The reality of your file’s encoding appears to conflict with that specified by your XML declaration. If your file actually uses one-byte characters, declaring encoding="utf-16" won’t change it to use two-byte characters, for example.
Try removing the conflicting encoding from the XML declaration. Replace
<?xml version="1.0" encoding="utf-16"?>
with
<?xml version="1.0"?>
You may also be able to load the file into a string as a work-around using LoadXML().