United States: Treasury Department Issues New Foreign Bank Account Reporting Rules

White Collar Defense and Investigations

Final Regulations Are Applicable for FBARs Due June 30, 2011

The Financial Crimes Enforcement Network (FinCEN) of the Treasury Department has issued new, final regulations governing foreign bank account reporting requirements under the Bank Secrecy Act. The new rules are effective for Reports of Foreign Bank and Financial Accounts (a reporting form commonly referred to as an "FBAR") which are due to be filed by June 30, 2011, and for all subsequent calendar years. Among the significant changes contained in the new FBAR regulations are (1) a revised definition of "signature or other authority"; (2) clarification of whether an account is "foreign" for FBAR purposes and, in particular, filing obligations in context of custodial accounts holding foreign assets; (3) a revised definition of "mutual fund"; (4) changes to the filing obligations for foreign accounts held by trusts; (5) enactment of an "anti-avoidance" provision designed to deter non-compliance with the FBAR rules; and (6) clarification of the recordkeeping obligations of officers or employees who file FBARs because of signature or other authority over foreign accounts of their employers. The final regulations include a lengthy preamble which contains a significant number of explanatory notes which clarify a number of previously ambiguous areas based upon comments submitted to FinCEN. It is expected that Treasury will issue a new FBAR form with instructions to reflect changes in the filing rules sometime prior to the June 30 filing deadline.

Background

All U.S. taxpayers are required to disclose whether they have a financial interest in, or signature or other authority over, foreign bank or financial accounts if the aggregate account balance of all such foreign accounts exceeds $10,000 in a single year. Such disclosure is made by filing the FBAR form with the Treasury Department every year, as well as by checking off a box and reporting any interest or dividend income on the taxpayer's personal income tax return. The FBAR form must be filed by June 30 of each calendar year. The willful failure to file the FBAR form is a felony, and can subject non-filers to substantial civil penalties. The civil penalty for a willful violation of the FBAR statute was increased in 2004 to $100,000 or 50 percent of the highest balance in the account for each year that the FBAR form was not filed, whichever is higher.

Definition of "United States person"

Under the final regulations, every "United States person" with a specified interest in a foreign bank account is required to file the FBAR form annually. The new regulations define "United States person" as (1) a citizen of the United States; (2) a resident alien; (3) a U.S. corporation, partnership, trust, or limited liability company. "United States person" includes U.S. citizens who reside abroad, and such individuals are required to file FBARs annually even if they maintain joint accounts with a non-U.S. spouse.

Notably, the final regulations do not include the "in and doing business in the United States" terminology contained in the October 2008 FBAR instructions. This language, had it been adopted in the final regulations, could have greatly expanded the definition of "United States person" to include foreign individuals and entities doing business in the United States.

Reportable accounts

The FBAR regulations define the term "account" broadly to include bank accounts, securities accounts, and other financial accounts. Bank accounts include savings deposits, demand deposits, checking accounts, and any other accounts maintained with a person in the business of banking. Securities accounts are defined as accounts maintained with a person engaged in the business of buying, selling, holding, or trading stock or other securities. Other financial accounts include the following:

• An account with a person in the business of accepting deposits as a financial agency;
• An insurance or annuity policy with a cash value;
• An account with a broker/dealer for commodity futures or options transactions; and
• A mutual fund or similar pooled fund which issues shares available to the general public that have a regular net asset value determination and regular redemptions.

The preamble to the final regulations clarifies that when a U.S. financial institution acts as a global custodian and holds an individual's assets outside of the United States in an "omnibus account," the individual is not required to file an FBAR unless the custodial arrangement permits the individual to directly access the foreign holdings. The final regulations also continue prior law and exclude foreign private equity funds and foreign hedge funds from the reporting requirements.

Definition of "financial interest"

The FBAR rules require the reporting of foreign accounts in which a United States person has a financial interest. An individual is considered to have a "financial interest" in a foreign account if he or she is the owner of record of, or has legal title to, the account, regardless of whether the account is maintained for his or her own benefit or for the benefit of others. If a foreign account is maintained jointly, each account holder is deemed to have a reportable financial interest in the account.

The final regulations also specify that a United States person has a reportable financial interest in a foreign bank account if the account is held by:

• an agent, nominee, or attorney on behalf of the United States person;
• a corporation in which the United States person owns more than 50 percent of the voting power or the total value of the shares;
• a partnership in which the United States person owns directly or indirectly more than 50 percent of the interest in profits or capital;
• any other entity in which the United States person owns directly or indirectly more than 50 percent of the voting power, total value of the equity interest or assets, or interest in profits;
• a trust, if the United States person is the trust grantor and has an ownership interest in the trust for U.S. tax purposes; and
• a trust in which the United States person either has a present beneficial interest in more than 50 percent of the assets or from which such person receives more than 50 percent of the current income.

In the preamble, FinCEN acknowledged that in the case of trusts, determinations of "beneficial interest" may be difficult if the person is a beneficiary of a discretionary trust or has a remainder interest. To clarify this area, the final regulations change the reporting criteria from "beneficial interest" to "present beneficial interest," and the preamble makes clear that persons who are discretionary beneficiaries or possess remainder interests do not have "present beneficial interests" for FBAR reporting purposes. The final regulations also provide that trust beneficiaries are not required to report the trust's foreign accounts if the trust, its trustee, or its agent is a United States person that files an FBAR reporting the trust's foreign accounts.

In the case of qualified retirement plans, IRAs, and Roth IRAs, the final regulations provide that participants and beneficiaries are not required to file FBARs reporting foreign accounts held by the plan or IRA.

Anti-Avoidance Provision

Importantly, the new regulations contain an "anti-avoidance rule" which specifies that any United States person who causes an entity to be created for purposes of evading the FBAR reporting requirements shall be deemed to have a financial interest in any foreign accounts held by such entity. The preamble clarifies that this provision is not intended to be applicable to persons "who make a good faith effort to comply."

Definition of "signature or other authority"

Any United States person having "signature or other authority" over a foreign financial account is required to file the FBAR form. Some commentators requested that FinCEN eliminate the filing requirement for individuals with signature or other authority over a foreign account, but no financial interest. FinCEN rejected that suggestion in the final regulations, which define "signature or other authority" as "the authority of an individual (alone or in conjunction with another) to control the disposition of money, funds or other assets held in a financial account by direct communication (whether in writing or otherwise) to the person with whom the financial account is maintained." The preamble to the final regulations further provides that "[t]he test for determining whether an individual has signature or other authority over an account is whether the foreign financial institution will act upon a direct communication from that individual regarding the disposition of assets in that account."

The final regulations identify certain exceptions to this rule, as follows:

• An officer or employee of a federally-regulated bank with signature or other authority over a foreign account maintained by such bank is not required to file an FBAR if the officer or employee does not have a financial interest in the account.
• An officer or employee of a financial institution registered with and examined by the SEC or CFTC with signature or other authority over a foreign account maintained by such financial institution is not required to file an FBAR if the officer or employee does not have a financial interest in the account.
• An officer or employee of an "Authorized Service Provider" – which is defined as an entity registered with the SEC and that provides services to an investment company registered under the Investment Company Act of 1940 – with signature or other authority over a foreign account maintained by an SEC-registered investment company is not required to file an FBAR if the officer or employee does not have a financial interest in the account.
• An officer or employee of a domestic or foreign entity with a class of equity securities or ADRs listed on any U.S. securities exchange with signature or other authority over a foreign account maintained by such entity if the officer or employee does not have a financial interest in the account.
• An officer or employee of a U.S. corporation with a class of equity securities registered under section 12(g) of the Securities Exchange Act with signature or other authority over a foreign account maintained by such corporation if the officer or employee does not have a financial interest in the account.

Recordkeeping relief for certain filers

Any individual or entity which files an FBAR form is required by law to maintain certain records relating to the reported foreign accounts for a period of five years and must make such records available for inspection if requested. In response to requests from commenters, the final regulations provide that officers and employees who file FBARs to report their signature or other authority over accounts maintained by their employers are not required to personally maintain records of the foreign accounts.

Streamlined Reporting For 25 or More Foreign Accounts

The final regulations provide that an individual having a financial interest in, or signature or other authority over, 25 or more foreign financial accounts need only provide the number of accounts and other "basic information" on the FBAR form.

Consolidated reports

The final regulations state that a U.S. entity which owns, directly or indirectly, more than a 50 percent interest in one or more other entities required to file an FBAR may file a consolidated FBAR on behalf of itself and such other entities. For example, a U.S. corporation which owns more than 50 percent of another entity may file a consolidated FBAR on behalf of itself and on behalf of its subsidiary.

Other issues

Unlike income tax returns which are considered timely filed if mailed by April 15, FBARs must be received by the Treasury Department by June 30 in order to be timely filed. Many commenters requested that FinCEN permit electronic filing of FBAR forms in order to simplify the filing process. In the preamble to the final regulations, FinCEN states that it is modernizing its technology systems and that electronic filing should be available at some point in the future.

The final regulations also provide clarity as to how filers are to calculate the maximum value of the foreign account being reported, particularly when some foreign financial institutions do not provide monthly or quarterly statements. The preamble states that when "bona fide statements are prepared in the ordinary course of business," filers may rely upon such periodic statements for purposes of determining the maximum value of the account.

Effective date

The final regulations are effective as of March 24, 2011, and they apply to FBARs due to be filed by June 30, 2011, for calendar year 2010 and for all subsequent years.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.