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Origin of Funds and EB-5 Investments (1 of 3)

Hello EB-5 investors. This is Floyd Mitchell with the EB-5 Investor Portal; the leading resource for information regarding the EB-5 visa. I publish articles based upon my interviews with leading US immigration attorneys and other EB-5 professionals which are produced as podcasts to educate EB-5 investors. Our podcasts are syndicated around the world on search engines, social media, YouTube, Google Podcasts and our own Apple News Channel – “EB5 Investor Portal”.
So, this is not a forum, or a blog post based upon personal opinions or experiences. It is information taken from my many, many hours of interviews with licensed immigration and securities attorneys, securities professionals and others.

Today’s episode is titled Origin of Funds and EB-5 Investments (1 of 3). Our guest is immigration attorney, Andrew Johnson, of law offices of Andrew P. Johnson in New York, New York. Mr. Johnson was a government prosecutor until he entered private practice in 1998. He has authored numerous articles on immigration and international litigation, some of which have been published by the American Bar Association and the American Immigration Lawyers Association. In addition, Mr. Johnson has been featured in the New York Times, quoted by the New York Daily News, and interviewed by CBS News on the topic of immigration. He has represented large corporations, nonprofits, and small companies in all aspects of immigration law. Mr. Johnson has spoken to business organizations in conferences around the world on the various strategies for immigrating and sending employees to the United States. Mr. Johnson practices immigration law exclusively and is an active member of the American Immigration Lawyers Association. Andrew is admitted into the United States Supreme Court first, seventh, ninth, and eleventh United States circuit court of appeals, New Jersey district court, and the State Bar of New Jersey.

We covered a range of issues – What is legal source of funds? What are the general rules? What sort of proof that you need? Is it complicated when you move funds from a business account to a personal account? What are the tax issues? Can gifts be used for the capital contribution? How about loans? Examples of secondary evidence to prove source of funds. Issues in Vietnam. Issues in Russia. What is the role of immigration attorneys in source of funds? Can transfer agents be used to transfer funds? What are the first steps in EB5 and how to plan the first steps.

I spoke with Mr. Johnson (Andy) regarding the origin of funds in EB-5 transactions.

Happy to talk about the most primary issue with a EB-5 applicant, which is the origin of funds. There’s two issues with origin of funds. One, sometimes applicants think it’s no problem whatsoever and then they realize, after going into detail, there are some problems based on his country’s specific tax laws. Two, some clients think they absolutely cannot prove their origin of funds and realize once they talk to an attorney who’s done this for many years, there’s absolutely many avenues in which you can prove origin of funds. With that information, let me tell you about the basic requirements.

Andy is an expert, so I wanted to know – what are the basic requirements of source of funds?

Origin of funds simply means how to prove that the money was obtained legally for USCIS purposes. That’s the most important because a lot of people explain that in my country it was obtained legally and the government knows it’s obtained legally, however it might not be considered legal origin funds under USCIS regulations.

The general rule about legal origin of funds is you have to come from an origin of which it was earned or legally obtained, and let me give you some examples. An easy one would be real estate. A house was sold and the proceeds of that money is used to show USCIS the legal origin of where the money came from. You also can do it from inheritance, just simple savings, investments, business profits or business salary, gifts from relatives or friends, and also you can use all types of variations. People don’t understand that you might have 10% come from inheritance, 10% income from business profits, 10% come from savings all the way through. You don’t have to have it come from one source.

There is one other issue that often people don’t fully understand. They simply say, “Okay, I’m selling a house I owned for two years and therefore that’s the profit and I’ll show that and prove that as my origin of funds.” Because it’s a recent sale of a house, USCIS will want to know where that money came from to purchase the house two years ago. If it’s a home 20 years old the requirement for documentation showing how that money was earned is much less and can be usually drawn from affidavits or statements by the applicant.

I wanted to know, how would one go about showing detail for the origin of funds on a transaction that dates back 20 or 30 years or more? Could he tell me how secondary evidence may be helpful in situations where the origin of funds date back so long and the investor may have a difficult time producing the proper detail to satisfy USCIS requirements?

First of all, we, in our ideal world, if it’s 20 years, try to show all the ways and actually how the money was earned 20 years ago. You would have to show how the money was earned, even if the house is owned 30 years or 40 years. The issue is it’s just easier, usually you can show, “Okay, this money was earned by salary … My father worked for a company and he made roughly $20,000 a year over 10 years and then bought the house in 1992.” It usually can be established that way, so you always still want to establish it. It becomes, I guess the best way to explain it is if it’s two years ago clearly you should be able to find where the money came from two years ago. If it’s 15 or 20 you can do it with what they call secondary evidence, in other words not directly from bank accounts where the money was transferred over because people might not be able to have records of that bank account.
We want to do our best to approve the money from a direct source as best we can, it’s just USCIS usually accepts what’s reasonable. It’s reasonable to show by affidavits and statements how the money was earned 30 years ago to purchase the house. It’s also reasonable that the house was bought two years ago to actually show where it came from out of bank accounts.

I asked if the origin of funds an item that only immigration attorneys work on or, do other players get involved in the process?

In fact, it’s our primary role. The other parts that we have to do are quite easy. It’s just identification documents and so forth. No, the investment banker, the regional center, they specifically don’t want to go into that issue because it’s a legal issue and requirement by USCIS. That is absolutely … That’s the most important job for the immigration attorney. As I had mentioned before, if the applicant can prove origin of funds there really is almost no other issue to make them ineligible to file for the EB-5 program.

What are some of the common problems or misconceptions clients have with origin of money?

Most clients naturally earn money … Let me give you an example. If they earn money through business income and it goes into their business account and they move it over to their personal account. Then they take that money, obviously, and most people don’t keep $500,000 or $300,000 into their personal account and let it sit there. The money will either be spent on cars and jewelry and living expenses or the money will be invested in stocks. Then the money is used to purchase stocks or investments, and then someone might cash out on that investment and then spend it on something else. Now, often clients say to us, “I’ve made $750,000 over the last two years. I can prove that.” The problem is they can prove it from their business account to their personal account, but then if the money has been used, or sent out, or spent, they have to be able to show how they can bring that money back into their personal account to USCIS. In other words it has to be fully tracked back. The reason why it is as difficulty as it is, especially with things that you expense, that’s sometimes very difficult.

A lot of clients have money from sources that we can’t use for USCIS, where they want to refill their personal account back up. They can say, “Okay, I can put $750,000 back into my personal account.” The problem is they can’t show where that money came from, they’re just refilling, in a sense, the personal account. Often, after we have those discussions, it’s easier for the applicant to almost do another business deal in order to get the money back into the business account moved over to the personal account, and have it stay there. With a lot of businessmen that’s actually quite easy. That issue, obviously, is what I had mentioned before. Some clients say, “Oh, well I make $500,000 a year, this should be no problem, it goes from my business account to my personal account, I have it invested and so forth.” They have to be able to legally show how that money is properly brought back into their business account without being replenished by money that’s from, in a sense, an ineligible source or an untraceable source. I know that gets a little complex but that’s what they really have to be worried about if they want to use money that they have saved or earned in the past. Where it went to and where it needs to go back. We have to draw it up in a sense where we actually track it and write up exactly the pathways, and sometimes even graph it up on a computer to make sure we can show the legality of it. Then we usually circle the sections or the amounts of money that would be considered questionable. Then with that we might say, “Okay, we have $75,000 that’s going to be untraceable, let’s try to find another source in order to prove that money,” which is often quite easy to do.

I wanted to know is it allowable for an investor to sell stock or other assets to come up with the investment required?

Absolutely. I don’t want to make it sound too difficult. If, for example, they earn income through salary or the business they own, they move it to their personal account, and then they purchase stock, then they sell that stock, it goes back to the personal account, we have legal origin of money, no problem whatsoever. The problem is, as I mentioned earlier, is often that money gets moved from stock, three years later it’s sold and goes to another stock, or then sometimes money is pulled out and expensed, that’s what I’m saying. When it has three or four multiple transfers you have to bring it back through all three of those transfers… Or trace it back from all three of those transfers to show the legality of it.

Is it fair to say that in essence, USCIS wants to know where the funds came from, they want to know that they were obtained legally, and a large part of your role as an immigration attorney representing the investor is to assist them with this critical aspect of the EB-5 process?

Absolutely. What we do is we explain what we can explain right here, but also the client would tell us, “Okay, this is my portfolio which I think I can use.” They would then tell us where and how they got certain sets of money. Then between us we would choose the easiest route, we believe, that they could take which would have the least amount of tax consequences to them in their own country. Remember, USCIS doesn’t evaluate tax consequences in foreign countries. They don’t know the tax law, they don’t want to go into that. Everything is done outside. We give the applicants the best few options we believe and then they choose which option they want to with the least amount of tax consequences in their country.

I asked Andy if the immigration attorney helps an EB-5 investor optimize or reduce their tax obligation in some cases?

In some sense. Our clients will know their tax laws from their country much better than we. We have a general idea of what it is. We just want to make sure there’s no tax problems within the US. We don’t do anything special, we just say don’t do the transaction or the gift transfer in the United States. Once that occurs, then they usually pick the route of how they want to do it in their own country. For example, if there’s three or four pathways we can choose, and let’s say if it’s in India, they get hit with high real estate taxes, they might want to avoid a high real estate tax sale to show that much profit. That’s just an example but we defer to the clients on their tax laws.

Well, we thoroughly covered a range of topics! I am happy I was able to share to share what I think is great advice, guidance and strategies for EB-5 investors. You can hear the full podcast by clicking on the following link which features the podcast series on the EB-5 Investor Portal
Make sure you watch for additional articles as this is part of a series of articles from Andrew Johnson on source of funds issues.

Please remember that the information in this article and the podcast series is for informational purposes only and should not be used as a substitute for individualized advice from qualified immigration counsel.

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