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The EB-5 Reform and Integrity Act of 2022 (RIA) became law as part of the Consolidated Appropriations Act over a year ago. The EB-5 community now recognizes the challenges of adjustment to the new statutory framework RIA introduced to Regional Centers and investors alike. One significant aspect of the newly imposed heightened standards for demonstrating a lawful source of funds is a common scenario when a third party contributes to or participates in the delivery of investment capital to the EB-5 project.
LEGAL FRAMEWORK: SOMETHING OLD, SOMETHING NEW
As it was prior to the reauthorization of the EB-5 program, the major condition imposed on the EB-5 petitioners is still the requirement that the investment capital be lawfully obtained and clearly attributed to the investor.[1] The regulation specifically excludes “[a]ssets acquired, directly or indirectly, by unlawful means (such as criminal activities)” from the permissible source of capital.[2] However, among other key elements of the EB-5 program, RIA modified the requirements for the documentation of the Source of Funds (SOF).
In particular, the law now requires business and tax records or similar records to be filed with form I-526, including tax returns of any kind filed during the past seven years (or another period determined by the DHS) by or on behalf of the investor[3] – a departure from the prior regulatory requirement of five years. In addition, disclosure of the identity of all persons who transfer funds into the U.S. on the investor’s behalf is now required. [4] Under the new standard, gifts, and loans now have a “good faith requirement” with reference to the disqualification of funds from impermissible sources, including illegal activity. Thus, lenders and donors’ records are mandatory in the cases where third parties are involved.
SOURCE OF FUNDS CHALLENGES CAUSED BY THE NEW RIA
Changed requirements undeniably increase the evidentiary burden for the investors and their representing attorneys. Investors are now expected to obtain sensitive and sometimes confidential fiscal documents from the parties who are not even seeking any immigration benefit and who might have engaged in financial transactions with the investor without consent for such exposure. These challenges are already reflected in the current adjudication trends.
Some countries, such as Vietnam, have laws that severely restrict the conversion of local currency into U.S. dollars or foreign transfers, causing many investors to find alternative means to transfer funds to the U.S. as part of the immigration process. However, recently, many practitioners reported a trend of USCIS issuing burdensome Requests for Evidence (RFE) and a disproportionally high denial rate for the cases of investors who had to use cryptocurrency or third parties to make the investment[5]. This abrupt departure from the practice of adjudicating such cases without questioning the legitimacy of the funds delivered by a third party is obviously undermining the confidence of the investors considering participation in the EB-5 program and sparks litigation on behalf of the investors already in the process.
Another obviously problematic jurisdiction in the current political environment is Russia. Evidence of widespread corruption among government officials, a non-transparent tax system, and sanctioned banks and large corporations historically make Russia-originated capital one of the most difficult to document properly to satisfy a petitioner’s burden of proof. Now, even with perfectly legal capital, documentation of transfer and currency conversion into USD inevitably involves the presentation of evidence pertinent to third-party intermediaries or cryptocurrency swaps since private individuals are restricted from exchanging their funds into USD or wiring them abroad. In the current reality, an explanation as to how capital was obtained in Russia and remitted to the new commercial enterprise requires not only an understanding of financial documents, but also an ability to navigate a rapidly changing political environment.
Additionally, the new requirement of third-party identity disclosure ignores the inherent nature of the integral part of the global financial markets – cryptocurrency trade. Cryptocurrencies are stored in digital wallets that are essentially software or applications installed by users without traditional authentication attributions. Cryptocurrency transactions do not reflect the name, account number, or tax ID of the holder. According to the IRS, the U.S. government applies the same taxation guidelines to all cryptocurrency payments by and to U.S. persons and businesses. [6] However, many countries do not have such policies in place, which makes exchanges much less traceable even if the investor is a holder of the digital wallet and the ultimate beneficiary of the conversion of crypto into conventional currency. When the transaction involves a third party, such as an exchange intermediary or a donor of investment funds, identification of that third parties with sufficient particularity becomes nearly impossible.
These apparent challenges present a question: What, if anything, can be done preventively to make a stronger case for investors utilizing the funds contributed or delivered by third parties? The language of the statute contains the reference to the approach that may assist the practitioners in presenting their case or, if USCIS finds the documents unpersuasive, may preserve the argument for litigation.
“GOOD FAITH” – IS IT REALLY THAT GOOD?
RIA introduces a new requirement for the funds originated from third parties, providing that gifted and borrowed funds may not be counted toward the minimum capital investment requirement unless “such funds were gifted or loaned to the alien investor in good faith.” [7]
“Good faith” is a concept apparently borrowed from the contract law and is used to describe a rule that requires every party to a contract to implement the agreement as intended, not using means to undercut the purpose of the transaction.[8] In the context of integrity measures promulgated by RIA, the “good faith” requirement opens a door to scrutiny of the relationship between the investor and a third-party lender or grantor. Simply put, the attorney representing an investor now has to document not only the fact of a gift or loan but also comprehensively answer why that significant sum of money was provided to the investor by a third party.
The courts previously recognized that in the adjudication of EB-5 cases, USCIS verifies compliance with the requirements that serve valid government interests – preserving the integrity of the EB-5 program by confirming that the funds utilized are not of suspect origin.[9] This approach is now expanded to third parties to ensure that the actual purpose of the transaction between those parties and the investor is not to inject unlawfully obtained funds into the process. Thus, it would be prudent to address the potential inquiry into the nature of the connection of the investor to the third party at the early stage of the document collection. Affidavits from these parties are not even optional when more explanation is needed on the motivation of the party engaging in the EB-5 process as a donor or lender, whether the intent is supported by financial remuneration, family ties, or other considerations. The anecdotal evidence suggests that even the inclusion of informal photographs illustrating the long ongoing relationship between the grantor and the investor helps to address the adjudicator’s concern that the gift or loan was not provided in good faith.
TMI: HOW MUCH INFORMATION SHOULD BE PROVIDED?
Many practitioners now agree that it is always safer to err on the side of over-documenting the source of funds rather than leave certain questions open for interpretation by the adjudicator. However, this approach is not necessarily endorsed by those third parties whose presence in the investor’s case is incidental and who feel reluctant to provide extensive documentation on sensitive financial matters to support the investor’s case. Thus, it is now more important than ever to have an open conversation with the investor at the early stage of representation to set the right expectations for the exposure before the burdensome and invasive RFE is issued and collection of the documents is done with significant time constraints.
Nevertheless, despite the change in the statutory language, the adjudication standard – a preponderance of evidence – remains intact, and setting this framework at the time of initial submission may limit the scope of the materials necessary to satisfy the burden of proof. The regulations exclude only the capital obtained by unlawful means. By prescribing this one and the only limitation on how investors may acquire the investment capital, the regulation implicitly omits other limitations.[10] The investor shall not be required to prove beyond reasonable doubt the qualifications of his capital, even if the capital was provided by third parties.
One of the practical approaches to establishing the framework for adjudication is to introduce the evidence that the parties who have never anticipated that their earning capacity and financial status may be subject to the scrutiny of the U.S. Government, did not keep certain records or did not structure certain transactions in the manner consistent with the practice of U.S. law. Creating a context, cultural and socioeconomic, may assist the adjudicator in the assessment of the legitimacy of the transaction without fully exposing the financial affairs of the donor or a lender.
Also, the new statutory language supports the proposition that alternative evidence may be considered in the source of funds adjudication. The new law specifically references “business and tax records, or similar records”[11] as evidence of the legitimacy of the funds. The regulation and policy are silent on what constitutes a record “similar” to business and tax documents. During the most recent EB-5 Stakeholder meeting, USCIS indicated that the Agency is currently updating the Consolidated Handbook of Adjudication Procedures, as well as the Policy Manual, templates, and other documents to provide more guidance and achieve a consistent application of the law.[12] Though the EB-5 community is generally skeptical of the efficiency of the USCIS’ policy-making, until guidance is issued, the investor may argue that functional equivalent of tax declarations (for example, corporate books, audited statements, profit and loss reports, etc.) may satisfy the burden of proof without releasing confidential information of third parties to the immigration services.
Finally, the landmark decision on the use of loan proceeds in the EB-5 process, Zhang et al. v USCIS, expressly held that provisions of C.F.R. focus “on the exchange between the foreign investor … and the new U.S. enterprise” rather than “on any prior exchange between the investor and his source of funds.”[13] Armed with this argument, the investor may still successfully limit the inquiry into the mechanics of the exchange between the investor and the third parties.
THE RESULTS OF RIA AND THE FUTURE OF SOURCE OF FUNDS
RIA, though welcomed by the EB-5 community, created multiple unprecedented challenges that require the development of approaches never utilized in the industry before. As the denial rate for Vietnamese investors traditionally relying on dealing with third parties in the EB-5 process raised, it became apparent that methods of documentation of SOF used for years without any detriment to I-526 adjudication need to be reconsidered. The enhanced requirement that the RIA imposes on lenders or donors of investment funds is reshaping the way attorneys now need to advise their clients on the evidentiary burden and incorporates additional “hidden figures” into an already complex equation. While USCIS has yet to develop guidance and policies for navigating this issue, it is up to the immigration practitioners to adapt to the changing environment.
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[1] 8 CFR §204.6(j)(3)
[2] 8 C.F.R. § 204.6(e)
[3] PL 117-103, Part 2 (L)(i) (“Source of Funds”)
[4] Id. (L)(ii)(III)
[5] See e.g. pending litigation AIIA v USCIS, Case 1:23-cv-00820 (U.S. District Court for District of Columbia); alleging “illegal and unconscionable policy shift” in adjudication of the Vietnamese Investors’ cases involving the third-party money exchangers;
[6] IRS Notice 2014-21; www.irs.gov/pub/irs-drop/n-14-21.pdf (last accessed July 5, 2022)
[7] PL 117-103, Part 2 (L)(iii)(I)(aa)
[8] Kirke La Shelle Company v. The Paul Armstrong Company et al. 263 N.Y. 79; 188 N.E. 163 (1933), codified as USS 1-304
[9] Spencer Enterprise Inc v. U.S., 229 F. Supp. 2d 1025, 1040 (E.D. Calif. 2001) aff’d 345 F.3d 683 (9th Cir. 2003).
[10] TRW Inc v. Andrews, 534 U.S. 19, 28 (2001)
[11] PL 117-103, Part 2 (L)(i)
[12] EB5 National Stakeholder Engagement hosted by USCIS (October 19, 2022); available at https://www.uscis.gov/sites/default/files/document/data/National%20Engagement-EB-5%20Immigrant%20Investor%20Program.pdf (last accessed on July 5, 2023);
[13] Zhang v USCIS, 978 F. 3d 1314, 1319-22 (D.C. Cir. 2020).
Natalia Polukhtin
Natalia Polukhtin, attorney at Global Practice, specializes in investment immigrant and non-immigrant visa categories. Native to Russia, Polukhtin earned her graduate and undergraduate degrees from Moscow State University before obtaining a law degree from Mercer University School of Law. She developed unique expertise in documenting source of funds originated from CIS-countries and published several articles on integration of non-traditional sources of funds, such as cryptocurrency, into the EB-5 process. She is a recipient of multiple professional awards, including Top 25 EB-5 Attorneys by EB5 Investors Magazine and recognition from IIUSA. She is a member of the Executive Council of the Immigration Law Section of the State Bar, and an author of a comprehensive guide written in Russian to business immigration to the U.S.
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