CUNA Regulatory Comment Call
April 8, 2010
FinCEN’s Notice of Proposed Rulemaking – Clarifications to Foreign Bank Accounts Report (FBAR)
EXECUTIVE SUMMARY
- The Financial Crimes Enforcement Network (FinCEN) is revising the Bank Secrecy Act (BSA) regulations regarding reports of foreign financial accounts.
- The proposed rule would clarify which persons will be required to file reports of foreign financial accounts, which accounts will be reportable and includes provisions intended to prevent United States persons from attempting to avoid this reporting requirement.
- The proposal provides an exemption for certain persons with signature authority over foreign financial accounts from filing reports. Specifically, officers and/or employees employed by financial institutions that have a federal regulator are exempted from Foreign Bank Account Report (FBAR) filing requirements for foreign financial accounts where they have signature or other authority but no financial interest in the account.
- CUNA believes that the majority of federal credit unions impacted by this proposal would fall within the exemption. However, there may be some state-charted credit unions impacted by the proposal.
- Please submit your comments on this proposed rulemaking to CUNA by April 22, 2010. Comments directed to FinCEN must be received no later than April 27, 2010.
Please feel free to fax your response to CUNA at 202-638-7052; email to Federal Compliance Counsel Nichole Seabron at nseabron@cuna.com; or mail them to Nichole in c/o CUNA’s Regulatory Affairs Department, 601 Pennsylvania Ave, NW, South Building, 6th floor, Washington DC 20004. You may also contact us for a copy of the regulation or access it here.
DISCUSSION
The Bank Secrecy Act authorizes the Secretary of Treasury to issue regulations requiring persons to keep records and file reports that are determined to have a high degree of usefulness in criminal, tax, regulatory, and counterterrorism matters.
The Financial Crimes Enforcement Network (FinCEN) has been given the authority to enforce BSA regulations. FinCEN has delegated to the Internal Revenue Service (IRS) the authority to enforce the Foreign Bank Account Report (FBAR) provisions of the BSA, as well as implement regulations, investigate violations and assess and collect civil penalties.
Currently, the BSA requires each person subject to the jurisdiction of the United States and that has a financial interest in or signature or other authority over a bank, securities, or other financial account (in a foreign country) to report the relationship to the Internal Revenue Service (IRS) each year that the relationship exists and provide pertinent information regarding the relationship in a report form. The BSA requires filing of the form to report foreign financial accounts exceeding $10,000. The form must be filed on or before June 30th of each calendar year for accounts maintained during the previous calendar year. The Act also requires that records of accounts be maintained for each person having a financial interest in or signature or other authority over such accounts. The records must be held for a period of five years.
The Report of Foreign Bank and Financial Accounts (FBAR) is the form used to report such accounts and the form instructions denote which persons are required to file the form, as well as the types of accounts must be reported. The instructions also specify exemptions from reporting for certain persons with signature or other authority over the accounts.
THE PROPOSAL
The proposed rule includes a number of definitions intended to clarify the scope of the individuals and entities required to file the FBAR and the types of accounts that trigger filing requirements. The proposal exempts certain persons from the filing requirements and includes provisions intended to prevent United States (U.S.) persons required to file the FBAR from avoiding reporting requirements. Finally, the proposal features a number of special rules designed to simplify FBAR filings under certain circumstances. These provisions are discussed below.
United States Persons
Under the proposal, a U.S. person is defined 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 under the law 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 would apply to an entity even when an election has been made under the Internal Revenue Code to disregard the entity’s structure for federal income tax purposes.
FinCEN suggests that this definition will provide a uniform standard regardless of where in the United States an individual may be and will capture individuals seeking to hide their residency to obscure the source of their income or location of their assets.
Reportable Accounts
The proposed rule specifies the types of accounts subject to reporting (bank accounts, securities accounts, and other financial accounts) and provides clarifying definitions for those accounts. The terms are defined as follows:
- A bank account is any savings, demand deposit, checking or other account maintained by a person engaged in the business of banking. This includes time deposits such as certificates.
- 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 account is defined as: (i) an account with a person that is in the business of accepting deposits as a financial agency; (ii) an account that is an insurance policy with a cash value or an annuity policy; (iii) 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 an commodity exchange or association; or (iv) 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 proposal provides examples of accounts that would fall within the definition of “other financial account” such as an account with a person that accepts deposits as a financial agency; an account that is an insurance policy with a cash value or an annuity policy; an account with a mutual fund or similar pooled fund, or investment fund, etc.
Exceptions for Certain Accounts
Certain accounts are exempted from reporting under the proposal. These exceptions take into consideration the governmental status of the accounts or limited account access. The following accounts would be excepted from reporting under the proposal:
- an account of a department or agency of the U.S., an Indian Tribe or any state or a wholly owned entity, agency or instrumentality of such;
- an account of an entity established under laws of the U.S., an Indian Tribe or any state;
- an account under an intergovernmental compact between two or more states or Indian Tribes that exercise authority on behalf of the U.S., an Indian Tribe or state.
Foreign County
A foreign country is defined as all geographical areas outside of the United States
Financial Interest
The proposal provides three different situational definitions for “financial interest.” They are as follows:
- Financial Interest When a U.S Person is the Owner of Record or Holder of Legal Title: a U.S. person is deemed to have a financial interest in any bank, securities or other financial account in a foreign country if he/she is the owner of record or holds legal title regardless of whether the account is maintained for his/her own benefit or maintained for the benefit of others. If the account is maintained in the name of more than one person, each U.S. person in whose name the account is maintained is considered to have a financial interest in the account.
- Financial Interest When Another Is Acting on Behalf of the U.S. Person: a U.S. Person that has a financial interest in a bank, securities or other financial account in a foreign country where the owner of record or holder of legal title is a person acting on behalf of that U.S. person. For example, where there is an attorney, agent or nominee acting on behalf of the U.S. Person with respect to the account.
- Other Situations That Give Rise to a Financial Interest: a U.S. Person is deemed to have a financial interest in a bank, securities, or other financial account in a foreign country where 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 total value of the shares; a partnership where the U.S. person owns (directly or indirectly) more than 50 percent of the interest in profits or capital; or any entity (barring a trust) where 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.
- a trust where the U.S. person has either a beneficial interest in more than 50 percent of the assets or receives more than 50 percent of the current income.
- a trust that was established by the U.S. person and where the U.S. person has appointed a trust protector that is subject to the U.S. person’s (direct or indirect) instruction.
U.S. persons who create entities (or cause such creation) for the purpose of evading reporting requirements shall be deemed to have a financial interest in any bank, securities or other financial account set up in a foreign county where the entity is listed as the owner of record or holder of legal title. The term “financial interest” also captures instances a U.S. person’s ownership or control over the owner of record or holder of legal title is at such a level that the U.S. person should be deemed to have a financial interest in the account.
FinCEN suggests that the proposal will capture the financial interests of U.S. persons regardless of how they are held or structured and that the anti-avoidance provision will thwart persons seeking to evade the FBAR filing requirements.
Signature or Other Authority
The current rule requires U.S. persons with signature or other authority over bank, securities, or other financial accounts in a foreign county to file the FBAR. The proposal continues this requirement and also provides a definition for the term, “signature or other authority.” Under the proposal, signature or other authority means an individual’s authority (alone or in conjunction with another) to control the disposition of money, funds or other assets held in a financial account through instruction to the person maintaining the financial account.
However, there are exceptions to this definition. FinCEN has provided exceptions for certain U.S. persons with signature or other authority over reportable accounts. Generally, these exceptions apply to officers and/or employees of financial institutions that are regulated by a federal regulator and certain entities that are publicly traded on a U.S. national securities exchange or otherwise required to register their equity securities with the Securities and Exchange Commission (SEC).
The exception granted to officers and/or employees of financial institutions is only applicable where the officer or employee has no financial interest in the reportable account. Where there is a financial interest in a reportable account, an FBAR would need to be completed.
The proposal provides the following exceptions to the signature or other authority requirement:
- an officer or employee of a financial institution 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 Administration is not required to report that he/she has signature or other authority over a foreign financial account owned or maintained by the financial institution and where he/she has no financial interest in the account.
- an officer or employee of a financial institution that is registered with and examined by the Securities and Exchange Commission (SEC) or Commodity Futures Trading Commission (CFTC) is not required to report that he/she has signature authority over a foreign financial account owned or maintained by the financial institution and where he/she has no financial interest in the account.
- an officer or employee of an ‘”authorized service provider” need not report that he/she has signature or other authority over a foreign financial account owned or maintained by an investment company that is registered with the SEC if he/she has no financial interest in the account. An “authorized service provider” is defined as an entity that is registered with and examined by the SEC and provides services to an investment company registered under the Investment Company Act.
- an officer or employee of an entity with a class of equity securities listed on any U.S. national securities exchange need not report that he/she has signature or other authority over a foreign financial account of the entity if he/she has no financial interest in the account.
- an officer or employee of a U.S. corporation that has a class of equity securities registered under section 12(g) of the Securities Exchange Act need not report that he/she has signature or other authority over the foreign financial accounts of such corporation if he/she has no financial interest in the accounts.
Special Rules
FinCEN proposed several special rules to simply FBAR filings in certain cases.
- Twenty-five or more foreign financial accounts – a U.S. person having a financial interest in or signature or other authority over 25 or more accounts is only required to provide the number of financial accounts and certain basic information on the report. However, the person may be required to provide more detailed information concerning individual accounts when requested.
- Consolidated reports – an entity that falls under the definition of “U.S. person” and that owns (directly or indirectly) more than a 50 percent interest in an entity required to file an FBAR may file a consolidated report on its behalf and on behalf of the entity it owns.
- Participants and Beneficiaries in certain retirement plans – Participants and beneficiaries in retirement plans (under section 401(a), 403(a) or 403(b) of the Internal Revenue Code), as well as owners and beneficiaries of individual retirement accounts (under sections 408 and 408A of the Internal Revenue Code) will not be required to file an FBAR for foreign financial accounts held by or on behalf of the retirement plan or IRA.
- Certain trust beneficiaries – certain trust beneficiaries are not required to report the trust’s foreign financial accounts if the trust, trustee or agent of the trust is a U.S. person that files an FBAR disclosing the trust’s foreign financial accounts and provides additional information as required.
FinCEN also notes that if the proposed changes are adopted, changes to the FBAR instructions would be necessary. Draft revisions to the instructions are provided on page 8852 and can be accessed here.
QUESTIONS REGARDING THE PROPOSED RULEMAKING
- FinCEN notes that the purpose of this rulemaking is to clarify the scope of
existing definitions and reporting exceptions under the rule. FinCEN believes
these changes may result in increased collection and reporting for some reporting
persons but that proposed clarifications will help reduce regulatory obligations
overall. Is FinCEN’s estimation of the burden resulting from this proposal
accurate? Will this proposed rulemaking increased your reporting burden and if
so, in what ways?
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Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com Mary Mitchell Dunn • SVP & Deputy General Counsel • (202) 508-6736 • mdunn@cuna.com Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com Luke Martone • Senior Regulatory Counsel • (202) 508-6743 • lmartone@cuna.com |
