United States: Final Regulations Regarding FBAR Filing Obligations

In February of 2011, the Financial Crimes Enforcement Network ("FinCEN")¹ issued final regulations ("Final Regulations") amending the Bank Secrecy Act regulations as they relate to the annual obligation to file the Report of Foreign Bank and Financial Accounts. Generally, each U.S. person who has a financial interest in, or signature or other authority over, a bank, securities or other financial account in a foreign country must report that relationship if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year. The required reporting is done on Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (the "FBAR"), which must be received by the Department of the Treasury on or before June 30 for accounts maintained during the previous calendar year.

FinCEN issued proposed regulations ("Proposed Regulations") in February of 2010. The Final Regulations make several important changes and clarifications to the Proposed Regulations. In general, the Final Regulations address the scope of the persons that are required to file FBARs, specify the types of accounts that are reportable, and provide filing relief in the form of exemptions for certain persons with signature or other authority over foreign financial accounts. The Final Regulations provide guidance on FBAR reporting obligations with respect to certain types of accounts, including insurance products and interests in foreign mutual funds, which come within the definition of "other financial accounts." Lastly, the Final Regulations also adopt an anti-avoidance provision to prevent persons that otherwise would be subject to reporting from avoiding their reporting requirement.

It should be noted that an updated version of the FBAR and instructions to such form were recently issued to reflect changes made by the Final Regulations. The instructions to the FBAR closely mirror the Final Regulations with some variations. Some important highlights of the Final Regulations include the following:

• The Final Regulations generally retain the definition of "U.S. person" adopted in the Proposed Regulations. Thus, the Final Regulations define the term "U.S. person" to mean a citizen or resident² of the United States, and 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 or Insular Possessions of the United States or the Indian Tribes. The definition does not adopt the definition of "U.S. person" contained in the instructions to the 2008 version of the FBAR, which imposed a filing requirement on non-U.S. citizens, non-U.S. residents and non-domestic entities that were "in and doing business in the United States." The definition in the Final Regulations also is consistent with Announcement 2009-51 (suspending the reporting requirement with respect to FBARs due on June 30, 2009 for persons who were not U.S. citizens, U.S. residents or domestic entities and permitting all persons to rely upon the definition of "U.S. person" found in the July 2000 version of the FBAR instructions to determine whether they had a filing obligation with respect to FBARs due on June 30, 2009) and Announcement 2010-16 (suspending the requirement to file an FBAR due on June 30, 2010, for persons who were not U.S. citizens, U.S. residents or domestic entities and permitting all persons to rely upon the definition of "U.S. person" in the July 2000 version of the FBAR instructions to determine if they had an FBAR filing obligation for the 2009 and earlier calendar years).
• The Final Regulations and the preamble to the Final Regulations address the definition of a "foreign account" and the treatment of certain custodial accounts. As a general matter, an account is not a foreign account if it is maintained with a financial institution located in the United States, even if it contains holdings or assets of foreign entities. As it relates to custodial accounts, in some cases, a U.S. person may have an account with a financial institution located in the United States, such as a bank. The U.S. bank may act as a global custodian and hold the person's assets outside the United States. In many cases, the custody bank creates pooled cash and securities accounts in the non-U.S. market to hold the assets of multiple investors. These accounts, commonly called omnibus accounts, are in the name of the global custodian. Typically, the U.S. customer does not have any legal rights in the omnibus account and can only access their holdings outside of the United States through the U.S. global custodian bank. The preamble to the Final Regulations states that, in this situation, the U.S. customer would not have to file an FBAR with respect to assets held in the omnibus account and maintained by the global custodian. In this situation, the U.S. customer maintains an account with a financial institution located in the United States. However, if the specific custodial arrangement permits the U.S. person to directly access their foreign holdings maintained at the foreign institution, the U.S. person would have a foreign financial account.
• The Final Regulations address the scope of the filing exemption for certain persons with "signature or other authority" over foreign financial accounts. The Final Regulations revise the definition of "signature or other authority" and define this term to mean "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 provides that the 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. If the institution will act on that direct communication, the individual has signature or other authority over the account for FBAR purposes. The preamble further provides that the phrase "in conjunction with another" was added to address the situation in which a foreign financial institution requires a direct communication from more than one individual regarding the disposition of assets in the account.
• The preamble to the Final Regulations states that officers or employees who file an FBAR because of signature or other authority over the foreign financial accounts of their employer are not expected to personally maintain the records of the foreign financial accounts of their employers.
• The Final Regulations provide that the definition of "other financial account" includes an account that is an insurance and annuity policy with a cash value. It also includes a mutual fund or similar pooled fund that issues shares available to the general public that have a regular net asset value determination and regular redemptions. See Section 1010.350(c)(3) of the Final Regulations for a complete list of "other financial accounts." This category also includes "other investment fund." However, the Final Regulations reserve on "other investment fund." In the preamble to the Final Regulations, FinCEN discussed the issue of mutual funds, hedge funds and private equity funds. It stated that:
• • With respect to mutual funds, FinCEN received a number of comments seeking clarification of the definition. Commenters noted that the term ''mutual fund'' may have a different meaning outside of the United States and might potentially cover hedge funds and private equity funds that have periodic redemptions. FinCEN wishes to reiterate that the definition of mutual fund includes a requirement that the shares be available to the general public in addition to having a regular net asset value determination and regular redemption feature. FinCEN believes that some of the concerns of commenters arose because the draft instructions to the form published with the proposed rule did not include the words ''which issues shares available to the general public.'' The instructions have been revised to reflect the language of the definition contained in the final rule. As such, FinCEN does not believe it necessary to amend the proposed definition with respect to mutual funds. Accordingly, FinCEN is retaining this part of the definition as proposed. Furthermore, FinCEN notes that the NPRM³ specifically reserved the treatment of investment companies other than mutual funds or similar pooled funds, and the final rule continues to do so.

• The Final Regulations also include an anti-avoidance rule that provides that a U.S. person that causes an entity, including but not limited to a corporation, partnership or trust, to be created for a purpose of evading this section shall 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.
• The Final Regulations also provide guidance on FBAR filing requirements for accounts held though trusts as well as the scope of exceptions to the filing requirements for officers and employees with signature or other authority over foreign accounts maintained by certain regulated, registered and publically traded institutions and entities.

For further details on the rules mentioned above, as well as other special rules relating to and exemptions from FBAR reporting contained in the Final Regulations, see 31 CFR Part 1010, RIN 1506-AB08 and the Federal Register.

The Final Regulations apply to FBARs required to be filed by June 30, 2011, with respect to foreign financial accounts maintained in calendar year 2010 and for reports required to be filed with respect to all subsequent calendar years. Additionally, the preamble to the Final Regulations provides that filers who properly deferred filing obligations pursuant to IRS Notice 2010-23 may, if they wish, apply the provisions of the Final Regulations in determining their FBAR filing requirements for reports due June 30, 2011, with respect to foreign financial accounts maintained in calendar years beginning before 2010.

Footnotes

1. FinCEN is part of the Department of the Treasury, but is not part of the IRS. Therefore, these regulations are not IRS regulations.

2. Section 1010.350(b)(2) of the Final Regulations defines a resident of the United States as an individual who is a resident alien under 26 U.S.C. 7701(b) and the regulations thereunder but using the definition of "United States" provided in 31 CFR 1010.100(hhh) rather than the definition of "United States" in 26 CFR 301.7701(b)-1(c)(2)(ii).

3. NPRM, or "Notice of Proposed Rulemaking," refers to the Proposed Regulations.

4. See Notice 2010-23. That notice provided the following:

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.