We’ve all grown up believing that EB-5 investors must document “SPOF” —the source of funds and the path of funds. Two co-equal requirements — that the investor’s funds came from a lawful source and tracing every penny of the investor’s funds often through multiple transactions and sometimes for decades.
There is only one problem. The requirement for a lawful source of funds is a legal requirement. It is contained in the regulations at 8CFR § 204.6 (e).
Which regulation creates the path of funds requirement? As pointed out to Judge Friedman of the D.C. District Court in the Battineni case, and as Judge Friedman concurs, there is no regulatory path of funds requirement.
As many readers of this article know, I have long advocated that there is a difference between law and lore. The law can only be found in one of three places- the statute, the regulations, or precedent decisions. The lore is everything else, including the USCIS Policy Manual, U.S. Citizenship and Immigration Services (USCIS) memos and FAQs, and USCIS adjudications.
It turns out that the law does contain a “path of funds” requirement. The problem is that it is not the requirement that USCIS has long imposed on EB-5 investors. Rather, as Judge Friedman recognizes, the requirement comes from one paragraph in the Matter of Izummi precedent decision that requires proving that the funds are the investor’s, the lender’s, or the giftor’s “own funds.”
In other words, once you prove that the source of funds of an investor, lender, or giftor is lawful, you only need to prove that the funds came from that source. You do not have to prove which dollars were used; you do not have to prove how all the money got into the bank account. If there is a sufficient lawful source of income from employment, you do not have to prove how all the other money in the account or accounts was obtained and whether the dollars for the investment came from the employment income.
This is a big deal. Since it is not the result of a new statute, regulation, or precedent decision and has always been the law, it applies equally to new or previous applications.
THREE SIGNIFICANT LESSONS FROM THE BATTINENI CASE
First, the Battineni decision directly and unequivocally rejects the U.S. government’s long-standing definition and application of the path of funds requirement. Instead, it reestablishes the original path of funds requirement as set forth in Matter of Izzumi, viz., that the path of funds requires proving that the funds being transferred came from the investor, the lender, the gift, or.
Second, the investor, the lender, or the giftor does not have to “trace every penny.” If the investor, lender, or giftor has proven a lawful source of funds, he does not need to prove which funds in their account were used for the transfer. The investor, the lender, or the giftor must only prove the immediate source of funds. If, for example, an investor’s source of funds was a sale of real estate, they should not be required to document how they acquired the funds to purchase the real estate 20 years ago.
HOW COULD THIS CASE IMPACT EB-5?
It remains to be seen how the USCIS and the courts will apply the language and principles of the Battineni case to cases involving money exchangers. Especially in recent adjudications, USCIS has applied its version of the path of funds requirement to deny investors’ EB-5 petitions when investors used a money exchanger to comply with a foreign country’s currency restrictions.
The issue is whether it is necessary to trace the money from the investor to the money exchanger to the EB-5 project. In the process, the money is changed from foreign currency to US dollars. USCIS uses the path of funds requirement to deny petitions because the investor cannot trace the money going from the investor to the money exchanger, sometimes from the money exchanger to a private company and then to the EB-5 project.
Arguably, the Battineni decision would not condone the requirement of “tracing every penny” from the investor to the money exchanger to the private company to the EB-5 project as necessary to meet a path of funds requirement. Rather, using the language and foundation of the Battineni decision, once the investor has proven the lawful source of their funds, the only issue is whether the investment came from funds. Therefore, the issue in a money exchanger case should be first, proving a lawful source of the investor’s funds (no change there) and second, proving by a preponderance of the evidence – not by tracing every penny – that the amount going from the money exchanger to the EB-5 project ultimately came from the investor.
If the equivalent of $800,000 in foreign currency went from an investor to a money exchanger on Monday and $800,000 in US dollars went from the money exchanger to an EB-5 project referencing the name of the same investor on Thursday, it would be hard to argue that the preponderance of evidence standard has not been met.
We must keep in mind that the Battineni decision is a decision of one federal district court judge in DC — a well-respected Senior Judge. However, since it raises an issue that has not been raised previously, and since it is based on very solid legal principles, hopefully it will be adopted and applied in many federal court decisions and, hopefully, by USCIS.
Ron Klasko
H. Ronald Klasko is an EB-5 immigration attorney and one of the founders of Klasko, Rulon, Stock & Seltzer, with offices in New York City and Philadelphia. His firm has has been chosen by Chambers Global as one of six top tier immigration law firms in the U.S.
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