REASURY ISSUES FINAL REGULATIONS CONCERNING FOREIGN FINANCIAL ACCOUNT REPORTING
Final rules have just been issued by the Treasury Department’s Financial Crimes Enforcement Network [FinCEN] concerning the reporting requirements for U.S. citizens or residents who, directly or indirectly, hold a beneficial interest in or exercise control over certain financial accounts in a foreign country. Various amendments to the long-standing foreign financial account reporting regulations were originally proposed by FinCEN in February, 2010, as part of its implementation of the 1970 Bank Secrecy Act [BSA]. The final rules focus on those persons who are required to file reports and the types of accounts which are reportable, while adopting provisions intended to prevent persons subject to the rules from avoiding their reporting obligations. With respect to foreign financial accounts maintained at any time during calendar year 2010, the new rules apply to reports required to be filed by the deadline, June 30, 2011. The rules also apply to reports required to be filed for all subsequent calendar years.
Who Must File
Generally speaking, any individual who is subject to the territorial jurisdiction of the United States, whether as a citizen or permanent resident, and any entity created, organized or formed under the laws of the United States, its territories or insular possessions, or of any state or the District of Columbia (hereinafter collectively referred to as a “U.S. person”), must provide certain information to the IRS with respect to any calendar year in which that person held either a
[1] financial interest in, or
[2] signature or other authority over
any bank, security or other financial account in a foreign country, provided that, at any time during such year, the account had a value in excess of ten thousand dollars ($10,000). The form used to report the information to IRS is Treasury Department Form 90-22.1, also known as the “FBAR” form. In addition to the June 30 filing deadline, records must be kept for each such foreign account for a period of 5 years.
A “financial interest” exists where a U.S. person is the owner of record or holds legal title to an account in a foreign country. In addition, 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 trust that was established by such person and for which a trust protector has been appointed. A trust protector is a person who is responsible for monitoring the activities of a trustee, with the authority to influence the trustee’s decisions or to replace (or recommend the replacement of) the trustee. Further, 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 corporation, partnership or limited liability company, if such person owns, directly or indirectly, more than fifty percent (50%) of the voting power of the entity.
Which Accounts are Reportable
An “account” includes any formal relationship with a foreign financial agency to provide regular services, dealings or other transactions, and may exist for a short period of time, such as an escrow account, but is not established by simply wiring money or purchasing a money order.
Only foreign accounts are reportable on the FBAR. An account is not a foreign account if it is maintained with a financial institution located in the United States, even though the account may contain assets or holdings of foreign entities. For example, stock or other securities of a foreign corporation held by a U.S. person in an account at a U.S. brokerage firm does not render the account “foreign” for FBAR purposes. Similarly, a U.S. person would not have to file an FBAR for assets held in a typical omnibus account maintained by a U.S. global custodian in which the U.S. person does not have any legal rights in or to the account and can only access the foreign assets through the intervention of the U.S. global custodian. However, if the specific custodial arrangement allows the U.S. person to directly access foreign assets maintained at a financial institution located outside the United States, then the U.S. person would be deemed to have a foreign financial account subject to the FBAR reporting rules.
Signature or Other Authority
The term, “signature or other authority” refers to the authority of a U.S. person, whether acting alone or in conjunction with another, to control the disposition of money, funds or other assets held in a financial account by means of direct communication with the person maintaining the financial account. The critical test for determining whether a U.S. person has signature or other authority over an account in a foreign country is whether the foreign financial institution will act on a direct communication from that person regarding the disposition of assets from that account (not to be confused with investment powers or similar management authority over assets within the account). The phrase, “in conjunction with another,” is aimed at addressing situations in which a foreign financial institution requires a direct communication from more than one individual regarding the disposition of assets from the account.
Individuals Employed in a Foreign Country
The new rules clarify that U.S. individuals employed in a foreign country who must file an FBAR because of their having a signature or other authority over their employer’s foreign financial accounts are not expected to personally maintain records of these accounts. This recordkeeping exemption does not extend, however, to U.S. individuals employed in the United States with signature or other authority over their employer’s foreign financial accounts.
