408 6,124 6,895 9,128 8,156

Vietnam 0 2 0 0 4 11 15 26 35 46 121 280

Taiwan 61 75 68 80 47 170 94 122 148 137 126 139

South Korea 14 88 376 385 693 903 295 254 447 364 225 116

India 0 5 20 19 19 72 62 37 76 87 96 111

Russia 0 0 0 1 7 60 41 30 42 70 100 88

Britain 8 26 44 43 115 324 135 57 67 84 41 80

Mexico 2 5 11 6 15 33 50 53 81 145 129 77

Venezuela 0 2 4 2 1 30 20 46 109 92 96 72

Iran 2 12 0 9 16 12 55 117 81 86 76 62

Source: U.S. Department of State, Report of the Visa Office, Table V Immigrant Visas Issued and Adjustments of

Status Subject to Numerical Limitations (by Foreign State of Chargeability), Part 3; multiple years.

Notes: Visas issued represents visa granted to individuals outside of the United States. Adjustments of Status

represents individuals already in the United States who adjusted their status. This table represents the sum of

these two groups. Great Britain includes Northern Ireland.

Author Contact Information

Carla N. Argueta

Analyst in Immigration Policy

[email protected], 7-1019

Alison Siskin

Specialist in Immigration Policy

[email protected], 7-0260

This section of the FEDERAL REGISTER contains notices to the public of the proposed issuance of rules and regulations. The purpose of these notices is to give interested persons an opportunity to participate in the rule making prior to the adoption of the final rules.

Proposed Rules Federal Register 3211

Vol. 82, No. 7

Wednesday, January 11, 2017

DEPARTMENT OF HOMELAND SECURITY

8 CFR Parts 204 and 216

[CIS No. 2595–16; DHS Docket No. USCIS– 2016–0008]

RIN 1615–AC11

EB–5 Immigrant Investor Regional Center Program

AGENCY: U.S. Citizenship and Immigration Services, DHS. ACTION: Advance notice of proposed rulemaking.

SUMMARY: The Department of Homeland Security (DHS) is considering making regulatory changes to the EB–5 Immigrant Investor Regional Center Program. Based on decades of experience operating the program, DHS has determined that program changes are needed to better reflect business realities for regional centers and EB–5 immigrant investors, to increase predictability and transparency in the adjudication process for stakeholders, to improve operational efficiency for the agency, and to enhance program integrity. This Advance Notice of Proposed Rulemaking (ANPRM) is organized to include requests for comment immediately following discussions of the relevant issues. DATES: Written comments must be received on or before April 11, 2017. ADDRESSES: You may submit comments, identified by DHS Docket No. USCIS– 2016–0008, by any one of the following methods:

• Federal eRulemaking Portal: http:// www.regulations.gov. Follow the instructions for submitting comments.

• Mail: You may send comments directly to U.S. Citizenship and Immigration Services (USCIS) by mail to Samantha Deshommes, Chief, Regulatory Coordination Division, Office of Policy and Strategy, U.S. Citizenship and Immigration Services, Department of Homeland Security, 20 Massachusetts Ave. NW., Washington, DC 20529. To ensure proper handling,

please reference DHS Docket No. USCIS–2016–0008 in your correspondence. This mailing address may be used for paper or CD–ROM submissions.

• Hand Delivery/Courier: You may submit comments directly to USCIS through hand delivery to Samantha Deshommes, Chief, Regulatory Coordination Division, Office of Policy and Strategy, U.S. Citizenship and Immigration Services, Department of Homeland Security, 20 Massachusetts Ave. NW., Washington, DC 20529; Telephone 202–272–8377. To ensure proper handling, please reference DHS Docket No. USCIS–2016–2008 in your correspondence. FOR FURTHER INFORMATION CONTACT: Lori MacKenzie, Division Chief, Operations Policy and Performance, Immigrant Investor Program Office, U.S. Citizenship and Immigration Services, Department of Homeland Security, 131 M St. NE., 3rd Floor, Washington, DC 20529; Telephone 202–357–9214. SUPPLEMENTARY INFORMATION:

Table of Contents

I. Public Participation II. Background

A. The EB–5 Program B. The Regional Center Program

III. Requests for Information A. Process for Initial Designation and

Exemplar Approval B. Safeguards for Monitoring and Oversight C. Continued Participation D. Termination

List of Acronyms and Abbreviations Used

ANPRM Advance Notice of Proposed Rulemaking

DHS Department of Homeland Security JCE Job-Creating Entity LPR Lawful Permanent Resident NCE New Commercial Enterprise NOID Notice of Intent To Deny NPRM Notice of Proposed Rulemaking RFE Request for Evidence USCIS United States Citizenship and

Immigration Services

I. Public Participation This ANPRM provides an opportunity

for DHS to hear and consider the views of the public on potential changes to improve and modify the EB–5 Regional Center Program. DHS invites comments, data, and information from all interested parties, including regional centers, investors, advocacy groups, nongovernmental organizations,

community-based organizations, and legal representatives who specialize in immigration law, as well as corporate and securities law. DHS welcomes comments on any and all aspects of this ANPRM. Your comments can help shape the outcome of this possible rulemaking.

DHS is issuing this ANPRM to seek comment from all interested stakeholders on several topics, including: (1) The process for initially designating entities as regional centers, (2) a potential requirement for regional centers to utilize an exemplar filing process, (3) ‘‘continued participation’’ requirements for maintaining regional center designation, and (4) the process for terminating regional center designation. While DHS has gathered some information related to these topics, DHS is seeking additional information that can help the Department make operational and security updates to the Regional Center Program while minimizing the impact of such changes on regional center operations and EB–5 investors.

When submitting comments, please indicate the specific section of this document to which each comment applies, indicate the specific question number to which each comment applies, and provide reasons for each suggestion or recommendation. Feedback that simply states that a stakeholder strongly prefers a particular outcome, unaccompanied by careful reasoning and actionable data, is much less useful to DHS.

DHS is particularly interested in data that would inform a quantitative and qualitative assessment of the costs and benefits of the potential changes described in this ANPRM. DHS is also interested in comments from the public that provide more information how to identify the small entity status of EB–5 stakeholder entities, such as regional centers and new commercial enterprises. DHS specifically requests information on revenue or employment data sources on regional centers and new commercial enterprises.

Instructions: All submissions for this advance notice of proposed rulemaking must include the DHS Docket No. USCIS–2016–0008. Please note that DHS has published a notice of proposed rulemaking entitled ‘‘EB–5 Immigrant Investor Program Modernization,’’ DHS Docket No. USCIS–2016–0006, separate

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1 Current law requires that DHS annually set aside 3,000 EB–5 immigrant visas for regional center investors. Section 116 of Public Law 105– 119, 111 Stat. 2440 (Nov. 26, 1997). If this full annual allocation is not used, remaining visas may be allocated to foreign nationals who do not invest in regional centers.

2 USCIS, Immigrant Investor Regional Centers, https://www.uscis.gov/working-united-states/ permanent-workers/employment-based- immigration-fifth-preference-eb-5/immigrant- investor-regional-centers.

from this ANPRM. The NPRM and ANPRM include distinct proposals, so please ensure that you submit your comments to the correct docket.

Comments must be submitted in English, or an English translation must be provided. Written comments may be submitted electronically or by mail, as explained previously in the ADDRESSES section of this ANPRM. To avoid duplication, please use only one of these methods to submit written comments. Regardless of the method used for submitting comments or material, all submissions will be posted, without change, to the Federal eRulemaking Portal at http:// www.regulations.gov, and will include any personal information you provide. Therefore, submitting this information makes it public. You may wish to consider limiting the amount of personal information that you provide in any voluntary public comment submission you make to DHS. DHS may withhold information provided in comments from public viewing that it determines may impact the privacy of an individual or is offensive. For additional information, please read the Privacy Act notice that is available via the link in the footer of http:// www.regulations.gov.

Docket: For access to the docket to read background documents or comments received, go to http:// www.regulations.gov and enter this ANPRM’s docket number in the search bar.

II. Background

A. The EB–5 Program

As part of the Immigration Act of 1990, Public Law 101–649, 104 Stat. 4978, Congress established the EB–5 immigrant visa classification to incentivize employment creation in the United States. Under the EB–5 program, lawful permanent resident (LPR) status is available to foreign nationals who invest at least $1 million in a new commercial enterprise (NCE) that will create at least 10 full-time jobs in the United States. See INA section 203(b)(5), 8 U.S.C. 1153(b)(5). A foreign national may invest $500,000 if the investment is in a ‘‘targeted employment area,’’ defined to include certain rural areas and areas of high unemployment. Id. The INA allots 9,940 immigrant visas each fiscal year for foreign nationals seeking to enter the United States under the EB–5 classification. See INA section 201(d), 8 U.S.C. 1151(d); INA section 203(b)(5), 8 U.S.C. 1153(b)(5). Not less than 3,000 of these visas must be reserved for foreign nationals investing in targeted

employment areas. See INA section 203(b)(5)(B), 8 U.S.C. 1153(b)(5)(B).

B. The Regional Center Program

Enacted in 1992, section 610 of the Departments of Commerce, Justice, State, and State, and Related Agencies Appropriations Act, 1993, Public Law 102–395, 106 Stat. 1828, established a pilot program that requires the allocation of a limited number of EB–5 immigrant visas to individuals who invest in new commercial enterprises through DHS-designated regional centers.1 DHS regulations define a regional center as an economic unit, public or private, that promotes economic growth, regional productivity, job creation, and increased domestic capital investment. See 8 CFR 204.6(e). While all EB–5 petitioners go through the same petition process, those petitioners participating in the Regional Center Program may meet statutory job creation requirements based on economic projections of either direct or indirect job creation, rather than only on jobs directly created by the new commercial enterprise. See 8 CFR 204.6(m)(3). In addition, Congress authorized the Secretary to give priority to EB–5 petitions filed through the Regional Center Program. See section 601(d) of Public Law 102–395, 106 Stat. 1828, as amended by Public Law 112– 176, Sec. 1, 126 Stat. 1326 (Sept. 28, 2012).

Requests for regional center designation must be filed with USCIS on the Application for Regional Center Under the Immigrant Investor Program (Form I–924). See 8 CFR 204.6(m)(3)– (4). Once designated, regional centers must provide USCIS with updated information to demonstrate continued eligibility for the designation by submitting an Annual Certification of Regional Center (Form I–924A) on an annual basis or as otherwise requested by USCIS. See 8 CFR 204.6(m)(6)(i)(B). USCIS may seek to terminate a regional center’s participation in the program if the regional center no longer qualifies for the designation, the regional center fails to submit the required information or pay the associated fee, or USCIS determines that the regional center is no longer promoting economic growth. See 8 CFR 204.6(m)(6)(i). As of November 1,

2016, there were 864 designated regional centers.2

The former Immigration and Naturalization Service last promulgated comprehensive regulations implementing the EB–5 Regional Center Program in 1993. 58 FR 44606. Although Congress has revised the program multiple times since, see Public Law 106–396, 114 Stat. 1637; Public Law 107–273, 116 Stat. 1758 (2002 statutory amendments), the regulations have not been updated to conform to the statutory changes. Neither have the regulations been amended to make improvements to the program based on the Department’s experience implementing the program for the last 25 years.

III. Requests for Information DHS is considering changes to the

Regional Center Program regarding the requirements for initial designation and continued participation, a potential requirement for regional centers to utilize an exemplar process, and the grounds for terminating regional center designation.

A. Process for Initial Designation and Exemplar Approval

DHS is considering ways to improve the process associated with the initial designation of regional centers and the approval of ‘‘exemplar’’ projects. Currently, an entity applying for initial designation as a regional center may choose whether to present a hypothetical project, an actual project, or an exemplar project with their Application For Regional Center Under the Immigrant Investor Program (Form I–924 application). A request for review of a hypothetical project should be supported by general proposals and general predictions showing that the proposed regional center will more likely than not promote economic growth and job creation. Organizational and transactional supporting documents are not required for a hypothetical project. Previous determinations based on hypothetical projects will not receive deference in the adjudication of subsequent filings.

If the entity includes an actual or exemplar project proposal with its Form I–924 application, USCIS determines, as part of the Form I–924 adjudication, whether USCIS will accord deference to its approval of that project when USCIS later reviews investor petitions associated with the same regional center

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3 Deference may also be accorded to the approval of a regional center investor’s Form I–526 or Form I–829 petition in the adjudication of related Form I–526 and Form I–829 petitions based upon an investment in the same investment project with the same project documents. Investors may submit evidence of association with an exemplar project before or while the regional center’s exemplar is pending with USCIS, or after the exemplar is approved.

and based on the same project. A request for review of an actual project requires a comprehensive and credible business plan that, among other things, provides a description of the business and verifiable detail on how jobs will be created. Organizational and transactional supporting documents for the new commercial enterprise are not required for an actual project. Deference generally will be accorded to prior approval of the business plan and economic analysis in subsequent filings related to an approved actual project.

A request for review of an exemplar project is comprised of a sample Form I–526 petition filed with a proposed actual project containing copies of the new commercial enterprise’s organizational and transactional documents. USCIS currently reviews exemplars to determine if they are in compliance with established EB–5 eligibility requirements. If the exemplar project is approved, the determination generally is accorded deference in subsequent related Form I–526 and Form I–829 filings.3

DHS believes that the existing process presents two problems. First, the adjudication of initial applications for regional center designation become much more complex when entities seeking such designation ‘‘bundle’’ their initial applications with actual or exemplar projects. Under the current process, regional centers often include a host of documents related to actual or exemplar projects with their Form I–924 applications, including project proposals and related organization and transactional documents, such as private placement memoranda, subscription agreements, operating and partnership agreements, and other information. USCIS must review all such documents submitted with Form I– 924 applications, even though the information contained in such documents is frequently unrelated to adjudication of the regional center designation (i.e., determining whether to designate the applying entities as regional centers).

Second, by allowing regional centers to choose whether to submit an exemplar project at all, USCIS effectively lets those entities determine the level of workload for the agency related to each EB–5 project. When a

regional center submits an exemplar proposal, USCIS must only assess the project once at an initial stage. Any issues related to project approval are considered and resolved at this initial stage, thus making individual immigrant investor petitions submitted pursuant to that project simpler to adjudicate. In contrast, when a regional center does not use the exemplar process, USCIS is presented with the project proposal multiple times, including with each individual immigrant investor petition submitted pursuant to that project. At this stage, issues related to project approval often require USCIS to issue a Request for Evidence (RFE) or a Notice of Intent to Deny (NOID) to each individual petitioner who is investing in that project. This presents a significant burden on the agency and each individual petitioner, and significantly delays the adjudication of their petitions.

To address these issues, DHS is seeking comment on whether it should bifurcate the Form I–924 application process into two steps, as follows: DHS would first require submission of a more general application for initial designation, and then, subsequent to designation, would require submission of a more specific application for approval of an exemplar project. DHS is considering a different form and fee for each of the two steps. DHS believes these changes would significantly reduce the issuance of RFEs and NOIDs and improve processing times for both applications for regional center designation and immigrant investor petitions. Individual immigrant investors would also bear a lower paperwork burden and would benefit from improved predictability in adjudications. DHS describes each potential change in turn below.

1. General Application for Initial Designation

As noted above, DHS seeks comment on its proposal to require entities seeking regional center designation to submit a more general application for such designation (i.e., without including documentation related to actual or exemplar projects). DHS expects that the information required to be submitted in such an application would generally conform to the requirements contained in the regional center statute, as amended. Under this process, an applicant for regional center designation would only need to include a general proposal based on general predictions concerning the kinds of commercial enterprises that will receive capital from immigrant investors, the jobs that will be created directly or indirectly as a

result of such capital investments, and the other positive effects such capital investments will have on economic growth. Further information about investments and regional center projects would generally not be required or reviewed as part of this initial filing. After USCIS designates the entity as a regional center, the regional center would be able to request review of investment offering documents and project documents, including the types of documents that typically accompany an ‘‘exemplar’’ project filing under current practice.

DHS believes this change would provide several benefits to stakeholders and USCIS. First, DHS believes the change would reduce confusion by simplifying the application for regional center designation and providing increased guidance on the limited types of information expected by the agency for adjudicating such applications. Second, the change would likely improve adjudication times related to such applications, as USCIS adjudicators would no longer need to review documentation that is unrelated to determining whether the applicant has satisfied the basic requirements for initial designation. Third, the change should reduce the frustration currently experienced by entities that meet the evidentiary requirements for initial designation but fail to meet the evidentiary requirements necessary to meet applicable deference guidelines for their projects and investment offerings. DHS understands that the inability of entities to file other requests when seeking initial designation as a regional center could effectively delay the ability of entities to receive decisions on those requests. DHS, however, believes these impacts may be outweighed by the clarity provided to stakeholders and the operational efficiencies gained by the proposal.

2. Mandatory Exemplar Process As noted above, DHS also seeks

comment on its proposal to implement an exemplar filing requirement for all designated regional centers. DHS is considering (1) requiring regional centers to file exemplar project requests, both to support individual EB–5 immigrant petitions and to maintain regional center designation and (2) requiring the approval of such a request before any investor may submit his or her EB–5 immigrant petition associated with a project covered by such request. As envisioned by DHS, USCIS would use the approved exemplar as evidence when adjudicating individual immigrant petitions related to the exemplar project.

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4 See USCIS Policy Manual, 6 USCIS–PM G (Nov. 30, 2016).

Under the exemplar filing requirement, regional centers would be required to submit all documentation necessary to establish that investments in the project would satisfy the eligibility criteria related to investment and job creation, in addition to evidence demonstrating the regional center’s continued compliance with Regional Center Program rules. Currently, exemplars typically include a comprehensive business plan, economic impact analysis, offering documents and organizational documents. Because DHS wants to ensure investments sponsored by the regional center are fully compliant with program requirements to maintain regional center designation, DHS is considering requiring that additional documentation be provided with exemplar filings, including (1) any documents related to the investment offering that have been filed with the U.S. Securities and Exchange Commission; and (2) any investment and offering documents that the regional center intends to provide to investors, as well as any agreements between the investor and the regional center.

DHS also seeks comment on the appropriate validity period for the approval of an exemplar project to ensure the regional center is actively promoting economic growth. DHS is considering limiting each exemplar’s validity period to a specific period of time, e.g., 2 to 3 years after the exemplar’s approval or latest amendment or associated immigrant investor petition. DHS has determined that regional center projects that for 2 to 3 years have not been amended and have not obtained EB–5 investments are generally not active. DHS is seeking public comments on potential exemplar approval validity periods, including the amount of time needed for regional centers to recruit investors, the amount of time needed for investors to file EB– 5 immigrant petitions, and the amount of time needed for projects to satisfy job creation requirements.

Finally, DHS seeks public comment on possible modifications to the existing policy governing the impact of a ‘‘material change’’ on an approved exemplar. Current policy requires DHS to deny petitions where, after the petition has been filed, there are significant changes to the exemplar project, including significant changes to the job-creating entity or entities receiving associated EB–5 investment. Under this policy, DHS has also denied petitions, on a case-by-case basis, where in the time between approval of the exemplar and adjudication of the petition, there were significant changes to project timelines and changes to job

creation methodologies.4 Regional centers and other stakeholders may feel that modifications to this policy may be necessary or wise if DHS were to implement a mandatory exemplar process. Public comment on this issue would help DHS determine whether and how to revise USCIS’s current approach to addressing material changes in the EB–5 context to account for a potential mandatory exemplar process.

DHS is considering these process changes as a means of addressing the increasing processing times associated with EB–5 immigrant petitions. DHS believes that by addressing potential issues with EB–5 projects in the exemplar process, the Department would significantly streamline the adjudication process for immigrant petitions filed by associated investors, including by significantly reducing the need to issue RFEs and NOIDs to those investors. Individual immigrant investors would also bear a lower paperwork burden and would benefit from improved predictability in adjudications. Moreover, an exemplar requirement may also lead to substantial government cost savings by reducing the paperwork, staffing, and physical space required to process EB–5 immigrant petitions. DHS understands that a mandatory exemplar process could negatively impact regional centers and investors by delaying investor filings and, as a practical matter given the prevailing structure of many regional center investment offerings, by delaying funding to regional center projects. DHS believes, however, that the operational efficiencies, reduced processing times, increased stakeholder predictability, and reduced paperwork burden resulting from the exemplar process described above would provide sufficient benefits to overcome these impacts.

3. Specific Questions for Public Input

DHS welcomes public comment on all aspects of the potential changes described above, but would particularly benefit from commenters addressing one or more of the following questions:

1. How can USCIS improve the initial designation process?

2. How would requiring an entity to obtain initial designation as a regional center prior to, and separate from, filing for approval of an exemplar project impact entities seeking regional center designation and investors seeking to associate with designated regional centers?

3. Would a bifurcated initial application process achieve the benefits discussed above—i.e., reduced overall paperwork burdens and improved processing times? Please provide specific data on how such changes would affect time or other burdens in initial documentation preparation.

4. What additional costs or benefits, if any, would occur as a result of adopting the suggested approach?

5. Would adopting the suggested approach 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.

6. Would it benefit potential immigrant investors to know whether or not an entity has been designated as a regional center, if the initial designation decision notice is solely for designation and does not include any decisions on exemplar projects?

7. Would a streamlined exemplar filing process impact any regional center or investor costs?

8. Should exemplar approval be required prior to a regional center- associated investor submitting an EB–5 immigrant petition? Please support the response by providing information regarding the costs and benefits of alternatives (e.g., by permitting concurrent filing with EB–5 immigrant petitions).

9. What additional costs and benefits would regional centers or investors incur as a result of a required exemplar approval prior to submitting EB–5 immigrant petitions?

10. What documentation should be required to accompany an exemplar application?

11. In what circumstances should a regional center be required to file to amend a previously approved exemplar?

12. For what duration should an exemplar approval be valid, and why?

13. Under what circumstances should USCIS seek to terminate a previously approved exemplar?

14. What effect, if any, should termination or expiration of an approved exemplar have on an investor whose immigrant visa petition has not yet been adjudicated?

15. What concerns, if any, would be raised by the elimination of the ‘‘actual’’ project deference process, wherein regional centers seek approval of the business plan and economic impact analysis associated with an investment offering, but not the investment offering documents?

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5 See 8 CFR 103.2(b)(1), 8 CFR 205.2; see also Matter of Izummi, 22 I&N Dec. 169 (Assoc. Comm’r 1998), Matter of Tawfik, 20 I&N Dec. 166 (BIA 1990), Matter of Arias, 19 I&N Dec. 568 (BIA 1988), Matter of Estime, 19 I&N Dec. 450 (BIA 1987).

16. Would some projects be deterred by a requirement to have an approved exemplar? DHS is particularly interested in how the exemplar requirement may affect the number of projects that obtain EB–5 investment and associated parties. Additionally, DHS seeks input on how an exemplar requirement might affect costs related to project timelines, business plan fees, and regional center administrative fees.

17. Would an exemplar requirement impact the financial structure of regional center investments? For example, would such a requirement decrease or increase the EB–5 capital portion of a project’s total finance? Would it impact the overall financing costs and rates of return for investors, regional centers, and developers?

18. How could USCIS define the term ‘‘material change’’ to account for the exemplar process, consistent with applicable regulations and case law, including regulations requiring petitioners to be eligible for the requested benefit at the time of filing and to remain eligible until the benefit is granted? 5 Please discuss how a new material change definition would impact pending EB–5 immigrant petitions.

B. Safeguards for Monitoring and Oversight

DHS has found that current 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. DHS is therefore considering incorporating additional regulatory requirements for initial designation as a regional center. For instance, DHS could require assurances that the regional center commit to an appropriate level of internal monitoring and oversight of investment offerings and business activities associated with the regional center or under its sponsorship. This would include investment offerings and business activities of any associated new commercial enterprises (NCEs) or job- creating entities (JCEs). DHS is seeking to help ensure that the stakeholder granted a regional center designation will perform appropriate oversight and monitoring with respect to capital investments, job creation, and business activities under its auspices such that the pooled capital investments at its

NCEs and JCEs will promote economic growth.

DHS seeks data and information on potential methods for ensuring an appropriate level of monitoring and oversight, including through regional center attestations, the submission of detailed information about the regional center’s oversight efforts of its NCEs and JCEs, and other compliance and enforcement mechanisms. 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.

DHS welcomes public comment on the issues described above, but would particularly benefit from commenters addressing one or more of the following questions:

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?

2. What forms of monitoring and oversight of NCEs, JCEs, and investor funds are regional centers currently utilizing as part of their best practices?

3. Do other entities associated with regional centers engage in monitoring and oversight?

4. What benefits, if any, would additional monitoring and oversight offer to regional centers and to immigrant investors?

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?

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?

7. What investment and other economic impacts could be expected from the establishment of new monitoring and oversight requirements?

8. What data and information should USCIS consider affirmatively disclosing

to increase transparency in the EB–5 program?

9. What additional costs would stakeholders incur in setting up and maintaining a monitoring and oversight process?

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?

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?

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.

C. Continued Participation DHS is considering ways to clarify the

requirements for regional centers to maintain their designation. Under the current regulatory framework, regional centers must provide USCIS with updated information to demonstrate they are continuing to meet program requirements—i.e., promoting economic growth, improved regional productivity, job creation, or increased domestic capital investment in the approved geographic area. Such information must be submitted to USCIS on an annual basis or as otherwise requested by USCIS, generally by filing the Annual Certification of Regional Center (Form I– 924A). See 8 CFR 204.6(m)(6). USCIS will issue a notice of intent to terminate the participation of a regional center in the EB–5 program if a regional center fails to submit the required information or upon a determination that the regional center no longer meets program requirements. Id.

The requirement that regional centers continue to serve the purpose of promoting economic growth is subject to varying interpretations, and regional centers have expressed uncertainty regarding the requirements for continued participation. In addition, DHS has found that a number of regional centers have maintained their designation without actually engaging in work related to the EB–5 program, which has led to growing concerns of potential fraud.

DHS is therefore considering certain changes to the regulations governing

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6 See 81 FR 73292; Form I–924 is available at http://www.uscis.gov/I-924.

continued regional center designations, including changes that would require existing and newly designated regional centers to demonstrate that they continue to meet applicable statutory and regulatory requirements. Specifically, DHS is considering the following requirements for continued participation:

• Requiring evidence of active participation in the regional center program. Such evidence could include having an approved and currently valid exemplar; having pending exemplar applications that were filed within a specific time frame; or the existence of pending Form I–526 or I–829 petitions that are associated with the regional center and that were filed within a specific time frame.

• Requiring periodic demonstrations that the regional center has active monitoring and oversight activities as described in the previous section.

• Requiring prompt notification to DHS of significant changes to the regional center through the timely filing of amendments to the regional center designation. The effect of such a requirement would turn on how DHS interprets the term ‘‘significant’’ in this context. For instance, DHS currently considers the following change to the regional center to be significant: 6

• Changes to the regional center’s name;

• Changes to the regional center’s ownership;

• Changes to the regional center’s organizational structure;

• Changes to the regional center’s administration that affect its oversight and reporting responsibilities;

• Changes to add or remove regional center principals; and/or

• Changes to the geographic scope of the regional center. DHS is considering whether or not other changes may be deemed significant, such as material changes to an approved exemplar filing.

DHS welcomes public comment on all aspects of the potential changes described above, but would particularly benefit from commenters addressing one or more of the following questions:

1. How would regional centers or immigrant investors benefit, if at all, from an explicit requirement that the regional center actively participate in the Regional Center Program?

2. What activities demonstrate active participation in the Regional Center Program? What evidence should regional centers be required to provide to demonstrate active participation?

3. If DHS conditions a finding of active participation on evidence that the regional center is associated with an approved and valid exemplar, a pending exemplar application, or a pending Form I–526 or I–829 petition associated with the regional center, how long should the regional center be able to retain its designation in the absence of such approved or pending exemplar or pending petition? Why is such a timeframe appropriate?

4. How would a continual monitoring and oversight requirement impact currently designated regional centers?

5. How would a monitoring and oversight requirement impact small entities? 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.

6. In what circumstances should a regional center be required to amend a regional center designation during an out-of-cycle filing?

7. What additional changes to the regional center amendment process would assist stakeholders in complying with the process?

8. Should DHS reconsider the current filing structure for notifying USCIS of the suggested changes—i.e., filing an amended Form I–924 petition with a fee? If so, what would be appropriate alternatives, and why?

D. Termination

Currently, USCIS can issue a Notice of Intent to Terminate and subsequently terminate a regional center designation if the regional center fails to submit required information annually, or if USCIS determines that the regional center no longer serves the purpose of promoting economic growth. See 8 CFR 204.6(m)(6). DHS is considering providing additional regulatory guidance to help stakeholders better understand the actions that can lead to termination of a regional center designation. Providing more detail about the types of activity (or inactivity) that may result in termination of the regional center would help regional centers better understand their obligations. This guidance would assist USCIS in more efficiently terminating

non-compliant regional centers and ultimately help strengthen program integrity by providing a consistent framework for adjudication of these decisions. Finally, this guidance would help ensure that regional centers are legitimately pooling capital investment and promoting economic growth consistent with the purpose of the Regional Center Program.

Some of the activities that DHS is considering explicitly listing as activities that would result in termination of the regional center include:

• Failure to meet the continued participation requirements;

• Obtaining designation by fraud or misrepresentation;

• Using unlawfully sourced funds to run regional center operations; or

• Misusing investor funds, including, but not limited to, use in any unlawful activity (e.g., Ponzi schemes).

DHS is seeking stakeholder input on actions that would cause USCIS to initiate termination actions against a regional center. DHS welcomes public comment on all aspects of the termination considerations, but would particularly benefit from commenters addressing one or more of the following questions:

1. What should DHS do to more effectively regulate the regional centers participating in this program?

2. Should the failure to maintain approved exemplar filings result in termination?

3. What activities should be considered a failure to promote economic growth and result in termination of the regional center?

4. What impact, positive or negative, would changes to clarify the termination grounds and process have on regional centers and/or investors? What impact would the changes have on small entities? 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.

5. What other factors impacting the regional center and/or investors should DHS consider when terminating a regional center?

Jeh Charles Johnson, Secretary. [FR Doc. 2017–00441 Filed 1–10–17; 8:45 am]

BILLING CODE 9111–97–P

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1. 1. Superintendent of Documents
   2. 2017-01-11T07:19:44-0500
   3. US GPO, Washington, DC 20401
   4. Superintendent of Documents
   5. GPO attests that this document has not been altered since it was disseminated by GPO

2016 EB-5 Industry Year in Review 2016 was an eventful year for the EB-5 industry, which crucially including two successful short-term reauthorizations of the Program. To put the year in perspective, IIUSA has compiled a "Year in Review" Timeline with important dates, links and happening that shaped industry activities and has led to where we are today. The first quarter of the year included several House and Senate oversight hearings on the EB-5 Program. IIUSA Executive Director Peter D. Joseph served as a witness in the April 13, 2016 Senate Judiciary Committee hearing. Later in April, IIUSA held another successful EB-5 Advocacy Conference in Washington, D.C. which brought over 400 industry stakeholders together for three days of networking, education and advocacy. The summer months were focused on building industry consensus on policy issues and bolstering the industry's negotiation capabilities in support of reauthorization of the Program with enhanced program integrity measures and maintaining effectiveness as an economic development tool. On the investor markets front, IIUSA increased its overseas visibility by participating in international conferences in Geneva, Shanghai, and Hong Kong and also produced its first-ever Investor Markets Report, giving members insight into emerging market trends across the globe. IIUSA helped garner additional public support for the EB-5 Program, including new and renewed resolutions from outside stakeholder groups like the U.S. Conference of Mayors, National Association of Counties, National Conference of State Legislatures and the Association of University Research Parks, to name a few. Positive media from coast to coast also enhanced our message of American job creation and community development. This year was one of great progress, setting the EB-5 industry up for a real reform and long-term reauthorization package in 2017. Without the continued support and engagement by our members, this progress would not be possible. We at IIUSA look forward to continuing to work with you all in the New Year!

Date Event

1/5 FINRA includes general solicitations under Regulation D in the EB-5 Program on its 2016 Regulatory and Examination Priorities Letter.

2/2 Senate Judiciary Committee holds hearing:​ ​The Failures and Future of the EB-5 Regional Center Program: Can it be Fixed?

2/11 House Judiciary Committee holds hearing: ​Is the Investor Visa Program an Underperforming Asset?

2/21 IIUSA Advocacy Coordinator, Nicole Merlene, presents at the National Association of Counties’ Community, Economic and Workforce Development Steering Committee: Economic and Workforce Development Joint Subcommittee meeting​.

4/2 The Congressional Research Service publishes a report:​ EB-5 Immigrant Investor Visa​ , which highlights the Program's history, requirements, petition process, admissibility, economic impact, policy issues, and legislation from the 114th Congress.

4/13 Senate Judiciary Committee holds hearing:​ ​The Distortion of EB-5 Targeted Employment Areas: Time to End the Abuse​ .​ IIUSA Executive Director, Peter D. Joseph, serves as a witness.

4/20-4/22 IIUSA​ ​successfully hosts the​ 9th Annual EB-5 Advocacy Conference and 11th Annual Membership Meeting​ in Washington, DC. The event brought over 400 attendees, 32 sponsors and 28 exhibitors together for three days of networking, education and advocacy.

4/25 USCIS hosts an EB-5 Stakeholder Listening Session to discuss minimum investment amounts, the TEA designation process, the regional center designation process, and indirect job creation methodologies.

5/12 IIUSA published the first-of-its kind ​EB-5 Investor Markets Report​ , a quantitative and qualitative analysis of established and emerging EB-5 investor markets. The report will be updated annually going forward.

6/1-3 IIUSA hosts Leadership Summit in Washington D.C. with the Board, President's Advisory Council, and committee chairs to find consensus on policy issues and strategic planning.

6/8 IIUSA Executive Director, Peter D. Joseph, presents at the Investment Migration Council (IMC) Investment Migration Forum in Geneva, Switzerland.

6/19-6/21 IIUSA staff represents the EB-5 industry at the SelectUSA summit for the third year in a row to promote the EB-5 Program to foreign direct investment professionals from around the globe.

6/27 The U.S. Conference of Mayors passes a ​resolution​ supporting the reauthorization of the EB-5 Regional Center Program for the 5th year in a row.

6/30 Senate Judiciary Committee holds hearing:​ Oversight of the Department of Homeland Security​ where Secretary Jeh Johnson reveals plans to publish regulations for public comment.

7/5 IIUSA joins the US Chamber of Commerce, Real Estate Roundtable, American Immigration Lawyers Association, and the EB-5 Investment Coalition in support of reauthorization of the Program with enhanced program integrity measures and maintaining effectiveness as an economic development tool.​Read More

7/8 The Association of University Research Parks passes a ​resolution ​of support of reauthorization of the EB-5 Regional Center Program.

7/22-25 The National Association of Counties passes a resolution of support of permanent authorization of the EB-5 Regional Center Program.

8/10 The National Conference of State Legislatures (NCSL) passes a ​resolution​ of support of permanent authorization of the EB-5 Regional Center Program.

9/12 Chairman Bob Goodlatte (R-VA-6) introduces ​H.R. 5992 ​American Job Creation and Investment Promotion Reform Act of 2016, co-sponsored by Ranking Member John Conyers (D-MI-13).

9/13 IIUSA Joins EB-5 Industry Stakeholder Groups in Sending ​Letter​ to Congress Regarding H.R. 5992, the American Job Creation and Investment Promotion Reform Act

9/15 IIUSA Executive Director, Peter D. Joseph Publishes Op-Ed in the Huffington Post “EB-5 Reform: Keep The Jobs, Fix The Problems” ​Read More

9/29 A Continuing Resolution (CR) extends the EB-5 Regional Center Program until December 9, 2016.

10/10-11 IIUSA Hosts the ​6th Annual EB-5 Industry Forum​ in Los Angeles, CA. the Forum featured 350 attendees, 38 sponsors and 23 exhibitors and an agenda that included 3 general symposium discussions, breakout sessions covering hot-topics for regional centers and investors, and due diligence and case studies seminars. The conference also featured Guest of Honor speakers from Congress, SEC, USCIS and DOS.

10/21 The Government Accountability Office releases a study examining the use of targeted employment areas in the EB-5 Program.

11/7 IUSA Executive Director, Peter D. Joseph, represents the EB-5 Regional Center industry at the Investment Immigration Summit East Asia series in Hong Kong.

11/17 IIUSA joins the US Chamber of Commerce, Real Estate Roundtable, American Immigration Lawyers Association, and the EB-5 Investment Coalition in support of reauthorization during the lame duck session.​Read More

11/24 IIUSA Executive Director, Peter D. Joseph, present at the American Immigration Lawyers Association (AILA). Mr. Joseph presented on program extension and congressional reform, new agency developments and trends and prospects and implications of the potential sunset of the EB-5 Program.

11/25 The Department of Homeland Security updates the unified regulatory agenda to include EB-5 regulation release at the start of 2017.

12/9 The EB-5 Regional Center Program gets a clean extension by being included in the continuing resolution (CR) that funds the federal government.

BY MICHAEL G. HOMEIER, ESQ. FOUNDING SHAREHOLDER, HOMEIER & LAW, P.C.

S enate Bill 2415, the “EB-5 In- tegrity Act of

2015” (the “Act”), was introduced on December 17, 2015 to revise the EB-5 Regional Center Program (the “Program”), followed two months later by introduction in the House of Representa- tives of the very similar companion bill H.R. 4530. The Act remains a work in progress, pending passage by both houses of Congress and eventual signing by the President. With the anticipated circus of the upcoming elec- toral season, only the most optimistic ob- servers believe passage might occur before a new Congress, and new President, take up a re-introduced Act in early 2017 (after the Program is again extended beyond Sept. 30, 2016).

Nevertheless, the Act as currently intro- duced remains highly significant to EB-5 participants. Improvements and corrections proposed by industry stakeholders and suc- cessfully negotiated into the prior legisla- tion before it was shelved in mid-December 2015 remain in the Act. The Act addresses primarily the securities and corporate as- pects of that prior legislation. Stakeholders can look to the Act to see what additional requirements Congress seems bent on add- ing to the Program. Depending upon how successful are presently-ongoing efforts to improve the Act, clarify its terms and ap- plication, and avoid unintended adverse consequences that could cripple or kill the EB-5 Program, it seems safe to assume the process will end up with Program changes more or less along the lines proposed in the Act presently.

The crosshairs of the Act’s focus are squarely set on regional centers (“RCs”). This no doubt reflects the popular miscon- ception of the Program as uniquely fraught with fraud, criminal activity, and terrorist drug-running investors laundering millions

of ill-gotten dollars through EB-5 invest- ment, with the thinking evidently being that if only RCs could be enlisted (or compelled) to become more actively involved in po- licing the EB-5 process, all those ill effects could be eliminated. So it is entirely unsur- prising that among the primary changes contained in the current Act is the imposi- tion of a certification requirement on RCs, that they attest that they, the projects they sponsor, and the people with whom they work are all in compliance with the secu- rities laws (federal and state). This is not a one-time certification requirement, instead it is imposed on every RC at numerous stag- es of the EB-5 process, including as part of the application for regional center designa- tion, the application for project pre-approv- al, and the filing of regional center annual statements as to bona fides of involved per- sons, as to securities law compliance, as to third-party promoters, and as to “associated new commercial enterprises” (as defined in the Act).

The securities laws impose compliance obligations on “issuers,” the companies that actually “issue” (sell) the investment oppor- tunities that are acknowledged to be securi- ties. Usually in the EB-5 industry, the issu- er is an entity legally separate and distinct from the RC entity, even if they may share common ownership or control. The deter- mining factor is not what an entity calls it- self, instead it is what the entity does. If an RC sells its own ownership interests, it is an issuer in addition to being an RC, and bears the issuer compliance obligations; but if the RC does not sell its own interests, the issuer obligations are not imposed by the securi- ties laws.

This is where the Act breaks new ground: to involve RCs more actively in oversight of the EB-5 industry, the Act adds its compli- ance certification requirement to impose “issuer-like” obligations on what are techni- cally non-issuers—the RC that is not a se- curities seller. This is a “sea-change” in the risks attaching to participation in the Pro- gram: where previously only actual issuers bore securities-level risk, for engaging in

the sale of their securities, now non-issuers (RCs) will carry such risk, even though not actually engaged in selling securities—and not under the securities laws, but under the Act. Although the RCs’ risk may still be less than that borne by an actual issuer, it is far more than the current minimal risk of per- forming only the RC function. To avoid this, many RCs may simply get out of the indus- try altogether.

Returning to the new certification obliga- tions themselves, they require that the certi- fier speaking on behalf of a regional center is to make his certification “to the best of the certifier’s knowledge, after a due diligence investigation.” To understand what this certification requirement means, it must be broken into its constituent parts.

“Certify” is a term of art in the legal pro- fession. It is commonly defined to mean “to authenticate or vouch for a thing in writing; to attest as being true or as represented.” Similarly, “certification” is defined as “the formal assertion in writing of some fact; the act of certifying or state of being certified.” To maximize its authoritative nature, many times the assertion is required to be given under oath: “I declare under penalty of per- jury under the laws of the State of California that the foregoing [statements are] true and correct,” as but one example. The Act itself is silent as to whether its certifications must be given under oath sometimes, always, or nev- er. (Note that the administrative agencies in- volved (including U.S. Citizenship and Im- migration Services and the Department of Homeland Security) have broad rulemaking authority, and could add an oath even if the Act itself as finally adopted was to remain silent on the point.)

The term “certifier” is defined in the Act. As to all Act provisions imposing the certi- fication requirement on RCs, the certifier is someone speaking for (on behalf of ) the RC.

As to the concept of “best knowledge,” that concept is nowhere explained in the Act. So again, to understand what might reasonably be meant by an undefined term, we look elsewhere for guidance by implica-

THE COMING INTEGRITY ACT: WHAT DILIGENCE IS DUE?

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tion. In the legal profession broadly, al- lowing a person’s statement to be limited to only what the person knows about is called a “knowledge qualifier.” Formally, a knowledge qualifier “qualifies” or lim- its a statement so that it only applies to what the speaker knows, and the speaker would only be liable for a false statement if he had actual contrary knowledge about the fact. In the case of the Act’s proposed requirement, if the speaker didn’t know when he gave his certifi- cation that what he said was untrue, he would not have acted wrongly if he turns out to be wrong.

There is a vigorous debate in the legal world disputing the proverbial number of angels dancing on the head of the pin, in this case whether or not the phrase “to the best of one’s knowledge” differs at all from “to one’s knowledge.” Some lawyers assert it is repetitiously redundant and adds nothing, because logically “to the best of X’s knowledge” means exactly the same thing as “to X’s knowledge.” Others argue that add- ing “the best of ” is a significant (and danger- ous) modification, because it could support an assumption that it implies some sort of heightened level of knowledge, perhaps in- volving a duty to investigate. The language of the Act renders this dispute moot for our purposes: the certification is explicitly to be based on “a due diligence investigation.” The knowledge that the certifier will be held to have and upon which he must make his statements, and perhaps give his oath, is that which would be produced by such an inves- tigation.

How much diligence is due under the Act? The Act doesn’t say. No provision specifies what is required as the necessary “due diligence investigation” upon which the certifier’s certification may properly be based. Once again, to understand what the Act requires, in the absence of added expla- nation or court interpretation, we must look outside the Act for guidance.

“Due diligence” as a legal concept is com- monly understood as referring to an inves- tigation into the facts of something. In prac- tice, what diligence is due differs according to the transaction or situation. The type and extent of diligence due in the case of a pur- chase or sale of an existing business involves different considerations and an investiga- tion appropriate for that kind of situation. The same investigation would not be appro-

priate to a case involving the offer of secu- rities financing a real estate development. In legislation focused on the latter kind of transaction, determining what kind of in- quiry is typical in a securities law context should illuminate what Congress intends to require by the Act.

As introduced earlier, in an offering situ- ation, the securities issuer and its principals must comply with the existing legal duty un- der the securities laws to exercise reasonable care to ensure that all material information about the issuer’s investment opportunity is disclosed accurately and completely to pro- spective investors, so that their investment decision can be an informed one. Securities law due diligence is the process of under- taking a reasonable investigation to confirm that the offering statements, documents, financial statements, and all other infor- mation provided to potential investors are complete and omit no material information.

Due diligence of an EB-5 securities trans- action typically involves the issuer engaging qualified professionals from the various ar- eas involved in such transactions, including immigration lawyers, economists, account- ants, engineers, and financial, marketing, and other consultants. It may also involve engaging qualified outside or third-par- ty experts (including U.S. registered bro- ker-dealers, contributing one of their “val- ue-adds” when brought into a project) to double-check information, detect red flags, or objectively evaluate the reasonableness of claims made in the offering documents.

Due diligence is an active, not passive, ac- tivity. It must be customized and tailored to

the facts and circumstances of each par- ticular offering: it is “impossible to lay down a rigid rule suitable for every case defining the extent to which such verifi- cation must go. It is a question of degree, a matter of judgment in each case.” Since the adequacy of due diligence is deter- mined on a case-by-case basis, each due diligence investigation stands or falls on the thoroughness of the investigation, and its appropriateness to that offering. It is an ongoing and dynamic process, and even after the conclusion of an investigation, it might need to be resumed anew if condi- tions change.

Specifically, a securities due diligence investigation typically involves establish- ment of a due diligence team of lawyers, accountants, and other experts to engage

in, among other information-gathering and –confirming actions: interviews of management employees about the business; interviews of suppliers, distributors, cus- tomers, accountants, and counsel; physical inspection of plants, factories, laboratories, and project sites; review of company doc- umentation and financial statements; ex- amination of primary contracts; analysis of ongoing, pending, and threatened litigation; analysis of the business plan and economist reports for consistency and absence of obvi- ous calculation errors; even the examination of trade journals and similar publications about conditions in the issuer’s industry. Pre-formed checklists may be useful in crafting a list of questions and identifying issues, but no list will satisfy the duty of due diligence in every situation, and rigidly fol- lowing a checklist does not automatically establish the adequacy of due diligence.

It might seem self-evident, but bears re- minding: all documents, statements, and other information resulting from the in- vestigation must actually be read. Due dil- igence cannot adequately be performed by simply taking statements and information at face value and relying on their veracity, and then merely reporting that date accu- rately. The reviewing team must be wary of red flags or any information which would or should otherwise strip those reviewers of their confidence in the accuracy of the offer- ing documents.

This due diligence requirement imposed on issuers under the securities laws is obvi-

CONTINUED ON NEXT PAGE >>

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Invest In the USAIIUSA ®

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Featured articles are reprinted from IIUSA’s Regional Center Business Journal trade magazine. Opinions expressed within these articles do not necessarily represent the views of IIUSA and are provided for educational purposes.

ously complicated, involves many moving pieces, and is definitely expensive to con- duct properly. Many issuers involved in the Program conduct limited diligence, because of time and cost, while others completely ignore the requirement altogether. They do so at their peril: ignoring the due diligence obligation carries a significant liability risk, one that is imposed on the principals own- ing and managing the issuer personally, rather than on the entity itself.

In adding “issuer-like” securities compli- ance obligations on RCs, the Act seeks to impose an additional due diligence obliga- tion on RCs, separate and apart from that al- ready existing under the securities laws im- posed on issuers. This revives the question of, how much diligence will be due from an RC under the Act? Which in turn raises a prior question: about what, exactly, is the RC to certify?

As stated above, the various certifications to be required of RCs under the Act apply either to certifying compliance with secu- rities laws broadly, or compliance with re- quirements under the Act specifically (such as the bona fides promoters, and agent re- quirements).

As to the former, it seems logical to guess that the due diligence standard applicable to offerings would also be applicable to RC certifications confirming broad securities law compliance. In turn, this raises the next question: must the RC conduct its own in- dependent full-blown securities law-level due diligence investigation, or may it instead satisfy its due diligence obligation by reli- ance on the due diligence conducted by the issuer, at least in part? Practically, the RC may lack the capacity or be too far removed to conduct as thorough an investigation of a complex offering as required of the issuer, and may lack the resources or knowledge to do so effectively. Thus, it would seem sen- sible to allow RCs to be able to reasonably rely to a significant degree on due diligence conducted by the issuer, so long as the issu- er’s diligence was itself reasonable. Howev- er, if RCs are permitted to do so, it is likely that such reliance can be neither absolute nor passive, there must still be some active review of both the offering itself and the is- suer’s own due diligence efforts conducted by the RC to qualify reliance as reasonable.

Similarly, as to certifying the narrower is- sues of compliance with other requirements

of the Act, such as bona fides (no “bad ac- tors” involved), promoters (brokers and other non-issuer sellers), and agents (prohi- bition of foreign government involvement), if the RC’s inquiry is reasonably crafted and conducted to investigate the issue thor- oughly, that should suffice. There will likely still be interviews or written Q&A, inspec- tions of contracts and records, background checks, and licensing confirmations, but more narrowly drawn to the specific point targeted. Given the more limited scope, cost and capability should be much less prob- lematic.

Presently, alas, all of these potential res- olutions, no matter how sensible, remain mere conjecture. As negotiations continue over the provisions of the Act, stakeholders (especially those hailing from the securities and corporate law areas) should pursue clar- ification of exactly what is Congress’ intent as to the due diligence requirements, and the addition of language requiring that rea- sonable diligence will be all, and everything, that is due under the Act to help confirm the credibility, safeguard the benefits, and en- sure the integrity of the Program.

YOUR ALL-ACCESS PASS TO EVERYTHING EB-5. Enjoy over 75+ Hours of exclusive EB-5 content including webinars and panel presentation recordings by purchasing the All Access Pass (AAP) for 2016. Exclusive to IIUSA Members, AAP holders receive additional insights from EB-5 reports and raw data on EB-5 statistics and trends.

Regional Center “data tracker” reports featuring aggregated reporting on all Regional Centers’ annual I-924A filings and designations/amendments

I-829 request for evidence (RFE)/denial raw data and report (2011-2013)

Notice of Intent to Terminate (NOITs) and final termination notices for terminated Regional Centers

Notices/reports of Securities & Exchange Commission (SEC) enforcement actions against Regional Centers

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REGIONAL CENTER BUSINESS JOURNAL

Issue #1, May 2013 iiusa.org | 98 | iiusa.org Issue #1, May 2013

By Robert C. Divine IIUSA Vice President Baker, Donelson, Bearman, Caldwell & Berkowitz, P.C.

O n February 14, 2013, USCIS dis- seminated publicly a draft policy memo concerning the employ-

ment-based fifth preference (EB-5). This article (1) notes the relatively few note- worthy changes to the prior dissemi- nated draft from November 2011 and (2) identifies some critical topics not ad- dressed by the memo.

The new draft clarifies a disappointingly small number of issues and continues to many important issues of significant uncertainty. Nevertheless, every effort at clarification should be appreciated so I list them here:

1 Adds to intro language to set a bal-anced program tone, including refer- ence to “ensuring program integrity”;

2 Makes many small technical legal and stylistic changes; 3 Opposes a guaranteed right of in-vestor’s eventual ownership in a particular asset (to be subtracted from capital at risk) [note: USCIS has said this orally in stakeholder meetings and in some adjudications, but never in public writing];

4 Clarifies that payment to investor of return on investment (i.e., profit, vs. redemption of capital) during or after conditional residency is acceptable;

5 Recognizes risk spreading by the singel investment enterprise among multiple projects (100% subsidiaries for non-RC sponsored) [ but note USCIS has tended to state that the projects must be identified in the I-526 of each investor relying on them];

6 Offers positive examples of restruc-turing/reorganization for NCEs es- tablished before Nov. 29, 1990 (convert- ing restaurant into nightclub, or adding substantial crop production to an exist- ing livestock farm);

7 Suggests that requested RC areas often are best justified by showing significant contribution to the supply chain and labor pool of proposed pro- jects;

8 Recognizes that investors in trou-bled businesses may combine pre- served and newly created jobs;

9 Recognizes, consistent with Direc-tor Mayorkas’ letter to Senator Le- ahy a few years ago, that investors may count indirect jobs located outside the RC boundaries [but providing no crite- ria about any limitations on this option, if any];

10 Hedges from prior discussion, suggesting a need for causation between injection of EB-5 capital and creation of created jobs claimed, while still recognizing that the NCE or JCE cre- ates the jobs;

11 Sets presumptions for I-829 ad-judication of “reasonable time”: one year generally OK, but beyond that only if “extreme circumstances” such as force majeure;

12 Articulates of deference policy to cover prior same-project adjudi- cations not only I-924 but also prior I- 526s, though no deference if “material change” meaning having a natural ten- dency to influence or predictable ability to affect the decision, and deference to I-526 approval when adjudicating I-829 on same plan;

13 Maintains that material change after filing I-526 up through ad- mission as a conditional resident require new I-526 (and any approved I-526 will be revoked), and cites as “material” (a) cure of a deficiency and (b) change of industry group claimed [note: it is not

clear whether “another industry group” refers to real change of business plan vs. simple change of NAICS codes claimed to meet USCIS ever-changing perspec- tives on this];

14 Recognizes that changes after admission as CPR can be signifi- cant without preventing I-829 approval as long as capital remained at risk (in- cluding being “expeditiously” shifted from one plan to another) in a job cre- ating enterprise within scope of industry approval of the same RC, and as long as there was not a preconceived intent to make the switch;

15 Repeats some policies already articulated in other memos, such as the requirement that jobs last at least two years to be sufficiently “permanent” to be counted (12-11-2009 memo), the requirement at I-526 to show that jobs will be created within 2.5 years of I-526 creation (12-11-2009 memo), that differ- ent investors/projects cannot count the same jobs (most recent TO memo).

The February 2013 draft fails to provide desperately needed guidance and clari- fication on many topics, which I list here from a first reading in hope that readers will share with IIUSA or AILA any other topics they believe need coverage, so that the most effective comments can be provided to USCIS. Such omissions include the following:

1 Whether the new commercial en-terprise (NCE) can have the option to buy back an investor’s interest after the end of the investor’s conditional resi- dence.

2 Whether sale or refinance of the job creating enterprise (JCE), ostensibly because of its success, may occur be- fore the end of conditional residence and generate return of capital to the NCE, even if the NCE does not distribute the capital to investors until after the end of conditional residence.

New Draft EB-5 Policy Memo from USCIS:

what’s really new, and what’s left undone

3 Whether and under what conditions a NCE may identify a business plan to generate jobs in and remove capital from an initial job creating enterprise and move the capital into subsequent enter- prises during the investors’ conditional residence (particularly, must all future such JCEs be fully documented in I-526, must they be principally doing business in RC or TEA, and must they create any new jobs if the original JCE maintains the jobs).

4 Whether a NCE may condition re-lease of funds from escrow until a certain number of investors’ I-526 peti- tions are approved (as opposed to only the approval of the respective investor’s I-526).

5 Whether direct jobs created outside the RC area or TEA may be counted even when most jobs are created within the area (“principally doing business, and creates jobs in”), and whether in- direct jobs arising from such direct jobs can be counted.

6 Whether investment across a port-folio of businesses must provide in I-526 a Matter of Ho compliant business plan for all of the businesses in the port- folio.

7 What constitutes the location of a job for purposes of such determina- tions as whether the enterprise is prin- cipally doing business in a RC or TEA. (Note questions of where the employee is physically and how often, where facili- ties are located, whether the employee reports to a remote location, etc.)

8 Whether a TEA investment may span multiple TEAs in multiple states. 9 Whether an area other than a county or MSA may be considered a TEA even without state designation, such as a single census tract, if publicly available data demonstrates the area has 150% of the national average unemployment.

10 Whether an NCE making loans to nonprofit entities may qualify. 11 Whether the investor may take credit for job creation arising from other funds not only invested in the NCE (the subject of the pre-RC regulation about “multiple investors”) but also from other funds invested in or loaned to the JCE [Note: this seems generally accept- ed in practice, but the memo mentions

only the language of the regulation that preceded RCs].

12. Whether investors in entities other than limited partnerships hav- ing very limited control similar to limited partners may be considered to be suffi- ciently “engaged in management” [Note: current USCIS’ training manuals have clarified this, but the draft memo omits reference].

13. Whether “verifiable detail” and “detailed statement” is consist- ent with the amended law concerning regional centers that requires only “gen- eral proposal” and “general predictions.”

14. Whether regional centers must be involved in developing, promoting/ marketing, managing specific projects to foreign investors, as opposed to merely promoting the economy of the region in- cluding seeking, monitoring, and report- ing to USCIS about qualifying projects whose developers can market and man- age the projects themselves [generally accepted, but the memo omits].

15 Whether a RC amendment MUST (vs. MAY, per I-924 instructions) be filed and approved in order for I-526s to be filed by investors in projects us- ing different job prediction methodology [stated in the negative twice in stake- holder meetings but nothing written down], or under sponsorship of RC that has undergone administrative change (ownership or management) [USCIS has stated in stakeholder meetings and I-924 instructions that only email noti- fication is necessary, but some emails from the Immigrant Investor Program suggest otherwise].

16 Exactly which types of expenses of a project may or may not be paid with EB-5 capital (interest on loan of EB-5 capital, broker dealer fees, pro- ject development fees, etc.)

17 Whether a worker authorized to work in the U.S. under TPS, de- ferred action, pending application for suspension of deportation or cancella- tion of removal, may be considered a qualified employee [Note: what is “an al- ien remaining in the U.S. under suspen- sion of deportation”?]

18 What is the legal basis for USCIS application of a policy requiring that RC-sponsored jobs be created be- fore the end of conditional residence.

19 A host of questions USCIS ad-dressed orally in recent stake- holder meetings but has not written down anywhere, such as to what extent part-time jobs and jobs employed by the JCE outside the U.S. are factored in.

20 Under what circumstances can the jobs of a tenant of the JCE, or jobs arising from visitor spending, be counted. [Note: USCIS has written only indecipherable memos on tenant occu- pancy, and no known decisions in con- tested cases].

21 When direct vs. indirect construc-tion jobs can be counted, as a practical matter, how “hard” and “soft” costs must be analyzed separately.

22. What USCIS means when in re-quests for evidence it requires “verifiable detail” about various items.

23 How NAICS codes are required, and on what legal basis. 24 When capital is considered “in-vested” for purposes of TEA designation, troubled business assess- ments, etc.

25 Whether the point to which an investor must maintain invest- ment and show jobs is the filing of I-829, the expiration of conditional residence (shown on card), or the adjudication of I-829.

26 Whether and under what circum-stances EB-5 capital may be used to repay bridge financing (debt or equity).

27 Whether jobs count if they were created on an indefinite basis dur- ing conditional residence but were lost before I-829 filed.

USCIS simply is not keeping up with the number of questions that reasonably arise for well intentioned developers and investors-- questions that need predict- able answers for prospective planning of major enterprises and projects. The government is not making EB-5 Pro- gram attractive to developers and inves- tors when they can only find out what the rules might be until after they spend hundreds of thousands or even millions of dollars in project development and marketing and the investors file their I-526 petitions. ■

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Issue #1, M ay 2013

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Issue #1, M ay 2013

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20 12

20 13

“IIUSA, as the trade associa

tion and repre sentative of th

e

EB-5 Regiona l Center Prog

ram industry, fully support

s

the Plaintiff’s motion to mo

dify the asset freeze order

and

return investo rs’ funds dire

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demonstrate that the Unite

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as a result. Th e difficult eco

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are protected by our laws.

”

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vestor progra ms around th

e

world operat e without inv

estment or im migration ris

k. In

the EB-5 Pro gram, investo

rs understan d that investm

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risk is require d. The immig

ration benefi ts associated

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the at-risk in vestment mu

st be transpa rent and pred

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cess, and su bstantive com

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“In just the la st month, IIU

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04/10 IIUSA submits le

tter to USC IS Director

on pro-

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04/05 IIUSA Files Amicu

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icago Con -

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supporting SEC’s Mo

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adjudicatio ns guidanc

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03/11 Execu tive Directo

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02/25-28 IIUSA meets with

Shanghai, Beijing, an

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wake

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01/06-07 IIUSA meets wit

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11/12 IIUSA sends lette

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10/16/201 2 EB-5 En

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nimple-

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low proces sing times.

■

O n Wedne

sday 4/1 0/2013,

IIUSA sent a letter to

USCIS

Director A lejandro M

ayor-

kas conce rning the p

rocessing back-

log and its detriment

al impact on the

success o f the EB-5

Program. IIUSA

notified M ayorkas of

its pool o f over

500 WAC #s for ba

cklogged I-526

petitions c ollected fro

m our Reg ional

Center me mbers all o

ver the co untry,

representin g over $25

0 million in pure

EB-5 capi tal formati

on. In this small

sample, pr ocessing t

imes range from

five to over twenty plu

s months. Fur-

ther rese arch usin

g USCIS

Case Sta tus data

brought

us to the exact and

stagger-

ing numb er of pend

ing I-526

petitions to be 5,8

87 (as of

January 2 -13). It

now be-

ing late-A pril, the n

umber is

likely clos er to 7,000

pending

(or $3.5+B illion and

70,000+

U.S. jobs) . This kind

of inefficien -

cy and un predictabil

ity in proc essing

times wou ld lead to s

eriously ne gative

consequen ces in the E

B-5 Progra m at

a time whe n it is peak

ing in econ omic

growth and regional d

evelopmen t na-

tionwide. ■

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June 2014

REGIONALCENTERBUSINESSJOURNAL

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In this issue:

1 2

3

DEPARTMENT OF HOMELAND SECURITY

DEPARTMENT OF STATE

FEDERAL GOVERNMENT FEDERAL GOVERNMENT

DEPARTMENT OF TREASURY DEPARTMENT OF COMMERCE DEPARTMENT OF JUSTICE

SECURITIES & EXCHANGECOMMISSION

ECONOMIC GROWTH(GDP)

U.S. JOBS

TAX REVENUE

PUBLIC SERVICES

CONDITIONAL GREEN CARD

ADJUSTMENT OF STATUS OR CONSULAR PROCESSING

GREEN CARD

INVESTORS

REGIONAL CENTER

ESCROW BANK

BANK

NCE

DEVELOPEREQUITY JCE

STATE GOVERNMENT

TEA

I-829

I-526

COMMUNITY/ECONOMIC DEVELOPMENT

CIVIL SOCIETY

EB 5 Compliance:A Blueprint for Economic Development

Immigration

Financial

March 2015

REGIONALCENTERBUSINESSJOURNAL

EB-5 Program Integrity: Separating Fact

from Fiction Association Building Committee Pushes

Support Through Public Letter to Congress

NASAA Simplifies Blue Sky Form D Filing

Process Rule 2040 and the Lawful Payment of

Foreign Broker FeesRegional Center Terminations

Form I-924A as a National Security and

Fraud Detection ToolSelf-Regulation and IIUSA’s Enforcement

Procedure $826 Million Foreign Direct Investments:

Another Record-Breaking Quarter Regional Center Designation: Refining the

Basic ApprovalSelectUSA Summit Showcases Diversity of

U.S. Investment Opportunities for Foreign

Investors

In this issue:

The above does not represent any standard flow of funds for an EB-5 transaction. It is an example to

demonstrate the layers of compliance needed to make sure #EB5isWorking.

July 2015

REGIONAL CENTER BUSINESS JOURNAL

2015 EB-5 Regio nal Economic De

velopment

Advocacy Confe rence Recap

The Path to Rea uthorization of t

he EB-5

Regional Center Program: A Tim

e for Industry

Confidence, Uni ty & Vigilance

What would the U.S. be like with

out EB-5?

Association Bui lding Committe

e Pushes Full

Speed Ahead to Reauthorization

Effects of the Pr oposed Leahy-G

rassley Bill

Double Jeopard y: The Risks of E

arly EB-5

Repayment

Five Approaches to Successful E

B-5 Banking

EB-5 Program G enerates over $

980 Million

in Foreign Direct Investment in t

he Second

Quarter of FY20 15

Summary of US CIS EB-5 Interac

tive Series

Call: Expenses t hat are Includab

le (or

Excludable) for J ob Creation

Economic Multip liers in the EB-5

Arena

TEAs: Data Chan ges for Census T

racts and the

Increasing Unce rtainties of Eligi

bility

SEC Censures U nregistered EB-5

Broker

Activity

Emerging EB-5 M arkets Spotlight

: India

In this issue:

EB-5:

July 2015 and the Re al Stories of

Regional Developme nt

The Hard Science of

its Economic Impact

SOU TH

AFR ICA

UNI TED

ARA B

EMI RAT

ES

RUS SIA

IND IA

CHI NA

VIET NAM

SOU TH

KOR EA

UNI TED

KIN GDO

M

COL OMB

IA

TAIW AN

NIG ERIA

MEX ICO

CAN ADA

VEN EZU

ELA

BRA ZIL

Octob er 20

15

REGIO NAL

CENT ER

BUSIN ESS

JOUR NAL

With Sho

rt Te rm E

xten sion,

Con gres

s

Reco gnize

s Imp ortan

t Rol e of E

B-5 R egion

al

Cent ers in

Econ omic

Deve lopm

ent w ith E

ye

Towa rd Re

form

“EB- 5 is W

orkin g” Le

tter o f Sup

port Sent

to

Cong ress

with Ove

r 875 Sign

atori es

2015 Q3 M

edia Revie

w (Ju ly-Se

ptem ber)

Look ing B

eyon d Ch

ina: E B-5 E

merg ing

Mark ets

EB-5 Proj

ect T rend

s: Wh at Is

Hot and W

hat

Is No t?

Less ons L

earn ed Fr

om S ecur

ities Litig

ation

in EB -5

Anti- Mon

ey La unde

ring Rule

s and IIUS

A

Mem bers

Eligib ility f

or Fe dera

l Trad ema

rk Re gistr

ation

New USC

IS Da ta Sh

ows Rem

arka ble G

rowt h

for E B-5 P

rogra m as

Sou rce o

f U.S . Job

-

Crea ting

Fore ign D

irect Inve

stme nt

Visa Bulle

tin 2 .0 an

d its Imp

licat ions,

Inclu ding

For E B-5 I

nves tors

IIUSA ’s 20

15 EB -5 In

vesto r Ma

rkets Rep

ort

Eme rging

EB-5 Mar

kets Spot

light on In

dia,

Russ ia an

d Vie tnam

In th is iss

ue:

A Loo k at t

he Tr ends

& Or igins

of

Ame rica's

New Job C

reato rs

EB-5 INVE

STOR MAR

KETS :