ILW.COM - Evidence of Source of Capital in Immigrant Investor Cases (Part IV)

Petitioners also have available arguments based exclusively on the INS regulations. In addition to challenging the regulations as ultra vires as discussed above, petitioners may contend that they indeed have complied with the letter of the regulations. Alternatively, petitioners may argue that the regulations are procedurally infirm and therefore are illegal.

a. Compliance with Regulation

8 C.F.R. § 204.6(j)(3) provides:

"To show that the petitioner has invested, or is actively in the process of investing, capital obtained through lawful means, the petition must be accompanied, as applicable, by:
(i) Foreign business registration records;
(ii) 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 with in five years, with any taxing jurisdiction in or outside the United States by or on behalf of the petitioner;
(iii) Evidence identifying any other source(s) of capital; or
(iv) 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 with the past fifteen years."

Principles of statutory construction apply equally to regulations promulgated by the INS.⁵⁷ The legislative purpose is expressed by the ordinary or plain meaning of the words used.⁵⁸ Thus, in cases where the petitioner submits foreign business records in compliance with subpart (i), corporate and individual income tax returns in compliance with subpart (ii), and evidence of his inheritance, for example, in compliance with subpart (iii), the Service should conclude that the regulation is satisfied. According to the regulation, a petitioner must present at least one form of acceptable evidence. The regulation uses the disjunctive "or" in identifying acceptable forms of evidence. The Service should not be permitted to fault petitioners for not presenting evidence of a "level of income" sufficient to enable the petitioner to invest $500,000 in an enterprise.⁵⁹ As already discussed, there is no legal basis for imposing this standard on an immigrant investor petitioner. Where an agency interpretation of what the law requires is inconsistent with its own regulations, the agency's interpretation is not controlling.⁶⁰ The agency interpretation shall be rejected if "[t]here simply is no room for the agency to interpret the regulation so as to add another requirement."⁶¹ The Service's failure to follow its own regulations should be challenged.⁶²

b. The Service's Regulation was Promulgated without APA Compliance

Another argument is that the regulation is procedurally infirm. The Administrative Procedure Act (APA)⁶³ requires that before an agency may issue a rule⁶⁴ it must first publish the proposed rule in the Federal Register to provide the public with notice of the rule, permit interested persons the opportunity to provide comment on the proposed rule and participate in the rulemaking process, address and respond to each comment provided, and incorporate in the rule a concise general statement of the rule's basis and purpose.⁶⁵ Only after the APA's "notice and comment" requirements are met may the agency then issue a final rule. This rulemaking process under the APA is mandatory, not discretionary. Rules made without compliance with the APA have no force and effect.⁶⁶

The Service did not comply with the APA when it promulgated its source of funds regulation. The Service's proposed rule⁶⁷ did not include any mention at all of the requirement of proof of source of funds, and it was only in the final rule⁶⁸ that the Service imposed this regulatory requirement, all without affording notice and opportunity for comment by the public. According to well?settled federal court precedent,⁶⁹ regulations that are promulgated without compliance with the APA's notice and comment requirements shall be set aside as void. The Service's regulation at 8 C.F.R. § 204.6(j)(3) is illegal because the public has not been afforded an opportunity for comment.

The Arbitrary and Capricious Application of Standards

Another argument is that the Service acts arbitrarily and capriciously when it imposes on immigrant investor petitioners the burden of proving their lawful source of funds. Agency action that is arbitrary or capricious shall be aside as illegal.⁷⁰ Agency action is arbitrary and capricious if it is not supported by reasonable and objective criteria as distinct from whim and impulse, or if it is not based on a reasoned evaluation of relevant factors.⁷¹

As described at length above, INA § 203(b)(5) does not require the investor petitioner to present proof of any kind concerning the petitioner's lawful source of funds or level of income. The Service's imposition of this burden of proof, therefore, arises from some other, unidentified legal authority. Not only is the source of the legal authority unclear, but the purpose of imposing the burden on petitioners is unclear and the legal standard the Service applies in individual cases is indefinite. As a consequence, the imposition of this burden of proof on investor petitioners is subject to legal challenge for reasons that it is both ultra vires and arbitrary and capricious.

It is of paramount significance that the initial evidence the Service requires a petitioner to submit in support of the I?526 petition, according to 8 C.F.R. 204.6(j)(3), would not necessarily prove that petitioner's capital is from a lawful source, and would not necessarily prove that petitioner has sufficient capital to be able to invest. 8 C.F.R. § 204.6(j)(3) states that "the petition must be accompanied, as applicable" by evidence of foreign business registration records, corporate, partnership 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, "[e]vidence identifying any other source(s) of capital," or certified copies of any judgments or evidence of other pending governmental civil or criminal actions within the past fifteen years. A petitioner could present all the documentation requested in the regulation, and still the Service could conclude that the petitioner did not prove that capital was derived from lawful means.⁷² Alternatively, a petitioner might present persuasive and conclusive documentation not specifically listed in the regulation and yet the Service could conclude that petitioner failed to comply with the regulation. The regulation is not narrowly tailored to elicit information that would prove anything at all, and therefore, the regulation is likely to be applied to specific cases arbitrarily and capriciously.⁷³

In practical terms, whereas a petitioner may be able to present evidence of a history of legitimate business and income?generating activities, that evidence understandably may not prove that the precise capital invested was obtained through lawful means. The difficulty a petitioner would have in proving such a fact is no different from the difficulty a defendant in a criminal case would have in proving that he did not commit a particular crime. How does one prove that he did not do something alleged? The inherent unfairness in imposing such a burden in both instances is why the burden of proof is appropriately on the government. As perhaps arguably more reasonably presented in the Service's regulation concerning removal of conditions for permanent resident investors, if the government presents initial evidence of criminal activity, then the source of the investor's funds may be an issue that an adjudicator may inquire further into and request additional evidence.⁷⁴

A related problem is that the Service's refusal to apply an appropriate evidentiary standard also leads to arbitrary and capricious results. The appropriate evidentiary standard is akin to a civil law "preponderance" standard. When a petitioner submits evidence concerning past lawful business and financial activity, and the Service has no contradictory information or derogatory information concerning criminal activity, the preponderance of evidence standard should be met. Federal courts have ruled that where a petitioner presents substantial, credible evidence in support of proving a particular fact and no contradicting evidence is available, the Service should conclude that petitioner has satisfied his burden of proving such fact.⁷⁵ Evidence of the filing of income tax returns and the operation of lawfully-registered businesses, combined with the petitioner's statement concerning lawful sources of capital, is probative of lawful sources of capital, not unlawful sources. That determination remains true even when the "level of income" is admittedly lower than what the Service might arbitrarily expect. As a matter of evidence, absent information concerning a petitioner's "unlawful" activity, the Service is hard-pressed to nullify the probative value of petitioner's evidence concerning lawful sources of capital. The Service's speculations about what level of income is required in a foreign country to be able to earn, invest and save sufficient capital for investment - without also knowing much more about the economic system of that country and the relative cost of living -- is an inherently flawed and suspect undertaking that is incapable of producing admissible evidence. The Service would need to present expert evidence to counter petitioner's probative evidence. The Service's speculations on the subject do not amount to expert evidence.

Another aspect of the Service's arbitrary and capricious application of 8 C.F.R. § 204.6(j)(3) is that the Service's exclusion of assets obtained by "unlawful means" from the definition of "capital" in 8 C.F.R. § 204.6(e) is so inherently ambiguous and incapable of definition. "Unlawful" is commonly understood to be broader than "criminal." Therefore, the Service's interpretation of its regulation may include countless activities, not including illegal drug trafficking and like criminal activity. For instance, the unlawful activity might include deceptive business practices such as false advertising, monopolistic business practices that amount to a restraint of trade, and cultural and social norms that involve payment of gratuities to local officials or the under?reporting of income when filing income tax returns. Unlawful activity also may include earning wages while present in the United States in violation of lawful immigration status.⁷⁶ Insofar as the breadth of the how the Service defines unlawful activity may be limitless it is a standard that is subject to arbitrary and capricious application.

Furthermore, whereas each of the above "unlawful" activities may or may not constitute a "crime" in the United States, they are not necessarily crimes or even "unlawful" in the country where they occurred. Which country's law is to be applied when the Service ascertains what would amount to unlawful activity? The laws of the People's Republic of China, for example, define "subversion," "disrupting social order," "spreading reactionary publications," and "illegal publishing" as crimes punishable by imprisonment⁷⁷ Suppose author Gao Xingjiang⁷⁸ without obtaining the necessary government permission, wrote and published for worldwide circulation a book that directly criticized China's human rights record and as a result earned the $1 million needed to invest in the United States and qualify for the investor category. His activity was unlawful and is to be punished in China. Are the proceeds of his unlawful activity to be rejected as a lawful source of capital? And what about the transfer of "legally?obtained" funds out of the petitioner's native country to the United States without compliance with a foreign country's foreign exchange requirements? The Service has not articulated a rational basis for distinguishing between various types of unlawful activity. Until the Service does articulate such a rational basis, the standard it imposes is arbitrary and capricious.

The "unlawful means" standard raises many other issues, the most important being the actual purpose in promulgating a regulation that imposes such a heavy burden on the petitioner. Does the Service intend to bar anybody who has ever committed a crime from immigrating based on the investor category? Does a crime committed in 1984, for example, invalidate all income the petitioner earned from that time forward? Or is the purpose more circumscribed? One potential salutary objective is minimizing the possibility that the immigrant investor category may be used as a vehicle for the crime known as "money laundering."⁷⁹ The crime and the prohibited underlying "unlawful activity" are well defined by federal statute.⁸⁰ Money laundering is viewed as a scourge on society. The U.S. Department of Treasury has established the Financial Crimes Enforcement Network (FinCEN) to link law enforcement, financial and regulatory communities in a battle against criminal organizations and other money launderers.⁸¹ FinCEN issues an occasional "FinCEN Advisory" to inform banks and other institutions of "serious deficiencies in the counter?money laundering systems" of a particular country, to report that such country has been identified by the Financial Action Task Force on Money Laundering⁸² as non?cooperative in the fight against money laundering, and to advise how the lack of adequate counter-money laundering controls in the country affect the possibility that transactions originating from such a country are being used for illegal purposes.⁸³ These and other like law enforcement resources are well known and readily available to the Service and consular officers. But the Service does not need any additional legal authority in the petition and visa adjudication process as weaponry to combat money laundering. The legal authority already exists in INA § 212(a)(2)(C) to deny admission to any alien who is suspected to have been an illicit trafficker in controlled substances, and in INA § 212(a)(3)(A)(ii) to deny admission to any alien who seeks to enter the United States to engage in any unlawful activity. The Department of State interprets the latter bar to admission to include aliens believed to be operatives of underworld criminal organizations.⁸⁴ These statutory bars to admission authorize the Service and consular officers to deny U.S. immigration benefits to any alien who would attempt to use the proceeds of criminal activity to invest in and immigrate to the United States. The authority of the consular officer in these matters is absolute and has been held to be not subject to review in court.⁸⁵ The unduly burdensome legal standard concerning lawful source of funds that the Service would impose on immigrant investors does not measurably advance the fight against money laundering; instead, the Service's requirements on this issue deter would?be investors who are not criminals from investing and immigrating to the United States.

In sum, the Service's "unlawful means" standard suffers from incurable ambiguity because like?situated petitioners are apt to obtain different adjudication results as the Service applies indefinite requirements.⁸⁶ Also, the purpose of requiring the petitioner to prove his or her lawful source of funds is nowhere evident. It violates due process to allow the Service to have both the authority to establish a vague and elusive concept such as "unlawful means" and the enormous power to enforce and regulate that concept in actual practice.⁸⁷

In adjudications of immigrant investor cases since 1998, when the AAO issued its four precedent decisions, the Service seems to operate on the theory that the investor's having a job, payment of taxes, possessing the capital to invest, and no apparent criminal record is insufficient evidence that the invested capital is derived from lawful means. The arbitrary and capricious nature of this determination is observed in the fact that the Service would not be able to rationally explain why its counterintuitive presumption is the more persuasive. The Service's arbitrary and capricious determinations concerning lawful source of funds appear to run counter to the employment?creating objectives of the immigrant investor statute without meaningfully advancing any law enforcement objectives.

For Part 1 of the article, click here. For Part 2 of the article, click here. For Part 3 of the article, click here.

⁵⁷Santamaria-Ames v. INS, 104 F.3d 1127, 1130 (9th Cir. 1996); Matter of Masri, 22 I. & N. Dec. __, 1999 BIA LEXIS 46 (Interim Decision No. 3419, BIA 1999).
⁵⁸Almero v. INS, 18 F. 3d 757, 760 (9th Cir. 1994).
⁵⁹See, e.g., Matter of [name redacted], WAC?99?210?51155 (AAO May 17, 2001) (requiring evidence of substantial income); Matter of [name redacted], WAC-99-143-53245 (AAO May 10, 2001) (requiring proof of accumulation of wealth over time); Matter of [name redacted], WAC-98-145-50004 (AAO Mar. 12, 2001) (noting evidence of substantial income).
⁶⁰Ruangswang v. INS, 591 F.2d 39, 43 (9th Cir. 1978) (where an INS regulation providing to investors an exemption from labor certification required an investor to present evidence of an investment of at least $10,000 and evidence of at least one year of relevant experience or training, the INS could not impose through case adjudication the additional requirement of proof that the investment expand job opportunities).
⁶¹Id. at 43.
⁶²Id. (reversing INS decision to deny adjustment of status). See also Bodeux v. INS, 668 F. Supp. 1452 (D. Kan. 1987) (reversing INS decision to deny H-1B petition on grounds of failure to produce supporting documentation although regulation stated such documentation was not required unless requested).
⁶³5 U.S.C. §§ 551?54.
⁶⁴The APA defines a "rule," requiring notice and comment, as "the whole or part of an agency statement of general or particular applicability and future effect designed to implement, interpret, or prescribe law or policy or describing the organization, procedure, or practice requirements of any agency." 5 U.S.C. § 551(4).
⁶⁵5 U.S.C. § 553(b), (c).
⁶⁶5 U.S.C. § 706(2)(D).
⁶⁷56 Fed. Reg. 30,713 (July 5, 1991).
⁶⁸56 Fed. Reg. 60,897 (Nov. 29, 1991).
⁶⁹Kooritzky v. Reich, 17 F.3d 1509 (D.C. Cir. 1994); Nat'l Ass'n of Manufacturers v. U.S. Dep't of Labor, 1996 U.S. Dist. LEXIS 10478 (D.D.C. July 22, 1996).
⁷⁰5 U.S.C. § 706(2)(A).
⁷¹Marsh v. Oregon Natural Resources Council, 490 U.S. 360 (1989); Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 302 (1971); Camarena v. Meissner, 78 F. Supp. 2d 1044 (N.D. Cal. 1999) (arbitrary and capricious to deny family unity benefits); Ortega?Peraza v. Ilchert, No. C?92?4972 MHP, 1993 U.S. Dist. LEXIS 2195 (N.D. Cal. Feb. 26, 1993) (arbitrary and capricious to deny work authorization to asylum applicant).
⁷²See, e.g., Matter of [name redacted], WAC-99-057-50002 (AAO Mar. 12, 2001); Matter of [name redacted], WAC-99-044-50107 (AAO Feb. 28, 2001) (submission of required income tax returns did not prove sufficient level of income).
⁷³For example, in one nonprecedent AAO case the EB?5 petitioner presented a stock sale agreement, corporate records, and two years of income tax returns indicating millions of dollars of income from the sale of his company. The AAO dismissed that evidence as inconclusive because the petitioner did not present five years of income tax returns. Matter of [name redacted] (AAO Feb. 4, 2000). In another case the petitioner submitted three years of individual income tax returns indicating approximately $1.9 million in income. The AAO found that evidence insufficient because the investment was made during the second of the three years and the reported income during the first of the three years did not amount to the $1 million the petitioner had invested. Matter of [name redacted] (AAO Mar. 12, 2001). In yet another case the petitioner submitted evidence of substantial proceeds earned on the sale of publicly traded stock. The AAO dismissed the evidence, stating: "Such secondary documentation is wholly inconclusive. The pertinent regulations require basic documentation of income earned over time and documentation of the source of that income. The one?time liquidation of assets does not suffice. While the center director attempted to deduce the petitioner's income from the documentation submitted, such speculations are not probative and are not the burden of the Service." Matter of [name redacted], WAC-99-044-50107, slip op. at 6 (AAO Feb. 28, 2001). The AAO routinely denies cases that appear to present acceptable evidence of substantial legitimate assets but which lack evidence of income tax returns. See, e.g., Matter of [name redacted] (AAO Apr. 13, 2001) (rejecting evidence from Citibank executive of petitioner's $3.5 million inheritance because petitioner did not present parent's Venezuelan business tax returns); Matter of [name redacted] (AAO Feb. 28, 2001) (rejecting evidence of no criminal record and proof of substantial businesses, real estate, and bank account balances in Hong Kong because petitioner did not present income tax returns).
⁷⁴8 C.F.R. § 216.6.
⁷⁵See, e.g., cases cited supra note 20.
⁷⁶Recent non-precedent AAO decisions hold that if the petitioner has resided in the United States unlawfully, he or she must rebut the presumption that invested capital was derived from wages earned from unlawfully working in the United States. See, e.g., Matter of [name redacted] (AAO Feb. 15, 2001); Matter of [name redacted] (AAO July 7, 2000).
⁷⁷See generally Bureau of Democracy, Human Rights, and Labor, U.S. Dep't of State, Country Reports on Human Rights Practices - 2000 - China, available at http://www.state.gov/g/drl/rls/hrrpt/2000/eap/index.cfm?docid=684 (last visited Sept. 22, 2001).
⁷⁸Author of Soul Mountain, winner of the Nobel Prize for Literature in 2000. Gao emigrated from China and became a French citizen.
⁷⁹As discussed earlier, the Service did not provide the opportunity for public comment on 8 C.F.R. § 204.6(j)(3). However, the comments to the Service's proposed rule concerning the lawful source of funds subsections of 8 C.F.R. § 216, 59 Fed. Reg. 1317 (Jan.10, 1994), and the Service's final rule, 59 Fed. Reg. 26,587 (May 23, 1994) indicate that the removal of conditions regulation is not based on the statute but rather is based on the Service's reading of a brief excerpt from legislative history; that the legislative history concerns money "received through the sale of illegal drugs" but not any other particular illegality; and that in the Service's view the regulation was warranted as consistent with Congress's overall policy concerning proceeds from illegal activities (citing money laundering as an aggravated felony; forfeiture of proceeds of sale of illegal drugs; and forfeiture of proceeds of racketeering activity). Reading this legislative history most expansively, Congress was intent on not interfering with the Service or consular officers in carrying out their ongoing duty of denying residence status to aliens known to be drug traffickers or money launderers. The decisions we reviewed indicate that the Service has substantially broadened the scope of its duties to include not only the investigation of "criminal" activity but also "unlawful" activity and activity "not subject to tax." See, e.g., Matter of [name redacted], WAC-97-205-51687 (AAO May 7, 2001); Matter of [name redacted] (AAO May 2, 2001). In any event, as discussed in this article, 8 C.F.R. § 216 imposes the burden of presenting evidence on the government, not the petitioner.
⁸⁰18 U.S.C. § 1956.
⁸¹See generally http://www.ustreas.gov/fincen/ (last visited Sept. 22, 2001).
⁸²The Task Force is a 29-member international group. See generally http://www.oecd.org/fatf/ (last visited Sept. 22, 2001). ⁸³As of June 22, 2001, the list of countries lacking sufficient counter?money laundering systems included Egypt, Guatemala, Hungary, Indonesia, Israel, Lebanon, Nigeria, Philippines, Russia, and several offshore island havens. See U.S. Treasury, Press Release (July 2, 2001), available at http://usinfo.state.gov/topical/econ/group8/summit01/01070201.htm (last visited Sept. 22, 2001).
⁸⁴9 FAM, supra note 48, at § 40.23 n5.
⁸⁵Saavedra Bruno v. Albright, 197 F.3d 1153 (9th Cir. 1999); Romero v. Consulate of the United States, 860 F. Supp. 319 (E.D. Va. 1994). A consular officer is required by internal regulation to specify the reasons for denying a visa application on the application form, and that form is filed in the consular office. If supplemental evidence is inadequate to overcome the basis for refusal of the visa, then the matter is administratively closed. Not even the State Department has the power to overrule the consular officer's determination. 9 FAM, supra note 48, at § 41.121(b)?(d).
⁸⁶See, e.g., Matter of [name redacted] (AAO Apr. 5, 2001) (evidence of earnings from professional services may not be sufficient if it is not accompanied by additional evidence of the cost of living); Matter of [name redacted] (AAO Apr. 13, 2001) (evidence of earnings from a business and sales of real estate may not be enough if not accompanied by evidence explaining the source of the initial capital to invest in the business and to purchase the real estate); Matter of [name redacted] (AAO May 2, 2001) (evidence of a loan as the source of capital is not adequate if the petition does not also include evidence of the lender's business receipts and expenses); Matter of [name redacted] (AAO Feb. 26, 2001)(petitioner must also prove he has sufficient lawful assets to repay the loan).
⁸⁷Chan v. Bell, 464 F. Supp. 125 (D. D.C. 1978) (holding that the Service-devised standard of "viable" marriage could not be enforced because it varied the terms of the statute, and because the standard permitted an unreasonably wide and unreviewable discretion to decide which marriages are viable).
⁸⁸Matter of [name redacted], WAC-99-044-50107, slip op. at 7 (AAO Feb. 28, 2001) ("Documentation of all funds invested into the new commercial enterprise must be shown to have been derived by lawful means.") See also Matter of [name redacted], WAC-99-210-51155 (AAO May 17, 2001); Matter of [name redacted], WAC-99-227-51910 (AAO May 16, 2001); Matter of [name redacted], WAC-99-057-50002 (AAO Mar. 12, 2001). These cases cite 8 C.F.R. § 204.6(g)(1), the definition for "multiple investors," which states that a new commercial enterprise may consist of multiple investors, "provided that the source(s) of all capital invested is identified and all invested capital has been derived by lawful means."

About The Authors

Lincoln Stone (Lstone@fms-law.com) is co-chair of the American Immigration Lawyers Association (AILA) Investors Committee, and is of counsel to Fainsbert Mase & Snyder, LLP (http://www.fms-law.com) in Los Angeles, California.

Stephen Yale-Loehr (syl@twmlaw.com) co-chairs the AILA Investors Committee with Lincoln Stone. He is co-author of Immigration Law and Procedure, published by Matthew Bender & Company, Inc. He also teaches immigration law and refugee law at Cornell Law School, and is of counsel at True, Walsh & Miller (http://www.twmlaw.com) in Ithaca, New York.

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