Among the several reporting forms that are issued by the US Financial Crimes Enforcement Network under the Bank Secrecy Act, two undoubtedly rank among the highest of them all in levels of noncompliance.
One is the CMIR: Report of International Transportation of Currency or Monetary Instruments, FinCEN Form 105, which is filed by persons leaving the United States with more than $10,000 in currency or unrestricted monetary instruments. Although the form must also be filed when persons enter the US with the same amounts, compliance with the outgoing obligation far exceeds that related to the filings when persons enter the US.
The second form that wins the prize for reaching the highest level of noncompliance is the Report of Foreign Bank and Financial Accounts, or FBAR.
This form must be filed by US persons who had a foreign financial account that exceeded $10,000 at any time in the calendar year. Failure to file it may lead to prosecution and fines up to $250,000 or prison of up to five years.
Increased penalties brought increased compliance
In 2004, Congress authorized a new $10,000 civil penalty for non-willful violations of the FBAR reporting duty and increased the penalty for willful violations to the greater of $100,000 or 50 percent of the amount of the FBAR-related transaction or foreign account balance at the time of the violation.
Reports of an IRS crackdown on offshore tax evasion, highlighted by the prosecution of the giant Swiss bank, UBS, were probably the cause of a further improvement in FBAR compliance.
By 2007, annual filings had increased to 349,717, a jump of nearly twice the total of 2001. By 2011, the number of FBARs filed had doubled again to 740,172.
The 2010 enactment of the Foreign Account Tax Compliance Act has undoubtedly been the greatest stimulant to the filing of the FBAR. This law, known as FATCA, seeks to construct a worldwide dragnet that will provide the US Internal Revenue Service with identifying information on all accounts held by US persons in other countries.
No one can identify with certainty the greatest stimulant in the sharp increase in FBARs filed, but the combined effect of the US prosecution of UBS and the enactment of FATCA is a weighty factor.
According to FinCEN, the number of FBARs filed over the past 10 years would follow a 45° angle if they were laid out in a chart. Here is what the annual filing data from FinCEN shows:
|Year||Number of FBARs Filed||Percentage Increase|
In 2008, the last year before the UBS prosecution, 349,717 FBAR forms were filed. In 2011, the year following passage of FATCA and the full resolution of the UBS case, including the bank’s disclosure to the IRS of 4,450 US taxpayers with hidden bank accounts, combined to produce 740,172 FBARs, a 112% increase in three years.
“I think the most significant jump had to do with the UBS case, followed by FATCA and the HSBC case,” Michael McDonald, a money laundering and financial crime expert who served as an IRS Criminal Investigation special agent before retirement, told ACFCS.
A ‘perfect storm’ approach to root out offshore tax evasion
The landmark 2009 US criminal case against UBS exposed a long-standing operation by the bank to lure 52,000 United States clients to help them evade US.
“Once people saw UBS turning over thousands of accounts to the IRS, they got worried,” McDonald said. “That’s when people like me, on the investigative side of things, started hearing from people that they were concerned about FBAR compliance.”
“These cases, including HSBC, led to FATCA,” McDonald said.
“You can’t say one without the other,” Don Semesky told ACFCS. He is principal at Financial Operations Consultants, in Baltimore, and was architect and first director of the US Drug Enforcement Administration’s Office of Financial Operations.
“The situation was a perfect storm. There’s the initial splash of the big bank cases, followed by FATCA, which for the first time makes foreign banks turn over customer information.”
“What FATCA does that a case like UBS does not do is cause coverage,” Semesky continued. “You’re not rooting out tax evasion on a case-by-case basis. With FATCA, you’re taking it over the whole world.”
Compliance by account-closure?
The reason for the decrease in number of FBARs filed in 2012 compared to 2011 is unknown. It could be that US taxpayers grew increasingly aware of the greater scrutiny of foreign accounts and that some chose to close their foreign financial accounts.
“I know people who decided not to file an FBAR because the chances of getting caught are not great and revealing an account carries risks,” said McDonald. “Instead they say, ‘I’m just going to close my account and not alert the IRS.’”