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By Edward Tanenbaum
Alston & Bird LLP, New York, NY
On March 1, 2016, the U.S. Financial Crimes Enforcement Network ("FinCEN") issued a Notice of Proposed Rulemaking ("NPRM") amending certain provisions relating to the filing of Reports of Foreign Bank and Financial Accounts ("FBARs").
As most people know by now (certainly post-UBS), all U.S. persons who have a financial interest in, or signature or other authority over, a foreign bank, securities, or other financial account (exceeding $10,000 at any time during the year) must file the FBAR form. The form previously filed was Form TD F 90-22.1 but that has been changed to FinCEN Form 114 and it must be electronically filed. The FBAR form is due by June 30 of the year following the report year although beginning with the 2016 reporting year, the FBAR must be filed by April 15, 2017, and, thereafter, by each April 15 of the year succeeding the reporting year, including extensions to October 15.
Back in 2011, FinCEN issued a final rule as well as implementing regulations amending the Bank Secrecy Act with respect to the FBAR. One favorable rule stated that, with respect to a U.S. person having a financial interest in, or signature or other authority over, 25 or more foreign financial accounts, the U.S. person would only be required to provide on the FBAR the number of financial accounts and certain other basic information, including the financial interest holder if not the person reporting, but would be required to provide detailed information concerning each account only when so requested by the IRS. That final rule dramatically reduced the burden of U.S. persons with only signature authority because under then prior rules the entire form was required to be completed rather than merely providing the number of accounts and certain basic information.
Another favorable rule provided that certain exceptions would exist for employees and officers of certain federally regulated entities who have only signature authority and no financial interest in a foreign account of an employer, e.g., certain banks and SEC-registered financial institutions. Similarly, employees and officers of certain U.S.-listed companies would not be required to report if they only have signature authority, and certain officers and employees of certain U.S. subsidiaries would not be required to report if they only have signature authority and if the U.S. parent is listed and has filed a consolidated report that includes the subsidiary.
However, FinCEN rejected an expansion of the exception from reporting available to certain officers and employees (with only signature authority) of: (1) foreign subsidiaries of U.S. corporations; (2) U.S. subsidiaries of foreign corporations; (3) U.S. parents with respect to foreign accounts of the U.S. subsidiaries of the U.S. parent; and (4) U.S. subsidiaries with respect to foreign accounts of the U.S. parent.
Subsequent to the issuance of the 2011 final rule and implementing regulations, FinCEN received numerous inquiries regarding the applicability of the exemptions to scenarios involving "over-lapping signature authority," i.e., when an officer or employee of a parent entity also has signature authority over the foreign financial account of the parent's controlled subsidiary entity and vice versa. The ambiguity existed since it was not clear whether the exemptions only applied if the individual is actually an officer or employee of the corporate entity that holds the account and not to situations in which the individual may have control over accounts held by affiliated entities that do not employ the individual.
The March 2016 NPRM states that, with respect to officers and employees with just signature authority, a policy decision has been made to provide a "simplified and expanded" exemption in order to reduce the obligations of filers. Thus, the NPRM would eliminate the requirement for officers and employees and agents of U.S. entities to report on accounts owned by the entity over which the officer, employee, or agent has signature authority only due to their employment when those accounts are already required to be reported by their employer or any other entity within the same corporate structure as their employer.
The NPRM makes clear, however, that the exemption applies to officers or employees who have overlapping signature authority with respect to U.S. parent and subsidiary accounts within the same corporate structure. Thus, the exemption would not apply in instances in which no entity within the employer's corporate structure has an obligation to report its financial interest in such accounts, e.g., where a U.S. person is employed by a non-U.S. entity with no obligation to report and the foreign entity is not included as a subsidiary of a U.S. entity that is filing.
As the quid pro quo, employers would be required to maintain information identifying all officers, employees, or agents with signature authority over those same accounts. This information must be maintained for a five-year period and must be made available upon a request by FinCEN.
The second of two changes proposed in the March 2016 NPRM relates to the exception for detailed reporting of accounts by persons owning 25 or more financial accounts. In this situation, FinCEN has decided to reconsider the liberal approach contained in the 2011 final rule and implementing regulations.
A study conducted by FinCEN apparently revealed that in 2013 10,800 FBARs were filed by filers with 25 or more accounts and that these filers had a total of 5,355,000 foreign accounts representing 56% of the total number of all foreign financial accounts, leaving FinCEN with little detailed information about such a huge number of accounts and leaving a significant number of foreign accounts "vulnerable to exploitation by those seeking to launder money, finance terrorist attacks or engage in other financial crimes."
Accordingly, the March 2016 NPRM completely eliminates the exemption from detailed filing for those filers who own 25 or more foreign accounts. Thus, all persons must file detailed information about the accounts regardless of how many are held by the filer.
Undoubtedly, the expansion of the exemption for filings by officers and directors who just have signature authority (but no financial interest) over foreign financial accounts of U.S. entities otherwise required to report their financial interest in such accounts will be viewed favorably, as it should.
On the other hand, the removal of the exemption from filing detailed account information by filers who have 25 or more such accounts will be viewed quite negatively. It certainly will increase the filing burden imposed on those affected.
Nonetheless, FinCEN maintains that this new proposed regulation will fill a significant gap in FinCEN's and law enforcement's ability to analyze a comprehensive set of data on all otherwise reportable accounts. In today's times, no doubt there are those who will believe that the cost/benefit analysis should tip in favor of the benefits to be derived.
This commentary also appears in the May 2016 issue of the Tax Management International Journal. For more information, in the Tax Management Portfolios, see Blum, Canale, Hester, and O'Connor, 947 T.M., Reporting Requirements Under the Code for International Transactions, and in Tax Practice Series, see ¶7170, U.S. International Withholding and Reporting Requirements.
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