What you need to know about EB-5 in South Dakota
"EB-5" is a complex affair at the intersection of government, business, crime and politics in South Dakota. A former state cabinet secretary died by suicide while awaiting indictment last year, it's spawned numerous bankruptcies, lawsuits, audits and investigations, and it's currently dragging down Republican nominee Mike Rounds' bid for the U.S. Senate.
Here's a primer on what you need to know to understand EB-5:
The very basics
It's a federal program where immigrants can earn green cards for investing $500,000 in U.S. projects. As governor of South Dakota, Mike Rounds embraced it as an economic tool, but it's come under increased criticism as a result of high-profile bankruptcies and investigations.
The people
RICHARD BENDA (profile): South Dakota Secretary of Tourism & State Development, 2006-2010. Promoted EB-5 visa investments, including through overseas travel. Signed deal to privatize the formerly state-run EB-5 program, then went to work for the private EB-5 manager after leaving office. Died from a gunshot wound in late October 2013 while facing a criminal indictment for allegedly misdirecting a state grant to pay his own salary.
JOOP BOLLEN (profile): Led South Dakota's EB-5 program as director of the South Dakota International Business Institute, a state agency, until 2009, then resigned and signed a contract to run EB-5 for the state through his private company, SDRC Inc. In January 2008, signed a contract with SDRC Inc. to help run EB-5 in South Dakota without disclosing he had founded the company days earlier.
PAT COSTELLO: Succeeded Benda as economic development secretary. Less interested in EB-5 than Benda and hasn't promoted it. Imposed minor reforms on SDRC, then eventually canceled its EB-5 contract because of the ongoing investigation.
MIKE ROUNDS: Governor from 2003 to 2010. Supported EB-5 as a tool to attract investment to South Dakota. Promoted Northern Beef Packers plant as part of his Certified South Dakota Beef initiative. Now running for U.S. Senate as the Republican nominee.
DENNIS DAUGAARD: Current governor of South Dakota, 2011-present. Requested criminal investigation of EB-5 after a federal grand jury subpoenaed state records concerning the program.
The terms
EB-5: Federal visa program where wealthy foreigners can get green cards by investing $500,000 in job-creating American businesses.
NORTHERN BEEF PACKERS: A bankrupt $115 million beef plant near Aberdeen that received most of its funding from EB-5 investors. Later bought at auction by a San Francisco investment firm, which is attempting to reopen the plant.
EPOCH STAR: A company created for the sole purpose of loaning $30 million to Northern Beef, a short-term, 29 percent interest rate loan. Incorporated in the British Virgin Islands and controlled by a Cayman Islands company. Its funding source was never disclosed, but in one document was described as the capital arm of a "major Asian bank." Eventually, Northern Beef used lower-interest EB-5 money to buy out the Epoch Star loan by purchasing the company.
REGIONAL CENTER: An entity, created by the federal government's U.S. Citizenship and Immigration Services, to manage EB-5 investments in a region. They can be run by governments, private companies, or private companies on behalf of governments.
SOUTH DAKOTA INTERNATIONAL BUSINESS INSTITUTE: The state agency originally granted South Dakota's regional center in 2004, until the regional center was privatized in December 2009. An arm of Northern State University, SDIBI received contracts from the Governor's Office of Economic Development to promote EB-5 and other programs in S.D.
SDRC INC.: A private company, founded by Joop Bollen, that signed a deal in 2008 to help run South Dakota's EB-5 program. Bollen signed the contract as a state official without disclosing that he also owned the company. A December 2009 contract gave SDRC Inc. full control of the EB-5 program. The contract was canceled for cause in September 2013, nine months ahead of schedule.
A history
EB-5 lets foreigners obtain U.S. green cards by investing $500,000 in American business projects that create jobs. It's been around for decades, though a change about five years ago let EB-5 investors make loans to projects instead of direct investments.
Under the loan model, for example, a project might seek $25 million in funding. Fifty foreigners would be recruited to invest $500,000 each in a specially created company, which would in turn loan $25 million at a low interest rate to the project. The project would pay off that loan over a period of time, such as five years.
From 2004 to 2009, South Dakota ran its EB-5 program out of a state agency, the South Dakota International Business Institute, based out of Northern State University and funded by the Governor's Office of Economic Development. That agency's director was Joop Bollen, and by the end, he was spending most or all of his time recruiting EB-5 investors.
For the final two years, a private company, SDRC Inc., assisted the International Business Institute with running the EB-5 program. Bollen signed the contract with SDRC Inc. without disclosing that he himself had founded the company a few days before. State officials say Bollen was not given permission to enter into a contract with SDRC Inc.
In December 2009, then-economic development secretary Richard Benda signed a contract with SDRC to take over the state's EB-5 program entirely. That same day, Bollen resigned his state position. The switch was proposed by Benda after the NSU president suggested EB-5 wasn't a good fit at the university.
Both before and after South Dakota's EB-5 program was privatized, Benda aggressively promoted EB-5 investments in the U.S., including by traveling overseas to China to speak at seminars devoted to finding investors for a high-profile beef plant in Aberdeen.
After leaving office at the end of 2010, Benda went to work for Bollen's SDRC as a loan monitor for SDRC's two loans to Northern Beef. He worked in this position for several years before moving on to other private sector jobs.
A draft indictment prepared by Attorney General Marty Jackley accused Benda of diverting a $550,000 state grant from Northern Beef to pay his own loan monitoring fees. Benda died in a 2013 suicide while under investigation and was never charged. At the time of his death, he was maintaining his innocence.
Gov. Dennis Daugaard has hired a private attorney to explore whether the state can recover the $550,000 Benda is accused of stealing.
The Aberdeen beef plant, Northern Beef Packers, was the highest-profile EB-5 project in South Dakota. It got close to $100 million of its $115 million total cost from EB-5 investments, but still went bankrupt in 2013, a year after it opened.
SDRC was able to receive a potentially huge payday for recruiting and organizing EB-5 investments. On just one fund, which loaned $35 million to Northern Beef, each of 70 investors paid $10,000 per year on top of a one-time $30,000 "expense" fee — millions of dollars for just one project. This is actually standard — or even low — for other privately run EB-5 projects around the country, experts say.
EB-5 wasn't the only source of funds for Northern Beef. The company also took out a mysterious $30 million high-interest loan from a Virgin Islands company with unknown investors, created for the sole purpose of loaning money to Northern Beef. Later, EB-5 money was used to remove the loan by buying the company, Epoch Star.
To get that loan, Northern Beef sought and received a declaration from the state Banking Commission that Epoch Star was "not in the business of lending money," thus exempting it from money-lending regulations and bank taxes.
One of the facts on which the commission based its ruling was Epoch Star's assertion that none of its founders were a bank. But in a separate document the commission didn't see, Chinese EB-5 investors were told the loan came from the "capital arm subsidiary" of a "major Asian bank."
In early 2013, the Governor's Office of Economic Development was served with a subpoena by federal law enforcement officials investigating its EB-5 program. Gov. Dennis Daugaard asked Jackley to investigate. Six months later, in September, Daugaard's administration canceled its contract with SDRC to run the EB-5 program "for cause, effective immediately."
Audits commissioned by Daugaard revealed some sloppy bookkeeping at Benda's GOED. They also discovered Benda had lined up a job with SDRC while still a Cabinet secretary but didn't disclose this job even as he approved new grants for the SDRC-funded Northern Beef Plant.
EB-5 has since become a political issue, with Democrats attacking both Daugaard and former Gov. Mike Rounds for their handling of the program.
Read more:
- "Questions go beyond beef plant"
- "Loan relied on secret, offshore investors"
- "Investment recruiter took cut of EB-5 money"
- "Recruiter didn't seek state approval"
- "South Dakota's visa investment program not unusual"
- "Vermont says EB-5 can work in state hands"
- "Beyond beef plant, results mixed in South Dakota"
- "Benda was 'in a hurry... but had nowhere to go"
- "Benda arrest was imminent when he died"
- "EB-5 secrets lie with silent Joop Bollen"
- "State EB-5 director signed deal with own company"
- "Rounds: Regents oversaw EB-5"