While most U.S. EB-5 attorneys have a solid understanding of “Source of Funds” (SOF) requirements as defined in both regulatory language and precedent decisions, the issue of “Path of Funds” is relatively new for many. SOF deals with tracing the origin of the EB-5 investment funds to prove they originate from lawful sources; POF deals with the flow of money from the EB-5 investor to the EB-5 project…and POF is now presenting some thorny issues for Vietnamese and Chinese EB-5 investors.
Here in Vietnam, as is the case of China, the government restricts the amount of money a person can send overseas. As the only EB-5 Regional Center with an established office in Vietnam, Vietnamese AVS EB-5 investors fund directly with the Regional Center, bypassing this issue, but for others, this represents a substantial problem for their I-526: to be able to fund an EB-5 investment, investors from Vietnam and China must rely on either assembling a group of friends and family willing to do a series of wires or, more frequently, on an intermediary third party who charges a fee to the investor to receive local funds in country and subsequently wire the funds from a third country to the U.S.
This second way of transferring funds through an intermediary third party is nothing new; in fact, it is commonly used by EB-5 investors from other parts of Asia. It is called “hawala” and it is practiced extensively in the Middle East and the Indian subcontinent. According to Investopedia, “hawala is a method of transferring money without any money actually moving…an alternative remittance channel that exists outside of traditional banking systems”. The hawala system started in the 8th century between Arabic and Muslim traders who didn’t want to make long journeys with cash, vulnerable to thieves; it permitted trade to be carried out without risk of traveling with the money collected.
Today, the use of hawala (or whatever it may be called locally) is embedded into cultures worldwide; just as EB-5 investors use third party intermediaries to fund their investment, migrants all over the world use the system to remit funds to their families back home. The reality is that hawala is used in China and Vietnam as a means of complying with local banking laws…and the USCIS is effectively punishing such compliance.
EB-5 laws and regulations are silent on the use of third party intermediaries for EB-5 funding, so the Requests for Evidence (RFEs) which USCIS suddenly started issuing in 2017 caught U.S. immigration attorneys and EB-5 applicants off guard. For reasons which are not clear, USCIS starting issuing RFEs which basically wanted to know where the funds wired by the third party intermediary originated…in other words, they are asking for the Source of Funds of the third country individual or company which has charged the Vietnamese or Chinese investor a fee to provide this service. Unfortunately, our office this week has seen what may be among the first USCIS I-526 denials (not an AVS investor but one from another EB-5 project) based on the investor’s inability to prove where their money agent’s foreign funds originated.
While this new USCIS adjudication policy came out of the blue without warning (or any regulatory provision substantiating the change the I can find), no doubt that it originated as a well-intended way to ferret out money transfers which originate from illicit activities such as money laundering, a focus the USG enforcement which continues to extend beyond banking regulations. Unfortunately, in the EB-5 context, the net result is that the proverbial baby is being thrown out with the bathwater, as I will explain. Moreover, the victims are EB-5 investors who have perfectly good SOF/POF but who are from East Asia and not the Middle East or subcontinent. Moreover, I’ve yet to hear of this line of questioning being raised in any Middle East, Pakistan or India RFE’s; if hawala is acceptable for these EB-5 investors, why isn’t it acceptable for investors from Vietnam and China? (It will be interesting to see how this impacts EB-5 investors from India, the next country expected to backlog; while the Indian government has attempted to regulate hawala, it is an extremely common way of funding EB-5.)
In the RFE’s I’ve seen, the USCIS is also demanding proof that the party wiring to the U.S. is a registered currency trader; there is no basis in current EB-5 regulations for this stipulation/requirement. The entities who provide money services for EB-5 investors are largely privately owned multinational companies with businesses in both Vietnam/China and a third country, typically Singapore or Hong Kong. In a typical deal, the company will charge a 1%-2% commission to handle the transaction, and to both Vietnamese and Chinese EB-5 investors, this is considered the reasonable cost of doing business in a way that complies with their local banking laws. Considering the fact that the vast majority of past EB-5 investors and future ones waiting on I-526 approval are from China, it is safe to say that the vast majority of past, present and future Chinese EB-5 investors would have their I-526s denied if this new policy was applied universally. If applied to India, the policy would effectively make EB-5 funding impossible for investors from the from the three countries with highest EB-5 demand.
IIUSA and other stakeholders – especially you scalliwag fake-TEA projects in NY who wind up with the bulk of EB-5 investment dollars anyway and who have the big lobbying budgets – need to sit down with USCIS and educate them on the reality of hawala. I get the concern about money laundering, but at least in Asia Pacific, this is just a convenient solution for legitimate investors working with private companies who are happy to help them out while making a buck. Third party money transfers are neither organized enough nor voluminous enough to be attractive for money laundering purposes, and criminal enterprises looking to launder funds are not going to do it $500,000 at a time when multiple banking jurisdictions worldwide are still, despite enforcement efforts, happy to help them launder tens of millions of dollars at a time.
The EB-5 regulations and case law are clear on what the SOF and POF demands from the investor, and we’ve all been playing by the same rules. USCIS should retract these RFEs because they create an extraordinary and unreasonable burden on vetted, accredited EB-5 investors relying on an already-heavily-regulated international banking system. Treating qualified investors as de facto financial institutions and placing them in the impossible position of proving KYC (“Know Your Client”) banking requirements for third parties is simply unfair.
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