By David Hirson, Nima Korpivaara, and Winnie Ng
The Employment-Based Fifth Preference (EB-5) immigrant visa category was created by Congress in 1990 to stimulate the U.S. economy through job creation and capital investment by foreign investors. In order to qualify, an EB-5 investor must invest at least USD 500,000 into a new commercial enterprise, which would create at least 10 full-time jobs for U.S. workers. EB-5 investments are divided into two categories: direct investment and regional center investment.
The initial EB-5 petition, Form I-526, must be submitted with documentation about the new commercial enterprise and documentation about the investor’s source of investment funds. The source of funds requirement for investors investing in a direct investment and regional center project are the same.
The EB-5 regulations require investors to prove that the investment funds were “obtained through lawful means.”  In other words, the investment funds must not have been obtained through criminal activity. The regulations listed four categories of documentation required to prove lawful source of funds:
Foreign business registration records;
Corporate, partnership, and personal tax returns or similar documents filed within the past five years;
Evidence identifying other sources of capital; or
Certified copies of court judgments, pending court cases, and administrative proceedings within the past 15 years.
While this list does not appear to be too overwhelming, in practice, USCIS requests a substantial amount of documentation to prove lawful source of funds beyond these specified categories. Although EB-5 regulations do not require investors to prove any amount beyond the investment capital, USCIS has requested investors to also prove lawful source of the administrative fees collected by projects. Many projects charge an administrative fee to cover operational costs and marketing expenses. Thus, if an investor invests $500,000 in a new commercial enterprise and the project in charge of the commercial enterprise charges an additional $50,000 administrative fee, the investor should provide documentation to prove that the total $550,000 was obtained from a lawful source.
In additional to proving a lawful source of funds, investors must also prove a lawful path of funds. The path of funds is the method used to document that the investor has possession of the funds and transferred the money to the new commercial enterprise in the United States. USCIS requires investors to properly document the path of funds to show that the funds arrived in the investment enterprise by lawful means.
The standard of proof for investors’ source and path of funds specified in the EB-5 regulations is the “preponderance of the evidence” standard, which means the USCIS officer must determine that it is “more likely than not” that the claims in the petition are true.  This is a lower standard of proof than the “clear and convincing” and “beyond a reasonable doubt” standards used in other circumstances. However, USCIS adjudicators often apply these higher standards of proof when adjudicating investors’ source and path of funds. Failure to adhere to the USCIS standards would result in the denial of the investors’ I-526 petition. Thus, EB-5 investors must be prepared to provide detailed documentation to prove the lawful source and path of funds to survive USCIS scrutiny.
While this appears to be a daunting task, there are a few basic principles that make this task more manageable. This article will outline some of the basic principles and guidelines that EB-5 investors and attorneys should pay attention to as they prepare their source and path of funds documentation.
Preliminary Questions to Consider
Because every investor is a unique individual, the way he/she accumulated his/her investment funds must be unique. Moreover, some investors have assets in excess of the investment funds. Thus, there are a myriad of ways by which an investor may prove his/her lawful source of funds. To determine the best strategies to prove an investor’s source of funds, investors and attorneys should answer three basic questions:
- Where are the funds now?
- Where did the funds come from? Were the funds obtained from a third party? If so, proof of funds from the third party must also be obtained.
- How are the funds to be transferred to the project or to the escrow for the project?
The answers to these questions would provide a good starting point for an investor and his/her attorney to determine the documentation required in the investor’s situation.
Where are the funds now?
Investors may have the investment funds deposited in their bank accounts. Others may have the funds in the form of stocks, real estate, or business. This preliminary determination leads to the next question.
Where did the funds come from?
This is where the situation may become more complex, because the investment funds may come from multiple sources. Moreover, this question must be asked repeatedly until the funds can be traced back to the original source.
Common answers to this question include the following:
- Employment earnings and bonuses
- Earnings from investor’s business
- Sale of business assets
- Retirement funds
- Proceeds from a real estate transaction
- Home equity loan
- Loan obtained from the investor’s business
- Loan obtained through a financial institution
- Loan obtained from a friend or family
Note: Loan funds must be secured by collateral assets of the investor. The investor will have to document and explain the lawful source of the funds used to acquire the secured/collateral asset. The money from the lender must also be from a lawful source and must be documented.
Each of these categories would be accompanied by a specific list of documents. For example, investment funds obtained from loans should provide loan contracts, financial statements, collateral (with appraisal of value), and bank statements showing the deposit of the loan. Investors who received the funds as gifts from family members or friends should provide gift letters, gift tax certificates, and bank statements showing the deposit of the funds into the investor’s account. For earnings from income or business, investors should provide employment contracts, company profiles, bank statement showing the total accumulated income, and tax returns showing that the proper taxes had been paid.
Investors and attorneys must make strategic decisions regarding which source to use. For example, if an investor’s accumulated earnings from income have been comingled with other sources, it is often extremely difficult to trace. In that case, the investor should consider using alternative sources to prove the lawfulness of his/her source of funds.
Suggestion: Use newly opened (sterile) bank accounts for each part of the transfer of the money to the United States.
As mentioned earlier, the funds must be traced back to the original source. This may require multiple layers of documentation.
For example, if an investor used accumulated income to purchase a real estate property, and subsequently uses the property as collateral to obtain a loan from a bank, the documentation required for this investor would be separated into three layers:
Documentation regarding the investor’s accumulated income should include:
- Employment contract;
- Bank statements reflecting deposits of his/her salary; and
- Proof of tax payment.
Documentation regarding the investor’s real estate purchase should include:
- Purchase agreement;
- Property ownership certificate;
- Bank statements showing payment for the property; and
- Proof of paid property tax or deed tax.
If a mortgage was involved and the investor used business earnings to pay off the mortgage, the investor should also provide the mortgage contract and proof of mortgage payments from business earnings.
Documentation regarding using the real estate property as collateral for the loan from the bank should include:
- Loan or mortgage agreement from the bank, showing the property as collateral;
- Appraisal reports of the property; and
- Bank statements showing the receipt of the loan.
This example is not a complex source of funds scenario because it only requires three layers of tracing. When more and more layers and transactions are involved, the scenario would be more complex and the list of documentation required would be significantly increased.
Were the funds obtained from a third party?
If the funds were obtained from a third party, proof of funds from the third party must also be obtained. For example, if the funds were the result of a gift, the lawful source of the giftor’s funds must be documented. If the source of funds was a loan, the lawful source of the lender’s funds and the collateral for the loan must be documented. If the lender is a well-known bank, then supporting documents of its lawful source of funds will probably not be required. If the source of funds is an inheritance, the decedent’s source of funds must also be documented.
The use of a “money exchanger” has special requirements: The nexus between the money exchanger in the home country and the business or individual disbursing U.S. dollars must be made clear. Otherwise, USCIS will not accept the money as being from a lawful source.
Source of Funds Issues
While the source of funds documentation should show an unbroken chain tracing back to the original source, investors should understand that their I-526 petition will not necessarily be denied if they cannot obtain some of the requested documentation. Where documentation is lacking, declarations may be used to detail the required information and explain why documentation cannot be obtained. Declarations may be prepared by the investor or others who can attest to the stated information. USCIS officers often accept declarations to supplement missing documentation if the declarations are credible. For example, if an investor cannot provide tax returns because they are not required to file tax returns in his/her country, a declaration from a tax professional in the investor’s country may be sufficient documentation.
Although declarations provide a useful alternative to explain missing documentation, they should only be used as a last resort. They should not be used to replace required documents. Please note that documents for submission to USCIS MUST be accompanied by a full and complete translation into English, where applicable.
How are the funds to be transferred to the project or to the escrow for the project?
Path of Funds Issues
Just like the proof for lawful source of funds, the proof for path of funds must be clear and unbroken. The path must clearly show that the funds have been lawfully transferred from the individual investor to the new commercial enterprise in the United States. This transfer may be especially difficult for countries with restrictions on the outflow of currency. In these situations, the investor may need to go through several layers of transactions.
China, for example, has stringent laws to control the transfer of money out of China. China’s regulations restrict individuals from transferring more than USD 50,000 abroad annually.
A new option arose last year for Chinese investors. Certain banks in China offer a service called “Youhuitong,” which allows investors to exceed the USD 50,000 limit on foreign currency transfers by permitting clients to transfer Chinese currency (RMB) overseas directly without first exchanging it into a foreign currency. Please note, however, that the practice of Youhuitong is currently under scrutiny in China, and may be temporarily suspended in many major Chinese banks. As such, some investors have looked into other ways to avoid China’s stringent regulations, such as using accredited money exchangers, etc.
Because USCIS officers impose a high level of scrutiny to verify the lawfulness of investors’ source and path of funds, investors and attorneys must understand that they must be prepared and willing to devote a substantial amount of time and effort to prepare source and path of funds documentation. These documents must be accompanied by accurate and complete translations into English where the document is in a language other than English.
David Hirson is managing partner at David Hirson & Partners, LLP. There he leads a dedicated team of EB-5 legal professionals to provide a full scope of services for investors, projects and regional centers.
Nima Korpivaara is a partner at David Hirson & Partners, LLP. Prior to joining the firm, Nima was a senior EB-5 attorney at Fragomen, Del Rey, Bernsen & Loewy, LLP, and worked inhouse for a Fortune 100 company.
Winnie Ng is an immigration attorney and founding associate of the firm, David Hirson & Partners, LLP. She specializes in working directly with clients on all components of the EB-5 investor application, combining her translation expertise with her legal analytical skills.
 8 C.F.R. § 204.6(j).
 8 C.F.R. § 204.6(j)(3)(i)-(iv).
 Matter of Chawthe, 25 I&N Dec. 369, 375-376 (AAO 2010); 2013 Policy Memorandum on EB-5 Adjudications Policy (May 30, 2013).