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Why 'Account Transparency' is Needed

January 03, 2017

Panelists: Reid Thomas, Dan Smith, Robert Cornish
Moderator: Kurt Reuss

Reid Thomas
NES Financial

Dan Smith
Trident Fund Services

Robert Cornish
Phillips Lytle

Kurt Reuss
Reuss Global  Capital Group

Kurt: In EB-5 from January 2013 to 2015, the SEC received over 100 tips, complaints and referrals related to possible securities fraud violations. As of May 2015, the SEC and other enforcement agencies had 35 open investigations primarily involving securities fraud in EB-5. In 2016, the SEC Office of Compliance Examination listed EB-5 as one of its annual Examination Priorities.

There's obviously a need for more control and transprarency of EB-5 investor funds and the Account Transparency Requirement (Section P of HR 5992) is an attempt to address that need.

Account Transparency rules come into effect as soon as the EB-5 investor’s money gets deposited into either an escrow account or into the NCE's account, and its protections continue until the funds are released into the JCE's account or into the project.

Some of the items addressed in the bill include: eliminating co-mingling of investor funds; preventing the premature release of investor funds from escrow; ensuring that investor fund transfers are first approved by an independent signatory.

And if the NCE is affiliated with either the JCE or the regional center then the signatory's role continues until all funds have been deployed into the project.

Reid: It's important to look at what's driving this to understand the intended scope of the provision. HR 5992 is the most recent in a series of draft legislation proposals that we've been seeing for over a year now, with the primary focus of protecting all stakeholders’ rights. Earlier this year we had the Jay Peak fraud incident, and I think the scope of this bill has been partly in response to that incident. Legislators looked at the integrity measures in place and asked, “Where did our measures fail in preventing that fraud from occurring, and what measures would have prevented it?”

After this occurrence, we did a study on the events and abuses that had become well known, starting with the Chicago Convention Center and concluding with Jay Peak. What we found was that, for the most part, the issues are arising after money has left escrow and before it moves into the JCE.

The Account Transparency requirement is directly targeted at interfering with fraud during this stage.

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