Last month, the United States District Court in the Eastern District of Pennsylvania (Philadelphia) ordered a default judgment against an interest in a limited partnership connected with an EB-5 investment. This otherwise obscure judgment is a reminder that USCIS designated Regional Centers have to exercise due care in verifying that only lawfully sourced funds are channeled into investments they manage.  Inglorious fraudsters may always be able to slip through the cracks. But we have some practical tips for Regional Centers wishing to avoid such investors and their unlawfully acquired funds.

Background: Proceeds from Dad’s “Secret Fund” go into an EB-5 investment 

Here is an overview of the facts of the case at 15,000 feet.

On February 18, 2015, the Criminal Division of the United States Department of Justice (DOJ) brought a Forfeiture in Rem action against an EB-5 limited partnership interest. The basis for the complaint was that an EB-5 investor, who also happened to be the son of former President Chun Doo-hwan of Korea, had made an investment into a Regional Center project with funds traceable to corruption proceeds. Specifically, the investor had liquidated a portion of bearer bonds that he owned and which were ultimately traceable to his dad’s “Secret Fund.” He used those funds to purchase an interest in an EB-5 limited partnership.

Top hashtags for dad’s “Secret Fund”: Bribery, Corruption, Money Laundering and Concealment.

Legal grounds for forfeiture action under 18 U.S.C. Section 981(a)(1)(A) and (C)

The basis for forfeiture against the interest in the EB-5 limited partnership was three-fold, and followed a District Court’s authorization in August 2014 for seizure of the $500,000 EB-5 limited partnership interest (“EB-5 interest”) because it was believed to have been purchased with proceeds of corruption:

  1. the EB-5 interest was derived from proceeds traceable to unlawful activity, including bribery of a foreign public official,
  2. the EB-5 interest was secured with funds known to be proceeds of an unlawful activity with a value greater than $10,000, and
  3. the EB-5 interest was acquired with proceeds of an unlawful activity, including bribery of a public official, with the intent to conceal the nature, source and proceeds of such unlawful activity.

The Court granted the government’s motion for entry of a default judgment last month.

What practical take-aways are there from this case?

No Regional Center can have a firewall that is 100% impervious to investors with unlawfully sourced funds. But implementing best practices may help.

Here are several practical tips for Regional Centers reviewing source of funds. Think of source of funds review as a process, not an exercise of completing a checklist:

  • Talk with investors directly when there are facts that present visible disconnects (e.g., no income history but large sums in bank accounts)
  • Do not assume that funds in a U.S. bank account are by definition legitimately sourced
  • Run an OFAC (Office of Foreign Assets Control) screen of your client’s name, and of the names of his or her immediate family members providing a gift for an EB-5 investment
  • Be alert about funds coming from investors who are either current or past government officials and their immediate family members
  • Spend time with investors to understand the facts before you conclude that funds were sourced unlawfully: prospective investors who may seem evasive may have nothing to hide
  • Hire a local expert in an accounting or law firm to conduct a background check of your prospective investor and his or her funds
  • Keep in mind that substance matters over form: document the efforts you make as a Regional Center to refine your practices in reviewing source of funds evidence

There are good reasons to get your EB-5 source of funds ship into shape. For starters, USCIS requests far more substantiation of the lawful source of EB-5 funds than banks, and adjudications of I-526 petitions are now tougher than ever. Also, we know that proposed EB-5 legislation that may be enacted later this year contains explicit reference to the FCPA (Foreign Corrupt Practices Act). No matter the stage of your offering, it is not too late to refine your practices.

Sound best practices are a firewall

Implementing best practices on reviewing source of funds will likely result in fewer occurrences of accepting an investor with funds sourced unlawfully. Forfeiture claims and litigation can be costly to Regional Centers, and negative PR about any aspect of a Regional Center’s practices can hurt business. Best practices make sound business sense.

While recognizing that a few inglorious fraudsters may always slip into one of your limited partnerships, having workable and understandable guidelines in place is sound EB-5 practice. And above all, be sure that your firewall is more than a checklist. Create a source of funds review process and ask your investors questions.