What anti-money laundering efforts mean to EB-5 attorneys?

By Natalia Polukhtin

In recent years, corporate transparency and anti-money laundering measures became an integral part of the EB-5 industry narrative. About two years ago, the EB-5 Reform and Integrity Act of 2022 (RIA) imposed heightened standards for demonstrating a lawful source of funds (SOF), including mandatory disclosure of the identities of all third parties contributing to or facilitating a transfer of the investment capital. Early in 2024, the Corporate Transparency Act (CTA) came into effect, impacting many businesses throughout the United States and creating additional disclosure and reporting obligations for immigrant investors and their representing counselors.

However, the significance of substantive changes in the due diligence and reporting obligations of participants in the EB-5 investment process should not overshadow another source of increase in the evidentiary burden of immigrant investors’ cases: the new provisions for regulating attorneys’ professional conduct.

The pressure for greater oversight of lawyers, especially regarding money laundering, has evolved over the recent decade. In 2016, the Financial Action Task Force (FATF), an international organization coordinating anti-money laundering (AML) and anti-terrorism financing efforts, found the U.S. falling short in several areas, including inadequate client due diligence by lawyers. Remarkably, in the apparent effort to address the same concern, the “Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017” was implemented in the UK, outlining the obligations of legal service providers, from sole practitioners to large international firms, in conducting clients’ due diligence. Congress has also tried unsuccessfully to address the issue with the ENABLERS Act in 2022, which aimed to regulate law firms under the Bank Secrecy Act similarly to financial institutions. It would have included requirements like filing Suspicious Activity Reports on clients’ financial dealings.

Recent corruption scandals, such as the Paradise Papers, Panama Papers, Pandora Papers, and FinCEN Files, have also indicated more regulation demand. Also, there are cases in which some U.S. attorneys have already been convicted of money-laundering-related offenses related to the facilitation of their clients’ financial transactions, exposing the ongoing interest of law enforcement in the role of legal service providers in international financial transactions. Anecdotal evidence also suggests an increased number of requests for evidence in EB-5 cases involving the money transfers from the jurisdictions implicated in money laundering and corruption scandals, like Russia and Venezuela.

The developing regulatory environment means that lawyers and EB-5 investors face more stringent oversight. Attorneys must now take extra precautions in advising clients on financial and corporate structures and cross-border transactions while ensuring that their clients fully understand the new obligations imposed by the CTA and other anti-money laundering regulations.

WHAT ARE ATTORNEYS’ ETHICAL OBLIGATIONS REGARDING ANTI-MONEY LAUNDERING?

The American Bar Association recently approved amendments to ABA Model Rule of Professional Conduct 1.16 (MR 1.16) concerning declining or terminating client representation. The Amendment certainly affects practitioners in all areas, but certain new obligations imposed by the amendment relating to anti-money laundering laws are of special significance for immigration lawyers, especially those handling EB-5 cases.

The amended MR 1.16 now states that “[a] lawyer shall inquire into and assess the facts and circumstances of each representation to determine whether the lawyer may accept or continue the representation” and shall withdraw from the representation of a client if “the client or prospective client seeks to use or persists in using the lawyer’s services to commit or further a crime or fraud.” The comments to the rule make a special reference to one illicit activity of the clients or prospective clients that may implicate the lawyers – money laundering. The comments discuss practitioners’ obligations regarding compliance with anti-money laundering laws and regulations that would warrant mandatory withdrawal or declining representation.

The amendment to MR 1.16 reaffirms that lawyers need not report to federal regulators or law enforcement on their clients, regardless of the potential risk of money laundering activities. However, Comment 2 (Mandatory Withdrawal) crafts continuing risk-assessment obligation on lawyers that involves verifying a client’s identity, understanding the background, and assessing the source of funds to ensure that the lawyer does not inadvertently assist individuals engaged in money laundering.

To summarize, the attorney must withdraw once money laundering activities perpetrated by the client are detected. Hence, the amended rule now requires legal service providers to conduct due diligence on the client at the commencement of the representation and during the representation to timely detect the need to withdraw at signs of perpetrated or committed money laundering, making representation more labor-intensive.

ANTI-MONEY LAUNDERING VIOLATIONS LIABILITY IN THE EB-5 PROCESS

There are multiple scenarios in preparation for the EB-5 case that may potentially require an immigration lawyer’s expertise in AML laws. The most obvious pattern would involve scenarios where clients usually transfer large sums of money from abroad to be placed with the investment enterprise. The EB-5 regulation excludes specifically “[a]ssets acquired, directly or indirectly, by unlawful means (such as criminal activities)” from the permissible source of capital. Under the new provisions of MR 1.16, the representing attorney would be under the duty not only to assess the source of the client’s capital at commencing representation but to constantly reassess the legitimacy of the funds during the course of representation to timely withdraw should the suspicious circumstances be revealed. This requirement appears especially burdensome given lengthy adjudications of EB-5 cases, where the request for evidence may prompt the attorney to re-visit the source of funds documents several years after the case was submitted.

Another problematic situation may be created when the attorney accepts clients’ investment funds into the trust account for the purchase of a business, transfer to the investment enterprise, or to be held to cover the Regional Center’s fees. The language of the commentary on the amended MR 1.16 indicates the lawyer’s obligation to inquire into the source of the wire and conduct due diligence to exclude the facilitation of money laundering using the IOLTA account.

The heightened requirements for the attorney’s due diligence suggest that the simple intake questionnaire may no longer be sufficient to address the AML concerns at the assessment of the legality of funds stage. Comment 2 to MR 1.16 provides basic guidance on “red flags” that the attorney should be able to detect during representation. Attorneys are advised to analyze the following factors:
• the identity of the client (and if the client is an entity, who are the beneficiaries);
• the lawyer’s experience and familiarity with the client
• the nature of the requested legal services
• whether the funds come from a jurisdiction that is considered at high risk for money laundering or terrorist financing
• the identities of those depositing into or receiving funds from the lawyer’s client trust account, or any other accounts in which client funds are held.

Apparently, analyzing the suggested factors takes attorneys’ efforts outside the scope of plain fact-gathering and evokes a need for substantive legal analysis. Subsequently, this means longer document-gathering time and more extensive evidentiary support than typical EB-5 cases would require prior to the Amendment.

HOW TO REDUCE PROFESSIONAL LIABILITY EXPOSURE?

The amendment to MR 1.16 suggests that immigration lawyers most likely apply the first round of due diligence efforts at the commencement of representation. This probably means that the EB-5 practitioners routinely handling clients’ funds or documenting the source of capital coming from abroad might need to establish internal Know Your Client (KYC) protocols for their offices, including verifying the client’s identity and understanding the client’s background.

Besides the approach as simple as putting the client’s name into a search engine and reviewing the results produced by the open sources, multiple resources that are not necessarily a standard tool in the practice of immigration law are available to EB-5 attorneys willing to conduct proper due diligence. For example, the U.S. Department of Treasury’s Specially Designated Nationals and Blocked Persons List is a helpful resource to assist lawyers in conducting their inquiry and assessment, which is comprised of “individuals and companies owned or controlled by, or acting for or on behalf of, targeted countries.” It also lists individuals, groups, and entities, such as terrorists and narcotics traffickers designated under programs that are not country-specific.”

In addition, the U.S. Department of Treasury issued a guidance on detecting money laundering activities that discusses signs of involvement of “black market” currency exchangers, shell companies, and the misuse of professional service providers. This document, based on the reports of the intelligence services and law enforcement, indicates several problematic issues that may be detected by an EB-5 attorney with proper KYC protocols in place. For example, a source and mode of delivery of the payment of legal fees may alert several AML issues. If the amount of investment capital or funds used to pay legal fees appears inconsistent with the client’s financial history or stated income, further investigation may be necessary not just to present an approvable case for immigration services but also to absolve a lawyer from professional liability. Unconventional delivery of the funds to either the lawyer or the investment enterprise in the US may be a red flag. Large amounts of cash, wires from unidentified sources, cryptocurrency swaps, and chains of transactions between offshore companies may warrant more detailed inquiry.

Once necessary protocols are implemented, these new regulations may lengthen the EB-5 process for clients, requiring them to gather more extensive financial records and provide greater transparency into their personal and business dealings. However, by working closely with their legal counsel and following strict compliance protocols, they can reduce the risk of legal issues and ensure a smoother path to U.S. residency. Thus, it may be more important than ever to set the right expectations for the clients just embarking on an EB-5 process, rather than wait for a burdensome Request for Evidence probing into AML violations.

EB-5 INVESTORS AND ATTORNEYS CAN HELP ADVANCE TRANSPARENCY AND FINANCIAL RESPONSIBILITY

In summary, recent amendments to the Rules of Professional Conduct create significant new risks for lawyers and additional obligations for EB-5 investors, centered around greater transparency and financial accountability.
Attorneys must now take extra precautions in advising clients on financial and corporate structures while ensuring that their clients fully understand the new obligations and possible legal consequences of under-documenting their source and trace of funds. Additionally, lawyers must maintain thorough documentation and potentially involve compliance specialists to mitigate risks associated with personal liability for money laundering or fraudulent activities of their clients.

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[I] PL 117-103, Part 2,(L)(ii)(III)   (“Source of Funds”)

[II] FATF UNITED STATES’ MEASURES TO COMBAT MONEY LAUNDERING AND TERRORIST FINANCING (2016), https://www.fatf-gafi.org/en/publications/Mutualevaluations/Mer-united-states-2016.html.

[III] MLR 17 prescribes using “Client Due Diligence” form that classifies recipients of legal services by the degree of “risk of money laundering and support of terrorism.” Banks and publicly listed companies call for simplified due diligence as “low risk.” Private companies and individuals are listed in the Regulations as “standard risk.” The heightened scrutiny is prescribed for the entities registered or operating in “high-risk third countries,” politically-exposed persons, and when the transaction is unusually large or has no apparent economic reason. See MLR 2017, Reg.33,37.

[IV] See e.g. United States v. Wise, SI 23 Cr. 73 (MKV), (S.D.N.Y. Apr. 25, 2023); United States v. Ravenell, 66 F.4th 472 (4th Cir. 2023);

[V] 8 C.F.R. § 204.6(e)

[VI] MR 1.16, Comm.2

[VII] See OFFICE OF FOREIGN ASSETS CONTROL, SPECIALLY DESIGNATED NATIONALS AND BLOCKED PERSONS LIST (SDN) HUMAN READABLE LISTS (last updated Apr. 27, 2023), https://ofac.treasury.gov/speciallydesignated-nationals-and-blocked-persons-list-sdn-human-readable-list; last accessed Oct.10, 2023 [1] See NATIONAL MONEY LAUNDERING RISK-ASSESMENT, https://home.treasury.gov/system/files/136/2022-National-Money-Laundering-Risk-Assessment.pdf; last accessed Oct. 10, 2023

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