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Indian and Middle Eastern EB-5 source of funds: an immigration lawyer speaks to the challenges and solutions

Immigration lawyer Kripa Upadhyay discusses the particular challenges for Indian, Pakistani, and Middle Eastern investors regarding source of funds, one of the most demanding aspects of an EB-5 petitioner’s I-526E petition. She also touches upon other issues specific to those regions, like remittance restrictions and OFAC clearances.

Multiple sources of funds for Indians

Upadhyay tells us documenting an Indian EB-5 investor’s source of funds — a task that under normal circumstances is probably the most difficult aspect of putting together a strong application — is even more complex.

“It’s hardly ever one source of funds. It’s a combination of two or three sources,” she says. “It might be real estate, and maybe income from a company they own — so then you’re dealing with wages and dividends.”

She observes that real estate transactions in India, or the sale of other major assets, present a host of issues most petitioners from other countries don’t have to deal with. “There are definitely additional challenges with Indians there.”

Indian Income Tax Act and HUF

The Indian Income Tax Act, 1961 has a concept called the Hindu Undivided Family (HUF) that has tax implications, especially for EB-5 investors. A HUF includes all people in a family directly descended from a common ancestor, and is seen as one entity for tax purposes.

Gifting within a HUF, like a family elder gifting a son, is complicated, and a comprehensive explanation to USCIS requires as much documentation as one can provide to show where that initial money came from. A petitioner also needs to be able to explain the taxation on income generated from a HUF gift.

Indian rights to inherited property and challenges

Inherited assets present a significant hurdle for many Indians trying to document a lawful source of funds. Upadhyay explains that most Indian families have no real succession documents: “Very few families in India actually have a legally registered will.”

In the very common circumstance where someone dies without a will, intestate succession applies. This follows the Indian tradition of passing down property or a businesses from a deceased male head of family down to his son or male children. The Hindu Succession Act allows for an estate to be equally distributed amongst the male children. But unless there is a legal will saying otherwise, women in India don’t have rights to inherit property.

“Indian parents obviously have the right to determine which children inherit what property — and male siblings obviously have the right to say, ‘no, I want to divide the property with my female siblings’ — but if a person in India dies intestate, by law it automatically flows to the males,” Upadhyay explains.

This becomes an issue for USCIS if there is no will and no paper trial to show a petitioner legally inherited property from his or her parents. The petitioner and their lawyer must then backtrack. A male petitioner who inherited such property needs to give the Immigration Service a signed relinquishment deed executed by all of the female family members. 

This is similar to the U.S. quitclaim deed and is a legal statement by the female family members that says they are voluntarily giving up all claims on the property that was the source of funds. And to be legally binding, it must also be registered with the local revenue authority.

For an outsider hearing about these Indian traditions regarding inheritances, this might suggest that most Indian EB-5 petitioners are men. Upadhyay confirms that this has been her experience: “The principal petitioner from India is almost always male.” She points out that sometimes males will gift the funds to a female spouse or child who becomes the principal petitioner, but the source of the funds almost always originates from a male family member.

The Indian 50/50 of paying for assets can be a ‘nightmare’

Many EB-5 investors get their investment capital from the sale of property and Indians are the same; however, what’s different for Indians is the “50/50” payment method they often use. “The way of doing business in India, and this applies to Pakistan as well,” Upadhyay tells us, “is the 50/50 way. So if you have a ₹ 500,000 real estate transaction, the seller would often take ₹ 250,000 or ₹ 300,000 in documented funds, like a check or bank transfer. And that’s the amount they claim on taxes. And then the remainder of the funds are given in cash, which is not reported. That extra ₹ 250,000 or ₹ 200,000, in this example, is essentially unaccountable money.” 

And that undocumented money is a problem for USCIS, as very often large cash transactions have up to half of the money not documented as income on tax returns. So what’s the solution to show the Immigration Service that the money an Indian investor invested was obtained through lawful means?

“You have to backtrack and amend your tax returns, or replace the undocumented portion of the funds with money you can document,” Upadhyay advises. She also tells us that tax returns can be amended but only if they are filed within the last two fiscal years.

When amending tax returns is not an option, new money is needed. So if an investor used the 50-50 way to sell a house for ₹ 500,000 but ₹ 250,000 is not documented, that investor may have to come up with the outstanding amount of money via a loan or gift from a family member.

“It becomes a nightmare,” says Upadhyay.

Indian remittance restrictions

The other primary source of funds challenge for Indians is the issue of remittance. Upadhyay tells us that the Reserve Bank of India is extremely stringent with funds exiting the country. An Indian resident is restricted to remit just $250,000 per person per financial year (starting April through the end of March). 

Given that the minimum EB-5 investment is $800,000, and additional fees and lawyer costs can add up to about another $100,000, this restriction means an Indian looking to emigrate via EB-5 will need four family members to remit funds.

Upadhyay says this can really complicate the source of funds documentation because in such a case you have to document the sources for each of those family members. “It’s a lot more work,” she says.

Indians often have funds from multiple countries

Yet another issue for Indian EB-5 investors is that many of petitioners are high-net-worth individuals with funds from not only India but often from the Middle East, as many people live or work in places like Dubai or Abu Dhabi.

This issue, which is also common for Pakistani petitioners, means an immigration lawyer will have to deal with the financial rules of two or more countries.

Middle East free-trade zones

A complicating factor for income that originates from the Middle East is that the United Arab Emirates has created free-trade zones that are essentially tax-free zones. So when a residence or business is located in a free-trade zone, personal and business tax records are often not available — there simply isn’t a need to keep financial records.

But USCIS insists on records for funds that originate from these zones. So what can be done? 

Upadhyay recommends that investors with money from a free-trade zone have an independent audit of five to seven years worth of income performed, to show the Immigration Service the legitimacy of the income.

Investors from free-trade zones should know that independent audits are usually performed by one of the big four accounting agencies, and Upadhyay warns that they are “not cheap.”

Is USCIS understanding of Indian practices?

With India, Pakistan, and Middle Eastern countries engaging in different societal practices when it comes to money, assets, and inheritance, does the Immigration Service have flexibility when processing petitions from these areas?

Unfortunately, the answer is no. Upadhyay shares a story about taking USCIS to federal court because of a denial on an I-526 petition. This case involved an Indian investor who had been living and working in the U.S. for over a decade. His source of funds was a combination of U.S. income, U.S. stock options, proceeds from the sale of real estate, and a $20,000 gift from his father.

The father’s gift of $20,000 came from an Indian property the father inherited from his father in the 1970s, which he then sold in 1985. 

So even though the EB-5 investor has a gift deed to show how he was given the $20,000, because the father lacked the inheritance documentation for the property he sold, the Immigration Service took issue with the proceeds from the property sale.

“We literally accounted for $480,000 to the penny. But USCIS denied the EB-5 application because they said there is insufficient documentation showing the father was the rightful owner of the house he sold. In spite of having 10 years of tax records from India. And, again, when property is inherited in Indian, records don’t exist.”

Upadhyay says USCIS proceeds with “extreme vetting” for source of funds documentation and the agency simply doesn’t have flexibility for different policies and practices in other countries around the world.

Kripa sees this issue occur with her colleagues’ clients as well — petitions are denied because of missing source of funds documentation. “It’s not because the investor is using nefarious funds; it’s just that the level of documentation USCIS is demanding is just not available in some countries.”

A specialist is sometimes required 

If Upadhyay is meeting with a potential client who wants to make an EB-5 investment, does she ever have a conversation upfront that documenting source of funds is going to be difficult? And would she ever tell a potential investor not to pursue EB-5 because she doesn’t believe their approval to be likely?

Yes, more than once. She shares an example of an investor working as a diamond merchant in a Dubai free-trade zone and sourcing diamonds from India; historically, such transactions were made with cash and without a paper trail. 

“I just refused to work with that person on an EB-5 application,” Upadhyay declares. “I’m sorry, there’s just no way on earth I would feel confident about that getting approved. So I’m not going to spend the time and energy on a petition that doesn’t have a reasonable chance to succeed.” 

Personal OFAC clearances

Another hurdle for EB-5 investors from Middle East countries, and potentially Iran, Syria, and Libya (Upadhyay isn’t certain here as she doesn’t have experience with these last three countries), is personal OFAC clearances. The Office of Foreign Asset Control is a U.S. agency that administers sanctions against certain countries and groups of individuals.

Getting a clearance involves sending an investor’s information to OFAC who will perform a background security check to determine if the investor or a member of the investor’s family is a sanctioned individual. Each investor must do this before submitting an EB-5 petition. The security check relates primarily to the individual’s source of funds. Without this clearance, the person is ineligible for U.S. residency.

Is this something most immigration lawyers handle? Upadhyay admits she doesn’t, as she lacks the experience; instead, she will refer such potential EB-5 petitioners to other lawyers who do have the experience in dealing with what such complicated matters. [Editor’s note: Broker-dealers will perform OFAC clearances on investors as a matter of course.]

“I’d rather just have it go to somebody who knows what they’re doing with that particular issue,” she states.

Conclusion: Indian and Middle East investors need lawyers experienced with their region

India, Pakistan, and the Middle East have different societal practices from much of the world. And this can be a substantive challenge to providing source of funds documentation acceptable to USCIS.

Everything from documenting unreported income and inheritances, to remittance challenges, to potential OFAC clearances are very particular and demand an immigration lawyer with direct experience in these matters.

Upadhyay is confident about working with Indian investors but isn’t shy about telling investors when they need someone else. “I want to work with people who I am confident can get a Green Card. If I don’t have the expertise they need, I’ll tell them, and, hopefully, guide them to a lawyer who can help. Choose your immigration lawyer wisely and based on experience that relates to your particulars,” she advises. “Your chance of EB-5 Green Card success may very well depend on it.” 

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