A federal lawsuit in Iowa alleges that two men orchestrated a scheme to underpay workers who came into the country on H-1B visas
Urbandale is a thriving residential suburb of Iowa's capital city, Des Moines. Go to its Web site and you'll see a picture of a charming gazebo and the claim that Urbandale is "a growing city that has held onto its small-town charm."
Part of that growth includes the U.S. headquarters of Pacific West, an IT consulting firm that employs both U.S. and H-1B visa workers from overseas. It is there, in a nondescript six-story office building at 2600 Aurora Ave., that dozens of skilled workers, mostly from India, were supposed to be working in 2004 and 2005.
But according to a federal lawsuit filed on Dec. 16 in the U.S. District Court for the Southern District of Iowa, some of those who came to work for Pacific West didn't get to enjoy the town's charms, or the computer programing or engineering jobs they expected to fill. A federal grand jury charges that in fact many of the workers wound up on the East and West coasts, working for companies that had nothing to do with technology.
Coordinated Federal Investigation
Two Pacific West executives, Vishnu Reddy and Chockalingam Palaniappan—also referred to as "Chuck Pal" in court documents—are charged with filing false documents with the U.S. Citizenship and Immigration Services and U.S. Labor Dept. to take advantage of the lower wage requirements in Iowa.
Critics of the worker-visa system have long claimed it is gamed by companies to replace skilled U.S. workers with lower-paid foreigners. But the allegations against executives at Pacific West—as well as those at four other companies under investigation—reveal the mechanics of a specific scheme that allegedly allowed employers to fraudulently cheat H-1B visa workers of their proper wage rates. Lawsuits have been brought against individual companies for H-1B visa fraud in the past, but allegations against Pacific West and other Iowa-based companies point to what may have become a common scheme to underpay H-1B visa workers by misrepresenting their geographic work location.
Details of this alleged fraud emerged as the U.S. Attorney for the Southern District of Iowa announced the arrest of 13 people in six states connected with five IT services companies, and the indictment of one company, Vision Systems Group, following a coordinated federal investigation. Vision Systems Group was ordered to forfeit $7.4 million that it allegedly obtained through fraudulent means. Three other technology companies—Worldwide Software Services and Sana Systems, both based in Clinton, Iowa; and Venurisoft of Clive, Iowa—remain under investigation for document fraud, prosecutors said. Vision Systems Group, Worldwide Software Services, and Sana Systems did not return phone calls and e-mail messages seeking comment.
"No Conspiracy to Defraud"
In the case of Pacific West, Reddy and Pal are charged with one count of conspiracy to defraud the U.S. and 11 counts of mail fraud. The defendants appeared in court on Mar. 6 for an initial hearing. Soby Mathews, an attorney for Pacific West, says he's confident that Reddy, Pal, and the company will be cleared of any wrongdoing. "We have complied with the spirit of the law and paid employees appropriate wages," says Mathews. "There may have been some technical errors, but we believe there was no conspiracy to defraud the government."
The H-1B visa program was set up in 1990 to help companies bring highly skilled workers into the U.S. to fill jobs that they were having a hard time filling with American workers. Critics say the program, which allows 85,000 skilled workers from overseas to enter the U.S. each year, is fraught with examples of deceptive practices that result in visa workers getting paid less than what they should.
Others say that the program systematically lets companies bring in lower-cost foreign labor when qualified U.S. workers are available. The net effect is that tech wages in the U.S. are dampened, they say, and job opportunities reduced for Americans.
Debate Is Sure to Continue
Supporters of the program, including tech giants like Microsoft (MSFT) and Oracle (ORCL), say fraud represents a small fraction of the program. Overall, they claim, it helps the U.S. economy by augmenting its skilled workforce. The debate is sure to continue as senators Charles Grassley (R-Iowa) and Richard Durbin (D-Ill.) prepare to introduce a bill by the beginning of April that would tighten restrictions on and increase oversight of the program. Already, language written into the recent federal stimulus legislation requires any company receiving U.S. TARP aid to jump through extra hoops before hiring H-1B workers. Meanwhile, federal U.S. agencies are working to detect and eliminate fraud.
The controversy over immigrant tech workers is heightened now that the economy is shrinking. Evidence shows that skilled workers are already leaving the U.S. to pursue better opportunities in their home countries. If a combination of fewer jobs and growing nationalism reduces the attraction of Silicon Valley and other tech centers for foreign workers, it could stifle innovation in the U.S.
Immigrants are critical to the country's long-term economic health, says Vivek Wadhwa, senior research associate at the Labor and Worklife Program at Harvard Law School. He says immigrants have started 52% of Silicon Valley's technology companies and contributed to more than 25% of global patents from the U.S., and generally make a major contribution to the U.S. economy. That is changing, though, as many skilled migrants are finding jobs higher on the career ladder in their home countries. "Right now they are taking their skills and ideas back to their home countries and are unlikely to return," states Wadhwa in a recent column on BusinessWeek.com. The policy question that arises is how to reduce fraud in the H-1B visa system while encouraging innovators and potential job creators to stay in the U.S.
A Wage Rate Arbitrage
To read the allegations in the federal lawsuit, it sounds as though some companies used the H-1B program as a way to arbitrage low-wage rates in parts of the U.S., such as the Midwest, against labor shortages in higher-pay states. Matthew Whitaker, the U.S. Attorney for the Southern District of Iowa, who spearheaded the investigation, says Operation Pacific Vision began 18 months ago when his office received tips that companies in Iowa were inflating the numbers of workers employed at local offices in their state and U.S. filings.
Whitaker says that in investigating the five companies involved, his office, along with federal agencies, found that supposedly high-skilled tech workers bound for Iowa on H-1B visa often wound up working in another state, sometimes for a third-party company and other times for an entirely different type of business such as a fast-food restaurant or a gas station.
Whitaker says the prevailing wage in Iowa could give employers a "30%-40% discount" on worker pay. Whitaker says the investigation into all five companies is ongoing. "We are continually working to clean up this very serious problem," he says.
Still Posting Ads
According to court documents, Reddy and Pal falsely stated in federal and state visa petitions that H-1B visa workers whom they sponsored would be stationed at Urbandale from October 2004 through December 2008. But Pacific West allegedly did not have positions open to employ the workers. Then, while Pacific West and its "agents and employees" allegedly sent quarterly reports to the Iowa Workforce Development office and other state workforce agencies from January 2005 to October 2008, between 51 and 59 workers per quarter were actually working outside the state for different companies, according to the court filing.
Today, Pacific West continues to post job advertisements online. A month ago, for example, it posted a listing on itzbig.com for a senior software engineer, a senior programmer analyst, and two senior systems engineers to be based in Urbandale.
Mathews, the attorney for Pacific West, contends that court proceedings will show that the company is not guilty of any wrongdoing. He says Pacific West is "not a body shop" but rather a high-level IT consulting firm. "They're real innovators," says Mathews. "They're producing a ton of jobs here in the U.S. and generating business opportunities for the advancement of technology."