When Good EB-5 Cases Go Bad
by Nicolai Hinrichsen, Carolyn S. Lee, and Stephen W. Yale-Loehr*
We present below some common potential pitfalls in an EB-5 case. The list of possible problems is illustrative, not exhaustive.
Source of Funds
How did an EB-5 petitioner obtain the money used for the commercial enterprise investment (the “source of funds”)? How did the EB-5 petitioner move that money from the “source” to the bank account of the commercial enterprise (the “path of funds”)? Documenting a clear answer to these questions is not always as easy as it might seem. Most EB-5 practitioners agree that documenting the source and path of funds used for an EB-5 investment can be a challenge in getting a petition approved. Even where the source of funds seems straightforward, delving into the details of the paper trail can reveal unanticipated problems.
8 CFR §204.6(j)(3) lists the documentation required to prove the lawfulness of funds used in EB-5 cases:
Foreign business registration records;
- Corporate, partnership (or any other entity in any form which has filed in any country or subdivision thereof any return described in this subpart), and personal tax returns including income, franchise, property (whether real, personal, or intangible), or any other tax returns of any kind filed within five years, with any taxing jurisdiction in or outside the United States by or on behalf of the petitioner;
- Evidence identifying any other source(s) of capital; or
- Certified copies of any judgments or evidence of all pending governmental civil or criminal actions, governmental administrative proceedings, and any private civil actions (pending or otherwise) involving monetary judgments against the petitioner from any court in or outside the United States within the past fifteen years.
Four 1998 precedent EB-5 decisions by the Administrative Appeals Office (AAO) have reinforced the importance of documentary evidence for establishing both the source and path of funds from an EB-5 petitioner’s bank account into the account of the EB-5 commercial enterprise. 
The AAO has expanded the regulatory requirements detailed above, treating them as necessary but not sufficient for an EB-5 petition. The documentary burden on petitioners in post-1998 AAO EB-5 decisions can be best characterized as “hypertechnical,” to use the AAO’s own oft-quoted descriptor.  The focus on path of funds remains strong, as the AAO continues to cite the four 1998 precedents in most decisions.
Adequately documenting the source and path of funds for an EB-5 petition is largely fact-dependent. Consider an “easy” case, where an EB-5 investor takes out a second mortgage on a home she has owned for the past 10 years. It would seem sufficient to include the executed mortgage agreement, deposit slips or wire transfer receipts showing the deposit of the loan proceeds into the investor’s bank account and wire transfer receipts and deposit slips of the EB-5 investor’s and the commercial enterprise’s bank accounts. However, this “straightforward” case could easily go awry for the unwary practitioner. While the source of funds is an historical investor-owned asset, if the petition neglects to include evidence of a “pattern” of income sufficient to support the original purchase of the house, USCIS might issue a request for evidence (RFE) seeking information concerning the source of funds for the original purchase of the house. Alternatively, if the paper trail documenting the movement of funds from the investor’s bank account to the bank account of the EB-5 commercial enterprise contains a deposit or withdrawal slip that, for whatever reason, does not include an account number, as far as the USCIS is concerned the “chain” is broken and an RFE will likely be issued.
While such pitfalls may be easily cured, others can be more difficult to fix, particularly if the EB-5 investment in the commercial enterprise has already been made. Consider an EB-5 investment funded by a corporate dividend from an investor’s solely owned foreign corporation. Before consulting with an immigration attorney, an EB-5 investor may choose to simply make the capital investment directly from his or her corporate account into the account of the EB-5 commercial enterprise, reasoning that since the foreign business is solely owned, why bother with the time and expense of transferring funds from the business account to a personal account and then on to the EB-5 commercial enterprise. Surely the result of transferring the money directly from the business account has the same net effect. Unfortunately, USCIS would most likely disagree and in such an instance, even an RFE might not save the petition. An EB-5 petitioner must show individual control and ownership of investment funds. This requirement may not be met where fund transfers originate from corporate coffers.
Changing the scenario above slightly, consider an EB-5 petitioner who has an existing solely-owned business in the United States. The business is successful, and over the years the investor, who is in the United States in E status, decides to use the retained earnings in her company to fund an EB-5 investment. Unfortunately, while USCIS adheres to “hypertechnical” rules in denying EB-5 petitions, it chooses to ignore the “technical” laws of corporations in evaluating whether an individual has “made” an investment. According to USCIS, retained earnings, even in a sole proprietorship, cannot be used for EB-5 investment purposes. 
However, all is not lost. The EB-5 petitioner can issue a dividend to herself out of retained earnings, pay personal income taxes on the income, and then reinvest that money in the very same commercial enterprise thus satisfying USCIS requirements. Hypertechnical indeed!
Use common sense when considering the myriad potential sources of an EB-5 petitioner’s investment income. Where funds are inherited, a will or trust forms are instructive. Where funds are earned from income on an investment, stock certificates, dividend letters, and account statements are vital. Where funds were earned from income on a previous business investment, the corporate tax returns for the business, complete with evidence of payouts to the owners, should be included.
Given AAO decisions on this issue, some may be tempted to include all conceivable documents relating to the petitioner’s source of funds in an EB-5 petition, hoping that the sheer mass of documentation will persuade USCIS that the money is sufficient and legitimately acquired. Do not yield to this temptation. As the AAO has often reminded losing EB-5 applicants, its review of the source and path of funds is “hypertechnical.” Simply submitting more documents in a “kitchen-sink” approach may prompt USCIS or the AAO to find fault in one minor transaction and deny the whole petition. Instead, organize the petition carefully to show a clear path of funds from the investor to the investment, and the lawful source of those funds.
Job Creation Requirements
In at least one case, USCIS has rejected jobs created by an EB-5 investor, even though the company in which the investor invested his money properly completed the I-9 paperwork. All of the new employees presented employment verification documents that reasonably appeared genuine on their face. Thus, the investor met the re-quirements of 8 CFR §274a.2. However, when the investor presented the I-9 documents to USCIS as part of his I-829 petition, USCIS said that some of the employees were not actually work-authorized. The number of disallowed employees meant that the investor had not created 10 jobs. For that reason, USCIS denied the petition.
The investor protested, saying that he had done everything he needed to comply with the I-9 requirements. He immediately hired a sufficient number of new employees and verified them through the E-Verify system to make sure they were properly authorized. He filed a motion to reopen with the new evidence. USCIS granted the motion. The moral of the story: you may need to have your EB-5 clients participate in E-Verify to make sure that employees are actually work authorized.
Construction Jobs in EB-5 Cases
When is a job not a job for EB-5 purposes? When it is a construction job.
Neither the EB-5 statute nor the regulations explicitly exclude construction jobs from consideration as the type of employment creation allowed under the EB-5 program. The regulations define “full-time employment” as working at least 35 hours a week.  That definition also includes indirect job creation as long as the indirect job requires 35 hours per week.  Thus, just reading the regulations alone, one would think that construction jobs should count.
The AAO has held, however, that construction jobs do not count for direct job creation purposes for the EB-5 program.  Nevertheless, USCIS is willing to allow the indirect and induced job creation from construction jobs in EB-5 regional center cases.
The USCIS interpretation may make sense in a short-term project such as building a single home. However, many regional center projects are of a long-term nature, and use the same construction crews for multiple years. This is particularly true for large projects such as building a planned community.
Efforts are being made to try to persuade USCIS that in such long-term projects, construction jobs should be counted as direct job creation. However, as of the date of this writing, there is no definitive answer from USCIS.
Potential Ethical Problems in EB-5 Cases
The main three ethical issues that arise in EB-5 cases relate to a lawyer’s duty of competence, duty of loyalty, and regulation of fee-splitting.
The analysis below is based on the American Bar Association (ABA) Model Rules of Professional Conduct (Model Rules), upon which 47 states base their professional conduct rules.  However, in exercising due diligence, practitioners are reminded to check the rules of their state and local bar associations before proceeding with an EB-5 case.
The initial ethical consideration is a lawyer’s duty of competence. The first rule of the ABA Model Rules states:
A lawyer shall provide competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation. 
The relevant considerations include the relative complexity and specialized nature of the matter, the lawyer’s general experience, the lawyer’s training and experience in the field in question,  the preparation and study the lawyer is able to give to the matter, and whether it is feasible to refer the matter to, or associate or consult with, a lawyer of established competence in the field in question. Under the ABA Model Rules, competence includes the ability to discern when an undertaking requires specialized knowledge or experience that the lawyer does not have. 
Under the ethical guidelines above, an attorney has three options when encountering a client who may benefit from an EB-5 petition. First, she can gain the EB-5 related legal knowledge and skill to competently represent the client herself. Second, she can refer the matter to an established EB-5 attorney. Third, she can associate or consult with an established EB-5 attorney. To find a competent EB-5 attorney, referring attorneys might consult AILA EB-5 committee members, the AILA EB-5 mentor list, and/or AILA publications, listservs, and web sources.
The second issue is the attorney’s duty of loyalty to the client. This issue is triggered most commonly where an EB-5 regional center offers a referral fee to agents who refer investors to their regional center, if the investor ends up investing in that regional center. Can an attorney who undertakes representation of the client in the EB-5 filing also receive the referral fee from the regional center? This question touches on two ethical rules.
The first rule cautions attorneys against conflicts of interest. ABA Model Rule 1.7 sets out the basic rule:
Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if:
- The representation of one client will be directly adverse to another client; or
- There is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client, a former client or a third person or by a personal interest of the lawyer. 
[A] lawyer may not allow related business interests to affect representation, for example, by referring clients to an enterprise in which the lawyer has an undisclosed financial interest. 
The conflicts rule in New York is set out in Disciplinary Rule (DR) 5-101:
A lawyer shall not accept or continue employment if the exercise of professional judgment on behalf of the client will be or reasonably may be affected by the lawyer’s own financial, business, property, or personal interests, unless a disinterested lawyer would believe that the representation of the client will not be adversely affected thereby and the client consents to the representation after full disclosure of the implications of the lawyer’s interest. 
A prudent lawyer will also want to avoid even the potential appearance of a conflict of interest. In New York, an attorney may not place himself in a position where a potential conflicting interest may, even inadvertently, affect or create the appearance of affecting his personal judgment or duty of undivided loyalty to clients. 
Under the ABA Model Rules, if there is a risk that the attorney’s personal interest in the referral fee will materially limit or impair her representation of the client, the attorney is prohibited from undertaking that representation. The analysis involves an attorney’s judgment in deciding whether representation would, in fact, be impaired. The risk is that some attorneys’ judgment may be found to be faulty after the fact by a court’s fact-finders or in the course of a disciplinary proceeding. One clear way to avoid the conflict is to take the referral fee and not represent the client in the EB-5 case.
The third issue involves ethics rules governing fee agreements between lawyers practicing in different firms. This issue most commonly arises where a less experienced attorney seeks to jointly represent her client with a more experienced attorney. ABA Model Rule 1.5(e) states:
A division of a fee between lawyers who are not in the same firm may be made only if:
- The division is in proportion to the services performed by each lawyer or if each lawyer assumes joint responsibility for the representation;
- The client agrees to the arrangement, including the share each lawyer will receive, and the agreement is confirmed in writing; and
- The total fee is reasonable. 
The analogous rule in New York is DR 2-107, which states in relevant part:
A lawyer shall not divide a fee for legal services with another lawyer who is not a partner in or associate of the lawyer’s law firm unless:
- The client consents to employment of the other lawyer after a full disclosure that a division of fees will be made.
- The division is in proportion to the services performed by each lawyer or, by writing given the client, each lawyer assumes joint responsibility for the representation.
- The total fee of the lawyers does not exceed reasonable compensation for all legal services they rendered the client. 
in the case. Second, the fee split has to reflect in proportion the services provided by the two lawyers, or the lawyers have to be jointly responsible. Joint responsibility means that the lawyers are ethically obligated to accept vicarious liability for malpractice during the course of representation. 
The practical problem encountered here for the new EB-5 practitioner is that she may find more experienced attorneys reluctant to shoulder joint liability, given the uncertainties of whether a fee split will be found proportionate. Attorneys may get around this particular hurdle by retaining the client for all non-EB-5 related representation such as nonimmigrant visa advice, adjustment or consular processing after EB-5 petition approval, and naturalization after the conditions on permanent residency have been lifted from the investor.
Many problems in EB-5 cases stem from either unwritten USCIS interpretations of the regulations that only an experienced EB-5 practitioner will know about, or changing USCIS interpretations that no one can predict in advance. An EB-5 practitioner needs to carefully advise his or her EB-5 clients about the unforeseen land mines in this area to manage expectations. Finally, even if a case is not denied because of evolving interpretations, it may be delayed beyond normal processing times.
Copyright © 2008 Miller Mayer, LLP. All rights reserved.
*Nicolai Hinrichsen, Carolyn S. Lee, and Stephen W. Yale-Loehr all practice EB-5 law at Miller Mayer, LLP in Ithaca, New York. Miller Mayer has a number of EB-5 articles available at www.millermayer.com.
Stephen W. Yale-Loehr chairs the AILA EB-5 Investors Committee. He also is executive director of Invest In the USA (IIUSA), a trade association established to promote the EB-5 program and to liaise with the immigration agency. The IIUSA web site is at www.iiusa.org.
 Matter of Soffici, 22 I&N Dec. 158 (Comm. 1998); Matter of Izummi, 22 I&N Dec. 169 (Comm. 1998); Matter of Hsiung, 22 I&N Dec. 201 (Comm. 1998); Matter of Ho, 22 I&N Dec. 206 (Comm. 1998).
 See, e.g., Matter of [name not provided], EAC 98 076 50508 (AAO Jan. 18, 2005), at 8 (“the ‘hypertechnical’ requirements for establishing the lawful source of an investor’s funds serve a valid government interest: confirming that the funds utilized are not of suspect origin.”) (citing Spencer Enterprises v. United States, 229 F. Supp. 2d 1025, 1040 (E.D. Cal. 2001), aff’d, 345 F. 3d. 683 (9th Cir. 2003)).
 Letter from Efren Hernandez, Chief, USCIS Business and Trade Branch, to Stephen Yale-Loehr, File No. HOOPRD 70/6.2.8 (June 4, 2004), available at www.usa-immigration.com/litigation.htm (last visited Nov. 29, 2008). See also Kenkhuis v. INS, No. 3:01-CV-2224-N,2003 U.S. Dist. LEXIS 3334, at *6 (N.D. Tex. Mar. 6, 2003) (“[t]he definition of ‘invest’ … requires an infusion of new capital, not merely a retention of profits of the enterprise”); De Jong v. INS, No. 6:94-CV-850 (E.D. Tex. Jan. 17, 1997) (same).
 8 CFR §204.6(e).
 See, e.g., Matter of [name not provided], File No. WAC-98-201-52237 (AAO May 22, 2002).
 See generally Model Rules of Prof’l Conduct (2006). TheNew York Disciplinary Rules of the Code of Professional Responsibility, the California Rules of Professional Conduct, and the Maine Code of Professional Responsibility are not based on the ABA Model Rules of Professional Conduct.
 Model Rules of Prof’l Conduct R. 1:1.
 Id. at cmt. 1.
 See, e.g., Attorney Grievance Comm’n v. Brown, 517 A.2d 1111 (Md. 1986) (“If a general practitioner plunges into a field in which he or she is not competent, ... the Code demands that discipline be imposed [and the] new Rule 1.1 (Competence) is consistent with [these old] standards”); Matter of Kaszynski, 620 N.W.2d 708 (Minn. 2001) (lawyer’s ignorance of immigration law and procedures and failure to supply documentation required to support clients’ claims for relief put clients in danger of deportation); Matter of Richmond’s Case, 872 A.2d 1023 (N.H. 2005) (“Rule 1.1 mandates that a general practitioner ... identify areas in which the lawyer is not competent”).
§ [E]ach affected client gives informed consent, confirmed in writing.
 See Model Rules of Prof’l Conduct R. 1.7 cmt 10.
 22 NYCRR §1200.20; see, e.g., Ethics Opinion of the Bar Assoc. of Nassau County 92-35 (1992) (an attorney may not accept a referral fee from a licensed general contractor, or licensed public adjuster, where she has represented, or intends to represent the referred party in any matter referring at all to the referral).
 See, e.g., Death v. Salem, 111 A.D.2d 778, 490 N.Y.S.2d 526 (2d Dep’t 1985).
 See Model Rules of Prof’l Conduct R. 1.5(e).
 22 NYCRR §1200.12.
 See Aiello v. Adar, 193 Misc.2d 649 (N.Y. Sup. Ct. 2002); see also Model Rules of Prof’l Conduct R. 1.5(e) cmt 7 (“[j]oint responsibility for the representation entails financial and ethical responsibility for the representation as if the lawyers were associated in a partnership. A lawyer should only refer a matter to a lawyer whom the referring lawyer reasonably believes is competent to handle the matter.”).