Recently, USCIS held an interactive engagement session with stakeholders on the issue of proving lawful source of funds for EB-5 Entrepreneur Investor applicants. The following is from my notes from the meeting. The most common Requests for Evidence or “RFEs” in EB-5 investor cases involve insufficient proof of the legal source of funds used to invest in commercial enterprises or regional centers. Proof of the required job creation is another frequent RFE issue.  However, this conference focused only on proving lawful source of funds. Representatives from the EB-5 division of USCIS said they were looking to improve processing times, including reducing the number of RFEs. They discussed evidence of  income/earnings, property and loans to trace source of funds. There were four main themes to the government’s tips for submitting evidence:

1. Make sure documents are not internally inconsistent between them or with the application;
2. Explain why evidence that would be required or useful is not available;
3. Provide probative evidence that proves or supports a claim to eligibility.

If there is any lesson from the following discussion, it is that to reduce the chances for RFEs and increase the chances for approval, “make it simple and make it clear” that the evidence proves each element in the EB-5 regulation.

• Proving source of funds from work/earnings income.

Evidence that the investment came from income or earnings can be proved by showing:

a)   Salary, bonuses, and/or commissions received;

b)   A detailed resume – including average monthly salary for each position (although resumes alone are deemed self-serving and should be supported by third party backup documentation);

c)   Self-declarations or letters from employers, again with proof of income/salary/year end earnings received/paid;

d)   Income taxes paid;

e)   Bank statements showing deposits over a period of time.

USCIS will give more weight to documents or letters from third parties such as banks and government agencies. Several pieces of evidence should be presented to bolster the same income figure, such as a self-declaration or bank letter with bank statements and/or pay stubs. A resume only would be considered too self-serving and would be given little weight, but a resume with a signed letter from the investor’s company abroad along with bank statements showing regular pay deposits would be given more weight.

• Source of funds from investment income or proceeds.

It is less common for USCIS to see applicants proving source of funds from dividends, interest, sale, or liquidation of their non-real property investments. But if an investor has these investments, the investor must show the following:

a)    Ownership of the investment funds that were used or liquidated by the EB-5 investor before investing in the EB-5 project;

b)   Proof that the prior investment itself was obtained lawfully;

c)    Proof of how that investment was accumulated over time, i.e., the path of investment up to the point it was used to invest in the EB-5 project.

Examples of this type of evidence include proof of ownership (e.g., stock certificates, bank/investment account statements), purchase documents, income tax statements, and documentation of the sale of the investment.

Here are a couple of examples given:

a)    From petitioner’s income – proof of acquired income, accumulated over time:

• Example 1: Suppose the EB-5 investor makes $200,000 a year for eight years and saved 10% from every paycheck. The investor should provide the bank statements over time, a letter from the employer proving the employment, and the bank statements showing transfer to/accumulation of savings funds over time.
• Example 2: The EB-5 investor earned income from an employer and used that income to purchase property or invest in a business. The investor will need to show sufficient income to purchase the property or business investment. For example, to show the home sale proceeds were used for the EB-5 investment, the investor would have to show she had sufficient income and lawfully gained income to purchase the house in the first place.
• Example 3: The EB-5 investor owned a business abroad and used money from that business for the EB-5 investment. The investor would have to show evidence of ownership in the business, for example, proof of her contribution of $100,000 into the company. If the investor then took a loan from company using equity interest as collateral, she would have to show the loan from the company used to put into the EB-5 entity, and the lawful source of the original $100k she put into the company abroad. (More on this below.)

• Using funds from gifts.

Gifts from someone else’s earned income, such as from a parent, require proof that the gift was obtained by lawful means. In other words, how did the parent get the funds in the first place before gifting them to the son/daughter investor in an EB-5 project?

• Example 1: Suppose “A” gets a gift from her father. A should document that her father gave her an unconditional gift (no expectation of repayment). A will also have to show that the father acquired the gift from lawful sources. See proving income, investment sources above, or property below.
• Example 2: Suppose “B” gets a gift from his mother. B should show the gift document and evidence of the mother’s salary over a period of time, her bank statements showing deposits from work, and a letter from her employer.

Although not discussed on the call, in other resources investors are reminded that gift transactions need to be clearly documented and should comply with local/foreign gift tax rules and any foreign rules relating to limits on cash or other funds that can be taken out of the country to be consider lawful gifts.

As a general rule for all the scenarios above, the investor should show the path of funds from accumulation over time and up to deposit into the escrow account for the new EB-5 commercial enterprise.

• Using funds from real property to invest in an EB-5 project.

Often USCIS will see EB-5 investment funding sources from the sale of real property or from loan proceeds where the property is used as collateral. (The EB-5 enterprise or property cannot be used as collateral.)  In either scenario, the investor must show ownership of the property at some point. Examples of appropriate evidence may include ownership registration, a deed, a purchase contract, a mortgage contract, a bill or transfer tax, payment receipts, and/or bank statements.

Several issues can come up in the property context where applicants should try to head off an RFE by submitting the documentation below with the initial application.

a) Prove the investor had sufficient funds or income to purchase the property in the first place. Include proof the property was lawfully obtained, and the funds used to purchase the property were lawfully obtained. E.g., gifted, income, bequeathed, savings from employment, etc.

b) Provide the property purchase contract. If it is unavailable, the applicant must provide proof the contract is not available or provide an explanation as to why it’s not available plus provide corroborating evidence of the purchase.

c) Another issue is an application with internal inconsistencies.  This comes up where the purchase documents differ from other documents in the record (e.g., the purchase/sale contracts do not match the bank statements, etc.). It is important that all the documents in an EB-5 petition be internally consistent! A common problem is where an investor contracts to buy real estate abroad before it is constructed, and the purchase price or valuation is sometimes later changed or amended. The difference in price or valuation among the documents needs to be explained. Another issue is where the investor buys unit A initially but ends up with unit B. The different addresses among the documents would need to be explained, especially from a third party such as from the seller or a government agency.

d) Mortgage contracts should be included in the EB-5 application. The details should reflect the investor’s ownership at any given point in time. This is important because it could affect the owner’s actual equity available for the EB-5 if the property abroad is used for collateral for a loan that will be used for the EB-5 investment. (See example below.)

e) For property sales, the proceeds of which will be used for the EB-5 investment, the investor must demonstrate ownership of the property; a contract for sale of the property; proof of payment received from the sale (e.g., sale or transfer tax receipts, wire transfers); ownership of the property now in the buyer’s name; and appraisals or other reports. As stated above, trace the path of those funds to the escrow account or direct investment into the commercial EB-5 enterprise.

Some property sale evidence issues that come up include the following:

a)  Lack of proof of the property sales proceeds from purchaser to seller/EB-5 investor. It is necessary to prove the entire transaction and flow of money to the EB-5 investor.

b)  When the property was sold, what was the state of the seller/EB-5 investor’s mortgage? Was it paid off? In other words, were the sale proceeds actually available to the seller for the EB-5 investment? For example, when the EB-5 investor first acquired the property, it sold for $300,000. Suppose he put $100,000 down and took out a mortgage of $200,000. The property later sells for $500,000. Was the $200,000 loan paid off? If so, only $300,000 was available for the EB-5 investment. This must be adequately proven.

c)  USCIS wants to see corroboration by a third party of the sale of real property. Examples include: sales tax or transfer tax receipts; and ownership registration in the buyer’s name from a government entity. They also want to see a property appraisal that shows the sales price was reasonable, especially if the EB-5 investor claims it increased in value over time.

d) Where property is used as collateral, USCIS wants to see proof of ownership of the property for the loan; evidence of the loan itself; contracts, notation of a lien, value, and transfer of the money from the lender to the EB-5 petitioner. Loan contracts should indicate it is truly a loan and should show repayment terms, obligation to repay, duration of the loan, interest rate, and a description of the property used as collateral.

e) For example, suppose another individual owns the property securing the loan. The EB-5 investor has to own the asset securing the debt in order to use the loan proceeds for the EB-5 investment. USCIS gave this example: EB-5 Petitioner gets a loan of $1 million secured by property owned by his brother. The brother agrees for the Petitioner to use the property as collateral. USCIS said this would not work (though there were some attorneys on the call that disagreed.) USCIS said that instead, the brother could take out a loan for $1 million secured by his own (the brother’s) property and then the brother could gift the petitioner the loan proceeds (with proof the loan proceeds and property were lawfully obtained and proof of the gift).

• Using loan proceeds from company equity ownership or loans.

Where the EB-5 Petitioner owns a company or has an ownership interest or asset that is used as collateral for a loan to be used for an EB-5 investment, the investor should prove the following:

a)    How the company was established;

b)   The company’s ability to issue the proceeds (both the authority to do so and sufficient funds);

c)    Proof of the funds or equity were used to secure the loan;

d)   Proof of the path of loaned funds from the company to the EB-5 Petitioner;

For example, suppose the EB-5 Petitioner is employed by company A abroad and she has a 66% ownership interest in the company worth $1 million a share. To prove she is using a loan against the shares as collateral, she should provide proof of:

1. The business operations,
2. Taxes paid
3. A financial audit report
4. Company and personal bank statements
5. Evidence of investment in the company (e.g., share certificates, petitioner’s funds used to contributed capital to the company were lawfully obtained (see above)).
6. Evidence of personal and primary liability for the loan
7. Evidence the loan was authorized by the company (e.g., minutes of meetings, etc.)
8. Evidence the company’s money was transferred to the Petitioner or to her escrow agent for use in the EB-5 enterprise.

• Other issues

Some points that were raised during the conference Q&A include the following issues/comments:

a. Regional center fees (above and beyond) the $500k. Must the investor also prove the syndication or administrative fees also came from a legal source? USCIS is concerned that the administrative fees are not taken from the $500k/$1million minimum investment required. Some guests commented that there was no legal authority to examine the administrative fee source of funds.

b. Foreign currency exchange issues come up, especially with Middle Eastern clients where investors exchanged foreign currency for dollars used to fund their EB-5 investment. It can be hard to prove the source of the money exchanged two years ago as the same funds for the EB-5. USCIS wants to see where were the funds deposited two years ago, and the records since then to trace the funds.

c. If an applicant or the person’s attorney disagrees with the requests in RFEs, they should provide the evidence or provide regulatory or statutory citations as to why the evidence is not required. Another strategy is when filing the initial petition, indicate what records are anticipated will be requested and explain why they cannot be found or submitted, or efforts made to get them and what happened.

d. For some Indian and Chinese investors, many property owners put their deeds in their children’s names and then take a loan out against them for EB-5 investments. USCIS said they would look at this issue.

Conclusion

As noted at the outset, proving lawful source of funds is a frequent RFE issue. It is best to document well an initial application and/or at least anticipate requests and explain why the documents are not available. In addition, the simpler the transaction for acquiring funds to invest, the easier it is to explain and provide supporting documentation. USCIS seems to do a better job with simpler arrangements. The more complicated the transaction, the more difficult it will be to explain or document. In either case, statements by the petitioner should be backed up with as much secondary evidence as possible. If you have questions or need some help with your EB-5 application, please call us at (206) 282-2279.