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Potential FCPA landmines selling EB-5 deals abroad through intermediaries

The Securities and Exchange Commission (“the Commission” or “SEC) recently published an overview of Foreign Corrupt Practices Act (“FCPA) enforcement actions. Since 2010, the SEC has had a specialized unit devoted to enforcement of the FCPA.

How does this relate to EB-5 practice? What do regional centers and EB-5 issuers need to know about the FCPA?

The FCPA may be implicated when a U.S. issuer or regional center sells an EB-5 investment abroad. There are several potential FCPA landmines that U.S. issuers and regional centers should recognize in advance of transacting business with foreign intermediaries. Here are a few illustrative FCPA red flags:

  • Payment of finder’s fees to any intermediary agency abroad that is owned or controlled by a government,
  • Payment to government officials to win business, or to overcome legal obstacles to market or sell a deal,
  • Payment of travel or entertainment expenses to government officials as part of an EB-5 marketing initiative, and
  • Quid pro quo arrangements with government officials or employees.

Screening intermediaries in the Middle East, Southeast Asia, China and other regions is an important starting point for commencing any business relationship. One component of this screening is getting the record straight at the outset about any relationship that the intermediary firm or broker has with foreign governments. When it comes to screening business partners abroad, do more than have a checklist. Engage local counsel where necessary to ensure that you have correct facts.

Fence the barnyard in before you have the SEC with an FCPA investigation at the gate

It's a fine time to get your regional center or EB-5 offering compliant. Literally. As recent history tells us, the impression that the SEC will only prosecute large cases is not true. Penalties for violations of the FCPA are strict, and the federal government has shown its willingness to impose them. Through the criminal process, corporations and other business entities are subject to fines of up to $2 million and their directors, officers, stockholders, employees and agents are subject to fines of up to $100,000 and imprisonment for up to five years. These fines are imposed per occurrence, and individuals may not be indemnified by their employer in order to pay them.

The attorney general or the SEC may also bring a civil action for violation of the FCPA resulting in fines of up to $10,000 per violation against any company, its directors, officers, employees, agents and stockholders. In addition, the SEC may seek to impose fines not to exceed (1) the gross amount of the pecuniary gain to the defendant as a result of the violation, or (2) an amount of up to $100,000 for individuals and $500,000 for business entities.

Our EB-5/FCPA take-away

Companies found to have violated the FCPA are bound to receive negative publicity. News reports about FCPA-related investigations are embarrassing and may negatively impact a company's ability to do business in the United States and abroad. Goodwill is one of the most valuable assets a company can have, and FCPA violations can seriously damage a regional center or project sponsor's reputation and brand image. This is particularly true for EB-5 regional centers who are trying to attract projects or investors. An FCPA prosecution can also serve as a serious legal impediment to future private placements.

If you are an EB-5 regional center or issuer, one initial step you can take to avoid FCPA landmines is working with counsel to develop suitable compliance guidelines. This is important because even an unwitting violation of the FCPA can lead to penalties and loss of reputation that can seriously damage a company. And most importantly, know your broker or EB-5 intermediary.

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Douglas Hauer is a Mintz attorney and noted authority on the EB-5 investor visa program, which gives developers a path for securing capital for real estate, hospitality, and infrastructure projects. He's an essential resource for companies looking for financing from offshore sources.