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case study of an unusual source of funds illustrates the absurdity and inconsistency in USCIS ’ “ indebtedness ” and “ currency swaps ” policies . The case involves $ 500,000 being used for EB-5 investment and rejected by the service on indebtedness grounds , but upon return via a refund from the new commercial enterprise , it was used in a currency swap for a newly sourced RMB and approved as a qualifying investment of capital .
BACKGROUND : INDEBTEDNESS AND CURRENCY SWAPS
Many remember receiving their first indebtedness request for evidence ( RFE ). Most seasoned EB-5 attorneys thought that it was a fluke , a one-off mistake from a new examiner without knowledge of EB-5 law or policy . However , as the RFEs began to trickle and then flood in , and many with a sinking heart realized that the first indebtedness RFE heralded the coming of a new age . It was a 180-degree change in USCIS policy , applied retroactively to EB-5 capital investment proceeds sourced from a loan . The subsequent denials cemented the change in policy .
"... A currency swap shifts the evidentiary burden of lawfulness to the third-party exchanger ..."
USCIS ’ historical policy recognized the legality of the currency swap and permitted petitioners to utilize such transactions , provided that they fully documented the lawful source of the RMB capital as well as the currency swap transaction providing petitioners with ownership of the USD capital .
EB-5 petitioners are required to document their ownership and the legality of EB-5 investment capital . USCIS , in accepting swap transactions , understood that the lawful source of a petitioner ’ s investment capital could be traced back to the lawfully acquired RMB , while the ownership of the USD investment capital was acquired via a lawful contractual agreement with a third party . Acceptance of such transactions also inherently recognizes the fungible nature of capital .
In the currency swap RFEs , USCIS views the seeming break in path of funds caused by the currency swap to mean that the investment capital may be unlawful . USCIS treats the USD investment capital as non-fungible , meaning that the USD can be traced back to the lawfully acquired RMB via the legal contractual agreement between the parties and has no bearing on the lawfulness analysis .
Recall that the indebtedness issue impacted certain cases where the EB-5 capital investment proceeds were sourced from a loan . USCIS held that loan proceeds used as qualifying investments must be secured solely by the assets of the petitioner and that the petitioner must be personally and primarily liable on the loan . As a factual matter , the cases primarily impacted by this change were those where a petitioner ’ s qualifying investment capital was sourced from a mortgage loan secured by property owned by non-spousal family members .
The USCIS policy change on this issue directly contravenes the EB-5 statute , regulations and precedent , which since the inception of the EB-5 program permitted EB-5 capital to be sourced from loan transactions mirroring this fact pattern . Nevertheless , USCIS adhered to this retroactive policy change , issuing RFEs and / or denying all indebtedness cases in the pipeline . USCIS affirmed the indebtedness policy in the new EB-5 Policy Manual .
Fast forward one year to the dropping of USCIS ’ s second retroactive policy change bomb , which was also “ announced ” in the form of RFEs that directly contravene long-standing EB-5 law and policy . In December 2016 USCIS issued the first currency swap RFE , requesting evidence of the source of the dollars acquired by an EB-5 petitioner in a currency swap .
For clarity , a typical currency swap occurs when an investor in mainland China transfers his or her lawfully acquired RMB to another party ’ s RMB account in mainland China . In exchange , the other party transfers his or her American dollars , located in an account outside of mainland China , to the petitioner ’ s account , which is also outside mainland China . The petitioner thereby acquires ownership of the USD capital , outside of mainland China , via the currency swap contract .
Instead , USCIS , while in most cases accepting that a petitioner is the owner of the USD capital , requires evidence of the independent source of the USD to ensure its legality . Essentially , in the currency swap RFEs , USCIS flips its historical policy regarding lawfulness and ownership in currency swap cases .
A recent case illustrates the importance of this policy change and its effect on indebtedness cases .
FACTS OF THE CASE
The petitioner is an adult Chinese national who sourced his RMB capital from a mortgage loan secured by a property he co-owned with his mother . He exchanged the RMB loan proceeds to USD through commercial banks , as well as 10 friends and family members using their USD $ 50,000 annual allotment . USCIS denied the case based on indebtedness . The new commercial enterprise refunded the USD capital from escrow to petitioner .
One year later , petitioner filed a new I-526 petition . In the second I-526 petition , petitioner documented a second , independent source of RMB capital . Petitioner exchanged the new RMB capital for $ 500,000 via a currency swap with a friend . The petitioner received the now standard swap RFE , and then notice of intent to deny ( ITD ), on the second I-526 petition requesting evidence of the source of the USD . In response , the petitioner provided evidence showing that the source of the friend ’ s capital was the same capital the petitioner received as a refund from the new commercial enterprise after the denial of the first I-526 petition .
That is , it was the capital sourced from indebtedness . The petitioner and the friend had engaged in a series of additional currency swaps over the intervening years that resulted
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