Compliance Risks of Restructuring to Avoid the H-1B/L-1 Surcharge

Avoiding the New $2,000 Surcharge May Raise Compliance Risks for Larger Petitioners that Now Restructure into Several Smaller Units Each with Less than 50 Nonimmigrant Employees

Introduction:

Outsourcing Business Model Targeted by Congress for Fee Increase

Chairman Schumer's H-1B Anti-Outsourcing "Intent of Congress" Speech

1. ENFORCEMENT: A Variety of Legal Standards Might be Applied to Investigations

2. THE USCIS FRAUD DETECTION & NATIONAL SECURITY (FDNS) "ARTICULABLE FRAUD INDICATORS" - Will Restructuring Make the Petitioner Suspect and Result in Audits and Investigations?

   STANDARDS OF LEGAL PROSECUTION

   THE USDOL LCA "WILLFUL VIOLATION" MODEL

   THE ICE IMMIGRATION FRAUDS MODEL

   TAX EVASION MODEL - A Question of Motive: Fee Avoidance or Fee Evasion?

   SARBANES-OXLEY (SOX) INVESTIGATIONS

   Introduction:

   Under the Emergency Border Protection Act signed into law Friday, August 13, 2010, filing fees will go up $2,000 for H-1b and $2,250 for L-1, as an increase in the USCIS Fraud Prevention fee. The measure will sunset September 30, 2014.

   In passage of this Bill, comments by Congressional leaders clearly signaled DHS and other agencies that Congress supports administrative measures already in place to roll-back the offshore outsourcing industry, and to eliminate the cost advantage attached to the dual-tier offshoring model, and that it stands ready to pass these restrictions into legislation.

   This has become a very aggressive and risky regulatory environment for foreign IT consulting and staffing firms. Under the circumstances, USCIS, ICE and other interested agencies may easily take this latest action by Congress as a green light to monitor targeted firms for evasion of this new law, including steps that might be construed as an effort to evade new discriminatory fees. At the very least, evasion could be penalized as a "willful violation" of LCA requirements, and potentially raises further fraud issues. In what some will view as a bitter coincidence, on August 13 the U.S. District Court for D.C. dismissed with prejudice an injunction request brought by H-1B staffing firms seeking the court's protection of their business model. In this environment, there may be little protection and some very harsh consequences for companies that attempt to evade the fee surcharge. Larger staffing companies that employ the traditional outsourcing model may face enforcement action for alleged fraud if they restructure into business units smaller than 50 employees solely to avoid paying the new fees. Those found to do so may be identified under the FDNS-DS "articulable fraud" criteria. FDNS is the unit within USCIS that currently conducts worksite audits of petitioning employers, and it also runs a database system (DS). A wide variety of USCIS I-forms and the accompanying documents are run through the FDNS Data System (DS) which identifies patterns of what agency administrators consider fraud indicators. The system is essentially a giant data-mining operation, which is shared with other federal agencies. The FDNS-DS has developed a set of "articulable fraud indictators" that are the basis by which USCIS selects petitioners for site audits. There are 21 known FDNS-DS indicators, the top three are:

   (Petitioner)Gross annual income less that $10 million. Company claims less than 25 employees. Company established for less than 10 years. Any company that matches those 3 indicators is subject to a "100 percent referral" policy for follow-up investigation, according to USCIS documents.

   Altogether, these indicators are far more expansive than the legal standards for immigration-related fraud that might be used in a criminal prosecution in a court of law. Any larger company employing 50 percent H-1B and L-1 non-immigrants – even if they are not subject to H-1B dependent classification -- that now restructures into smaller business units employing less than 50 workers is likely to trigger a red-flag at the FDNS-DS unit which is now operating at every USCIS Service Center. That may lead to enforcement actions by several agencies, including ICE and UDOL Wage & Hour Division (WHD).

   In cases where an LCA violation is found by WHD, an appeal may be lodged with a USDOL Administrative Law Judge and the Administrative Review Board (ARB). There is a sizable body of administrative law precedent regarding willful misrepresentation of the LCA attestations along with failure to create and retain accurate records that may be applied. One should expect that similar evidentiary standards and case law establishing willful violations would be applied to any sanctions arising from improper evasion of the LCA fee surcharge.

   While it is not clear at what point evasion of the surcharge would rise to a criminal fraud violation, it is likely to result in some very close administrative auditing and investigation, along with questioning of motives at points of contact by USCIS, USDOL, and Consuls. Evasion of the surcharge may be considered cause for investigation if federal officers determine that there was no legitimate purpose behind a restructuring other than intent to evade compliance with the law. Any evidence of intent to defraud the U.S. is a strongly aggravating factor in the sentencing phase under federal sentencing guidelines.

   As this paper shows, firms that already have compliance problems should be very, very careful about how they proceed in this environment.

   Finally, we will discuss the investigative and prosecutorial frameworks which federal agencies may apply to these issues. The most likely potential prosecutorial models can be drawn from ICE investigations, IRS tax evasion cases, SOX fraud matters, and money laundering prosecutions.

   Chairman Schumer's H-1B Anti-Outsourcing "Intent of Congress" Speech

   On August 13, President Obama signed the Emergency Border Security Supplemental Appropriations Act (H.R. 6080/S. 3721)1 that imposes steep fee increases upon H-1B and L-1 petitions submitted by some employers.

   According to Congressional leaders, the measure is intended to directly target large foreign staffing firms. Senate Immigration and Homeland Security Committee Chairman Charles Schumer, the principal Senate sponsor, stated his view of the intent of Congress upon introducing the Bill2 for the Senate vote which carried by unanimous consent. Schumer made it clear that he and others in Congress see the business model of such firms as harmful and contrary to the original intent of American nonimmigrant visa programs that are used by these firms:

   The business model of these newer companies is not to make any new products or technologies like Microsoft or Apple does. Instead, their business model is to bring foreign tech workers into the United States who are willing to accept less pay than their American counterparts, place these workers into other companies in exchange for a "consulting fee," and transfer these workers from company to company in order to maximize profits from placement fees. In other words, these companies are petitioning for foreign workers simply to then turn around and provide these same workers to other companies who need cheap labor for various short term projects.

   The President made no reference in his signing statement to objections raised by the Indian government and trade groups which view the move as discriminatory and directed at large, successful global outsourcing firms based in that country.3

   Outsourcing Business Model Targeted by Congress for Fee Increases

   Sec. 402 of the Act imposes large hikes in filing fees for H-1B and L-1 petitions from companies having 50 or more employees with 50 percent of their workforce made up of non-immigrants in those categories. Filing fees are slated to go up $2,000 for H-1b and $2,250 for L-1, as an increase in the USCIS Fraud Prevention fee, the proceeds to go to pay for additional Border Patrol manpower and infrastructure improvements it the Southwest. The measure will sunset September 30, 2014.

   Chairman Schumer's H-1B Anti-Outsourcing "Intent of Congress" Speech- Target Larger, Newer Foreign Staffing Agencies that Don't Market Their Own Proprietary Products and Processes.

   Congressional leaders clearly intend that USCIS apply this fee increase in such a way that it particularly targets larger, newer foreign staffing agencies that do not market their own proprietary products and processes. Schumer (D-NY) stated that it is his intention to introduce significant additional restrictions on H-1B outsourcing in a proposed Comprehensive Immigration Reform (CIR) measure that he says will be pushed through next year.

   The Bill, which originated as a House measure co-sponsored by border state Democrats, received rare bipartisan support in both houses, and may be a good indicator of where U.S. immigration policy is headed.

   House Speaker Nancy Pelosi stated that she views HR 6080 as the first leg of CIR, and the House as well as Senate version of that larger immigration package contain measures that would carry into law current administrative restrictions on the outsourcing model.

   In his prepared remarks on the Senate floor before the vote Thursday4, Chairman Schumer made some unusually harsh remarks about H-1B and some of the companies and workers that use the program. He said that the H-1B program has been exploited by "multinational temp agencies" that "undercut U.S. wages and discourage students from entering tech fields."

   Sen. Schumer also made it clear that the next round of Comprehensive Immigration Reform (CIR) legislation coming from Congress will back up existing USCIS administrative measures restricting L-1 and H-1B. Some agency actions – such as the 2008 GSTechnical Services AAO decision and the January 2010 H-1 directive, the Neufeld memo -- have been criticized as substantially deviating from existing legislation. The pending CIR Bills already contain sections addressing these measures.

   There is additional reason for outsourcing firms to be alarmed. Simultaneous with the...