February 23, the Treasury Department's Financial Crimes Enforcement Network (FinCEN) issued a final rule to amend the Bank Secrecy Act (BSA) regulations regarding the Report of Foreign Bank and Financial Accounts (FBAR). The rule, which is effective March 28, 2011 and applies to 2010 reports required to be filed by June 30, 2011 and those for subsequent years, largely adopts the proposed regulations issued on February 26, 2010.

Background

The FBAR form is used to report a financial interest in, or signature or other authority over, one or more financial accounts in foreign countries. No report is required if the aggregate value of the accounts does not exceed $10,000. When filed, FBARs become part of the BSA database. They are used in combination with Suspicious Activity Reports, Currency Transaction Reports, and other BSA reports to provide law enforcement and regulatory investigators with valuable information to fight fraud, money laundering, terrorist financing, tax evasion and other financial crime.

FinCEN delegated the authority to enforce the FBAR rules and to amend the form to IRS in 2003. However, FinCEN retained the authority to revise the applicable regulations.

Changes in the proposed regulations

The proposed regulations sought to:

1. include provisions to prevent persons from avoiding reporting requirements; 
2. define a U.S. person required to file the FBAR and define the types of reportable accounts such as bank, securities, and other financial accounts; 
3. exempt certain persons with signature or other authority over, but no financial interest in, foreign financial accounts from filing FBARs; 
4. exempt certain low-risk accounts e.g., the accounts of a government entity or instrumentality for which reporting wouldn't be required; 
5. exempt participants/beneficiaries in certain types of retirement plans and include a similar exemption for certain trust beneficiaries; 
6. clarify what it means for a person to have a financial interest in a foreign account; 
7. permit summary filing by persons who have a financial interest in 25 or more foreign financial accounts, or signature or other authority over 25 or more foreign financial accounts; and 
8. permit an entity to file a consolidated FBAR on behalf of itself and the subsidiaries of which it owns more than a 50% interest. 

FinCEN received a number of responses to the proposed regulations, many of which sought broader exemptions and/or clarification of which accounts and individuals are subject to the FBAR requirements.

Final rule. The final rule largely adopts the proposed regulations, with several slight modifications and clarifications. It addresses the scope of persons who are required to file FBARs and the types of accounts that are reportable. It also provides filing relief, in the form of exemptions, for certain persons with signature or other authority over the accounts, and adopts provisions intended to prevent persons subject to the rule from avoiding their reporting requirements.

The preamble to the final rule makes the following clarifications:

1. Reportable accounts. FinCEN clarified that an account maintained with a U.S. financial institution is generally not considered a foreign account for FBAR purposes, even if the account contains holdings or assets of foreign entities. In general, the FBAR rules also do not apply to certain types of custodial arrangements in which a U.S. bank, acting as a “global custodian,” combines the assets of multiple investors and creates pooled cash and securities accounts in non-U.S. markets. FinCEN reasoned that U.S. customers with these types of accounts typically have no rights in the foreign accounts and can access their holdings only through the U.S. financial institution.
   
   M&Q caution: FinCEN warned, however, that a U.S. customer is considered to have a foreign financial account if the custodial arrangement allows him to directly access his foreign holdings maintained at the foreign institution.
2. Signature or other authority. In the final rule, FinCEN issued a revised definition of “signature or other authority” for FBAR purposes. The revised definition clarifies that an individual has such authority over an account if the foreign financial institution will act upon a direct communication from the individual regarding the disposition of assets in the account. FinCEN also clarified that the signature authority definition applies only to individuals.
3. Recordkeeping requirements. FinCEN clarified that individuals who have signature authority over their employer's foreign financial accounts are not personally required to maintain the records of that employer for 5 years.
4. Definition of “U.S. resident.” FinCEN clarified that, in determining whether an individual is a U.S. resident, the elections under Code Sec. 6013(g) (under which a nonresident alien married to a U.S. citizen or resident can elect to be treated as a resident for tax purposes) and Code Sec. 6013(h) (where a nonresident alien who becomes a U.S. citizen or resident before the close of the tax year and is married to an individual who is a U.S. citizen or resident on the last day of that tax year is treated as a citizen for the entire year) are disregarded.
5. “Other financial accounts.” FinCEN clarified that the treatment of life insurance policies and annuities as accounts for FBAR purposes won't cause them to be treated as accounts under other BSA regulations. Also, for life insurance policies, FinCEN stated that the obligation to file an FBAR rests with the policy holder and not the beneficiary.
6. Interests in trusts. FinCEN clarified that, in order to avoid confusion for discretionary beneficiaries or remaindermen, only beneficiaries who have a present beneficial interest in excess of 50% are subject to the FBAR rules.

FinCEN also stated that, although filers are currently required to print and mail FBARs, it is in the process of modernizing its system to allow for electronic filing.