Foreign Bank Account Reporting (FBAR), the 2011 amendment to the US Bank Secrecy Act is one of the broadest and most consequential regulations to emerge from the reaction to 9/11 terrorism and the 2008 financial crash. Superficially it is demanding: companies, individuals and US persons are required to report any foreign financial accounts if their total balances were over $10,000 at any time during the reporting year. Beneath the surface it is even more onerous as the expansive definitions of eligible accounts, US persons and other matters ensure added complexity.
What is FBAR? An introduction to the Foreign Bank Account Reporting.
1) What is FBAR?
2) Who needs to file? What needs to be filed?
The regulation requires that US persons with a financial interest or signature authority over financial accounts in a foreign country report this relationship to the US Treasury. The operative terms in the regulation are US persons, financial interest and financial accounts.
- US persons includes citizens or residents of the US, entities such as corporations created or operating under US law as well as trust and estates operating under US law.
- Financial accounts include conventional bank accounts along with a wide range of financial assets including securities, insurance, futures, options and investment accounts.
- Financial interest includes control through signature authority as well as beneficial interest.
FBAR reporting is also complex. Reporting is required in any year in which the combined maximum balance in eligible financial accounts exceeds $10,000 at any time during the reporting year. Once that threshold is reached, all accounts must be reported no matter how small their value. Mercifully the exchange rate which must be applied to the amounts can be a single end-of-year rate. While the FBAR is filed annually it is not filed with an individual or company return. Instead it must be filed electronically with FinCEN using the BSA E-Filing System. Required information includes the type of account, account number, name and address of the financial institutions and the maximum balance during the reporting year. There’s good news for those with more than 25 accounts, less detailed information is required for each account, but the underlying information must be retained for five years.
3) What happens by failing to properly comply with FBAR?
The consequences for failing to properly comply with FBAR include significant civil and criminal penalties for individuals and companies. The IRS which enforces FBAR distinguishes between willful and non-willful violations. At the most benign end of the spectrum a non-willful FBAR violation can yield a civil penalty of up to $12,459 for each violation, at the discretion of the IRS examiner. At the other end, willful failure combined with other violations can result in civil penalties of more than $500,000 and criminal penalties of up to $500,000 and ten years in prison for each violation.
4) Challenges for corporations
The first is where within an organization should responsibility for FBAR be vested. The second is creating the business processes and acquiring the systems to make sure that the compliance process is efficient and comprehensive. Both are challenges that have not always been fully met by impacted companies in the years since FBAR became a requirement.
FBAR originated with the Financial Crimes Enforcement Network (FinCEN) within the US Treasury and is enforced by the Internal Revenue Service (IRS). Perhaps reflecting its FinCEN roots there are significant consequences for compliance failure, negligent or otherwise. Willfully fail to report an eligible account and the penalty can be as high as the greater of $100,000 or 50% of the balance in the account at the time of the violation, along with prison time. Even negligent failure to report can result in substantial penalties.
5) Corporate Compliance
There are two key elements to corporate compliance with FBAR:
1) Organizational—where should responsibility for FBAR compliance be vested?
2) Systems—what system or systems should be deployed to ensure complete and accurate compliance?
From the organizational perspective FBAR has been the law for several years so most US headquartered companies with global operations are aware of the regulation and working to comply. Their compliance efforts are not always efficient or robust suggesting that a strategic approach to FBAR compliance could yield significant cost savings while also reducing risk.
A major challenge in complying with FBAR is that the broad scope of covered persons, account types and mandated information requires the crossing of many functional boundaries within the company. This complicates the decision as to which group should be accountable for the filing. Should it be the corporate secretary, treasury, tax or some other functional area? Evidence suggests that there are currently considerable differences in the vesting of reporting responsibility from organization to organization. And while the IRS doesn’t require consolidated filing, multiple decentralized filings raise the danger that accounts or individuals may fall through the cracks, since once the reporting threshold applies to the consolidated entity all accounts must be reported.
For foreign companies, compliance may be handled by local staff or an outside law firm with senior management at company headquarters potentially left unaware of corporate exposure. In these cases the fragmented nature of the information creates compliance risk that requires action from the most senior levels of executive management.
From a systems perspective the source material for FBAR filing is likely to come from multiple systems including the Treasury Management System (TMS), legal entity management software, ERP and the usual assortment of spreadsheets that are used by virtually all companies. In this case Bank Account Management (BAM) systems are the preferred choice because of their ability to manage all the elements of FBAR—serving all corporate functions and all corporate data sources. BAM systems generally have the advantage of reasonable cost in addition to the relative ease with which they can be integrated into other systems during implementation. A single source of truth created in a BAM system provides the most robust assurance of efficient and complete compliance.
Vesting responsibility for compliance and providing the processes and tools
Foreign Bank Account Reporting (FBAR), the 2011 amendment to the US Bank Secrecy Act is one of the broadest and most significant regulations emerging from the 9/11 acts of terrorism and the 2008 financial crash. It declares that companies, individuals and US individuals are required to report any foreign offshore financial accounts if their total balances are over $10,000 at any time during the reporting year.
This creates two challenges for companies: where within an organization should responsibility for FBAR be vested and creating the business processes and acquiring the systems to make sure that the compliance process is efficient and comprehensive. Both are challenges that have not always been fully met by impacted companies in the years since FBAR became a requirement.
Download this article today and learn about FBAR, examined in non-technical language with reference to the growing body of regulatory text where required.