Hi everyone. This is Sam Silverman, managing partner of EB-5 Affiliate Network. Thank you for taking some time to join us today. Today, we’re going to be discussing lawful-source-of-funds best practices for Russian and Eastern European nationals. Today, we’re going to be joined by two immigration attorneys who have extensive experience working with Russian and Eastern European nationals. They both speak Russian, and we have worked with both of them over the past several years.
During the webinar, if you have any questions, please use the chat box to submit them throughout the webinar, and we’ll address as many questions as we can at the end of the webinar. So again, if you have a question on something, use the chat box, send us a message, and we’ll try to cover as many as we can at the end. Here’s a quick overview of what we’re going to be discussing today. We’ll speak a little bit about our speakers. We’ll talk generally about source of funds and how it’s a component of the EB-5 investment process and some common source of funds and issues that come up when working with investors, particularly from Russia and Eastern European countries. We’ll go through one specific case study and share some information about a template that we have available as a kind of initial point to start. And then we’ll open it up for questions at the end.
So, before we jump into the source-of-fund slides, a quick announcement: we recently updated our targeted employment area map. It now has the most current data and gives you an instant yes or no. So, if you’re looking for a potential project site to qualify for TEA status, your first step is going to be determining if it’s a TEA area or not, and therefore whether it would allow investors to invest the lower $900,000 versus $1.8 million, a second recent development. We recently updated our EB-5 guidebook with all the new regulation that went into effect at the end of 2019. It’s available for free at eb5guidebook.com, or if you want a hard copy, it’s also available on Amazon as well. Okay. So quick, quick introductions. So, as I mentioned earlier, I’m Sam Silverman. Today it’s just going to be me. Usually I’m joined by my partner Mike or Tim, and you can see a little bit of our backgrounds on this slide here.
High level, we’re all from institutional investment consulting and legal firms and attended some of the top universities in the US. A little bit of background about EB5AN: We’re a national EB-5 regional site operator and manager. Our regional centers have sponsored more than 1800 investors from more than 60 countries. We’ve been around since 2013. And we have an extensive portfolio of projects around the United States. This is a quick graphic showing the coverage of our regional center network. So, any project, whether it’s manufacturing, assisted living, or healthcare technology, can be sponsored by one of our regional centers, as long as it’s located in an approved geographic area. And this is a map showing where some of our investors come from—most importantly, investors from a wide variety of backgrounds all around the world consistently find value in our investment approach.
And now I’ll turn it over to Irina and Charles to let them introduce themselves and share a little bit of background about how they got into the EB-5 space and what their experience has been working with investors from both Russia and other European countries in the region.
Thank you so much, Sam. My name is Irina Rostova, and I started working with the EB-5 Immigrant Investor Program actually as a result of researching the program for a good family friend of ours about 10 years ago. I thought it was a great program. It was straightforward. The requirements were straightforward in terms of the investment amount and the job creation. But at the time I felt like not a lot of immigration attorneys felt comfortable with the program itself. And since my background was in banking—I came from JPMorgan Chase before I went to law school—I felt like it was a great fit for me. And since then it’s been wonderful. My law firm has grown a lot. We’ve been focusing on EB-5 investors, and we’re presenting it [the program] specifically to mostly investors. And at this point, we’ve represented investors for probably almost every country that has applied through the program.
We have a lot of investors from, you know, Europe and Eastern Europe, lots from Asia and Africa, the Middle East, and South America. So, like, a very diverse portfolio. I enjoy it because I get to see the different techniques that we use for sources of funds. So sometimes, you know, we get ideas from investors who we represented in Argentina, and we apply those ideas to investors from Ukraine or from Russia. And of course, the volume of the applications that we have helps. And we also serve as reviewing attorneys for some of the larger regional centers. So, before any of their investors could file an application, we would review it for quality control. That exposure allows me to stay on top of the trends, which is also very helpful because immigration likes to change the way they adjudicate petitions all the time. So it’s really good to have, you know, a nice volume from different countries where you can constantly see the differentiators that they’re making to education.
Thanks Irina. My name’s Charles Raether, and as far as my background with EB-5 goes, I’d say it goes back to, I guess, what, eight, nine years. I’ve had my own practice for about 10 years. Prior to that, I was working overseas actually in Russia and Kazakhstan, doing a lot of work actually there for Jones Lang LaSalle. So, my background is I’ve been an attorney for about 20 years, but for a while, I was actually living and working in these countries. And so unlike Irina, I had to learn Russian the hard way by actually living there, being there for a while, and got to develop my skills that way, working over there.
And then, when the subprime mortgage crisis hit, you know, it hit everywhere, including developing markets. And that’s why I came back in 2008, 2009. And, how did I get into EB-5? I can’t remember, but at that time, my practice was based up in Washington, DC. We were doing a lot of immigration work, but there, there wasn’t much of a nexus there for EB-5 except for the regulatory side with CISP in there and Homeland Security. But we had clients that were coming up, primarily Russian from South Florida. They knew I was Russian or that I spoke Russian, but I was actually American. And they started traveling, you know, up to DC to work with me. And so, I started traveling down to South Florida, and then we eventually set up a virtual office down here and then eventually moved the entire practice and the family down here. So, I’ve been doing EB-5 for that entire period of time. I probably have more of a focus on these markets, and Irina has probably more of a broad client base in terms of countries and all that. I would say the majority of our EB-5 clients are from Russia and these markets. So, we’ve tended to go deep in these markets as opposed to having a broader net with other investors. And what can I say? Uh, it’s been a trip.
It’s been very exciting. And I, as one aside, just for people that are working with investors from these markets, it’s interesting to see how the market has evolved over the last eight, ten years because, you know, eight years ago when I was talking to Russian investors or other investors from this part of the world, you talk to them about the general concepts and structures of EB-5. And they would look at you like, you know, you were crazy, that this was just some con game and a scam, and I’m never going to see my money again. And it’s interesting to see over the years how the knowledge base and level of, uh, I guess acquaintance with the program has changed for these people in these countries. And so, now, it’s much more common that you bring up EB-5 and people already have a general idea what it is, and oftentimes they already know some of the details and they’re ready to move forward with it. So, I think that’s encouraging for the market in general, in terms of attracting or working with investors from these markets, because there’s definitely a much higher level of understanding of the program than there was, say, five years ago, and a much greater acceptance of it. And now you’re working with, you know, clients that have friends or friends of friends that have gone through the program. And so, they’re much more comfortable with it.
Great, great. Thank you. Thank you both. I put together one slide, kind of an overview of both, um, of each law firm. So, Irina, maybe if you can start first and just share like a minute or two on kind of, you know, why investors from these regions, you know, why you think you’re the best option for working with them on source of funds with respect just to Russian and Eastern European investors. And then I’ll let Charles jump in and share a little bit about his approach, and then we’ll dive into the specifics of the program.
Sure. Uh, well, as Charles mentioned, he started his practice about nine years ago. We started at approximately the same time. And, so for Eastern Europe, my initial focus was just on Eastern European clients because they speak fluent Russian, and obviously understood kind of the culture and the specifics of operating a business there as well as here and still, despite the fact that the firm has grown and we have since represented a lot of other countries, I’m still going to make a rough estimate that about 20 to 25% of all Russian-speaking investors are represented by me. And I believe Charles has the same numbers, or maybe a little bit higher than that. So, um, I think that that’s kind of why it was a good idea for the two of us to do this panel because most of the investors that have successfully gone through this program have been represented by either Charles or I in the last few years.
That gives us a great glimpse because obviously we’re familiar with the nuances of what’s going on specifically for Russian investors, for Ukrainian investors, for the systems of reporting in Latvia, for the systems reporting in Kazakhstan. You know, I do enjoy having a diverse kind of portfolio of investors because we do get a lot of really great kind of ideas or exposure through non-Eastern European investors. I’ve seen it numerous times that either agencies or investors sort of develop a system of tracing funds that has been accepted by USDA, and then we can apply that system or that approach to other countries. So that’s been very helpful. Sometimes they can give ideas and we kind of suggest them to investors based on what we have done in non-Eastern European countries. But yeah, I guess it’s just the volume of how many of these Eastern European investors we’ve represented in the last two years.
Yeah. Well, then, maybe to add on to what Irina said, I think for both of us, I think, yes, I think you and I both, it’s hard calculating these numbers, how many investors actually were filed, you know, because of the delays with reporting. But I think you’re probably right between our two firms. We definitely account for the majority of Russian EB-5 investors in any given year over the last couple of years. So, I guess for the participants of today’s call, it’s probably a pretty unique opportunity at least, you know, between the two of us. We certainly make up the lion’s share, probably, in the market and in that region. So, the only thing I can add to that is that we’ll see how things go further, you know, since the regulatory changes at the end of the last year—obviously the increase to $900,000 put a dent in demand.
Last year was, I’m sure for everybody on both sides of the industry, very busy, both on the project side and the legal side. And we probably, you know, sped up a number of applications. I mean, people were filing maybe a little bit earlier than they otherwise would have because of the increase. So, we’ll see how things go forward in the future. But I still am optimistic about these markets. I think some people were thinking they might’ve taken off sooner than they have. Obviously, the increase in price is maybe going to slow things down a little bit. We’ve been noticing an uptick in the second half of 2020. And so I think, going forward, after people have gotten used to the new rules of the game, if you want to call them that, and realize things aren’t going to change in the near future at all, or go back to $500,000, I think people are going to reconcile themselves to that and hopefully start, you know, moving forward with their plans.
Great. Great. Thank you both. So now we’re good.
We’re going to shift gears and kind of go into the details on exactly what is source of funds and how it fits in with an EB-5 application. We’ll kind of start with the basics and assume that some of the viewers of this presentation aren’t that familiar with the mechanics of what goes into an actual I-526 petition to start with.
Sure. So, I guess I can start on this part. So for the I-526 petition, there are two parts to the initial petition for the green card. One is we need to document the source of funds for the funds that the investors are placing in the project. We need to document that they were earned lawfully and that they were also transferred lawfully to the project. And then the other part of it is that we have to compile the project documents and the project has to show that it meets the EB-5 requirement that there’s going to be 10 jobs created for each investor. And, you know, that the business plan is realistic that they are in, they’re going to be able to obtain all the financing, etc.
So, you know, the part that Charles and I focus on is the work with the investors specifically on their source of funds. And there’s different, you know, there’s different documents that are required depending on what your sources are. Our goal as the attorneys is to try to find the simplest kind of solution, because, you know, for example, if you have ones that have sources done documents, and it’s inheritance from your grandmother, and your grandmother was employed by, you know, some big corporation her entire life, and it’s easy to show her income and your inheritance, and that’s going to be an easy source of funds. If the other source of funds is, you know, we bought a property which we sold, then bought a new one, which we sold and started a company, which we sold, it’s a little bit harder to trace. We try to lean towards the source. That’s going to be easier to try and trace to make it easier on the investor. And I think, Charles, you can kind of mention, um, in more detail about the typical sources on this slide.
Did you want me to mention typical sources? I guess I would say, at least from our experience, the most common sources for funds I would say would be dividends from proprietary businesses. Our clients, I would say that the majority of our clients are business owners, they have their own business. And I would say the majority of the cases that we’ve done, generally, they use income dividends from their business for the EB-5 investment. After that, I would say probably sale of real estate, which is very common, not only in Russia and these markets, but I think worldwide it’s a very common source, using sale of real estate. Then probably gifts of some nature, either from parents or other relatives, and, you know, salaries, salaries from an attorney’s perspective, that’s probably one of the easiest source of funds to use.
But it’s probably the least likely, or one of the least likely used in these markets and Russia’s surrounding markets, just because of the tax structure there—it’s really a terribly high tax on salaries. And so, as a result, clients, to the extent possible, they, you know, tend to take out their earnings from their businesses as dividends or other manners to reduce taxes. And so, just using salary alone, it’s possible, you know, if you have a client that works for a large corporation or something, that’s possible, but you tend not to see that too much in these markets in general. Would you say, you know, from your experience, what’s been kind of the average number of unique sources of funds that go into one of these applications?
What do you mean by unique sources?
Like something besides what I just mentioned just now, like something that’s kind of off the wall.
I think, then, do you mean like a combination for each investor? How many different sources are usually compiled?
Exactly, ten or five or…
In my experience? One, two, three.
Yeah. I tend to agree with that, yeah. I mean, the fewer, the better—it makes it less complicated for the adjudicator and for the attorney and/or client to collect documents. Yeah. I’d say somewhere between one and three, because once you start getting above three different sources, it can get pretty hairy. But you know, you might have a client that doesn’t have a choice. I mean, you’ve got to do that, so, um, yep. Got it. Got it. Okay. So now we’re going to dive into a little bit more detail on some of the other unique sources other than just salary that we briefly mentioned.
I can take the first two, and then Charles, maybe you could talk about the second sources. The second two are very popular. So as Charles mentioned, when it comes to ordinary income, that’s not very common for Eastern Europe. We’ve definitely had investors who sourced the funds straight from a salary from whatever company that they’re working for. In those cases, we need to show the tax returns, which is, uh, in Russia, it’s vine, the fail, like there’s a specific form that the employer gives them. If they’ve had additional funds via dividends or anything like that, that has to be declared separately, and we have to show those declarations. We always obtain a letter from the employer just confirming what their job position was and what their income was. And occasionally, we do run into an issue with Eastern Europe where their initial source of funds was the employment that they had three to five years ago, and they’ve earned their funds through employment and since then they purchased real estate and the money has been in real estate.
We can trace the real estate, but since the employment and the ordinary income was three to five years ago, they may not have the tax returns anymore. And that company may be closed or we can’t, you know, can’t obtain financial data from them. So, occasionally, we can use secondary evidence, the labor books, and in Russia and most post-Soviet Union countries, they still have official government labor books. So, any time you’re employed by any company, there is a record that’s made in the book of your position and the dates of employment. Unfortunately, the LIBOR books do not provide salary level. So that’s why we can only kind of use it as secondary information. And sometimes we’ve been able to pull, you know, statistics on salaries or their executive positions or sales positions to kind of supplement this information.
So, when it comes to ordinary income, we can definitely use it also. This often happens where we have investors who are receiving a gift from friends or family or parents. And if the parents had, you know, good, traceable, ordinary income, they can gift that income to their children. So, it doesn’t necessarily have to be the income of the investor. It can be the income of the spouse or their relatives making a gift, to them. Another thing is capital gains. One of the most common ways to preserve wealth or assets in the Soviet Union is real estate. Currency is very unstable. A lot of other things are very unstable. So, one of the most common things that people will do is once they’ve accumulated some money [is that] they will purchase real estate, whether a condominium or land, and over the years, since the country went from a socialist country to a capitalistic country, the cities really developed and the prices for real estate have skyrocketed in many cities.
So, it’s very common to see that somebody bought an apartment for $200,000, $400,000 and sold the same apartment for a million dollars 10 years later. So, for this sort of growth, the prior Russian laws did not require reporting or income tax on, basically, capital gains from a sale of real estate. If there were capital gains from, you know, stocks or bonds, usually that’s easy to show because typically whatever your financial institution that was holding your assets, when they sell it, they are the tax agents and they would pay the tax before they distribute the pure profit. So, we definitely can document that, either through those companies or, you know, through the sale of real estate. When it comes to real estate, we will need documents like a contract for purchase or sale, the titles, and the transfer of those titles. And one of the fun things about Russia and Eastern Europe is that it’s still large net cash economy.
So, those transactions, if we have a sale of real estate, often the sale is closed with actual physical cash. U.S. immigration is used to seeing bank transfers. They’re used to seeing escrow accounts when a sale of an asset took place. It doesn’t work in Ukraine and Russia because when you’re selling an apartment, the buyer literally deposits cash into like a bank safe, and you’re allowed to retrieve it once you’ve proved that you completed all the transfer documents. So, that’s something we also work with, and we just include additional information for the US, yes, articles, letters from Russian attorneys explaining how these cash transactions take place. And then we try to trace the cash from the sale to the deposit. And realistically, there are a lot of gaps, and that’s one of the ways we also, you know… sometimes it’s kind of good and bad to have a cash economy, but in essence, a lot of times we will have a gap. You know, from the moment of the sale of real estate, the investors usually don’t deposit that cash in their bank accounts.
They can keep it in their safe deposit boxes or in the bank safe deposit box. So we want to be able to show that deposit later. So, we try to accumulate either receipts or currency conversion receipts. So, we just have to be mindful about what documents can possibly be available, but that’s something we definitely can, you know, advise clients on. Often what I see a lot in Eastern Europe [is that] a lot of clients don’t even realize the sort of documents they can obtain because they say, “Well, I just deposited cash. I don’t have receipts of that.” But the banking system works pretty well. You can actually go and seek some prior transactions or prior currency conversions. You know, you can kind of get information regarding prior sales of real estate or average prices of real estate in that region, if you don’t have, you know, for example, the purchase and sale contract anymore. So there are ways that we can accumulate secondary evidence as well.
I’m not sure if there’s not a whole lot, maybe, I can add to that, but just, you brought up a couple of interesting points, Irina, that I wanted to maybe elaborate on or share my experience [with]. The one thing you mentioned with the labor books and using that as proof of employment… I’m sure you’ve noticed this too, in the RFEs lately from USCIS, that … they obviously have some Russian speakers now, Russian-speaking adjudicators, because, it’s interesting—they’re now, in a lot of the RFPs, making reference in Russian to particular documents. I’ve noticed in particular, the labor book, they’ll refer to it in Russian and even some other documents they’ll refer to in Russian. So, in a way, that’s, in all honesty, I think it’s actually a good thing because, you know, if they’re getting Russian speakers on board there who kind of are more familiar with the system, I think, in general, that’s probably a good thing because they’re supposedly, I don’t know, familiar with just kind of, you know, documents, paperwork, how things are kind of done in these markets.
So, in general, that’s probably a good thing. The one thing I’ve noticed too as far as our fees go with that, and I don’t know to what extent this is true—I mean, I guess it’s true for investors from other countries as well, but definitely those from Russia—in the last year or so, [there’s] definitely [been] an uptick in the, um, how would you say it? The toughness of the RFEs. I don’t know a better word, right. I mean, so I would say, like, at least with our Russian clients, I’d say the majority are probably getting through without any RFE, but those who do get an RFE—if I had to make a guess, I’d say maybe 30%, you know, plus or minus, [is the percentage of] RFEs that are being issued right now for Russians.
They’re very tough. Now it could be, you know, maybe some of these investors had difficult cases, and that may be the case if I’m just trying to think here on the fly. So, they had difficult cases, so it’s not surprising. Maybe we did get a tough RFE, but I’d say overall, the majority are kind of flying through without any problems, but the ones that are getting picked for our fees. I mean, they’re just going, they’re there. I mean, the stuff they’re requiring I think is uncalled for, in some cases, and unjustified, but you can tell they’ve got Russian speakers on board who are asking for particular documents and certain types of things going back. So, we’re just letting clients know we’ll be prepared, you know, this, you know, might come up in an RFE, and we’re going to have to provide documents if that does come up. The other thing I wanted to mention about, you mentioned like capital gains, like the sale of real estate—we’ve definitely been noticing they’re requiring, or at least requesting in RFEs appraisals for these real estate sales. So, even if we’ve got all the documentation confirming the purchase and the sale and even, you know, confirming registration and the local, you know, what do you want to call it… the equivalent of a local county courthouse with the land registrar, they’re also asking for appraisals.
And I think maybe in part that’s due, like Irina was saying—I mean, you’ve seen some astronomic increases in values there over short periods of time. And so, I suppose maybe USCIS is suspicious as to the actual veracity of some of those figures. So that’s also something we’re telling clients to be prepared for, if they don’t have an appraisal right now, that, you know, we might need to get one generally and with that say we’re able to do that. We can [do it]. There’s appraisers, licensed appraisers. And even after the fact, you can go to them and they can try to do research and say, “Okay, at this period of time, you know, this, you know, unit or apartment or whatever was roughly worth a certain amount,” and go from there. I think, you know, I think, Irina, you covered everything on the slide. The only thing maybe I might add [is], you know, gifts, I think gifts are…
I haven’t spoken about the loan specifically, but I think that’s a really important one for a lot of them.
Right. And I was going to mention that. Yeah. Um, the gifts.
We’re going to jump into that a little more specifically. Let me advance the slides, and then, why don’t you take the next one here?
Um, okay. So, problems with documenting ordinary income. So if we’re talking about, you know, W2 income, if we’re talking about just salaries, that’s pretty straightforward. As Irina mentioned, there’s some forms most common it’s irrelevant is what’s called a to N DFL, um, for, um, confirming income and whatnot. The one thing I just wanted to flag is that unlike in the US, year-end tax filings are not necessarily required. It depends on what types of income you have. But if you only receive, for example, or if your client only received, you know, salary, maybe bonuses, and other, you know, ordinary income related to their employment, they will generally, you know, they’re not going to have to file a tax return at the end of the year, whereas in the US, you know, no matter what, in most cases, when you have income, you’re going to have to file the 1040 at the end of the year.
So, in Russia, the general rule is kind of like, I would say, if you generalize, that there’s probably not a year-end declaration unless you have multiple sources of income that you received that year or if your situation would merit it. So, just asking for, you know, annual tax returns is not necessarily going to get you what you need to prove your source of funds. Proving that taxes have been paid, again, that also depends on what kind of income you have. And you’re going to have different forms or different records, both from a tax compliance side as well as from the bank, depending [on whether] your income was purely employment, income salary, or if your income was from your own business.
And if it’s from your own business, then it’s going to depend on what type of tax regime you selected for your business. So, there’s something that’s called like a simplified tax system in Russia, and I don’t know what the other [one is]… they always call it the non-simplified form. And so, that’s, for example, let’s say you own your own business. And even in Russia, there’s types—you could have something like an LLC, or you could have basically what’s called a sole proprietorship, but that’s treated as a separate legal entity under Russian law. And I think by treaty with the US, the US treats it as a legal entity, and technically it’s just a sole proprietorship. And so, depending on what kind of legal structure your client has for the business, and then what type of tax system that they selected to use, that’s going to affect, you know, what those records would be that would be relevant and to help show the path of funds as… sorry, the source of funds as for … bank records. As Irina mentioned, you know, sometimes bank records might be lacking because [Russia and Eastern Europe] is in large part still a cash economy, although that’s changing, definitely in Russia. The Russian government is making efforts to reduce the, you know, the gray economy there and the cash economy and trying to get everybody using the banks, using bank records. From my experience, I’m not sure if we’re going to discuss path of funds a little bit later as well, but I would say, ironically, maybe a path of funds with Russian investors is oftentimes more of a challenge than source of funds, in part because of the reasons that Irina also mentioned: a lack of faith in the banking system usually prevents people from keeping large amounts of money for extended periods of time in their bank account.
So, clients, even if they’re getting regular income, they’re getting dividend payments, salary payments. You know, the vast majority of our clients, when that money hits the bank account, it usually goes somewhere else. They’re not going to keep it there for a real extended amount of time. And so, generally, you know, what they often do just for security purposes is cash out the money, take it out in cash, and save it in a safe deposit box or just under their pillow at home or something. And so, the problems kind of arise, and when you’ve got to reconstruct kind of this path of funds… so let’s say you have this master account that they generally use for their dividend payments and for their salaries. And you’re going to see a lot of cash coming out, and you’ve got to kind of, you know, reconstruct that all, and then, say, when they’re getting things ready to wire their funds to the project, they’re going to have to redeposit that money. And so we, at least with us, it’s often a very labor-intensive process, as we’ve got to go through, you know, maybe months or even years of bank statements, seeing where this cash is getting withdrawn, and then, you know, accounting for that cash. And then, you know, bringing it back into the account in order to then, you know, document it and send it over.
Now, I’m sure everybody was familiar with this, but, you know, one demand or requirement of USCIS is that, at least lately, and especially in RFEs, we’ve been seeing that they want to see an accumulation of that fee and of those funds prior to the investment. So, you know, I don’t know, you know, I’m trying to think how much of a period of time they want to see with the accumulation of funds on that account. Up to now, we haven’t had any real problems with clients’ states—for example, for these reasons I’ve mentioned, they take the cash out and then, say, two weeks, four weeks prior to making the investment, they put the cash back into the account, and then they wire it over. From my experience, I’ve never had a problem.
They’ve raised questions about that, but generally, when we explained, “Hey, it’s a, you know, undeveloped banking system, very insecure, lack of confidence”… we’ll often even sometimes include, again, I don’t know how helpful this is, but, you know, when things kind of work, you tend to go with it. But, you know, it might not even be of any help, but we’ll also even include sometimes a statement from the client and, generally more importantly, maybe, you know, contracts that show them renting out a safe deposit box in the bank to kind of confirm, you know, or reinforce the words of their statement or what’s, you know, in our memo, saying you know, “Hey, they in fact rented a safe deposit box during this time. That’s where they kept the money.” I mean, it’s indirect evidence, it’s not direct, but at least, you know, from our experience it’s worked out. Okay.
Yeah. We have seen… one of the trends that I think we are seeing is definitely more requests for showing accumulation of funds in the account. They weren’t as stringent about it before. It seems like there was new training that took place last year, where all the EB-5 adjudicators were retrained and provided with like standardized questions they can ask. So definitely showing your accumulation of funds, maintenance of those funds, and the accounts has been a big trend. So, we’re paying more attention to that.
Sounds good. Thank you. Well, let’s shift gears a little bit and talk a little bit about capital gains on this slide, and then on the next one, some issues with gifts from family or friends as a source of funds.
Okay. Well, I can make an initial discussion here about the capital gains. I try, I would say [for] the vast majority of, at least our clients from these markets, capital gains tend to relate to sale of real estate, in general their primary residence. Although not necessarily a lot of people will buy, for investment purposes, you know, second, third apartments or houses or whatnot and then flip them. So, I would say that’s the most common type of capital gains.
Security is not so much, and thinking about it, I guess we’ve had it maybe in some cases, but it was probably in cases where the client’s funds were outside of Russia, maybe in Europe or the US, where they had some capital gains and use that. But at least from my experience, that’s been pretty unusual. So, I’ll focus at least with my discussion on the real estate side of things. As I mentioned earlier, USCIS is requesting appraisals both for the time of the purchase as well as the time of the sale. Now, again, I don’t know if that’s just related to the fact that these particular clients, they maybe had some, you know, more difficult cases, or if this is a sign of what’s to come. So, generally, getting an appraisal for the time of the sale has not been a problem for our clients because it’s generally relatively recent.
Maybe it was a year ago, two years ago, or even less. So that’s generally not a challenge. And oftentimes, they might already have an appraisal that was conducted in conjunction with that transaction. But we’ve also been seeing USCIS requesting an appraisal for the purchase to confirm the initial value when they purchase that property, say, you know, 10, 15 years ago. I think that’s stretching it, but I guess we can’t argue with the regulators. But at least in the cases that that has come up with us, we were able to get some appraisals or, I’d say, maybe pseudo appraisals because then, when you’re going back 10, 15 years ago, these are emerging markets that didn’t necessarily have comps that could be used to give a very clear, justified market value to some of these transactions.
So we’re going to see, I guess, how USCIS treats these going forward. Showing appropriate taxes have been paid—that’s generally not a problem, providing requisite, you know, governmental filings or forms to show payment of the taxes in Russia, the primary residence, is free from taxation. As I recall, well, [it might have] been held by the owner for five years or a long time, but they only had a hold up three years. So, with a lot of our clients, they generally did not even have to pay any taxes. In those cases, we would use to get an opinion from a local attorney or accountant referring to the relevant statute in the Russian statutes indicating why no taxes were paid because the client was not obligated to for such and such a reason.
And that’s always been more than adequate for USCIS purposes, as for the bank records showing the funds coming in and out, or the receipt of the funds. Again, things change if it was a transaction that happened maybe, you know, three, five years ago, and certainly longer back. A lot of transactions for real estate, still to this day, although that’s less common, were done in cash, as Irina mentioned, and using like safe deposit boxes. So, literally, you know, the buyer would deposit the money cash into a safe deposit box. He or she would have a key, and then the other side, or the other side’s attorney, would have another key, and so then the seller would then go into the safe deposit box, take the cash, and then deposit it presumably into their bank account.
So, that’s very common. And so, we would have cases like that. And we’ve never had problems documenting that as long as you explain the situation. More recently, I think people are generally just using money wires between accounts, between the buyer’s and seller’s accounts. And so, that’s much easier to trace from an EB-5 perspective. As to the question here, you know, when did they buy this asset and how that might affect it, I’m sure everybody’s been affected by the USCIS policy of increasingly looking further, further back in the past to confirm, you know, or provide, you know, substantiation of where the funds came to originally purchase the capital asset. That’s, for everybody, becoming increasingly difficult. And I guess it just depends on the particular situation. Then, we do run into the problem sometimes with clients, and I guess I’d have to admit even at least one client I can think of.
I mean, we just could not come up with a way where we felt comfortable that they could, you know, explain where they got the initial funds to purchase that capital asset or real estate. And so, it can be a challenge. Ideally, and this is what we do with our clients too—sometimes, if they’re in that situation where, like, well, [they] have all these homes or multiple homes and [they] sold them, resold them, but how do we prove where [they] got the initial money for that? When we run into a problem like that, a lot of times we’ll say, “Hey, did you, or maybe, you know, immediate relatives get a privatized apartment?” So, when they were privatizing the apartments and residences, back in the early 1990s, when the Soviet Union fell apart, the government basically gave you know, the living space of its inhabitants to the people that were living there. So, you know, many times we’ve had cases where, you know, a client might, say, well, either they might have an apartment that was privatized or maybe their grandmother did and, you know, set it up so that she gifts money to, you know, her grandson, for example, to do the EB-5 investment. And so, sometimes that’s been a way to get around that issue of trying to prove, you know, source of funds back, you know, going back 20, 30 years ago. Irina, did you have any thoughts?
No, I think you covered it pretty well. I think we can go probably to the next one. And I’ll be happy to talk about this one in detail for the gifts or inheritance. So, this is very, very common in EB-5. So, something older investors always ask me, “Is it okay? Does it look strange or weird that I’m getting the money as a gift either from my brother, from my parents?” It does not look strange in the EB-5 world. I would say, you know, depending on the country, but in some countries, 80% of EB-5 funds are gifted by family members. And for other countries, you know, such as Russia, Eastern Europe, you know, maybe 20 to 30% of sources of funds may have a gift element to them. There’s nothing wrong with the gift. We just need to show that the source of the funds for the person who’s making the gift is also lawful.
I obviously discourage any use of gifts from friends. So, the relationship matters. It’s not forbidden to receive a gift through a friend, but it’s going to raise a lot of questions. And I’ve had investors who have received gifts, you know, from their boyfriend and girlfriend or, you know, somebody that they had a prior relationship with, and maybe they have children with, but never a formal relationship. So that, that makes sense. I don’t think it would raise any other questions, but it’s kind of like, one guy giving you, another guy, half a million dollars, a $900,000 gift because [you’re] buddies—that looks strange. And what that will do is the USCIS officer will look for reasons and we’ll look for faults with that application because in their head, they’re going to be convinced that, “Okay, this person is not really giving this, you know, … gift, [you’re] just taking lawfully sourced money, and then they’re going to give [you your] cash back that [you] cannot source.”
So, the relationship matters as far as the transaction. It’s very simple. We have a standard gift template that most of our investors use where the gifter just signs that “I’m gifting this gift with no expectation of repayment.” And you know, it’s a great way also to either simplify a source of documents, or sometimes it’s the only way to really accumulate enough funds that are lawful. Because a lot of times we have investors who may have earned their funds lawfully, but they just don’t have the documents anymore because the transactions occurred 15 or 20 years ago, or, you know, these transactions just were not the sort that required communication. So sometimes for those, we’ll use, you know, gifts from family members or parents, if it’s going to be easier to trace. And I think we can go to the next slide unless Charles has anything too add?
Nope. I think the loans were the last light that we may have skipped over it if we go back one. Yes. So the loans, I think, yeah, this is, yeah, we can share, I think this is kind of a fast-moving area because with the Jong appeal case that they got approved last week, that’s certainly going to change things going forward, I think. But with historical loans from third parties, I don’t know what your experience is, Irina, but I don’t think we’ve ever had one, [or I can think of] only one case we’ve had. And that’s why I’m happy about the appeal case. Turning out how it did with Jong last week is, uh, we did have a client who got an unsecured loan from a bank because he was on the board of directors for that bank for a long time. And so, they gave him an unsecured loan. And so, you know, depending on how the Jong case was going to come out, you know, we were a little bit nervous how that would turn out, but fortunately, that case came up well.
And so, I think he should be in pretty good standing for his case and going forward. I think, you know, that opens up a lot of opportunities for other investors going forward, but, you know, from my experience, I would just… at least in these markets, we just haven’t had, in the past, loans from family or friends, or even company loans, just because I think a lot of the documentation that’s required to show, you know, that you’ve got a lien on the property is some kind of, you know, note or the, you know, security, in the property and all the documentation that’s required. It hasn’t been too popular for us.
Well, I think one of the things I think we might want to elaborate on is … for a long time that we’ve had this problem with USCIS … if a person is using a loan for their EB-5 investment. So, if they took a loan from a third party and invested that money into EB-5, then that loan had to be personally guaranteed by assets that amount to at least as much as the loan loss. And that interpretation was challenged in court, you know, and obviously, we have, right now, a good outcome. The issue is, of course, USCIS is very set on continuing to fight this. I think they really don’t want unsecured loans to be used in EB-5, but now they have three judges who have told them that they’re wrong under the law. There’s no requirement to secure the loan.
I will comment on the fact that we have used loans either from companies or third parties in EB-5 cases. Actually, a lot of times, [loans were] used for the path of funds. So, for example, you know, in Argentina, they had, you know, restrictions on how many dollars you could buy. So, a lot of people would do sort of like a private conversion. So, if they have dollars in Argentina because they sold real estate and they went to wire the money to Miami, they can’t wire over a certain amount directly. So, they created a loan agreement with a company that would find a company who, for example, buys goods in Argentina. So, you have a textile company that wants to buy $6,000 worth of goods in Argentina. So, they do a loan agreement whereby, you know, they pay for that company’s goods in Argentina with their dollars.
And that company reimburses them in Miami. Of course, we have to confirm that it doesn’t violate any local laws, but in this case specifically that I was talking about, there would usually be a loan agreement either from the company to the investor or from the investor returning that loan. What we have found is, what I’m seeing a lot this year in RFEs is USCIS now saying you can’t just use a random company. You actually have to provide information showing that this company was a lawful business. So essentially, you didn’t just take a loan out from an unknown company. We don’t know if that company is engaged in a lawful activity, and in my opinion, even that can be challenged. I don’t think there’s a legal basis in the EB-5 law that says if you took out the loan from a third party, you have to prove that that third party earned those funds lawfully. It wasn’t a gift. You have to pay that money back. So, it’s just a loan. But at this point, USCIS is questioning that, and they’re asking for documents to essentially, you know, not necessarily document the entire source of funds for the third party, but to show that that third party is engaged in lawful activities.
Right? And I think because of that, that at least for a lot of our investors from these markets, Russian markets, it’s not that they’re engaged in illegal activity, but it’s an extra burden and if there’s other alternative sources of funds to use, [clients] generally tend to prefer that.
I think one of the most common situations where we do see a loan in Eastern Europe, the way it’s used the most is by investors who, instead of distributing a dividend to themselves from their own company, can take out a shareholder’s loan. So, say you own a company. Your company earned a million dollars in earnings. You can distribute it to yourself, but then you will pay a dividend tax on it. If you issue a loan, you can pay a smaller percentage. It’s like a shareholder’s loan. And then, you know, once your EB-5 funds have been returned to you from the project, you can put it back into the company, and it would pay the loan. Now, that loan that you’re taking out from your own company still has to, by the old rules, be secured, but it’s very easy in this case because you can just use your own shares in the company. So essentially, the company doesn’t have any debt, as a million dollars have been distributed in profits, the value, and you own 100% of this company. Then, objectively, the value of your shares is a million dollars. So, by taking out this loan from the company for a million dollars and using your shares to guarantee it, you were taking out a secured loan, and you’re basically postponing your taxation because you’re not paying a dividend tax.
Okay. Got it. Thank you. Thank you both. We’re going to now jump over to some of the specific aspects of the applications for Russian and Eastern European nationals. I know we already covered some of those, but we’ll just quickly recap them all. Yeah. Irina, do you want to start with this one and maybe just start with the frequent concerns and kind of walk through what the process would be to address those questions?
Okay. So the best practices and frequent concerns… um, let’s see. Well, number one, don’t do anything until you’ve spoken to your attorney. Number two, don’t withhold information that’s important from your attorney. It’s, you know, it’s very important that we know the whole truth. So, if you tell us, “Hey, we earned this money and we deposited it into our bank, and then we’re going to transfer the funds from Alpha Bank,” that’s great. So I will tell you, “Great. We’re going to have a clean source of funds and path.” If you forget to mention to me that after you deposited your funds to Alpha Bank, you took it out for a year and we won’t be able to trace it, and then it went back a year later, that’s going to be an issue. So that’s definitely something we are here to advocate for you.
So definitely provide us with the information. That’s not to be confused by some Eastern European clients—like, attorneys are not here to help you trick the US government. So, we can only work with documents and information that is real. So that’s another thing: don’t ask us questions about like, “Oh, what if we just have this note made, how is it verified?” Like, if it’s not the real document, don’t use it. You’re only gonna put yourself in a bad situation. Okay. And we’re actually seeing that. So, one of the things that is sort of brand-new that I wanted to mention is the Russian government has made all the tax returns, all the corporate tax returns, public. They passed along 2018 in 2019. They’ve created an online platform and loaded it with all those tax returns going back to 2013.
So right now, you can pull up any commercial entity in Russia, and you can see what they have stated in their corporate tax returns, including what dividends they’ve shown, what they showed us, gross income, net profit. And if they’ve distributed any dividends, USCIS knows about it. They’re using it to verify information that’s provided to them by investors. So that’s very important. Um, and let’s see, one of the frequent concerns is, “Are tax returns themselves enough to substantiate the income?” Not necessarily. So, it depends on the situation, but USCIS tries to apply a little bit of a logic standard. They don’t always have the best logic, but they try to. So, for example, if you have earned $1 million cumulative in the last 10 years, and we can show that every year you have been making $100,000 and now you’re investing $900,000, that’s not going to be enough. Your income is not going to be enough because USCIS understands that you’ve also had to live and spend money for the last 10 years.
So, when it comes to accumulation of savings and tax returns, often we also have to show why, how you have been able to accumulate all your earnings. You have a low cost of living because you were living in your parents’ apartment. You didn’t have rent, you didn’t have kids, or for countries, you know, such as Ukraine, where just the cost of living is so much cheaper, or at least it used to be, where, like, you know, an average salary per month is $300–400, it’s much easier to show that a family can easily live in Ukraine on $35,000 a year and be very well off. So, if they’re earning $200,000, most of it is going to be saved. So, tax returns are not always just the only information that we use—we definitely use additional [information], but tax returns are kind of the key components I always like to have in all my petitions. I like to have documents that we consider primary—so, usually, government-issued or something that you turn into the government, such as tax returns, or, you know, title documents for real estate bank transfers—and then secondary information, which could be information about the average cost of living in particular countries, certain practices or information about the fact that you had access to an apartment where you don’t have to pay rent.
If you don’t mind, I’ll chime in on that one question too. I think that’s a good frequent concern here. You know, if their businesses is more than 10 years old, how do [they] document where the source of funds came from to start up that business? I mean, that’s a very relevant question, comes up all the time, and it comes up with actual petitions. The easy answer, but this is the cop-out answer for a variety of reasons, primarily tax reasons, [is that] most companies, when they’re started up in Russia and these other markets as well, Kazakhstan etc., from my experience, they just put a nominal, whatever the smallest amount, you know, of, of, uh, what do we call it? I would call it in English, uh, “capital declared,” “NEC declared capital,” but anyway, the capital that was required to open the company. They generally, I mean, [put up] literally like 10,000 rubles, which at that time, you know, would be what, maybe $300 or something, $500.
So generally, from experience, that is an important issue, but it’s generally not too hard to, you know, show where you might’ve earned $300, $500, $1000 to, you know, make that initial capital contribution to the company. In cases where, for whatever reason, the amount was actually larger than that, unfortunately, at least from our experience, you know, we try to show where the client earned that money. If you’re going back a significant amount of time, 10 years, 15 years, 20 years, when there just wasn’t much documentation in these markets, much less having the ability to save it or having it archived or something, generally we might resort to, you know, declarations by the client and provide them with whatever supporting document they might be able to provide as backup. You know, maybe they were, you know, these informal retail traders that were popular, like in the 1990s in Russia, that were basically like large flea markets and stuff like that. So, we would have a declaration maybe by the client, and then if we had any kind of documentation, which often might be hard to come around or come by, to kind of support their words, from my experience, USCIS has generally been pretty flexible about that. So, that’s how we handled that.
Great. Great. All right. We’ll shift over and talk about capital gains and then gifts and then loans, and then we’ll walk through a real-life scenario.
Okay. With capital gains, um, yeah. What income was used to find the purchase price of the property? Uh, absolutely. As it’s written here, cash was often, you know, the starting point for these acquisitions, and [with] stuff like that, tracing things back, again, can be difficult. And it is, but we’ve had several clients that have substantial businesses right now, you know, above the board, you know, nothing, you know, under the table and etc., but they’d have to go back 15 years, and they got their initial money because they, you know, bought some cheap real estate on the cheap and, you know, just got caught up in the uptick and they were able to flip it in a year or two for a tremendous [profit], again, but trying to prove where they got that initial money can be a challenge.
So it’s just a matter of going through with the client to see what income that they have is documented, or somehow we could document, that the served as a genesis or as a source of that initial source of funds that was in used to purchase the capital asset, which was then later, you know, realized and sold as part of the EB-5 process. I’m just looking at the frequent concerns here. Uh, documents outside of the document retention period. Yes. Good, good question. About how to provide source of funds for documents outside of the document retention period. I’m not a Russian attorney, and so I’m not always privy to all the details. This is just anecdotal. We get conflicting information from our clients or from our clients’ attorneys too, you know—sometimes people say, “Oh, this is impossible. We can’t get this documentation from, you know, the tax ministry or the tax authorities or other local bodies.”
And then sometimes we’ll have a very similar situation and somebody else is able to get that. And so, you know, of course I understand it might depend on the location as well. So what I’m saying is that it seems like either some clients are more resourceful than others or whatnot, but it’s always at least worth having clients do some due diligence or research on their part, trying to talk to whatever the local tax department is or whatnot that would have the requisite documentation and see if somehow they can procure that because I, you know, in some cases, we’ve been well beyond the statute limitations, but [the clients] were able to get that somehow. In other cases, we weren’t. “If I’m enrolled in auto fixed deposits, can I use that?” Um, that concern, I’m not even clear on that. So, I don’t know if either Irina or Sam, if you can address that, [whether clients] with auto fixed deposits can use that. I’m not sure what situation there you’re referring to is. Um…
But I think we can skip over that one. Okay. All right. Yeah. That might not be relevant for these markets, but I think otherwise, yeah, everything was.
Um, for gifts. Yes, gifts are very popular source of funds for a lot of our clients, especially when they have children. And so, the parents might not necessarily want to get the green card and then give the funds to their children to allow them to get residency here. In the case of an inheritance, [it’s] through a will. Correct. You get the equivalent of a testament of a will, or if there is no will that, there’s local rules of intestate succession, to my understanding of Russia. It’s generally straightforward. We’ve had a few cases like this, and it generally was not a problem getting that paperwork showing the inheritance, and then showing the path of funds from the deceased to the recipient. So that generally is pretty straightforward.
In the case of a gift, obviously you need to source the funds of the gift donor the same way you would source the funds for a regular, you know, a direct investor, if it were his or her funds. So, generally, you know, like Irina said, they have a template, we kind of have a template gift agreement that we have clients execute. There are no—at least in Russia, and I believe most of the other markets—there’s not a tax that’s level. Well, actually, I take that back. I think in Ukraine, there is one, but in Russia, there’s not a tax that’s levied between close relatives. For example, if a gift from a parent is made to a child or spouse, there is no gift tax there. But I think, you know, Irina, you can maybe elaborate. But I think in Ukraine, there is something to that extent because I think with our Ukrainian clients, that that was an issue sometimes.
They are there, there are that are applied depending on the type of asset and things like that. But, yeah, usually for inheritance, we basically seek advice of local counsel. So, we’ll ask the clients, you know, who they were working with to get their inheritance. And then we’ll get that local consult to draft a letter saying, “Okay, this is how the process works. If there was no will, this is what happens.” And, you know, it goes through court probate. And then we attach those documents because there are countries where the inheritance passes automatically by operation of law. There are others where, like, steps and registration steps have to be taken, and gift tax is very important because we basically, whether or not there is inheritance tax in that country, we need a local attorney to state that because USCIS will assume there is inheritance tax, and they will ask for proof that the investor paid it. So, if there is no inheritance tax, when you do the provider role, [you need something] like a printout or a legal opinion.
Right, right. And that’s what we do do as well. Yeah. And I think for those jurisdictions where there are gift taxes, and I think Ukraine is one of them… we also had a situation with Turkey with some Turkish investors. One possible way of doing that is depending on how the laws are written, if the gift occurs outside that country, then in many cases, that tax is not levied. And so, that’s how we’ve done it with investors, like I mentioned, from Turkey and elsewhere. If the actual execution of the gift itself, the transfer of the property or the money, is executed outside of that country, then I don’t believe that tax applies. But again, you have to find out in each respective case.
Great. Great. We’ll go. The next slide. Yep. Okay. Um, I’ll give it a crack here too with loans from third parties. I think we kind of covered this already when the lender is a friend or family member, as Irina mentioned. I think that’s pretty risky, too. USCIS tends to frown on it and view it as a workaround when the investor camp sources individual money and tries to recruit a friend to serve as the straw man to, you know, provide the loan. So, I think we always discourage clients from doing that. And I don’t think we’ve ever had a case where a loan was made from a friend or family member. We try to encourage clients that if they’re going to consider this, I mean, getting a loan from the bank, it’s a bank that is the safest and best route.
And, you know, from our experience, that’s generally the way that clients have gone forward with that. Like I said, we’ve had some clients that have done non-collateralized loans, and with the latest court decision, it looks like that is, you know, completely kosher. And we shouldn’t have any problems going forward with that. Loans from an investor’s own company—I think, Irina, maybe if you want to elaborate or repeat what you said before about that or what documentation might be required… I think it’s laid out here pretty well, but if there’s anything you want to provide…
A loan from your own company—it’s just such a convenient thing for so many entrepreneurs because, again, that was one of the ideas we actually saw implemented a lot in Asia and have used it for Eastern European investors. So, if you own 100% or if you own a large share in a company and the company has undistributed income, and as long as you are allowed by the local laws, because not every country allows you to take shareholder’s loans—I think Russia had some restrictions on it at one point, then they lifted them—but if you’re taking out the loan from your own company, we need to make sure you properly secure it with your own shares again at this point because of the court decisions. We may not have to show it for your future security, but I would still be on the safe side.
And then we need a loan agreement. The loan agreement, as long as the loan agreement doesn’t use EB-5 assets as a security, it’s fine. It can be for whatever amount of time that you want it to be. I usually tell the clients not to rush the loan. It’s perfectly okay for it to be for 10 years because frankly, it’s easier to repay it once you’re returned your EB-5 investment. If you don’t—if you have a loan agreement that’s just for two years—USCIS, when they’re adjudicating the I-526, they usually adjudicate it about two, two and a half years after we submit it, so they will ask, actually, for proof of repayment of the loan. So, kind of more reasons if you’re issuing the loan to yourself and you don’t need to repay it any sooner, it makes sense to have a longer agreement, then just use your EB-5 returned funds to repeat in the future. But, yeah, contracts, I think that’s all.
I think within the Russian context, if the company is an IPA, like a sole proprietorship, I don’t think they can draw loans against that. I don’t know what your experience has been, Irina. So, we do have a lot of clients that have IPAs. And so this option just is
Well, yeah, a sole prop would not work because it has to be a separate legal entity, because otherwise you’re just borrowing funds from yourself. Plus, for an IPA, your funds are not considered someone else’s—your funds are your funds to begin with. You were going to pay the 6% tax no matter what. So it doesn’t make sense in those cases. It makes sense if you have like an old, like, corporate structure—those are the cases where it makes sense. Yeah. And company financials will be very important. Like, we’ll have to review company financials, make sure there’s actual, you know, undistributed profit, because USCIS is going to look for that.
And so, this has kind of a summary, kind of, I think we’ve kind of run through these different things. Corporate tax returns are now public online. But again, that’s, at least, within our case, that only applies to a small number of our clients. I mean, I would say the vast majority of our clients have, you know, sole proprietorships or no corporate structure that would be subject to that first point there. But nonetheless, it’s good to know about that. Accumulation of funds, as we also mentioned yesterday, they’re increasingly requested to show that accumulation because these are cash economies. A lot of times, you’re not going to see long-term accumulation, if at all. I mean, like I said, our clients, they want to minimize the risk exposure to the banks. And so, they generally put the cash in only when it’s necessary, but from our experience, if they deposit it shortly before transferring the funds into the project, at least from my experience, that has not been a problem at all.
Time limits, you know, unfortunately, they’re increasingly going back in time in terms of providing source-of-funds documentation and other documents. And, and I guess, you know, we just have to work with the clients on a case-by-case basis to come up with the best response possible. And like I said, a lot of times it just might be declarations. And fortunately, up to now, we’ve never had a denial based on that time limit issue. So, you know, even though it sounds daunting, I think as long as you can put together some kind of documentation or declarations that, you know, pass the relatively low standard of evidence required in these cases, it should be okay. And then, the path, okay. The path of funds. That’s fine too. Let’s go to the case study here.
Yep. So, we’ll spend a few minutes walking through kind of a real-life example, and, you know, both of you can chime in and kind of explain, you know, how you would explain it to the client and then what types of documents you would want to try to find to support each of the different components here. So this is going to be on the more complex side, just so we can try to illustrate all the different types of documents that you would need—you know, kind of a maximum worst-case scenario, where you’d need to show a lot of different sources. Irina, do you want to go ahead and start with number one?
Give me just one second. I’m having a little trouble with my microphone.
Speaker 6 (01:15:04):
So, I can jump into the meantime if you want. So yeah, yeah, that’s fine. Just jump in. And when Irina gets her microphone working and you’re back with us, Irina. Yeah. Well, so yeah, obviously your message from that slow connection. So I want to make sure it works properly before we start, but Charles, go ahead. So basic, obviously basic demographic information about the client inbox. One here indicated that’s something you’re going to need, regardless of the source of funds that you’re going to use. Provide a current appraisal—again, something pretty straightforward [to show the] source of funds used to purchase that. Or the documents showing [the passing of the title] again, that’s something we went into detail earlier about. Source of funds could vary so that you’re going to have to revert back to those more detailed slides that we went through to analyze which source of funds would be relevant in this case. If it’s a situation of an inheritance or a gift, again, showing passage of title and all that, but that’s generally pretty straightforward, I think.
Yep. So one before we dive into some of the specific documents, just zooming out to the big picture. If we look at the red boxes on the screen… so generally, what’s happening here, there’s a Russian investor who’s a Russian national, right? And they happen to own an apartment building in Moscow, right? And they have a friend who’s in the United States, and that person’s a U.S. national, they’re a U.S. citizen and they own a consulting business. And that person has accumulated income from their consulting business that’s been operating in the US, and they’ve paid tax on that income, [earning] approximately $300,000 after-tax income for five years. So, they earned about a million and a half post-tax. They’re going to make a loan to their Russian friend. And that loan is a 10-year note, essentially, that’s going to be secured by that piece of real estate in Moscow that the investor owns, right?
So, in this case, kind of high level, you’re going to need to show not only the collateral for that loan, how the person got that apartment building in Russia, where they got the money, how long they’ve owned it, and then that it’s actually worth more than the $900,000 that’s being loaned on it, but you’re also going to need to show in five, six, and seven, you know, who’s this person who’s loaning the money. It’s not a traditional loan from a major bank like Wells Fargo. It’s a private market loan. But it’s an independent lender. So because it’s not a bank, it’s not someone who’s in the business of just loaning money, then you’re going to need to show, well, where did this person who’s making the loan, where did they get the money that’s being used to fund this loan? And the answer is they operated a business and that business earned income, legitimately, and they pay tax on it, and they have all the tax returns showing that that income was reported and taxes were paid.
And so, once you’ve established that, okay, this person did accumulate the capital, they did pay tax on it, they can prove that they have the money and it hasn’t changed hands, now they can make a loan, you know, they’re free to do so. It’s a, you know, it’s a private market. They can make a loan if they want. And so, they decided to make this loan, and the security of the loan is reasonable. We want to be able to prove that the apartment building is worth at least $900,000, right? Otherwise, you know, you wouldn’t loan $900,000 on a building worth $300,000, right? So, current appraisals are showing that it’s actually worth more than $900,000. And then also you need to show, well, how did this investor get that building? Did they inherit it from one of the parents?
Did they buy it many years ago? And it’s gone up in value. And so, if they inherited it, then, you know, show that they inherited it and who they inherited it from. If they bought it themselves years ago and it’s appreciated, then, you know, show how and when they purchased it and ideally, the source of funds used at the time of the purchase, right? So, there’s a number of different pieces that come into play here. And really, what USCIS wants to see generally is that you’re using income, that the appropriate tax has been paid, and you’re doing a general at market transaction. You’re not loaning $900,000 on something worth $300,000. And the terms of that loan are close to market, right? You’re not lending it at 0.01% interest. No, it’s a traditional mortgage 10-year term. And you’re charging, you know, LIBOR plus 300 basis points or some fixed reasonable interest rate given the type of collateral and the risk that’s involved. Right. It just has to make sense. Right. So that’s kind of generally how you want to think about and approach the source of funds process. And Irina and Charles, can you, you know, please jump in and, you know, [elaborate] on the specifics of the documents that are going to be needed? Those will vary situation by situation, but high level, it has to be a real transaction if you’re going to be receiving a loan, and you have to be able to initiate that.
No, it’s a very good case study. It’s a good example. I’ve never seen any structure [like this]. I’ve never used a structure like this in these particular markets, but nonetheless, I think it’s a very good overview, Sam, of kind of how you would structure this.
Um, yeah, it’s a great example. I actually had a few cases that were practically identical to this. One of them was for Eastern Europe, a couple were for just, you know, Canadian and Latin American investors. And one thing that I want to add, Sam, you’re absolutely right that you need to include, whenever you’re using a more complex structure like this, you need to show that this was a legitimate transaction. I find it very helpful to provide background information. You know, for example, why couldn’t this Moscow-based businessperson obtain a loan from a local bank? So that’s something we definitely would explain because a lot of adjudication for EB-5 is making sure that the officer feels comfortable with the information. If it makes sense to them, they’re not going to be suspicious.
If something doesn’t make sense because we didn’t give it any backstory, they’re going to get suspicious. And when they get suspicious, they don’t know what they’re looking for, but they’re going to ask for everything. And they’re going to kind of look for reasons to deny based on technicalities. So here, for example, I would include an explanation of why this person didn’t try to obtain a loan in Russia. One of the more likely reasons is probably going to be that any loan that they obtain in Russia is going to have a really high interest rate. Another reason that could be that traditional real estate loans are often issued, you know, for the purposes of, like, remodeling or construction, and you cannot use them for other purposes, such as investment in, like, a third project. So, definitely explain that here and show some evidence.
Absolutely. You know, for the US lender, we show their source of funds, you know, where they’re coming from, making sure that, you know, because it’s a private entity and not a bank, we need to show that this is lawful. One thing that absolutely USCIS will ask is they will ask to see payments. So, remember, from the time we submit the I-526 petition to the time an officer looks at it is going to be at least a year and a half. So, often, they will send a request for evidence asking to show the payment schedule from the petitioner to the lender. And, you know, they also want to see what was the source of those funds, that it was done with lawful funds. And then, you know, it’s just their way of making sure that the transaction is legitimate.
But yeah, it’s an interesting structure. We’ve had to use it a few times. Um, specifically, it’s actually not a terrible structure for countries that have limitations on how much money can be wired out at a single time or how much currency can be purchased. So, again, in Ukraine, Venezuela, you know, again, Argentina had some of those restrictions—if you have lawful funds where you have an asset in your home country, you can sell the asset, but it will take you, you know, a year or two to transfer the money under the currency compliance. It makes sense for you to keep the asset, then just take a loan roll from a certified, like, a verified person here in the US. Another reason is sometimes if we just provided additional background information on why this investor doesn’t want to sell the asset—maybe they believe it is going to grow in price a lot. So instead of selling the asset, they’re seeking a loan from [a U.S. lender].
Here’s the question, though. What if, especially in countries that have harsh currency restrictions—clients ask us about this, too—you know, [about] the loan provided from the US national friend, the Russian investor might just say, “Well, here, don’t send the money to me and my Moscow account, send it directly to the, you know, the project.” I don’t know what you guys feel about that. I mean, it’s less than optimal. And I can’t remember if we’ve ever had a situation like that. I mean, I know USCIS generally wants to see custody by the actual investor prior to investment.
In the situations we’ve seen where this structure has been implemented in real life, and we have seen it with our clients a few times as well, typically what will happen is that EB-5 investor, the Russian national or whatever country they happen to be from, we would want them to open up their own bank account in the United States. And signature banks are pretty flexible in terms of opening up accounts without having a physical person go to the bank in the US. A lot of times, these investors are located out of the US, and they can’t, especially now given travel restrictions. You’re not gonna be able to fly in, in person, to sign something. So, you’d open an account in that person’s personal name and then instruct the lender to just provide the loan funds to that U.S. account. Then, you avoid transferring out of the country, and you also make sure that the investment into the project comes directly from that EB-5 investor’s, new, personal account that’s already in the US, so you avoid that complication. You avoid the currency transfer. Irina, I don’t know what you’ve seen on that side.
Um, yes. So in the situations that I’ve had, the clients have happened already to have a lot of U.S. contacts. That’s why they had lenders here who were willing and able to help. So, in all of my situations, these clients were coming to the US occasionally already. There was no issue with opening a bank account for them here, but it’s a very valid point. As Charles said, the money would go from the lender to a personal account, probably in the US, of the investor, and then to the project. And one thing to consider is we want to make sure that this entire deal in transaction also doesn’t violate any local laws. Most countries don’t have a law that states you cannot use your local collateral to obtain a loan in another country. It seems like a very normal private transaction, but some may, or maybe if you took out the loan in a foreign country, you have to declare and pay taxes on it. There may be some smaller jurisdictions that have some sort of restrictions like that. So, you want to also double-check with current counsel, I mean, with local counsel for that investor.
Yep. Yep. Great. So I think that covers this slide with respect to the actual source-of-funds letter. So the way this actually works, and I’ll let Charles and Irina, you know, jump in here to tell typically how a project investment happens. The project that is selected provides an I-526 template. And in that template, there’s a section of the letter that describes the project and the flow of funds and how the investment itself meets EB-5 rules and requirements. And then there’s this section of the letter, which specifically covers how the investor obtained their money and their path of funds. So, basically, source of funds and path of funds that’s unique to that individual investor. All the project information is going to be the same for every investor in the project because they’re all investing in the same project, but the source of funds and path of funds of the letter will be unique to each person.
So, what we’ve kind of put together here using that case study that we covered on the previous slide is just kind of a template example of how that section of the letter looks and what types of exhibits and documents you would want to have as support. So, this is just kind of an initial place to get started, to take a look at and see, “Okay, I’m planning to do an EB-5 investment. You know, here’s kind of a flavor of what is going to need to be communicated to the US government to meet the burden of source of funds and path of funds.” And this’ll vary dramatically based on the source of the funds, whether it’s real estate or consulting business, etc. But this is just an example kind of referencing the case study that we just covered of what types of documents are going to need to be provided. Here’s a more detailed list, but go ahead, Charles and Irina.
Well, I think, like you said, that the template is a very critical component, and, you know, regional centers that have had good experience and been doing this for many years, they’re able to put together, you know, effective templates that make the job easier for everybody, both for us and, in part, for the investor in terms of preparing the list of documents. And generally, you know, the source of funds portion is in some portion of the template itself, and you’ll have the project description, etc. And, you know, some portion will be set aside for a source of funds as in the path of funds. And then, we’ll just kind of plug in our analysis there and, you know, the number of the exhibits accordingly, etc.
Yeah. Now this is a really great example. And whenever we work with investors, we usually kind of give them an extensive list of just potential documents, you know, and it’s broken down in sections of, okay, if you’re using source of funds from ordinary income, these are the type of documents we need. If it’s from real estate, this is the list of documents we need, and kind of, you know, give them that extensive list [where] they understand based on what section they fall into and what they should be gathering. But yeah, I mean, EB-5 was already document-heavy a few years ago, but I can just say that in the last 10 years, we’ve seen that demand increase. I think the office has become, in a certain way, a little bit more sophisticated about what they should be asking for.
Oh, they’ve become more demanding about the, you know, the volume of documents they want to see at the same time. It’s important for investors to realize that no, almost nobody has a perfect package. So, when we work with investors, we kind of look at what is missing and what are secondary or incorrect, you know, pieces of evidence that we can use to help prove our [case by 0.1% more], which is very important. I think that’s a question a lot of investors ask—it’s the burden of proof. The investors, by law, investors do not have to prove 100% that their investment funds are lawful. They have to show enough documents and information that it makes it more likely that it’s lawful than the fact that it’s not lawful. To be honest, legally, that’s actually not a very high standard in practice. We think the immigration office applies that much stricter than the legal standard.
So, we usually ask for more documents, but this is just to let people know, like, do not be scared by the volume or by the fact that you may not have some of these documents. That’s the job of the attorneys to work with you and to either potentially suggest alternatives or, a lot of times, you know, in situations like Charles, who has worked in Russia for so many years, a lot of times he will suggest a company to you where you can go and obtain [information] or, like, you know, a government entity or organization that can provide you with relevant information.
Yep. Thank you. Thank you. Irina. One other point is generally to mention that during the review process by a USCIS adjudicator, that process, first, is not happening in a vacuum, right? That these adjudicators, you know, they do have access to Google, and they are going to do basic research and confirm, you know, using publicly available sources, whether or not a company does own something, whether or not it’s traded, you know, that that is going to happen. And so, you want to make sure that you’re not taking a position that’s going to be, like, very easily contradicted using a publicly available source. Right. And the other kind of major point I want to emphasize is just “simple is critical,” right? So, you know, even in a complicated source-of-funds package, like the example that we’ve chosen to cover today, you want to try and really logically explain everything in detail and kind of, you know, have all of the supporting exhibits.
Every, every possible sentence should be reviewed with the question of, “Okay, if I read this as someone who doesn’t know anything about the situation, what questions would I have?” And then, the next sentence should kind of directly address those questions or provide reference to an exhibit which, you know, provides those answers, right? You want to, you know, show and not force them to dig around and try to figure out what you’re trying to display, right? The easier you make it for them to read through the package and have every obvious question very easily addressed, the better off, you know, you’re going to be, right? So that’s why it’s really important to work with an experienced immigration attorney who’s worked with a lot of clients from that region of the world and who’s seen a lot just through volume, you know, seen a lot of applications.
And so, you know, it can give you an idea of what types of questions could be asked, and then, you know, start thinking about, “Okay, what types of documents would we need to try to address those questions?” Maybe we won’t get them and maybe we will. Right. There’s no, you know, they don’t… unfortunately these are not all reviewed by the same person, and standards change, manuals change. They can always issue new guidelines, new training. So, it’s always a moving target in terms of the review and timing and what questions may or may not come up. Um, okay.
All right. So, we’ll now shift over to the question-and-answer section. It looks like we did get a number of questions. So, I don’t know if we’ll be able to cover all of these, but we’ll try to cover a couple of them. And if there are other questions that we can’t get to, please reach out. The contact information for both Irina and Charles is on the screen—Irina in the middle, USA investor visas, and Charles of AmLaw, at the bottom there. Um, okay. So one question that we got is, by taking a shareholder loan, does the investor need to prove how [they] initially founded the company and then paid capital into that company? Or is that not going to be going to be required if there was minimal capital used for the startup?
I would say they are almost always asked for it there because we have to… because presumably when we’re taking a shareholder loan, we’re securing it with the shares. So, we have to prove how you acquired the shares. If the capital is nominal, they’ll accept, you know, indirect evidence. So, the government labor book showing that you’ve been employed beforehand should be sufficient. Usually, we just provide university diplomas and copies of the government labor books showing that you have been employed prior to establishing the company.
Yep. Yep. Got it. Another question we had—I can take this one. Could a regional center be held liable if it’s later discovered some of its clients’ funds were questionable? So the quick answer to that is no. The investment is done through the project sponsor. The regional center is just linked to the project through a job affiliation agreement, essentially. And so, no, there’s no real link directly to the regional center, and just high level, the regional center and the project sponsor, the new commercial enterprise and the manager. They don’t get to see the investors’ source-of-funds documents. Those are protected by attorney–client privilege. And so, the investor is going to be working directly with Irina or Charles and is not going to be providing those financial documents to the regional center or to the project. That’s all going to happen only with the attorney. And then, the attorney is going to directly submit that information to USCIS. Irina, can you maybe touch on kind of how documents are kept by your firm and then how they’re used and, you know, a little bit about that? I think that’s an important point.
Sure. I mean, one convenient thing about the work that we do is everything is done remotely. So the investors will send us scans of all the documents. Once we prepare the petition and we determine what we’re going to use and what we’re not going to use, we put together the petition, we usually will save the client’s additional documents in their electronic file just in case in the future we get a request for additional evidence. We can use some of these documents, and one thing USCIS still requires is a submitted paper copy of all the petitions, which is very frustrating. It’s a massive filing that’s, you know, at least 500 pages. Sometimes it’s 1500 pages. So, we print out everything from the project and the investor, but to get in a package and send it in, we don’t keep a physical copy. Our investors don’t want a physical copy. We send our investors a full scan of the copy of their petition as soon as it’s submitted so they always have it for their records. And then we keep our electronic files. You know, we only promise to keep them for about three years in reality. I think we’re gonna continue to keep them for our clients for about 10 years and then delete the files.
Got it, got it. One other question we had is, “How do you prove the gaps when an investor’s funds are moved from one account to another, especially when, you know, perhaps the account balances don’t match up?” Exactly. If you’re moving a hundred dollars from one account into another one, but then when you deposit money, you ended up combining it with more money going into the second account where the hundred that you want to show, you know, joined in. And there’s another note on this to talk about—that, you know, you only have to source the $900,000, you know, nothing more, nothing less. And so, you know, oftentimes—and I’ll let Irina talk about that a little more—but oftentimes, you know, there’s more money that’s around than just exactly the $900,000. And so, you know, how do you deal with those situations?
Yeah, more money in our line of business is not a good thing. So whenever we start working with the investor, we always discuss this first. So, once again, of all the investors should be aware of the fact that do not move any money at all until you’ve spoken to an immigration attorney and decided what you’re going to do, because the mistakes that we find that then cause the investors an extra headache are often that investors start moving money around in anticipation of entering the EB-5 program. So, normally, we would look at our situation, and if we need to get funds from a corporation via dividends or via loan, we always ask the investor to use a personal account that is separate from their other money. So, if you have an account where you already have $500,000 and we’re sourcing $900,000 from dividends from your firm, don’t put it in the same account where you already have the $500,000 because they’re going to be what’s called commingled.
And then you have to prove the $900,000 plus the $500,000. So, you know, well in advance, we kind of asked two separate things, but it depends on the situation. I mean, a lot of our labs use money for their investment that they’ve had for 15, 20 years in accounts with all their life savings. It’s impossible to trace, you know, $7 to $12 million that they have in those accounts that have been accumulated over more than a decade. It’s impossible to trace all the transfers. So, we do a more general approach. We kind of show their tax returns for those years from their home countries, showing they’ve been earning the funds, they’ve been transferring them to U.S. investment accounts and keeping them in these investment accounts. And you know, when it comes to gaps, again, I would have to look at the individual situation. If it’s just a small amount, it’s easier to sort of, like, argue your point with the officer that, “Look, it’s a thousand dollars.”
Like, we’re not going to be able to trace it. The client took it out in cash, put it back, you know, $900, three months later, it’s insignificant. We have shown the origin of the money like that. This particular money, we’re not going to. Because at the end of the day, again, we use the preponderance of evidence standard, meaning we don’t have to prove everything 100% and money is fungible. People use it. So, if all my income comes from my lawful work that I do in this law firm, I still use my income. I take money, I lend it to a friend, they pay it back. I, you know, buy something, then I sell it, it’s okay. That there were some transfers in your accounts—as long as, I think, your origin is very strong, the path of the funds, USCIS officers can be more forgiving with if the origin if the sources are well done. And well-documented.
Great. We’ve got time for one last question—which is, it looks like the regional center program has been extended through December 11, 2020. What’s going to happen after that? Charles, do you want to comment on that quickly?
Well, hopefully, you know, it was extended temporarily. And if history has any guidance to the future, hopefully then when they pass the extent, you know, the long-term budget… actually with the lame duck Congress, I don’t know if that’s going to be more problematic, but hopefully it’s good. It’s going to get renewed. Again, I don’t know if you guys have heard anything, it’s just this period of time, you know, in the past it’s been maybe for a year or two years… obviously we’d like, you know, a more long-term solution, but given the gridlock in Congress these days, it seems like, you know, they just might extend it for another year or so, and then just kind of kick the can down the road to be dealt with.
Yep, great, great.
Or long-term legislation, because for the program to be extended for a long period of time, we need some sort of, like, long-term or new legislation to be passed. We don’t anticipate anyone who’s going to vote on specifically like EB-5 re-legislation. So EB-5 is just probably going to be extended as it has been historically together with the government budget. So, you know, we hope that that trend continues. Again, it’s been almost 30 years since the inception of the program.
Hopefully it continues in exactly the same way at this point. We have no reason to believe otherwise.
Great. Great. Thank you. Thank you very much, both of you, Charles and Irina, for taking time out of your busy schedules to join us. And as I mentioned earlier, if there are questions, please reach out to any of the three of us—our contact information’s on the screen. And if you want to see a recording of this video or share it with a friend, it’s going to be posted on our YouTube channel next week. And if you are interested in a copy of the slides that we went through for reference, you can email us at email@example.com. So thank you again. And, yeah, we hope it was helpful.
Thank you everyone. Thank you so much. Thanks for having us. Bye.