By Melissa Davis
A key component of making a successful EB-5 investment is the ability to demonstrate the source of funds used to make the investment.
The investment must be derived from a “lawful” source. It may seem like this should be a straight-forward presentation, however depending on the nature of the source of funds it can be more complicated than one may expect. Here is what investors and their service professionals should consider when planning for the EB-5 investment or when providing evidence to USCIS after the investment has been made.
Source of funds information required by USCIS
USCIS eligibility requirements dictate that the investor must demonstrate that the capital invested in the new commercial enterprise was obtained through lawful means.[1] The investor must also document the path of the funds to establish that the investment was made with the investor’s own funds.[2]
This means that investors must demonstrate not only how they obtained the capital to make the EB-5 investment, but also that it is their own and that it was derived from a lawful source.
PRESENTING THE PATH OF FUNDS
When presenting a source of funds analysis, some general rules apply to present a clear picture of the path of funds:
- Be specific. Do not generalize the source of funds. The investment must be traced to a specific source.
- Present the evidence in a sequential manner so that that the reader can easily follow each step along the path and include supporting evidence for each step along the path.
- Consider using flow charts or visual aids at the beginning of the presentation so that the reader sees a picture of the path before reviewing the evidence.
- Refer to the supporting evidence in clearly labeled appendices. When referring to bank accounts, use specific bank names and account numbers.
- Ensure that all documents in foreign languages are translated by a certified translation service and that the certification is included with each translated document.
- Consider having a third party or independent expert review the narrative and supporting evidence to confirm that the path of funds history and evidence are clear and complete.
SUPPORTING EVIDENCE
In establishing that the capital was acquired through lawful means, the investor must provide evidence demonstrating the direct and indirect source of the investment capital.[3] USCIS requires specific types of evidence to demonstrate lawful means.
MONEY EARNED FROM PROPERTY OR INVESTMENT
If the investment source is derived from money earned from the sale of property or an investment, USCIS requires evidence of property ownership, including property purchase or sale documentation. Be prepared to provide evidence regarding how the initial investment was made or property was purchased. For example, if an investor is selling a piece of real estate that was owned by the investor, provide evidence of the source of funds used to make the original real estate purchase. Also provide evidence of the payment of any necessary taxes associated with the property while it was held by the investor.
Upon sale, segregate the sale proceeds in a separate bank account and avoid commingling the proceeds with other sources of funds. This step allows the investor to demonstrate the “path” of funds more easily.
FUNDS DERIVED FROM GIFTS AND LOANS
As of May 14, 2022, gifts and borrowed funds are permissible for petitions filed on or after that date, provided:
- They were gifted or loaned to the investor in good faith; and
- They were not gifted or loaned to circumvent any limitations imposed on permissible sources of capital, including, but not limited to, proceeds from illegal activity.[4]
USCIS requires evidence of any loan or mortgage agreement, promissory note, security agreement, or other evidence of borrowing which is secured by the investor’s own assets for which the investor is personally liable.[5]
Investors relying on gifted or borrowed funds must demonstrate the lawful source of those funds by submitting appropriate evidence for the party making the gift or, if not a bank, the lender.[6]
Investors should be prepared to provide any legal documents associated with the gift, including the gift instrument as well as the bank records evidencing the transfer of the gift funds to the investor. Bank records should include those of the gifting party as well as the recipient. Make sure to include not only the bank statement but also the related bank documentation support that contains the names and financial institutions associated with the transaction.
Investors using funds from a gift must be able to demonstrate how the person gifting the funds obtained those funds to demonstrate they are from a lawful source. The gifting party essentially must go through the same steps as the investor would have to demonstrate the funds were derived from a legal source.
For example, if the gifting party obtained the funds for the gift from the sale of stock or securities, evidence will need to be submitted to demonstrate the source of funds used to purchase the stock or securities. If the value of the stock grew over time, provide evidence in the form of monthly securities statements that document the growth in value.
If the funds from the gifting party were held in a bank account over a period of time, bank records will be required to demonstrate the gift proceeds remained in the bank account. Many financial institutions in the United States do not maintain bank records for a period longer than seven years and banks in foreign countries have similar document retention policies. In situations where the gifting party did not maintain bank records and such records are no longer accessible, obtaining a statement from the financial institution regarding their retention policy may be helpful.
Once again, it is worth noting that segregating the funds derived from a gift or loan in a separate bank account to avoid commingling will allow the investor to demonstrate a clear “path” of funds in the source of funds presentation.
MONEY EARNED FROM EMPLOYMENT
Investors using money earned over time from their occupation must demonstrate that appropriate taxes were paid on the earnings. This can be accomplished by providing the following evidence:
- Personal income tax returns for a period sufficient to establish the accumulation of earnings to fund the investment.
- Evidence of income such as earnings statements or official correspondence on company letterhead from current or prior employers stating when the investor worked for the company, position held, duration of employment, and how much income the investor received during employment.
Evidence other than tax returns may also be presented to demonstrate the payment of individual income tax on earnings such as an individual income tax report or payment certificate for taxes paid on wages and salaries, income from labor and service or business activities, royalty income, interest and dividend income, and rental income.
Including a chart that tabulates the earnings over time to demonstrate sufficient capital was accumulated to make the EB-5 investment may be helpful to the presentation. Beware that earnings deposited into a personal bank account which were commingled with funds from other sources could be problematic and a detailed explanation regarding any other sources of funds may be necessary.
MONEY EARNED FROM A BUSINESS
If the investor’s capital was derived from a business in which the investor had an ownership in, or if a gifting party obtained the funds from a business, evidence will need to be submitted that demonstrates the business is a legal entity. The evidence required includes:
- Foreign business and/or tax registration records.[7]
- Five years of business income tax returns.[8]
- Corporate, partnership, or other business entity annual reports and agreements.
- Audited financial statements.
The investor or gifting party may submit bank statements to demonstrate the receipt of funds from the business. Including both the business and personal bank statements to illustrate the outgoing transfer of funds from the business side, along with the corresponding incoming transfer into the personal side, will bolster the presentation.
USE OF INDEPENDENT EXPERTS
Consulting with experts prior to making an EB-5 investment may help to avoid potential pitfalls in the investment process. If an EB-5 investor has a choice of different sources of capital to invest, consulting with an expert may help the investor choose a source of capital that is most easily documented for the source of funds presentation.
The use of an independent expert to assist in the source of funds presentation may also help present a more compelling analysis to meet the “preponderance of the evidence” standard. A foreign tax professional may be of assistance in demonstrating that a foreign company filed the appropriate types of tax returns and paid the appropriate taxes. When commingling of funds has occurred, a forensic accounting expert may be helpful in presenting an accepted tracing methodology that demonstrates the path of funds which were commingled.
BEING PREPARED CAN LEAD TO SUCCESSFUL OUTCOME
Making an EB-5 investment can be a life-changing decision for an investor. Advanced planning on the source of the EB-5 investment may prevent “hiccups” in the process by allowing the investor to present a source of funds presentation that is solid and easily understood by USCIS. Engaging with experienced professionals will help the investor achieve a successful EB-5 process.
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[1]8 CFR 204.6(j)(3)
[2] In re Matter of Izummi, 22 I&N Dec. 169, 195 (Assoc. Comm. 1998).
[3] 8 CFR 204.6(j)(v)
[4] INA 203(b)(5)(L)
[5] 8 CFR 204.6(e)
[6] INA 203(b)(5)(L)(iii)(II)
[7] 8 CFR 204.6(j)(3)(i)
[8] 8 CFR 204.6(j)(3)(ii)
Melissa Davis
Melissa Davis is a partner at KapilaMukamal, LLP, a boutique CPA firm located in South Florida. She provides forensic accounting, litigation support and insolvency advisory services to clients. She has conducted large scale fraud investigations, including forensic and securities fraud and corporate business conduct analysis. Her experience includes civil and criminal litigation support, asset tracing, tracing commingled funds, damage calculation services, and forensic accounting services associated with EB-5 investor related matters. Davis has extensive experience in investment and Ponzi-scheme investigations, which have involved working in conjunction with the SEC, the FTC, the CFTC, federal equity receivers, investors, and bankruptcy trustees.
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