On May 30, 2013, following months of discussions, stakeholder comment, and even federal court litigation, USCIS finally issued its much-anticipated Final EB-5 Adjudications Policy Memorandum. The May 30th Memo sets forth an accepted framework for Regional Centers and Investors alike regarding topics such as amendments, escrow, bridge financing, states’ TEA designations, and material changes to the I-526 business plan at the time of condition removal. Yet, the May 30th Memo was largely silent on perhaps the most central and time consuming issue for most EB-5 investors: guidance on source of funds.

Determining what constitutes an acceptable EB-5 source of funds (and even more so, what documents are needed to carry the day) can be quite challenging for investors and their attorneys. The regulations provide that capital investments acquired “directly or indirectly by unlawful means (such as criminal activities)” are not qualifying. This is expected and painfully obvious. The regulations also provide a brief list of examples of documents which are very generally worded and are so encompassing that most are largely inapplicable unless an investor has a great many sources of capital. Determining exactly what is needed can be quite difficult in answering the one question nearly every investor has:

“How far back do I have to go to prove my investment is lawful?”

The regulations, memoranda, and case law give minimal guidance. It is of course accepted that the investor need only demonstrate by a preponderance of the evidence that the source of funds is lawful. See Matter of Chawathe, 25 I&N Dec. 369, 375-376 (AAO 2010). But what is the evidence needed to show wealth that was acquired long ago?

The regulations suggest including tax returns “of any kind filed within five years” (8 C.F.R. 204.6(j)(3)(ii)), but that suggestion is not terribly helpful in answering the question where, for example, the investor liquidated an asset acquired more than five years ago. Although never codified in a regulation or memorandum, longstanding agency lore led to an acceptance of the so-called “Seven Year Rule.” We covered that this “Rule” is no longer followed and RFEs seeking evidence going back even to the 1990s are disturbingly becoming more common.

Indeed, USCIS has never really addressed the source of funds topic publicly with guidance, instead sending its signals through stakeholder calls, RFEs, NOIDs, and denials. Such an approach unfortunately can lead to great inconsistencies between program administrators, individual adjudicators, and over time. We saw this most strikingly this past Spring when USCIS abruptly departed from a plain reading of the regulatory definition of “capital” and issued narrow and largely arbitrary guidance changing its policy on the use of loan proceeds as a source of funds, following months of surprise denials involving facts materially similar to cases approved just last year.

So perhaps now is the time for USCIS to re-engage its stakeholders as it did through much of 2012-2013 and develop comprehensive source of funds guidance (as it did compared to its draft guidance issued relating to I-829 issues) that can provide investors with greater clarity and reduce inconsistent adjudications. This would assist all stakeholders until comprehensive new regulations can be issued.

Until that happens, investors must continue with this somewhat unpredictable state of affairs. We all agree that investors need not be excused of their statutory requirement of showing the lawful source of capital simply because it was acquired long ago; it is just that it can be quite difficult. The following are some best practices to consider in documenting such cases:

  1. Focus on what is generally accepted to be commercially reasonable regarding document retention. Whether or not it was ever the law, the “Seven Year Rule” gave investors a Maginot Line with a general relaxation of the documentary requirements to prove a source of funds if an asset was acquired more than seven years prior to the filing. Even if not followed, the logic behind this practice can still be used by investors in arguing that it is not reasonable that they be required to produce documents from long ago that would not otherwise be kept in the normal course of business. Analogies can be made. For example, the IRS advises that absent fraud or failure to file, returns and records need not be kept indefinitely. The regulations as well, only reflect an intent to include five years’ of returns as described above. Investors can use such provisions to push back on tricky RFEs or affirmatively argue that including such documents would be unreasonable.
  2. Remember that only the source of funds must be documented, not the Investor’s entire net wealth. Under the regulations, Investors need not prove the legality of their entire net wealth, only the source of their EB-5 capital investment (and perhaps the administrative fee).There are a few caveats to this general point. Tricky issues arise when an asset is liquidated, such as when real estate is sold or mortgaged. USCIS has taken an increasingly stringent approach requiring an investor ability to purchase an asset liquidated for EB-5 capital. Further, USCIS often requires the investor to prove that beyond that purchase, his/her income or assets were sufficient to live on at the time.While the liquidation transaction documents may be quite recent, the documents contemporaneous to the purchase documents might be long discarded. 8 C.F.R. 103.2(b)(2)(i) instructs that“[I]f a required document, … does not exist or cannot be obtained, an applicant or petitioner must demonstrate this and submit secondary evidence … pertinent to the facts at issue.” Therefore, if a record cannot be obtained due to the passage of time, it is important to demonstrate this through valid and objective evidence, such as certifications from banks, property registration entities, and tax officials.

And of course one should also…

  1. Liberally use personal and third-party statements. Few investors’ cases are perfect or crystal clear. As USCIS takes the position that statements by counsel are not evidence, investors themselves should execute personal statements filling in any “gaps” of evidence brought about because of time.

Of course, USCIS sometimes sees such gaps as self-serving, and thus they can be bolstered through third party statements corroborating the petitioner. Such statements are most probative when executed by individuals unrelated to the petitioner or the transaction, who to all outward appearances do not have any interest in the approval of the I-526 petition.

Finally, investors and stakeholders would do well to remind USCIS that the case is to rise or fall not based upon the inclusion of any one particular document, but instead based on the preponderance of the evidence. In other words, just because an investor cannot meet every single specific request of an RFE, that does not necessarily mean that his or her burden has not been met. Proving the lawful source of funds can be done even if certain requested documents are cannot be provided.