Proposed Changes to Foreign Financial Account Reporting Requirements

On February 26, 2010, the U. S. Financial Crimes Enforcement Network (FinCEN) issued a Notice of Proposed Rulemaking (NPRM), published in the Federal Register, to amend the regulations implementing the Bank Secrecy Act (BSA) regarding the Report of Foreign Bank and Financial Accounts (FBAR).

The FBAR form is used to report a financial interest in, or signature or other authority over, one or more financial accounts in foreign countries. No report is required if the aggregate value of the accounts does not exceed $10,000. When filed, FBARs become part of the BSA database. They are used in combination with Suspicious Activity Reports, Currency Transaction Reports and other BSA reports to provide law enforcement and regulatory investigators with valuable information to fight fraud, money laundering, terrorist financing, tax evasion and other financial crime.

In developing the NPRM, FinCEN worked closely with the U.S. Department of the Treasury, Office of Tax Policy (OTP), and the IRS. FinCEN delegated the authority to enforce the FBAR rules and to amend the form to the IRS in 2003. However, FinCEN retained the authority to revise the applicable regulations.

The proposed rule:

• Includes provisions intended to prevent persons from avoiding reporting requirements.
• Defines a "United States person" required to file the FBAR and defines the types of reportable accounts such as bank, securities, and other financial accounts.
• Exempts certain persons with signature or other authority over, but no financial interest in, foreign financial accounts from filing FBARs.
• Exempts certain low-risk accounts, e.g., the accounts of a government entity or instrumentality, for which reporting will not be required.
• Exempts participants/beneficiaries in certain types of retirement plans and includes a similar exemption for certain trust beneficiaries.
• Clarifies what it means for a person to have a "financial interest" in a foreign account.
• Permits summary filing by persons who have a financial interest in 25 or more foreign financial accounts, or signature or other authority over 25 or more foreign financial accounts. Also permits an entity to file a consolidated FBAR on behalf of itself and the subsidiaries of which it owns more than a 50-percent interest.

These rules are not yet effective, and comments regarding the proposed rules are due to FinCEN by April 27, 2010.

Below is a summary of the most-significant provisions.

Persons Required to File an FBAR--"U.S. Person"

The proposed regulations would define a "United States person" as a citizen or resident of the United States, or an entity, including but not limited to a corporation, partnership, trust or limited liability company, created, organized, or formed under the laws of the United States, any state, the District of Columbia, the Territories and Insular Possessions of the United States or the Indian Tribes. This definition applies to an entity regardless of whether an election has been made to disregard the entity for federal income-tax purposes.

The determination of whether an individual is a resident of the United States would be made under the rules of the Internal Revenue Code, specifically 26 U.S.C. 7701(b) and the regulations thereunder, except that the definition of the term "United States" provided in 31 CFR 103.11(nn) will be used instead of the definition of "United States" in 26 CFR 301.7701(b)-1(c)(2)(ii).

The proposed change provides for uniformity, regardless of where an individual may be in the United States. In addition, the proposal takes into account that individuals may seek to hide their residency in an effort to obscure the source of their income or location of their assets. The proposal also clarifies that a U.S. limited liability company treated as a disregarded entity for U.S. federal income tax purposes would be considered a U.S. person for FBAR purposes.

Types of Reportable Accounts--Background

The BSA authorizes the Secretary of the Treasury (the "Secretary") to require records or reports when a person "makes a transaction or maintains a relation for any person with a foreign financial agency." Although the BSA authorizes the Secretary to address both transactions and relations, the proposed Rule change is focused on relations. FinCEN believes that when a person maintains an account with a foreign financial institution, the person is maintaining a relation with a foreign financial agency. For this purpose, an account means a formal relationship with such person to provide regular services, dealings and other financial transactions. The length of the time for which service is being provided does not affect the fact that a formal account relationship has been established. For instance, an account is not established simply by conducting transactions, such as wiring money or purchasing a money order, where no relationship has otherwise been established.

"Other Financial Account"

The proposal would define "other financial account" to mean:

• An account with a person that is in the business of accepting deposits as a financial agency;
• An account that is an insurance policy with a cash value or an annuity policy;
• An account with a person that acts as a broker or dealer for futures or options transactions in any commodity on or subject to the rules of a commodity exchange or association; or
• An account with 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 definition of "other financial account" does not include pooled investment companies, such as private equity funds, venture capital funds and hedge funds. FinCEN chose to omit these funds for a variety of reasons. These kinds of funds are privately offered funds and their characteristics vary greatly. In addition, the lack of functional regulation over these kinds of funds may make it difficult to define and distinguish certain types of these funds from others. Also, pending legislative proposals would apply additional regulation and oversight over the operations of some of these investment companies.

"Financial Interest"

Financial Interest When the U.S. Person Is the Owner of Record or Holder of Legal Title

The proposed rules are directed at including in the definition of "financial interest" certain instances where a U.S. person's ownership or control over the owner of record or holder of legal title rises to such a level that the person should be deemed to have a financial interest in the account. FinCEN believes that these rules are necessary to ensure that these financial interests of U.S. persons are reported on the FBAR, regardless of how the interest is held or structured. The proposed rules also include an anti-avoidance rule to capture reporting in instances where persons seek to evade the requirement to file an FBAR through the use of devices such as transfer companies.

It is proposed that a U.S. person has a financial interest in each bank, securities or other financial account in a foreign country for which he is the owner of record or holds legal title, regardless of whether the account is maintained for his own benefit or for the benefit of others. If an account is maintained in the name of more than one person, each U.S. person in whose name the account is maintained has a financial interest in that account.

Financial Interest When Another Is Acting on Behalf of the U.S. Person

It is proposed that a U.S. person has a financial interest in each bank, securities or other financial account in a foreign country for which the owner of record or holder of legal title is a person acting on behalf of that U.S. person, such as an attorney, agent or nominee, with respect to the account.

Other Situations Giving Rise to a Financial Interest

It is proposed that a U.S. person is deemed to have a financial interest in a bank, securities or other financial account in a foreign country for which the owner of record or holder of legal title is:

• A corporation in which the U.S. person owns directly or indirectly more than 50 percent of the voting power or the total value of the shares, a partnership in which the U.S. person owns directly or indirectly more than 50 percent of the interest in profits or capital, or any other entity (other than a trust) in which the U.S. 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 U.S. person is the trust settlor and has an ownership interest in the account for United States federal tax purposes. See 26 U.S.C. 671-679 to determine if a settlor has an ownership interest in a trust's financial account for a year.
• A trust in which the U.S. person either has a beneficial interest in more than 50 percent of the assets or from which such person receives more than 50 percent of the current income.
• A trust that was established by the U.S. person and for which the U.S. person has appointed a trust protector that is subject to such person's direct or indirect instruction.

A U.S. person that causes an entity to be created for a purpose of evading the FBAR reporting requirements would have a financial interest in any bank, securities or other financial account in a foreign country for which the entity is the owner of record or holder of legal title.

Exceptions for Signature or Other Authority

Proposed exceptions exist for U.S. persons with signature or other authority over reportable accounts. These exceptions generally apply to officers and employees of financial institutions that have a federal functional regulator, and certain entities that are publicly traded on a U.S. national securities exchange, or that are otherwise required to register their equity securities with the U.S. Securities and Exchange Commission. Such relief is thought appropriate in light of the federal oversight of these entities. These exceptions apply, however, only where the officer or employee has no financial interest in the reportable account. These institutions would still be obligated to report their financial interests in reportable accounts.

Special Rules

FinCEN is proposing special rules to simplify FBAR filings in certain cases:

• Twenty-five or More Foreign Financial Accounts. A U.S. person having a financial interest in 25 or more foreign financial accounts need only provide the number of financial accounts and certain other basic information on the report, but would be required to provide detailed information concerning each account when so requested by the Secretary or his delegate. Similarly, a U.S. person having signature or other authority over 25 or more foreign financial accounts need only provide the number of financial accounts and certain other basic information on the report, but would be required to provide detailed information concerning each account when so requested by the Secretary or his delegate.
• Consolidated Reports. An entity that is a U.S. person and owns directly or indirectly more than a 50-percent interest in an entity required to report under this section would be permitted to file a consolidated report on behalf of itself and such other entity.
• Participants and Beneficiaries in Certain Retirement Plans. Participants and beneficiaries in retirement plans under sections 401(a), 403(a) or 403(b) of the Internal Revenue Code as well as owners and beneficiaries of individual retirement accounts under section 408 of the Internal Revenue Code or Roth IRAs under section 408A of the Internal Revenue Code would not be required to file an FBAR with respect to a foreign financial account held by or on behalf of the retirement plan or IRA.
• Certain Trust Beneficiaries. A beneficiary of a trust described in proposed paragraph (e)(2)(iv) would not be required to report the trust's foreign financial accounts if the trust, trustee of the trust or agent of the trust is a U.S. person that files an FBAR disclosing the trust's foreign financial accounts and provides any additional information as required by the report.

In addition, FinCEN anticipates that in the case of U.S. persons who are employed in a foreign country and who have signature or other authority over foreign financial accounts owned or maintained by their employer, the instructions to the FBAR form would prescribe a modified form of reporting for such persons.