By Stephen P. Pazan
The consultant performing a source of funds analysis is often asked by the EB-5 investor exactly what specific documents and proof are required. Admittedly, some documents are so commonly provided that they can be considered as required. But law and policy, even where it does discuss the documents that the Investor Program Office wants to see appended to an I-526, is permissive. It talks about the documents that an investor may or should supply. The expert’s reply, then, to a foreign investor who asks the question is often a dissatisfying and ambiguous. “It depends.”
In a recent scenario, a foreign investor paid his administrative fee from an LLC account in the United States after the source of funds report had been completed. The investor’s lawyer and SOF consultant had never been told about the LLC. Understandably, the regional center, which wanted to receive the investment quickly, was frustrated by this the last minute switch. A reasonable person would have assumed investor would have drawn the funds from previously disclosed accounts. The question posed was, if the I-526 was submitted without sourcing the administrative fee, what would the result be?
ADMINISTRATIVE FEES NEED NOT BE SOURCED
Administrative fees include different things depending on the project. Some include attorney fees, fees for source of funds reports, commissions to agents and other expenses for which the typical investor might otherwise be responsible. In all cases, administrative fees exist mainly for the pleasure and profit of the regional center running the project. In fact, in today’s competitive EB-5 market, some projects “waive” them altogether as an incentive to investors. Then, they likely recoup some of what would otherwise be collected by charging for services separately.
Neither the INA nor the CFR sections that discuss EB-5 mention anything about administrative fees. The USCIS Policy Manual says nothing about them, either. None of the precedential decisions discusses them. [1]
Since the authority is silent as to administrative fees, it seems logical that sourcing administrative fees is not strictly required. Nonetheless, sourcing these fees can be an important credibility issue, and should be considered on a case-by-case basis.
WHY SHOULD ADMINISTRATIVE FEES BE SOURCED?
Nothing in the training materials at the Investor Program Office (IPO) for professionals adjudicating I-526 petitions direct that administrative fees be sourced. But in some cases, it may be wise to do so.
IPO’s management and training programs do uniformly stress the burden of proof. Indeed, there is a credibility element associated with every I-526 (and I-829). The investor must prove his or her eligibility by a preponderance of evidence. That means that when an investor provides a questionable collection of proofs, the IPO adjudicator may ask in a request for evidence (RFE) for things that are not strictly required in order to articulate in a denial why she or he does not believe the petitioner’s evidence, or to provide assurance that a contemplated approval is sustainable.
In fact, RFEs routinely request information not directly related to the investment funds, such as the source of a child’s expensive college tuition, or the source for frequent and presumably expensive travel to the United States. Lawyers representing investors typically comply with these requests rather than fight about them, but they reserve their rights in RFE responses, sometimes aggressively. This is presumably to guard against a denial based on the fact that the tuition, for example, is not lawfully sourced. While it may be sound practice to reserve rights, and pragmatic to respond regardless of those rights, the adjudicator is probably on firm ground when making the request for the following reasons:
CREDIBILITY AND INDIRECT SOURCES OF FUNDS
While the language employed by USCIS in its various policy advice is limited to a treatment of “capital invested” and says nothing about administrative fees, it does say in the Policy Manual that, “[a]ny assets acquired directly or indirectly by unlawful means, such as criminal activity, will not be considered capital. In establishing that the capital was acquired through lawful means, the immigrant investor must provide evidence demonstrating the direct and indirect source of his or her investment capital.” [2]
A broad and encompassing definition of the phrase “indirect source” might include any means employed by an investor whereby lawfully sourced capital was made more available for investment by the presence of unlawfully obtained capital that the investor uses for living expenses and support. Such a definition begs the discussion of whether money is fungible – a troublesome question which has never been addressed by USCIS in any case or policy paper that might be deemed binding on the EB-5 industry.
While perhaps not deliberately, IPO considers the phrase “indirect source” broadly in its adjudication process. Consider adjudications from the robust Chinese market of a few years ago. Many investors used the “loan model,” whereby a refinanced real property was often the investor’s only significant asset and subjected the investor to a huge debt service. Many investors operated very close to the bone. Adjudicators at IPO were often skeptical and employed a World Bank-published subsistence living calculator to dispel the suspicion that there might be undisclosed unlawful income that was aiding the chosen lifestyle and thus indirectly funding the investment. Adjudicators used the World Bank poverty levels as a litmus test to see if it was credible that the Chinese investors would invest such huge proportions of their overall wealth in EB-5.
INTEGRITY OF THE PROGRAM
Examining the source of administrative fees is probably also a fair expression of USCIS’ responsibility to ensure program integrity. “It is critical to our mission that we administer the EB-5 program with utmost vigilance to ensure program integrity,” it says in Policy Memorandum 602-0083 (May 30, 2013). Arguably, allowing unlawfully obtained funds to be used for administrative fees violates the integrity of the program, as does allowing an investor who is otherwise a suspected criminal to use his or her lawfully obtained funds for EB-5 while living in sumptuous surroundings thanks to criminal proceeds. The extension of that argument is that, if criminality or fraud is instrumental — a proximate cause — in making the investment possible, then it is an indirect source of the investment and the affected part of the investment will not be considered capital.
For example, an investor who funds through the loan model might be asked whether the term on the loan is so short and the interest rate so high, that the loan is an obvious sham, or whether it is usurious and therefore an affront to the integrity of the EB-5 program. Clearly, the integrity of the program may be considered compromised if the loan is issued based on an investor’s fraud or misrepresentation to a bank. Or the adjudicator may see that the investor’s child is attending a $40,000 per-year university and living off-campus and ask how it is funded in order to verify that the representations made to the Department of State at F-1 visa processing regarding the source of tuition payments do not encumber the same money that the investor claims as his/her EB-5 investment capital.
ELIGIBILITY IS SEPARATE FROM SOURCE OF FUNDS
As a practical matter, the well-heeled investor with copious amounts of lawfully acquired assets probably does not need to source his or her administrative fees. In such a case, an adjudicator might assume that an investor who doesn’t need to use unlawfully acquired capital won’t. Adjudicators may even accept that investors of significant wealth may have some illegal income, but that the illegal income is not a direct or indirect source of the investment funds. After all, eligibility issues are often separate from SOF issues.
A source of funds consultant should make a case-by-case decision as to each client and how much effort should be expended on providing a lawful source of funds analysis for big-ticket items, including the administrative fee, that show up on an investor’s balance sheet. The best practice is to employ a consultant for SOF that has the experience and intuition to ensure the burden of proof in each case is satisfied. But generally, it is the marginal investor who has the greater burden of production who may wish to source his/her administrative fee.
Notes:
[1] See, e.g., Matter of Ho, 22 I&N December 206 (Assoc. Comm. 1998); Matter of Izzumi, 22 I&N December 169 (Assoc. Comm. 1998); Matter of Hsiung, 22 I&N December 201 (Assoc. Comm. 1998).
[2] See Policy Manual, Chapter 2, Eligibility Requirements, A.1 & 4. The Manual does not define “indirect source.”
Stephen P Pazan
Stephen P. Pazan, esquire, is an attorney working as a consultant to Baker Tilly Capital, LLC on EB-5 source of funds and other issues. Pazan was a consular officer with the U.S. Department of State in Colombia, Kiev and Warsaw, and an EB-5 adjudicator for the USCIS before leaving government in March 2018. He is also special counsel to the New York law firm Barket Epstein Kearon Aldea & LoTurco, LLP.
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