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

The questions often posed is whether “accounts” with these
entities should be reported on FBARs / Form 8938 – Read more on FBARs here – https://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.


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
  • ·       
    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
  • ·       
    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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