The Long Arm of FBAR

Q (gtnews):You report having observed a keen interest by financial service sector clients in the reports of foreign bank and financial accounts, aka FBAR, as required by the US Internal Revenue Service (IRS). Briefly, what’s the background to FBAR and who does it affect?

A (Mohan Murali):
Basically almost anyone who has anything at all to do with the US and is in the country for any period of time – including temporary immigrants and Green Card holders – needs to be aware of FBAR and its requirements.

FBAR has been administered and enforced by the US Internal Revenue Service (IRS) since 2003. Any US person, corporation or trust holding over US$10,000 in a foreign account at any point during the calendar year is required to annually file an FBAR, via IRS Form 90-22.1, with the US Treasury Department’s Financial Crimes Enforcement Network.

What has triggered this interest and what are the questions most commonly being asked about FBAR?

The IRS has been ramping up efforts to use FBAR as a tool both in stamping out tax evasion and raising revenue. The number of FBARs being filed has steadily risen in recent years. Indeed, the frequency of questions really started taking off in 2009 with the investigation into Swiss bank UBS, which was suspected to have persuaded US individuals to establish accounts in Switzerland to avoid US taxes.

In addition to the many people who still aren’t aware of FBAR, there are also those who aren’t conversant with its requirements and who often underestimate its severity. Typical questions include ‘What do we need to do?’ and ‘Do we have enough time to comply?’ We’ve been getting enquiries for several years, and these questions regularly come up at the various conferences we attend.

What does meeting the requirements of FBAR involve and what are the penalties for non-compliance?

An FBAR must be filed for a range of accounts, ranging from savings and chequing, brokerage and securities and also certain types of insurance policies and non-cash assets like gold.

The civil penalty for willful failure to file FBAR can be US$100,000, or 50% of the value of the offshore account, whichever is greater. The IRS has demonstrated an increasing willingness to employ FBAR in its campaign against tax evasion. A civil suit brought against J Bryan Williams in 2009, who had deposited US$7m in Swiss accounts without declaring it, sought a US$200,000 penalty for failing to comply with FBAR.

Other high-profile cases have included California attorney Christopher Rusch, who was sentenced to 10 months in prison along with two of his clients, for assisting them in evading a filing, while a one-year sentence plus restitution of $200,000 and an FBAR penalty of nearly $288,000 was slapped on consultant Christopher Berg for transferring income to a secret Swiss account with UBS.

According to one recent report the problem with FBAR “is that countless Americans with foreign accounts and US expats are completely unaware of its existence.” Is this correct and if so, is such lack of awareness excusable?

Immigration lawyers, fund managers and tax consultants in many cases probably could have done rather more in alerting individuals to the existence of FBAR. These groups should be more proactive than they have been in sharing their knowledge and explaining its impact. Where this hasn’t happened, individuals have had the opportunity to state their case to the IRS.

Recent reports suggest that the scope of FBAR could extend further, for example to include bitcoin and other virtual currency accounts? Do you regard this as a logical – and probable – development?

Not in the near future, but very possibly in the longer term once these cryptocurrencies become more established. Certainly the decision by Microsoft to provide bitcoin with some support has brought that day nearer.

In the meantime, the IRS probably has bigger avenues to go down and bigger culprits to go after, particularly as the big multinational corporations are unlikely to become major users of virtual currencies just yet. Given rapid technological changes though, the situation might soon be different. The IRS could wake up to increasing bitcoin usage and want to capture it. In the meantime, its main focus is on the hidden wealth of individuals, while bitcoin is more of a transactional tool.

You’re also seeing interest in electronic bank account management (eBAM), which has been talked about for several years without really taking off. Is it now finally achieving the critical mass needed for widespread adoption?

Our own company has been regularly involved with eBAM since 2009 and it’s something of a ‘chicken and egg’ situation as regards the banks. A number of banks have been proactive and built their services around eBAM; indeed three major US banks are currently talking to us about managing eBAM for their corporate customers.

Outside of North America and Europe, achieving that critical mass is more difficult. A number of countries apply rather stricter regulation and a digital signature might not suffice. CGI Group is performing valuable work in this space to encourage more local adoption.

Was the postponed launch of SWIFT’s eBAM central utility – reportedly due to too few banks being ready to commit – a major factor in preventing eBAM from gaining momentum earlier?

Well it hasn’t been abandoned – the project is still being worked on and it will provide a much-needed depositary. It’s generally recognised that such a central utility will be a good thing, which corporates have much to gain from. As they recognise its value we should be able to catch up fairly quickly.

So are all banks now fully committed to eBAM or are there still some holding back?

In the near term, it’s likely that eBAM will continue to be the province of the bigger banks and also the bigger corporations. Smaller companies are likely to adopt eventually, but this might still take some time.

For the benefit of any treasury department considering a move to eBAM, what are the main advantages – and are there any that perhaps aren’t immediately obvious?

It helps make bank account administration streamlined and centralised, but treasury departments first need to get their systems streamlined and centralised. Once they do, eBAM is then simply a case of just flipping a switch.

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From a compliance standpoint, the speed that eBAM provides as well as the cost are the main benefits. As the Russian rouble has recently demonstrated, big currency movements are now a regular occurrence, so eBAM enables you to respond swiftly and make changes to your account structure.

So is eBAM for everyone, or are there certain companies for which it is less suitable or where other options would be more appropriate?

It really depends on the industry that your company operates in and the nature of your business. Does it depend on the rapid movement of currencies for example, or do you need to regularly send instructions to your bank which need immediate action? If your bank is situated immediately across the road from your business then maybe eBAM is less vital but if the account is a further distance away you probably do need it

Thank you for your insights. Any other issues relating to either FBAR or eBAM that we haven’t yet mentioned?

Perhaps we could mention the increasing need for market readiness in highly critical, high visibility areas that FBAR underlines and which eBAM responds to. Automating and promptly submitting FBAR reports is critical and eBAM helps the task to be completed promptly. Axeltree’s own treasury management solution, Treasurytree, offers an FBAR module that delivers automated reporting in compliance with the US Treasury’s requirements.

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