US Reporting of Accounts in Digital / Challenger Banks (FBARs)




It's #taxseason and for the first time, there is a question on #crypto #cryptocurrency

But we do not get as many questions on #bitcoin as we do on #challengerbanks.  The definition of challenger banks is wide but I'm including service providers like #transferwise #revolut #YouTrip #InstaReM #Monzo #PayPal #TIAA etc

The questions often posed is whether “accounts” with these entities should be reported on FBARs / Form 8938 – Read more on FBARs here - http://www.mooresrowland.tax/2014/11/fbars-and-form-8938.html

To answer this question we need to look at FinCen - Financial Crimes Enforcement Network



What is FinCEN?

FinCEN is a part of the U.S. Department of the Treasury, and reports to the Office of Terrorism and Financial Intelligence.  Their mission is to safeguard the financial system from illicit use and combat money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities.

FinCEN carries out this mission by receiving and maintaining valuable information provided by financial institutions and others; analyzing and disseminating this financial intelligence to law enforcement and other stakeholders; and sharing financial intelligence with counterpart organizations in other countries.

So, where does FinCEN get its data? A key aspect of FinCEN’s mission is to issue and administer regulations pursuant to this country’s anti-money laundering and counter financing of terrorism laws. These laws require a broad range of U.S. financial institutions and others to assist U.S. government agencies in the detection and prevention of money laundering. Financial institutions do this by maintaining records and filing reports with FinCEN on suspicious or large cash transactions. And the term “financial institution” is quite broad. It includes:

  • ·        Traditional depository institutions like banks and credit unions;
  • ·        Money services businesses, such as Western Union, Money Gram, and PayPal;
  • ·        Casinos and some card clubs;
  • ·        Insurance companies;
  • ·        Securities and futures brokers;
  • ·        Mutual funds;
  • ·        Operators of credit card systems;
  • ·        Dealers in precious metals, stones, or jewels;
  • ·        Certain individuals and trades or businesses, transporting or accepting large amounts of cash.



Collecting Financial Intelligence

There are three primary reports that FinCEN collects.

The first is the Currency Transaction Report, known as the CTR. CTRs must be filed on all cash transactions exceeding $10,000.

The second report is called the Suspicious Activity Report (SAR). SARs are reports of suspicious transactions. While the dollar thresholds differ slightly by industry, generally speaking, if a financial institution “knows, suspects, or has reason to suspect” that any transaction or attempted transaction is suspicious, and it meets the applicable dollar threshold level, a SAR is required.  Millions of SARs are filed annually.

The last report is the Report of International Transportation of Currency or Monetary Instruments, known more commonly as the CMIR. A CMIR must be filed by any individual or business that takes any part in physically transporting or shipping/receiving more than $10,000 in either currency or bearer negotiable instruments into or out of the United States.




Analyzing and Using the Financial Intelligence

FinCEN makes the raw financial reporting it collects directly available to more than 10,000 federal, state, and local law enforcement and regulatory users.  This is done through a computer program that called “FinCEN Query,” which allows users to easily access, query, and analyze years of financial intelligence; apply filters to narrow search results; and utilize enhanced data capabilities.




FBARs

But let’s return to FBARs or FinCen 114.  Are these accounts reportable on the FBARs?

A United States person, including a citizen, resident, corporation, partnership, limited liability company, trust and estate, must file an FBAR to report:
  • ·        a financial interest in or signature or other authority over at least one financial account located outside the United States if
  • ·        the aggregate value of those foreign financial accounts exceeded $10,000 at any time during the calendar year reported.


Generally, an account at a financial institution located outside the United States is a foreign financial account. Whether the account produced taxable income has no effect on whether the account is a “foreign financial account” for FBAR purposes.

But, you don’t need to report foreign financial accounts that are:
  • ·        Correspondent/Nostro accounts,
  • ·        Owned by a governmental entity,
  • ·        Owned by an international financial institution,
  • ·        Maintained on a United States military banking facility, 
  • ·        Held in an individual retirement account (IRA) you own or are beneficiary of,
  • ·        Held in a retirement plan of which you’re a participant or beneficiary, or
  • ·        Part of a trust of which you’re a beneficiary, if a U.S. person (trust, trustee of the trust or agent of the trust) files an FBAR reporting these accounts.


The key point above is the Nostro account exception.   A nostro account refers to an account that a financial institution holds in a foreign currency in another bank.  Nostros, a term derived from the Latin word for "ours," are frequently used to facilitate foreign exchange and trade transactions. A Nostro account is a reference used by Bank A to refer to "our" account held by Bank B. Nostro, is a shorthand way of talking about "our money that is on deposit at your bank."

Nostro accounts differ from standard demand deposit bank accounts in that they are usually held by financial institutions, and they are denominated in foreign currencies

Some argue that these digital services do not actually hold accounts on their own but do so in or using US banks (especially if you register with a US address).  You would need to clarify with the institution if this applies to your service and if it does, then separate FBAR / Form 8938 reporting may not be required.

At the end of the day, there’s no penalty for reporting something that you didn’t need to report, so when in doubt, you should report the account.

The only true exception to this reporting requirement is gold or silver that is privately vaulted overseas. However, if your precious metal assets are stored in an overseas bank vault, then you will still need to report the account on your FBAR.


As always, this article and nothing on this website is to be considered advice.  Talk to your own tax team at all times. 

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