On Nov 01 2017 by Karuna Chandani Simbeck

Path of Funds – It’s Complicated

Moving large sums out of a country for an EB-5 investment is not a simple process, but it is further complicated by USCIS’ unreasonable and changing standards of evidence.

In early 2017, and for the first time, USCIS started issuing Requests for Evidence (“RFEs”) to Chinese EB-5 investors who used third party money exchangers to invest capital in a new U.S. commercial enterprise (“NCE”) in the U.S. 

Chinese citizens are permitted to transfer a maximum of USD 50,000 per person annually, due to government restrictions. While there was a rumor that this limit would be reduced to $7,500, those rumors were put to rest recently when the Chinese government confirmed no such changes and indicated that such rumors were a result of misinterpretation of unrelated regulations according to Chinese news outlets.

Due to the restrictions on transferring money out of China, investors commonly rely on two options to exchange of Renminbi (“RMB”) funds to U.S. Dollars, and transfer to the U.S.: the friends and family method and the single intermediary approach.  The first option is to rely on family and friends, whereby the investor transfers RMB funds to 12 or 13 family and friends. In turn, these individuals exchange the funds to USD and transfer to the investors USD account.  Although the most straightforward method, it requires a substantial amount of coordination and documentation. Accordingly, it takes a few weeks or months to transfer the EB-5 investment funds out of China and into the NCE. 

As an alternative, investors increasingly rely on the second option, namely single intermediary currency swap whereby RMB funds are transferred from the investor’s account in China to the third party’s account, also in China. In turn, the third-party transfers USD 500,000 from an overseas account, most commonly located in Hong Kong, to the investor’s USD account. 

However, after years of approving cases using this single intermediary approach, in early 2017, USCIS began questioning whether the use of the third party as a value transfer exchange has caused a break in the path of funds. Therefore, USCIS claimed, it is not enough for investor to show the lawful source of his income, and must now document the lawful source of funds of the USD supplied by the third-party. Questioning the lawfulness of the investor’s exchanged capital is not only incorrect, but it is also a drastic departure from well-established USCIS policy, and one made with no prior notice to stakeholders.  

The path of funds chosen by investor bears striking resemblance to the informal remittance system known as Hawala, which is routinely used in countries where investors face significant hurdles in attempting to transfer money outside of the country.  In fact, given the strict controls on exporting money, one can presume that EB-5 investors from Iran, including those whose petitions have been approved by USCIS, have routinely used the Hawala System.   

Questioning this currency exchange method commonly used by Chinese investors while approving Iranian investors using the similar Hawala method not only creates a de facto double standard in adjudication, but will also have disastrous repercussions on the longevity and effectiveness of the immigrant investor visa program.

Further, this exchange of assets is no different than the investor exchanging an asset of real property for RMB. In the sale of real property, asset A, the property, is exchanged for asset B, RMB. USCIS does not demand the source of funds for the exchanged sale proceeds nor does it question if the exchanged sale proceeds had been obtained through lawful means. USCIS does, however, seek to establish ownership of the property prior to the sale. In the case of the value transfer exchange, USCIS has in several RFEs conceded that the capital invested belongs to the investor. However, this RFE trend comes as no surprise to some given USCIS IPO Chief Nicholas Colucci’s background with the Department of the Treasury, Financial Crimes Enforcement Network (FinCEN). To deal with unannounced policy changes, attorneys will have to go back to the drawing board. Guessing what other changes USCIS will make is now very much a part of the EB-5 process. 

Given USCIS’ recent policy change in the single intermediary approach, there is a pressing need to innovate in lawfully transferring EB-5 funds to the NCE. One of the possible options would be to develop methodology by which RMB funds remain in mainland China, but the USD invested in the NCE is still considered a lawful source of funds.  The challenge is to ensure that the methodology complies with USCIS requirements, which we think is doable with some careful planning and documentation in collaboration with various industry experts.  

The material contained in this article does not constitute direct legal advice and is for informational purposes only.  An attorney-client relationship is not presumed or intended by receipt or review of this presentation.  The information provided should never replace informed counsel when specific immigration-related guidance is needed.

This article appeared in NES Financial’s Fall 2017 Platinum Medallion Partners ebook “EB-5 Insider” published on October 31, 2017.