Originally published June 3, 2011
Keywords: FBAR, final regulations, financial crimes, FinCEN, Bank Secrecy Act, BCA
The Financial Crimes Enforcement Network (FinCEN) of the US Department of Treasury issued final regulations under the Bank Secrecy Act (the "BSA") in February of 2011 with respect to the "Report of Foreign Bank and Financial Accounts" (FBAR). The final regulations replaced proposed regulations published in 2010.1 They are effective for FBAR filings for calendar year 2010, which are due no later than June 30, 2011, and for reports required to be filed for all subsequent years. In addition, the final regulations permit any person who, pursuant to IRS notice 2010-23, properly deferred filing an FBAR for years prior to 2010, to apply the provisions of the final regulations for purposes of determining their filing requirements for reports due June 30, 2011, for such prior years. The IRS also recently issued a revised FBAR form and instructions intended to reflect the changes made by the final regulations.
In our May 27, 2010 Legal Update, "FBAR: Deadline Approaches, Issues Remain for Employee Plans,"2 we summarized proposed regulations under FBAR, as applied to employee plans, and issues in need of further clarification. This Update briefly describes guidance provided in the final regulations and revised instructions with respect to employee benefit plan-related FBAR filings.
Existing guidance implementing the BSA requires that any US person having a financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country report this relationship to the IRS for each year in which the relationship exists if the aggregate value of all such accounts exceeds $10,000 in such year. The filing deadline for each calendar year is June 30 of the following calendar year. The form used to file the account is the FBAR (Form TD F 90-22.1). In addition, Schedule B to IRS Form 1040 requires that the taxpayer disclose whether he or she has a financial interest in, or signature authority over, a financial account in a foreign country.
Notwithstanding the requests of numerous commentators, the final regulations do not provide a broad exemption for pension and welfare plans. FinCEN noted that it felt that a broad exemption for entities based on a tax-exempt status was inappropriate as the FBAR filing requirement is broader than tax administration. Although a broad exemption from the FBAR filing requirements was not provided for employee benefit plans, a number of issues that affect employee benefit plans were addressed in the final regulations.
Clarification of Foreign Account Status. One of the more vexing issues under the proposed regulations was the potentially broad sweep of the concept of a "foreign account." In the preamble of the final regulations, FinCEN makes two important clarifications that should provide significant relief for employee benefit plans.
First, the preamble indicates that as a general matter, an account is not a foreign account under FBAR if it is maintained with a financial institution located in the United States. By way of example, the regulations provide that if an individual maintains an account with a securities broker located in the United States, the fact that the account may hold securities issued by a foreign entity will not render the account a foreign account. The instructions to the revised FBAR provide additional examples on this point: an account maintained with a branch of a US bank that is physically located outside the United States is a foreign financial account, while an account maintained with a foreign bank that is physically located in the United States is not a foreign financial account.
Second, the preamble to the final regulations also provides guidance on the application of the FBAR requirements to accounts maintained with a US bank acting as a global custodian with respect to assets held outside the United States. Commentators on the proposed regulations noted that, often, a US custodian bank may create pooled cash and securities accounts in the non-US market at a foreign institution to hold the assets of multiple investors. These accounts, commonly called omnibus accounts, are in the name of the global custodian. Typically with such accounts, "the US customer does not have any legal rights in the omnibus account and can only access their holdings outside of the United States through the US global custodian bank."
FinCEN states in the preamble of the final regulations that the US customer would not have to file an FBAR with respect to assets held in the omnibus account and maintained by the global custodian as FinCEN considers such an account to be with a financial institution located in the United States. However, the results change and the US person would be considered to have a foreign account if the specific custodial arrangement permits the US person to access directly their foreign holdings maintained at the foreign institution.
Plan Sponsor Relief/Elimination of Trust Protector Rule. Under the proposed regulations (and the instructions to the 2008 form), a US person was considered to have a financial interest in a foreign account for which the holder of legal title or the owner of record is a trust established by such US person and for which a "trust protector" has been appointed. A "trust protector" was defined in the 2008 instructions as "a person who is responsible for monitoring the activities of a trustee, with the authority to influence the decisions of the trustee or to replace or recommend the replacement of the trustee." The functions of a trust protector sounded remarkably similar to those of a named fiduciary with the authority to appoint and remove the trustee. Hence, in those instances in which a plan sponsor had appointed a named fiduciary with such powers with respect to the trustee, the proposed regulations and the 2008 instructions seemed to treat the plan sponsor as having a financial interest in the plan, which would have necessitated an FBAR filing by the plan sponsor. The trust protector rule was excluded from the final regulations and revised instructions. Thus, plan sponsors will not be required to file an FBAR on account of having appointed a named fiduciary with authority with respect to the trustee.
Trusts Treated as US Person. Commentators on the proposed regulations had argued that a trust should not be treated as a US person—and thus subject to a separate filing obligation—in light of the fact that a US trustee would also have an obligation to file an FBAR with respect to the trust. The final regulations continue to include a trust created, organized or formed under the laws of the United States in the definition of a US person for purposes of the FBAR filing requirements.
Signature Authority. Commentators expressed great concern with the breadth of the definition of signature authority contained in the proposed regulations; they were concerned that all parties, such as plan investment committee members who participate in the allocation of assets or have the ability to instruct or supervise others with signature authority over an account might be required to file an FBAR. The final regulations narrow the definition of signature authority.
The regulations limit signature or other authority to the authority 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 further clarifies that such authority exists over a foreign account when "the foreign financial institution will act upon direct communication from that individual regarding the disposition of assets in that account." It is expected that this narrower definition will eliminate the requirement to file an FBAR for plan committee members who administer a plan, but who do not have the authority to contact directly a foreign financial institution and authorize the disposition of assets held by such foreign financial institution (and who are not required to file on any other basis).
Non-enforcement for foreign commingled funds other than mutual funds. FBAR filings must be made with respect to a foreign mutual fund, or similar funds that issue shares available to the general public and offer regular redemptions. The final regulations reserve on whether an FBAR filing is required for persons with a financial interest in, or signature or other authority over, any other foreign commingled fund. Thus, for now, FBARs do not have to be filed with respect to interests in private investment entities, such foreign hedge funds and foreign private equity funds.
Exemption for Plan Participants and Beneficiaries. The final regulations retain the exemption for plan participants and beneficiaries that was included in the proposed regulations. Under this exemption, participants and beneficiaries in plans (which would include 401(k) plans) described in Internal Revenue Code Sections 401(a), 403(a) and 403(b), and owners and beneficiaries of IRAs described in Sections 408 and 408A, would not be required to make an FBAR filing with respect to a foreign financial account held by or on behalf of the retirement plan or IRA.
Exemption for government plans. The revised instructions to the FBAR expressly provide that no FBAR filing by any person is required with respect to a foreign financial account of any government entity, including a retirement or welfare plan of a government entity.
The existing guidance together with the final regulations is complex, subject to a number of ambiguities, and includes numerous issues not discussed in this Legal Update. The complete final regulations are available at 76 Fed. Reg.10234 (February 24, 2011).
1. 75 Fed. Reg. 8894 (February 26, 2010).
2. Available at http://www.mayerbrown.com/publications/article.asp?id=9050&nid=6.
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