by Reza Rahbaran
Lured by the hallmarks of freedom and opportunity, immigrant investors have continued to flock to the United States. Despite economic recession and political stagnation, America is still viewed as the safest place to park your money. The year 2012 produced unprecedented growth in both the number of EB-5 investors and new regional center petitions. All the signs indicate the program will be over-subscribed in 2013, but at the same time there is increased pressure and competition for foreign investors.
New EB-5 markets are essential for the longevity and health of the EB-5 program. Greater diversification of investors allows regional centers to hedge against the inherent risks with relying on a single market for their investor pool. China, still by far the largest EB-5 market, is saturated, mature and dominated by agents. With the spike in newly formed regional centers, increased competition is steadily raising the cost of acquisition of investors to undesirable levels.
For many years, Iran has held the podium position for EB-5 investors from the Middle East, but that may be about to change. In 2009, protests in Iran sparked a movement that resulted in a complete overhaul of the political landscape in the Arab world. The “green revolution” proved unsuccessful in Iran, but the domino was flicked. Like a wild fire, the “Arab Spring” that followed removed the ubiquitous portraits of strongmen and created nascent democracies in Egypt, Tunisia, Yemen and Libya. The transformation is far from complete. With the ensuing turmoil in these fragile democracies, marred by civil war and instability, there has been a surge of emigration from the Middle East. Egypt alone, with a population of over 100 million, could very well surpass the Iranian EB-5 market.
The Middle East is not without its own problems. Sanctions, capital export restrictions, “hawala” and evidencing the source of funds (or lack of) can put off even the most seasoned of practitioners. Regional centers that are averse to direct marketing may also shy away as there are no migration agencies operating in the region. However, those that do venture may offset market entry costs by the lower acquisition cost per investor. If you are looking to the Middle East as a new source of EB-5 investors, it is important that you are familiar with the key issues.
The Office of Foreign Assets Control, of the U.S. Department of the Treasury, enforces and administers U.S. economic sanctions. Until recently, EB-5 stakeholders dealing with Iranian investors were well versed in the Iranian Transactions Regulations and dreaded the wait for the investor’s specific OFAC license (without which no EB-5 funds could lawfully enter the United States). In October 2012, by executive order, the ITR was renamed the Iranian Transactions and Sanctions Regulations, within which OFAC was authorized to issue a general license for Iranians wishing to immigrate to the United States under the EB-5 Program. This decision has transformed the Iranian EB-5 market (by far the largest pool of EB-5 investors in the Middle East) and contemporaneously shortened OFAC license processing times for Syrian investors. Estimating OFAC processing times for specific licenses was and is never an exact science; average processing hovers around four months and could exceed 12 months. This extended EB-5 process created investor fatigue and in some instances delayed EB-5 projects.
While the requirement of no specific OFAC license has removed a layer of bureaucracy for Iranian EB-5 investors, practitioners should still pay close attention to OFAC as the regulations and exemptions are continually being revised. Transfers must still adhere to both section 560 and the rules pertaining to Specially Designated Nationals. Syrians still need a specific license, and with a lot of “old money” leaving the Middle East, running SDN checks on all Middle Eastern investors and their source of funds should be the first action taken by a practitioner. As the market develops, regional centers should also do their due diligence if making referral fee payments to Middle Eastern agents, as OFAC infractions carry both severe financial and criminal penalties. It would be prudent to implement OFAC compliance measures when dealing with any EB-5 investor, especially Middle Eastern and South American investors.
With capital export restrictions in most non-gulf Arab states and Iran, getting investor funds to the United States can be a challenge. In addition, EB-5 petitions require a clearly documented money trail from the investor to the new commercial enterprise. Practitioners must be careful not to advise investors on how to break capital export restrictions (methods of transfer), and at the same time, should make them aware of the documentation required to support the investor’s petition. Advice limited to types of documents needed, rather than the method of transfer, should be sufficient for investors to make a successful transfer and obtain adequate evidence of their money trail.
The Hawala Financial System
In most cases, investors will be utilizing hawala (or “sarrafi” in Iran) to make the transfer to the United States. This centuries old alternative banking system, or network, allows for the transfer of value without the actual movement of money across borders (not too different from traditional banking where digits on one computer move to another). The transactions made within the hawala network are based completely on the honor system and the reputation of hawala brokers. However, since this does not happen through regulated banking channels, there are many questions surrounding the legality of hawala due to its potential for use as a money laundering tool. Some have gone as far as to call the system “financial terrorism.” This has obscured the reality of the system’s practical and efficient uses. In some regions, hawala is the only method of transfer available and it would be inaccurate to label hawala brokers as financial terrorists. A World Bank report on hawala in Afghanistan praises the system’s self-regulation and reported that over $200 million of transfers were made to Afghanistan from NGOs at the outset of the war with the Taliban, without which these organizations efforts would have been crippled. The U.S. Treasury has frequently stated hawala in itself is not illegal. In fact, without hawala there can be no EB-5 investors from Iran, or outward money transfers made for any purpose. The act of laundering money is not akin to the method or system of moving money; it is the intent of the parties involved that makes it money laundering. For EB-5 purposes, practitioners should view hawala in the same light as a wire transfer. Clients should be advised to obtain details of the value of funds being transferred, the originating bank, recipient bank and the facilitators in between. Such documentation is accepted by USCIS as supporting evidence for the lawful source of funds and money trail.
Political instability is rarely lonely and is almost always accompanied by financial instability. Currency fluctuations in these new beacons of democracy, as well as those being affected by sanctions, has resulted in a rise in demand for both dollars and gold in the Middle East. Iran has certainly felt the sting of sanctions over the past 24 months. Its currency, the rial, has seen a 75% drop in value against the U.S. dollar. Consequently, many investors have sought to hedge against further losses by buying dollars and gold. With government crackdowns on “dollar hoarders,” most have resorted to storing large amounts of cash or gold in safe deposit boxes in their homes. This source of funds fiasco is a reality that EB-5 practitioners must face when dealing with Iranian investors. There are many news articles that document the economic instability in the region. Practitioners should stay abreast of current affairs in the Middle East so they can collect supporting articles for gaps in the money trail, should they exist. In the case of Iran, international news outlets have reported on the currency devaluation, government crackdown on hawala brokers and rush on the banks. As long as a reasonable legal nexus exists between the funds and the investor, then there exists a lawful source of funds.
By the nature of the program, EB-5 investors hail from countries with some sort of instability, whether economic, political or social. There are no “easy” EB-5s. The Arab Spring has turned the Middle East into a burgeoning new market for EB-5 stakeholders. Developing a channel for EB-5 investments from the Middle East will mitigate the inherent risk of relying on a single pool of investors. Growth opportunities for the EB-5 program must come from responding to markets that show a demand for the EB-5 visa. Therefore, becoming familiar with the foreign export controls of the Middle East (the hawala financial system, U.S. sanctions and OFAC regulations) will ensure the success of EB-5 stakeholders as they respond to this growing demand and access the new market that is the Middle East.