Recent Changes To FBAR Reporting Obligations - Financial Services

The Financial Crimes Enforcement Network ("FinCEN") on February 24, 2011 issued a final rule to amend the Bank Secrecy Act ("BSA") implementing regulations regarding the Report of Foreign Bank and Financial Accounts ("FBAR").¹ The FBAR is used for U.S. persons to report a financial interest in, or signature o other authority over, one or more financial accounts outside the United States. The Final Rule codifies several changes proposed by FinCEN in 2010,² provides additional clarity about the types of non-U.S. accounts that are required to be reported on an FBAR, and addresses the scope of U.S. persons that are required to file the FBAR.³ The Final Rule is effective March 28, 2011 and applies to reports required to be filed by June 30, 2011.

Definition of "United States Person"

The Final Rule defines a "United States person" required to file an FBAR 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 Indian Tribes. By way of example, this definition includes each investment adviser, investment company (registered or unregistered), broker-dealer or other entity organized under the laws of the United States. The determination of whether an individual is a resident of the United States will be made under the rules of the Internal Revenue Code. According to the Final Rule, FinCEN believes that individuals who elect to be treated as residents under the rules of the Internal Revenue Code should file FBARs only with respect to foreign accounts held during the period covered by the election. For entities, the definition in the Final Rule applies regardless of whether an election has been made to disregard the entity for federal income tax purposes.

Types of Reportable Accounts

The Final Rule describes the types of non-U.S. accounts that are required to be reported on an FBAR.

Bank and Securities Accounts

The Final Rule defines "bank account" and "securities account" with reference to the types of financial services for which a person maintains an account. Under the Final Rule, a "bank account" means a savings deposit, demand deposit, checking, or any other account maintained with a person engaged in the business of banking. This definition encompasses time deposits, such as certificates of deposit. A "securities account" is defined as an account maintained with a person in the business of buying, selling, holding, or trading stock or other securities.

Other Financial Accounts

The Final Rule defines "other financial account" as:

An account with a person that is in the business of accepting deposits as a financial agency;
An account that is an insurance policy or an annuity policy with a cash value;
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.

While the definition of "other financial account" specifically includes an account with a non-U.S. mutual fund, other types of non-U.S. pooled investment companies— including non-U.S. private equity funds, venture capital funds and hedge funds—are not required to be reported. The preamble to the Final Rule notes that FinCEN received a number of comments seeking clarification of the definition of mutual fund, including comments that argued that the term "mutual fund" may have a different meaning outside the United States, and might potentially cover hedge funds and private equity funds that have periodic redemptions. In declining to alter the definition in response to such comments, FinCEN reiterated that the definition of mutual fund includes a requirement that a fund's shares be available to the general public in addition to having a regular net asset value determination and regular redemption feature.

Notably, FinCEN elected to reserve a section of the Final Rule to require future reporting of "other investment funds," which implies that the FBAR reporting requirement may be extended to other types of non-U.S. investment companies in the future. In the preamble to the Proposed Rule, FinCEN noted that the characteristics of privately offered funds vary greatly, and the lack of financial regulation makes it difficult to define and distinguish certain types of funds from others. Until FinCEN defines the term "other investment fund" by rule, investment funds that do not fit within the Final Rule's definition of mutual fund will not be subject to the FBAR reporting requirement.

Financial Interest in an Account

The Final Rule generally codifies current standards for determining when a United States person has a financial interest in an account for FBAR reporting purposes. Under the Final Rule, a United States person has a financial interest in each bank account, securities account, or other financial account in a foreign country for which: (i) he or she 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; or (ii) the owner of record or holder of legal title is a person acting on behalf of that United States person, such as an attorney, agent or nominee with respect to the account.

In addition, a United States person has a financial interest in each bank account, securities account, 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 United States person owns directly or indirectly more than 50% 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% of the interest in profits or capital, or any other entity (other than a trust) in which the United States person owns directly or indirectly more than 50% 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 account for U.S. federal tax purposes; or
A trust in which the United States person either has a beneficial interest in more than 50% of the assets or from which such person received more than 50% of the current income.

Finally, a United States person that causes an entity to be created for the purpose of evading the reporting requirement shall have a financial interest in any bank account, securities account, or other financial account in a foreign country for which the entity is the owner of record or holder of legal title. The preamble to the Final Rule notes that term "evading" is not intended to apply to persons who make a good faith effort to comply with the regulations.⁴

Exceptions for Certain Accounts

The Final Rule provides an exception from reporting for certain low risk non-U.S. accounts, including:

An account holding of a department or agency of the United States, an Indian Tribe, or any state or any political subdivision of a state, or a whollyowned entity, agency, or instrumentality of any of the foregoing, including an account of an entity established under the laws of the United States, of an Indian Tribe, of an state, or of any political subdivision of any state, or under intergovernmental compact between two or more states or Indian Tribes that exercises governmental authority on behalf of the Unites States, an Indian Tribe, or any such state or political subdivision;
An account holding of an international financial institution of which the United States government is a member;
An account holding in a "United States military banking facility" operated by a United States financial institution designated by the United States government to serve United States government installations abroad; or
Correspondent or nostro accounts that are maintained by banks and used solely for bank-to-bank settlements.

Determining Whether an Account is Foreign

The preamble to the Final Rule notes that FinCEN received a large number of comments requesting clarification as to when an account is deemed "foreign" for purposes of triggering the FBAR filing requirement. In response to such comments, FinCEN clarified that, as a general matter, an account is not a foreign account under the FBAR if it is maintained with a financial institution located in the United States. As an example, FinCEN stated that individuals who purchase securities of a foreign company through a securities broker in the United States as part of their investment portfolio are not required to file an FBAR, since the mere fact that the account may contain holdings or assets of foreign entities does not render the account foreign for purposes of the FBAR.

In addition, FinCEN noted that it had received a number of comments asking for clarification regarding specific custodial arrangements. According to the commenters, a United States person may have an account with a financial institution (e.g., a bank) located in the United States, and that financial institution may act as global custodian and hold the person's assets outside the United States. Typically the United States person does not have any legal rights in these non-U.S. accounts and can only access such person's holdings outside of the United States through the global custodian. In such a situation, FinCEN clarified that the United States person would not have to file an FBAR with respect to assets held in the account and maintained by the global custodian, as the customer maintains the account with a financial institution located in the United States.

Reporting by Persons with Signature or Other Authority

Prior to adoption of the Final Rule, each United States person with signature or other authority over a bank, securities, or other financial account in a foreign country was required to file an FBAR—even if the person had no financial interest in the accounts⁵ Under the Final Rule, a United States person with signature or other authority over a foreign financial account will not be required to file an FBAR under the following circumstances:

An officer or employee of a bank that is examined by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, or the National Credit Union Association need not report that he or she has signature or other authority over a foreign financial account owned or maintained by the financial institution if the officer or employee has no financial interest in the account.
An officer or employee of a "financial institution"⁶ that is registered or examined by a federal banking regulator, the Securities and Exchange Commission ("SEC") or the Commodity Futures Trading Commission need not report that he or she has signature or other authority over a foreign financial account owned or maintained by the financial institution if the officer or employee has no financial interest in the account.
An officer or employee of an "Authorized Service Provider" to a registered investment company ("RIC") need not report that he or she has signature or other authority over a foreign financial account owned or maintained by the RIC if the officer or employee has no financial interest in the account.⁷
An officer or employee of an entity whose equity securities are registered with the SEC or listed on any United States national securities exchange need not report that he or she has signature or other authority over a foreign financial account of such entity if the officer or employee has no financial interest in the account.⁸
An officer or employee of an entity that has a class of equity securities registered (or American depository receipts in respect of equity securities registered) under Section 12(g) of the Securities Exchange Act of 1934 need not report that he or she has signature or other authority over a foreign financial account of such entity if the officer or employee has no financial interest in the account.

In the preamble to the Final Rule, FinCEN noted that it received several comments requesting clarification of the scope of these exceptions. In response, FinCEN clarified that the exceptions do not apply to officers and employees of investment advisers when they are providing advisory services to clients that are not RICs. Similarly, an officer or employee of an Authorized Service Provider may avail himself or herself of the applicable exception only: (i) with respect to the reportable accounts of those clients that are RICs; and (ii) if the Authorized Service Provider is registered with and examined by the SEC.

Special Rules

The Final Rule also simplifies FBAR reporting in certain cases, including:

A United States person having a financial interest in or signature or other authority over 25 or more foreign financial accounts need only to provide the number of financial accounts and certain other basic information, unless additional information is requested;
An entity that is a United States person and owns directly or indirectly more than a 50% interest in an entity required to report will be permitted to file a consolidated report on behalf of itself and such other entity;
Participants and beneficiaries in certain retirement plans and individual retirement accounts ("IRAs") will not be required to file an FBAR with respect to a foreign financial account held by or on behalf of the retirement plans or IRAs;
Certain trust beneficiaries will not be required to report the trust's foreign financial accounts if the trust, a trustee of the trust, or an agent of the trust is a United States person that files an FBAR disclosing the trust's foreign financial accounts and provides any additional information as required; and
Officers or employees who file an FBAR because of signature or other authority over the foreign financial accounts of their employer need not personally maintain the records of the foreign financial accounts of their employers, as would otherwise be required under the Final Rule.

Practical Considerations for FBAR Filers

On February 26, 2010, the IRS temporarily suspended the FBAR filing requirement for certain persons. Under the IRS guidance: (i) an investor will not have to file an FBAR for calendar year 2009 and earlier years if that investor only invests in offshore funds other than mutual funds, provided that such person has no other reportable foreign financial accounts for the year in question; (ii) persons with signature authority over, but no financial interest in, a foreign financial account for which an FBAR would otherwise have been due on June 30, 2010, have until June 30, 2011 to file; and (iii) reporting by persons who are not United States citizens, United States residents, or domestic entities is not required for calendar year 2009 and earlier years. Moreover, such persons must file an FBAR for the 2009 calendar year by June 30, 2011; however, such persons may rely on the scope of reporting obligations set forth in the Final Rule in determining whether an FBAR is required for earlier calendar years. In addition, because the BSA imposes a six-year statute of limitations on FBAR filings, the safest course of action is to file an FBAR for the 2005 and later calendar years by June 30, 2011.⁹

Footnotes

1 FinCEN, Amendment to the Bank Secrecy Act Regulations – Reports of Foreign Financial Accounts, 76 Fed. Reg. 10234 (Feb. 24, 2011) (hereinafter the "Final Rule").

2 FinCEN, Amendment to the Bank Secrecy Act Regulations – Reports of Foreign Financial Accounts, 75 Fed. Reg. 8844 (Feb. 26, 2010) (hereinafter the "Proposed Rule"). For a summary discussing the Proposed Rule and the temporary suspension of the FBAR filing requirement for certain persons by the Internal Revenue Service, see "Recent Changes to FBAR Reporting Obligations," DechertOnPoint (March 2010), available at http://www.dechert.com/library/FS_TAX_Private_Client_SA_3-10_Recent_Changes_to_FBAR.pdf .

3 In a related matter, the U.S. Internal Revenue Service ("IRS") recently announced an offshore voluntary disclosure initiative ( "OVDI") for taxpayers that report previously undisclosed foreign accounts, assets, and income by August 31, 2011. For more information, see the OVDI page on the IRS website, at http://www.irs.gov/newsroom/article/0,,id=234900,00.html?portlet=7 .

4 In the preamble to the Final Rule, FinCEN noted that it received a comment that recommended that the antiavoidance provision specifically incorporate the rules found in 26 C.F.R. § 1.671-2(e)(4), relating to the treatment of transfer companies used to disguise the fact that a trust had a United States grantor. In declining to expand the scope of the anti-avoidance provision, FinCEN stated that it believes that the provision is sufficiently broad as to make it unnecessary to specifically incorporate 26 C.F.R. § 1.671-2(e)(4), as the Final Rule captures all situations in which entities, including trusts, are used to evade an FBAR reporting obligation.

5 For FBAR purposes, signature or other authority means 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 by whom the financial account is maintained.

6 For purposes of this exception, a "financial institution" is a defined term under the Bank Secrecy Act implementing regulations. Significantly, investment advisers, commodity trading advisors and commodity pool operators are not "financial institutions" under these regulations.

7 "Authorized Service Provider" means an entity that is registered with and examined by the SEC and provides services to a RIC, and includes an investment adviser to a fund. Accordingly, an officer or employee of a registered investment adviser need not file an FBAR to report having signature or other authority over a foreign financial account owned or maintained by a RIC that is managed by the adviser. On the other hand, an officer or employee of a registered investment adviser generally must file an FBAR to report having signature or other authority over a foreign financial account owned or maintained by the investment adviser itself or the adviser's other clients—including, for example, a non-RIC subsidiary of a RIC that is formed for the purpose of investing in commodities and commoditylinked investments.

8 In addition, an officer or employee of a United States subsidiary of such entity need not file a report concerning signature or other authority over a foreign financial account of the subsidiary if he or she has no financial interest in the account and the United States subsidiary is named in a consolidated FBAR report of the parent.

9 31 USC § 5321(b)(1).

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.

United States: Recent Changes To FBAR Reporting Obligations