FBARs on OFAC Controlled Banks - A Trap (for the Unwary or Otherwise)

International and Tax Alert

Title 31 and the regulations thereunder require that a U.S. person with a financial interest in, signature authority over, or other authority over a financial account located in a foreign country the aggregate value of which exceeds $10,000 at any time during the calendar year has a Foreign Bank and Financial Account reporting requirement to file a so-called “FBAR.” See 31 C.F.R. § 103.24; TD Form 90-22.1 (and instructions thereto). Financial accounts are broadly defined and the rule includes U.S. corporations and various of their subsidiaries. As a general matter, officers or employees of certain corporations (and certain of their subsidiaries) which meet specified public listing or size requirements need not report that they have signature authority over a foreign financial account of the subsidiary if they have no personal financial interest in the account and has been advised in writing by the chief financial officer of the parent corporation that a current report has been filed by the corporation which includes that account; however, officers or employees from smaller and mid-sized corporations, as well as various foreign entities, are not excepted from the FBAR requirement.

The FBAR requirement is separate from the tax reporting requirements routinely faced by individuals and entities, is not a Federal tax form, is governed by Title 31 not Title 26 (the tax rules) of the United States Code, and is not subject to the stringent rules that limit the sharing of the information therein by the IRS with other governmental agencies. Reflecting its purpose as an anti-money laundering tool, the penalties for willful failure to file an FBAR also are extremely high, and can reach 50 percent of the amount in the account per violation. 31 U.S.C. § 5321(a)(5). Furthermore, while the application is not precisely clear, the IRS appears to take the position that this penalty would apply for each year an FBAR was not filed - resulting in a penalty larger than the account balance itself if FBARs were willfully not filed in more than two years. Although the IRS has constructed internal penalty guidelines to temper this result (for cooperative taxpayers who reported in the income earned from the account who have no history of past FBAR violations and no illegal source money in the account, the penalty is generally limited to a smaller percentage of the amount in the account and is capped at $100,000), those internal guidelines are obviously limited and are subject to change.

U.S. persons with accounts governed by the Office of Foreign Assets Control (OFAC), such as those with Iranian bank accounts, face an added problem in filing an FBAR, namely, that while the act is required to prevent a Bank Secrecy Act violation it may implicate them in an Iranian Transaction Regulations violation. Specifically, without an OFAC license a U.S. person (even if that person is also an Iranian citizen), cannot deal with parties designed by OFAC in Iran. While there are many designated parties, six of the largest government-owned banks1 are included in that list. Even having an account in one of those institutions can violate the ITR.

Accordingly, by complying with the FBAR filing requirements and declaring the ownership of a foreign bank account, a U.S. person with an Iranian or other OFAC controlled bank account directly discloses to the U.S. Government that they are committing a crime. While it is possible that the Fifth Amendment act of production doctrine would protect a filer who - knowing this trap - avoided it by failing to file the FBAR (see generally Marchetti v. United States, 390 U.S. 39 (1968)) - this is far from the ideal scenario. A more proactive and constructive resolution would be to come forward to both OFAC and the IRS under their respective voluntary disclosure programs and set the matter straight under both sets of provisions.

1 Bank Saderat, Bank Sepah, Bank Mellat, Bank Melli, Future Bank B.S.C., Export Development Bank of Iran.

For more information, please contact any of the following lawyers:

Larry Christensen, lchristensen@milchev.com, 202-626-1469

Related Files
Related Links

The information contained in this newsletter is not intended as legal advice or as an opinion on specific facts. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. For more information about these issues, please contact the author(s) of this newsletter or your existing Miller & Chevalier lawyer contact. The invitation to contact the firm and its lawyers is not to be construed as a solicitation for legal work. Any new lawyer-client relationship will be confirmed in writing.

This newsletter is protected by copyright laws and treaties. You may make a single copy for personal use. You may make copies for others, but not for commercial purposes. If you give a copy to anyone else, it must be in its original, unmodified form, and must include all attributions of authorship, copyright notices and republication notices. Except as described above, it is unlawful to copy, republish, redistribute, and/or alter this newsletter without prior written consent of the copyright holder.