The FBAR or FinCEN 114
With the increase in global reach of brokerage firms today, it is more and more likely that a FINRA registered broker-dealer may open an account with a foreign financial institution. These accounts can take the form of a bank account, brokerage account, mutual fund, trust, an insurance policy with cash value or another foreign financial account. And while the requirement applies to individuals as well as businesses, the focus of this discussion will be on broker-dealers. This requirement is primarily to alert the IRS to the fact that such an account exists, and largely relates to abuses relating to hiding income or assets.
Broker-dealers operating in the United States are subject to a complex set of regulations related to the Bank Secrecy Act (“BSA”), Office of Foreign Assets Control (“OFAC”), and others that generally fall under the category of Anti-Money Laundering (“AML”) compliance programs. As such, each broker-dealer is required to designate an AML Compliance Officer and to have AML compliance procedures which are approved in writing by a senior member of management of the broker-dealer. FINRA Rule 3310 outlines the requirements related to AML compliance. It requires, among other things, that each broker-dealer conduct an independent test of its AML compliance program.
Each FINRA broker-dealer must develop procedures to ensure compliance with the BSA. It is here that we find the requirement for broker-dealers to make reports of foreign financial accounts. Specifically, 31 C. F. R Section 1010.350 requires each US person (which includes broker-dealers) having a “financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country” to report that fact, along with other information, to the IRS. There are special provisions for those who have an interest in 25 or more accounts but we won’t discuss that here.
Must a Broker-Dealer File?
A broker-dealer must file an FBAR if it had a financial interest in or signature authority over at least one financial account located outside the US and the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year.
When is Filing Required?
When the requirements above are triggered in any calendar year, the Report of Foreign Bank and Financial Accounts (“FBAR”) must be filed no later than June 30 of the year following the calendar year being reported. For example, if an account is opened and meets the aggregate value requirements in October of 2014, the filing must be made by June 30, 2015. The actual FBAR report must now be filed through the FinCEN BSA E-Filing System. The report, which is now called FinCEN Report 114, has replaced form TD F 90-22.1.
What are the Penalties for Late or Non-Filing?
If you are required to file the FBAR and do not properly file it, or fail to file it, you may be subject to a civil penalty of up to $10,000 per instance, assuming the violations are non-willful and not due to reasonable cause. However, if the violation is found to be willful, the penalty could be the greater of $100,000 or half the balance in the account at the time of the violation – for each instance. So clearly, this requirement is one that broker-dealers should ensure that their procedures address and that they cover in their training programs.
Compliance with the BSA/AML requirements is complex and is not to be taken lightly. Mitch Atkins, FINRA’s former South Region Director, has extensive experience in AML compliance and AML independent testing. Contact FirstMark Regulatory Solutions at 561-948-6511 and speak with its principal, Mitch Atkins, for more information.