Last Wednesday Shanghai Police arrested Mei “Linda” He, the CEO of Wailian Group along with at least four other colleagues for “illegal foreign exchange trading.” The arrest was reported by China Daily on Friday August 11th, but not much else has been reported in the western media. Mei “Linda” He is the principal of the Wailian Group, who is estimated to have represented over 5,000 EB-5 investors who applied for an EB-5 residency through mainland China since the 2007 Financial Crisis. In the EB-5 industry it has been widely known that Wailian was the main migration agent that placed the roughly $3 billion in EB-5 financing responsible for Related Companies’ development of Hudson Yards, in Manhattan, New York. Hudson Yards currently is home to some of the most expensive office rents in Manhattan and in the United States.
The EB-5 program was created under the Immigration Act of 1990, as a way for foreign investors to sponsor their own immigration, as opposed to a family member or an employer. In exchange for a $500,000 investment in the US economy, as long as the investment created 10 jobs for legal US residents, the applicant, the spouse, and any unmarried children under the age of 21 could all qualify for a green card and later have a path to US citizenship. Congress allocated 10,000 visas annually and in 1993 the Regional Center Pilot Program was created to allow developers or other project sponsors to pool capital together to do larger projects. Since inception, the EB-5 program has been responsible for over $50 billion in foreign direct investments in the US, and more importantly more than that in US taxes. EB-5 investors, and green card holders generally, have to pay US taxes on their worldwide income.
Since the 2007 Financial Crisis, when bank lending and project financing dried up, the EB-5 program became a very popular method for project developers to finance real estate projects. In that same time frame the People’s Republic of China became by far the biggest contributor of investments in the EB-5 program, attributing to almost 80-90% of EB-5 investments in the United States between 2010 and 2017. Most of these investments were syndicated by migration agencies, similar to Wailian. Migration agencies in China are overseen by Exit & Entry administrations in different provinces. During the height of EB-5 flows to the US, there were over 1,000 migration agents in China. Typically, a migration agent had to pay the equivalent of $300,000 us dollar for the right to operate each branch of their migration agency, in the form of bond paid out to the province’s exit and entry administration. A large migration agency like Wailian operated more than 30-40 branches in various cities throughout China.
One of the challenges that migration agencies faced was transferring funds outside of China, given the currency restrictions which prohibited more than $50,000 US Dollars allowed to be taken outside of China in a any given calendar year. Investors had several ingenious ways to get their funds out of China. Some of these included getting a loan in Hong Kong, where there were no currency controls, against property in Mainland China. Another route was a concept called smurfing, which required an investor to utilize 10 or 11 family members’ [ID cards or Passports] to transfer $50,000 each out of the country. This process initially required the national ID card number for currency transfer allocation, but later required the family member to physically transfer the funds (as the Chinese government became more and more strict). Other ways required the use of third-party currency traders or forex traders to receive the funds outside of China for their EB-5 investors. Some migration agencies outsourced the currency transfers while others did the work in-house. China has been cracking down on currency flight for many years, but the arrest of one of the highest profile migration agency’s principals has definitely sent a loud and clear message to Chinse citizens, that the Chinese Communist Party is taking a hardline approach to both currency flight out of China, and immigration outside of China.
It was widely reported that on Baidu, China’s version of Google, immigration outside of China was searched over 100 million times. The draconian Covid lockdowns in various provinces, and other recent world events that have put China (the world’s second largest economy) at odds with the United States (the first) have played a major role in Chinese citizens looking to immigrate outside of China, or at the very least have a second passport to have that optionality.
Ms. Mei “Linda” He and her colleagues who were arrested and charged in Shanghai have been accused of transferring 100 million RMB outside of China, which carries a penalty of 500 million RMB (or 5x). The Wailian Group has been responsible for investments many multiples of that, through the EB-5 program. It is unclear if this is an isolated incident or if other migration agencies will also be targeted. It is also unclear if this charge has to do with funds the Wailian Group transferred themselves or through a third-party agency. One thing that has become crystal clear however is that the Chinese Communist Party will not tolerate currency flight and are going to make examples of those that contribute to it. They also cannot be happy that 100 million or more of their population who are allegedly interested in immigrating out of China. The currency controls and these crackdowns are to combat outbound immigration and currency flight.
