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Bank Failures and EB-5: Experts Explain How Regional Centers Can Protect Investor Funds

The Federal takeover of Signature Bank had some investors worried about the security of their EB-5 deposits. At a recent webinar, industry experts discussed EB-5 banking and how to ensure investor funds are safe.

You may have read about the failures of Silvergate and Silicon Valley Bank and the Federal takeover at Signature Bank. While these banks had some things in common, Signature was notable because it was home to a large concentration of the market for EB-5 deposits. What does this mean for EB-5 investor funds, and what should Regional Centers do now?

To help EB-5 stakeholders better understand the situation and what it can teach us, JTC assembled a panel of experts for a virtual event where they broke down what happened and why those who use JTC as an independent escrow agent have fewer worries about the potential for bank failures in the future.

Addressing the concerns of EB-5 investors

Titled, “Fund Security in EB-5: What You Need to Know,” the March 23 webinar allowed EB-5 stakeholders from around the world to hear from a panel of industry experts that included specialists in fund administration, legal, and project fundraising. Attendees were able to ask questions about the state of the US banking industry and how it may affect EB-5 projects and immigrant investors.

As a JTC General Counsel Jill Jones stated, an immediate worry when banks fail is that “the nervousness spreads to other banks, leading customers to pull deposits and creating a ripple effect”. However, as she noted, it can also be a wake-up call. “People are being more cautious and more thoughtful about the way they make deposits,” she said.

According to Abteen Vaziri, Managing Director at Brevet Capital, it’s important for Regional Centers to reevaluate their banking relationships because, for immigrant investors, there’s more than just money at stake. “Some investor’s life is depending on this,” said Vaziri.

Security of funds needs to be a priority to ensure successful immigration applications, and this means finding the right banking partner. In the wake of the issues at Signature Bank, investors may have the urge to put their funds at the largest institution possible to protect themselves from bank failure. But as the attendees stressed, even if a bank seems stable, that doesn’t mean it understands EB-5.

“There’s a real danger that a bank, operating under business as usual, wouldn’t know the nuances of EB-5 and really cause some negative immigration impacts,” said Jones.

So what kinds of banks are right for EB-5? Typically, it’s regional or super-regional sized banks. The largest institutions don’t normally deal with EB-5 because of the complexity of the program.

“EB-5 is not large enough for them to invest the time to come up with a compliance program that would satisfy regulators,” said Jones.

Larger banks “have so many billions of dollars in deposits, they don’t really need to go get additional deposits,” added Vaziri. “So they’re not so much interested in EB-5. They don’t really care about the brain damage of figuring out EB-5 or doing EB-5 deposits.”

“Typically, KYC becomes a big issue,” said Rohit Kapuria, Partner, Saul Ewing LLP. Elements of due diligence like source of funds can be complicated when a project has investors from all over the world. Many countries also have remittance restrictions that increase the number of deposits.

Regional banks are large enough to handle the size and complexity of EB-5 business while being small enough for it to be worth their time to develop specialized policies and procedures. That’s why JTC works with regional banks to help them understand the nuances of the program and develop a compliance regimen necessary for catering to EB-5.

A major theme of the webinar was diversification and the importance of working with more than one bank in order to provide investors with the greatest protection possible.

“While regional-sized banks are a perfect fit for EB-5, it’s really smart to use multiple regional banks, not just one,” said Jones. There are several reasons for this, and the use of multiple banking partners is just one component of JTC’s strategy to offer maximum protection for investor funds.

How JTC keeps EB-5 investor funds secure

One aspect of the US banking system that’s important to understand is that FDIC insurance is provided for deposits up to $250,000 for each depositor in each financial institution. But an EB-5 project that has many investors might have millions of dollars in the bank – is that money left uninsured?

Some EB-5 investors may have been unnecessarily worried because, as Jones noted, there was “a rumor being spread that the FDIC limit of $250,000 applied to the entire account, no matter how many investors had deposited funds.” If structured correctly, this is untrue. If the EB-5 account is set up as a fiduciary account, where the New Commercial Enterprise is accepting deposits for the benefit of the investors, the insurance would pass through to the beneficiaries, or the EB-5 investors. Therefore, each investor receives the full $250,000 FDIC insurance coverage.

But even $250,000 would not be enough if the amount invested is $800,000 or more. To solve this problem, EB-5 investor funds must be held in multiple financial institutions in order to achieve 100% FDIC insurance. By spreading deposits around at multiple banks, no investor deposit will ever exceed $250,000 at any one institution. It’s what Jones called “diversification for the purpose of safety and security,” and Vaziri said it was a big reason why his firm works with JTC.

“We don’t feel comfortable partnering with one single bank,” he said. “No matter how reputable or successful a bank is, you just never know what’s under the hood.”

While FDIC insurance can ensure investor funds won’t be lost in the event of a bank failure, getting that money back may take time, and EB-5 projects and investors don’t have the time to wait. Funds need to be moved to another institution quickly so projects can keep going, which can be hard to accomplish if the failing bank is also your escrow agent.

The importance of an independent escrow agent

Many depositors use a bank as both their depository institution and escrow agent, which leads to funds being tied to a single financial institution. Not only does this create the danger of balances exceeding FDIC insurance limits, but it also reduces your ability to pivot and move the deposits should the bank change its policies, exit the business, or go under.

Instead, JTC offers its clients an independent escrow agent solution to go with our EB-5 fund and escrow administration solutions. JTC is not a bank, but instead works with many banking partners and can consult with clients to choose the banks that are best for their projects.

One of the main benefits of this structure is that escrow deposits can be moved quickly between depository institutions, and without making changes to the escrow agreement or offering documents. As escrow agent, JTC can deposit funds in one or more financial institutions, nationwide and move them as needed so we can take action when the need arises.

Having an independent escrow agent is an important part of EB-5 best practices, but it’s also crucial to choose an escrow agent that is well-versed in the nuances of EB-5 and knows how to navigate the concerns of financial institutions’ risk and compliance departments. Not all banks accept EB-5 funds, and just because a bank does accept EB-5 doesn’t mean they understand it. That’s where experience comes in, something JTC has as both an escrow agent and an EB-5 fund administrator.

The EB-5 Reform and Integrity Act of 2022 contains new rules for both escrow and fund administration, including the use of separate insured accounts, the need for co-signatory by the fund administrator on disbursements, and ensuring that the movement of funds is in accordance with the offering documents. JTC offers comprehensive solutions designed to create a culture of security, transparency, and compliance throughout the EB-5 process while also offering peace of mind to investors through purpose-built technology and online access to account and project information.

With JTC as your escrow and fund administrator as well as escrow agent, you can work with your preferred banking partners and move funds as needed while also allowing investors to see the status of their investments through our 24/7 online portal. As the panelists echoed, this combination of security, transparency, and expertise allows JTC’s clients to quickly move past hiccups like what’s happened in the banking industry.

“JTC is a legend in this business,” said Kapuria. “You guys are the gold standard in many ways.”

“I think this goes to show how your platform works so much better, where you’re the escrow administrator, and you have several different banks in your purview so investors don’t have to put all their eggs in one basket,” said Vaziri.

While there could be issues in the banking sector in the future, JTC’s clients are prepared and protected so they can continue funding projects. As Vaziri said, “Today is just as good as any time to invest in EB-5,” but you need the right partner.

“JTC has the tools and ability to provide guidance,” said Kapuria, “which a lot of folks don’t.”

More from the webinar

The full webinar, which included a range of topics as well as Q&A from the audience, hit on many aspects of banking for EB-5 and what happens when banks fail. Among the other topics discussed where how pre-approval forms may need to be updated if funds are moved to a different bank and what to do if a failing bank was your escrow agent, including if you’re mid-capital raise and need to continue raising funds.

>The webinar recording is available online so you can get the information you need. And if you have further questions about escrow and banking for EB-5, get in touch with a JTC representative.

Watch the “Fund Security in EB-5: What You Need to Know,” webinar replay today!

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