CUNA Regulatory Comment Call

April 8, 2010

FinCEN’s Notice of Proposed Rulemaking – Clarifications to Foreign Bank Accounts Report (FBAR)

EXECUTIVE SUMMARY

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:

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:

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:

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:

Special Rules

FinCEN proposed several special rules to simply FBAR filings in certain cases.

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

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