Business Fraud Alert. FinCEN Issues Final Rule on Foreign Bank Account Reporting (FBAR)

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1 Cadwalader, Wickersham & Taft LLP New York London Charlotte Washington Beijing March 2011 Business Fraud Alert A Newsletter Covering Developments in Criminal and Civil Enforcement of Anti-Fraud Statutes March 1, 2011 FinCEN Issues Final Rule on Foreign Bank Account Reporting (FBAR) On February 24, 2011, the Financial Crimes Enforcement Network ( FinCEN ) issued its final rule (the Final Rule ) on Foreign Bank Account Reporting ( FBAR ). 1 The Final Rule arrives a year after FinCEN released its Notice of Proposed Rulemaking (the NPRM ), which proposed a number of changes to the FBAR filing instructions. 2 While it clarifies certain issues, the Final Rule leaves other matters unaddressed and provides little of the relief sought by practitioners. Overview of FBAR Reporting The Bank Secrecy Act requires the Secretary of the Treasury to require a resident or citizen of the United States or a person in, and doing business in, the United States, to... keep records and file reports, when the resident, citizen, or person makes a transaction or maintains a relation for any person with a foreign financial agency. 3 Its stated purpose is to assist in the enforcement of criminal, tax, regulatory, and counter-terrorism laws. The Secretary designated rulemaking authority to FinCEN. FinCEN requires the FBAR to be filed annually for [e]ach United States person having a financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country... 4 The report is filed with the Internal Revenue Service on Form TD-F (Report of Foreign Bank and Financial Accounts) for foreign financial accounts aggregating more than $10,000 in a calendar year. 5 It is due annually on or before June 30 for accounts maintained during the previous calendar year. United States Person The Final Rule defines United States persons as individual United States citizens and residents (as determined by Internal Revenue Code ( IRC ) 7701(b)), as well as entities including (but not limited to) corporations, partnerships, trusts, Attorney Advertising. Prior results do not guarantee a similar outcome.

2 2 Business Fraud Alert March 1, 2011 and limited liability companies created, organized, or formed under United States federal or state law. 6 Consolidated filing. An entity that is a United States person and which owns, directly or indirectly, more than a 50% interest in one or more other entities required to file an FBAR report, may file a consolidated report on behalf of itself and such other entities. 7 Retirement Plans. Participants and beneficiaries in retirement plans under IRC 401(a), 403(a) or 403(b), as well as owners and beneficiaries of a standard or Roth individual retirement account ( IRA ), are not required to file an FBAR with respect to a foreign financial account held by or on behalf of the retirement plan or IRA, although the plans themselves must file. 8 Trusts. FinCEN declined to exempt trusts from FBAR reporting, despite the argument that since a United States trustee must also file, the trust s filing would be duplicative. FinCEN was not sympathetic to this argument, emphasizing that duplicative reporting served a checks-and-balance function that was useful to law enforcement. The Final Rule does, however, provide that the beneficiary of a discretionary trust need not file an FBAR provided that the trust, the trustee, and/or an agent duly files (or if the beneficiary has a present beneficial interest in 50% or less of the trust s assets, or receives 50% or less of the trust s income). 9 Reportable Accounts Reportable accounts include bank accounts, securities accounts, and other financial accounts held outside the United States, even if held at an affiliate of a United States bank or other financial institution. 10 Accounts maintained with a financial institution located inside the United States are not subject to FBAR reporting, even if the account contains holdings or assets of foreign entities. Bank accounts include savings deposits, demand deposits, checking, and other accounts maintained with a person engaged in the business of banking. 11 Securities accounts include accounts with a person engaged in the business of buying, selling, holding or trading stock or other securities. 12 Other financial accounts include (1) accounts with a person that is in the business of accepting deposits as a financial agency; (2) insurance or annuity policies with a cash value; (3) accounts with a person that acts as a broker or dealer for futures or options transactions in any commodity on or subject to the rules of a commodity exchange or association; or (4) accounts with a mutual fund or similar pooled fund which issues shares available to the general public and that have a regular net asset value determination and regular redemptions. 13 Comments to the NPRM sought clarification as to whether mutual fund includes foreign hedge funds and private equity funds that have periodic redemptions.

3 Business Fraud Alert March 1, FinCEN reiterated that the definition of mutual fund includes a requirement that the shares be available to the general public. However, FinCEN reviewed and left unclear whether equity interests in foreign nonmutual company investment funds could be subject to FBAR reporting. Exceptions. The Final Rule excepts certain types of financial accounts from FBAR reporting: (1)Accounts of a department or agency of the United States, an Indian Tribe, or any State or any political subdivision of a State, or a wholly-owned entity, agency or instrumentality of any of the foregoing; (2)Accounts of international financial institutions of which the United States government is a member; (3)Accounts held at United States military banking facilities; and (4)Correspondent or nostro accounts that are maintained by banks and used solely for bank-to-bank settlements. 14 FinCEN declared that with respect to omnibus accounts in which a United States bank serving as a global custodian creates pooled cash and securities accounts in the non-u.s. market to hold the assets of multiple investors, the United States customer typically does not have any legal rights in the omnibus account and may only access their holdings through the global custodian bank. Without such legal right, the United States customer would not have to file an FBAR with respect to assets held in the omnibus account. However, if the custodial arrangement permits the United States person to directly access their foreign holdings, the United States person would have a foreign financial account for which reporting may be necessary. Financial Interest A financial interest in a foreign account includes the following: 15 Owner of record or holder of legal title. A United States person has a financial interest in each foreign account for which he or she is the owner of record or has legal title, whether the account is maintained for his or her own benefit or for the benefit of others. Other financial interest. A United States person has a financial interest in each foreign account for which the owner of record or holder of legal title is: (1)A person acting as an agent, nominee, attorney or in some other capacity on behalf of the United States person with respect to the account; (2)A corporation in which the United States person owns, directly or indirectly, more than 50% of the voting power or the total value of the shares; a partnership in which the United States person owns, directly or indirectly, more than 50% of the interest in profits or capital; or any other entity in which the United States person owns, directly or indirectly, more than 50% of the voting power, total value of the equity interest or assets, or interest in profits; (3)A trust, if the United States person is the trust grantor and has an ownership interest in the trust for United States Federal tax purposes; or

4 4 Business Fraud Alert March 1, 2011 (4)A trust in which the United States person either has a present beneficial interest in more than 50% of the assets or from which such person receives more than 50% of the current income. Signature or Other Authority FBAR reporting also applies to United States persons with signature or other authority over foreign financial accounts. 16 If multiple United States persons share such authority, all must comply with the reporting requirement. The Final Rule provides a revised definition of signature or other authority as: [T]he authority of an individual (alone or in conjunction with another) 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 test for such authority is whether the foreign financial institution will act upon a direct communication... regarding the disposition of assets in that account. This revised definition clarifies it is limited to those with direct authority over an account. This distinction is helpful because it means those who merely participate in the decision to allocate assets or have the ability to instruct or supervise others with signature authority need not file. Exceptions. The Final Rule provides five exceptions for United States persons with signature or other authority, but no financial interest, in the foreign financial accounts of the following types of employers: 17 (1)Officers and employees of a bank that is examined by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, or the National Credit Union Administration. (2)Officers and employees of financial institutions that are registered with and examined by the Securities and Exchange Commission ( SEC ) or Commodity Futures Trading Commission. (3)Officers and employees of an Authorized Service Provider ( ASP ) 18 with signature authority over a foreign financial account of an investment company that is registered with the SEC. (4)Officers and employees of entities with a class of equity securities listed (or American depository receipts listed) on any United States national securities exchange. This exception extends to officers and employees of a United States subsidiary of a United States entity with a class of equity securities listed on a United States national securities exchange, if the subsidiary is included in a consolidated FBAR report of the parent. (5)Officers and employees of entities that have a class of equity securities registered (or American depository receipts in respect of equity securities registered) under section 12(g) of the Securities Exchange Act (i.e., the entity has $10 million of assets and 500 or more shareholders of record).

5 Business Fraud Alert March 1, FinCEN Response to Industry Comments FinCEN reported 42 timely-received comments to the NPRM. In most cases, FinCEN declined to expand exceptions to FBAR reporting or provide any significant relief. FinCEN refused to eliminate outright the reporting responsibility for those with signature authority, or to eliminate it for employees with signature authority but without a financial interest in their employer s foreign accounts (except for the designated entities above). It also failed to address whether an employer is obligated to provide its employees with the information needed to properly file an FBAR. FinCEN refused to relax FBAR reporting for accounts located in countries with strong anti-money laundering regimes. FinCEN refused to exempt regulated financial institutions, pension plans, ERISA plans, and welfare benefit plans. In each case, FinCEN was not sympathetic to suggestions that the FBAR reporting regime results in duplicative or otherwise unnecessary filings. In fact, it considers duplication as an appropriate way to establish checks-and-balances for law enforcement purposes. In addition, FinCEN declined in most cases to expand the existing signature authority exceptions: FinCEN refused to expand the exception to (i) ASPs servicing clients that are not investment companies registered under the Investment Company Act of 1940; and (ii) ASPs servicing registered investment companies when the ASP itself is not registered with the SEC. It declined to permit the voluntary filing by a foreign parent to satisfy the filing obligations of the officers and employees of United States subsidiaries. Mutual insurance companies were not granted an exemption. However, the Final Rule provides some minor relief and several helpful clarifications for practitioners: Employees with signature authority need not personally maintain the records of their employer s foreign financial accounts. Although reporting is not limited to foreign financial accounts with an income stream, the Final Rule amends the definition of life insurance and annuities accounts to include only those with a cash value. The trust provisions now exclude beneficiaries of discretionary trusts, and there is no longer the trust protector provision that appeared in the NPRM. Modified reporting is now explicitly available to officers as well as employees overseas. In determining whether the $10,000 reporting trigger is reached, the Final Rule clarifies that an accountholder may rely on periodic account statements. FinCEN predicts that electronic filing of the FBAR will be available in the future.

6 6 Business Fraud Alert March 1, 2011 Conclusion The Final Rule becomes effective on March 28, 2011, and applies to foreign financial accounts maintained in 2010 and subsequent years. Individuals who elected to defer previous filings pursuant to IRS Notice are permitted to apply the Final Rules in preparing their reports, which are due June 30, Aside from some helpful clarifications, the Final Rule includes few substantive changes from the NPRM. FinCEN leaves intact most of the FBAR filing requirements and generally refuses to expand any of the exceptions that were previously available. Individuals who may be subject to FBAR reporting should familiarize themselves with the Final Rule and should consult legal counsel to ensure they fully understand their filing obligations. The editors would like to thank Joseph V. Moreno of the Business Fraud & Complex Litigation Group, and Daniel J. Mulcahy, senior counsel in Cadwalader s Tax Department, for their contributions to this Business Fraud Alert. Endnotes 1. Available at 2. Available on the FinCEN website at regs/frn/pdf/ pdf U.S.C. 5314(a) CFR (a). 5. Available on the IRS website at CFR (b) CFR (g)(3) CFR (g)(4) CFR (g)(5). 10. Draft Instructions to IRS Form TD-F , p CFR (c)(1) CFR (c)(2) CFR (c)(3) CFR (c)(4) CFR (e) CFR (f)(1) CFR (f)(2). 18. Authorized Service Provider means an entity that is registered with and examined by the SEC and that provides services to an investment company registered under the Investment Company Act of IRS Notice permitted deferral for individuals holding signature or other authority over, but no financial interest in, a foreign financial account I.R.B. 441 (February 26, 2010).

7 UPCOMING EVENTS The 25th Annual National Institute on White Collar Crime March 2 4, 2011 San Diego Marriott Hotel and Marina, San Diego, CA The 25th Institute will focus on the most significant fraud trials of the past year as well as a discussion of the ethical obligations of white collar lawyers. The Institute consistently draws senior representatives from the corporate sector as well as the Department of Justice, prosecutors and distinguished members of the federal judiciary. Partners Ray Banoun, Chair of the Institute, Jodi L. Avergun, Peter B. Clark and Stephanie J. Meltzer will be speaking at this event. For more information or to register for the program, please visit: Advanced Forum on Whistleblower Enforcement and Compliance March 29 30, 2011 Flatotel, New York, NY This forum will focus on the future of handling and managing whistleblower claims for leading in-house and outside counsel. With all eyes on recent whistleblower provisions, including Dodd-Frank, the stakes are high to reformulate and update corporate compliance programs in response to the proposed threat of a growth in whistleblower claims. This is an essential time for corporate compliance officers, secretaries and audit committee members to respond in the form of effective, innovative defense, compliance and whistleblower claims handling. Partner Bret A. Campell will be speaking at this event. For more information or to register for the program, please visit: Foreign Corrupt Practices Act April 12 13, 2011 The W Hotel, New York, NY This program will provide advanced and practical insights on the latest FCPA enforcement cases, global anti-corruption compliance strategies, and networking opportunities. Panelists include senior U.S. and foreign government officials. Charles Duross, head of FCPA enforcement initiatives at the U.S. Department of Justice in Washington, DC, will open the conference with a Year in Review panel. Partners Ray Banoun and Peter B. Clark will be speaking at this event. For more information or to register for the program, please visit: Fifth International Pharmaceutical Regulatory and Compliance Congress and Best Practices Forum May 3 5, 2011 Polat Renaissance Hotel, Istanbul, Turkey The Pharmaceutical Compliance Forum International Pharma Congress brings together senior global compliance and ethics professionals and legal counsel from the European Union, Central and Eastern Europe, and Middle East and Africa to share experiences and best practices to clarify compliance challenges and discuss potential responses to them. Partner Bret A. Campbell will be speaking at this event. For more information or to register for the program, please visit:

8 Business Fraud Alert is published periodically by the Business Fraud & Complex Litigation Group of Cadwalader, Wickersham & Taft LLP Cadwalader, Wickersham & Taft LLP. All rights reserved. Quotation with attribution is permitted. The newsletter provides general information and should not be used or taken as legal advice for specific situations, which depend on the evaluation of precise factual circumstances. The views expressed in these articles are those of the individual authors and do not necessarily represent the views of Cadwalader, Wickersham & Taft LLP or its clients. For further information on the articles contained in Business Fraud Alert, or matters related to Cadwalader, Wickersham & Taft LLP s practice, please contact a member of the Firm. EDITORS: Raymond Banoun (Editor-in-Chief); Stephanie J. Meltzer (Co-Managing Editor); Jodi L. Avergun (Co-Managing Editor) Business Fraud & Complex Litigation Group Partners Jodi L. Avergun jodi.avergun@cwt.com Peter B. Clark peter.clark@cwt.com Anthony M. Mansfield anthony.mansfield@cwt.com Raymond Banoun ray.banoun@cwt.com Bruce A. Hiler bruce.hiler@cwt.com Stephanie J. Meltzer stephanie.meltzer@cwt.com Bradley J. Bondi bradley.bondi@cwt.com Michael Horowitz michael.horowitz@cwt.com Gregory Mocek gregory.mocek@cwt.com Bret A. Campbell bret.campbell@cwt.com Gregory K. Lawrence greg.lawrence@cwt.com Dale C. Turza dale.turza@cwt.com Business Fraud & Complex Litigation Group Special Counsel Jeannine D Amico jeannine.damico@cwt.com Thomas A. Kuczajda tom.kuczajda@cwt.com Joseph V. Moreno joseph.moreno@cwt.com Thomas Stimson thomas.stimson@cwt.com office locations New York One World Financial Center, New York, NY Tel Fax London Dashwood House 69 Old Broad Street, London, EC2M 1QS Tel +44 (0) Fax Charlotte 227 West Trade Street, Charlotte, NC Tel Fax Washington 700 Sixth Street, N.W., Washington, DC Tel Fax Beijing 2301 China Central Place Tower 2 No. 79 Jianguo Road, Beijing , China Tel +86 (10) Fax +86 (10) FSC 100% Recycled Products with this 100% Recycled label support re-use of forest resources and in accordance with FSC standards only use post consumer recycled wood or fiber. Cadwalader, Wickersham & Taft LLP respects the privacy of our clients and friends. Your contact information is maintained in our marketing database and may be used to advise you of firm news, events and services, as well as for internal statistical analysis. We may forward contact details to appointed agencies that assist us in processing mailings but will not provide them to any other party for any other purpose, other than as required by law. If you wish to correct your information or would like to be removed from our marketing database, please contact Claudia Freeman, Director of Marketing, at claudia.freeman@cwt.com or at our New York address listed above.