How to Get into Trouble with the Financial Crimes Enforcement Network
You do not have to be a tycoon to have foreign bank accounts. You may even accidentally acquire some, as I did. When my mother in Germany passed away, I suddenly became the owner of several. As a trusts and estates attorney, I know that I have to report it to FinCEN (Financial Crimes Enforcement Network), but did you? Obviously, many expatriates have foreign bank accounts because without them they would not be able to function. There are many other reasons, some of them good, others nefarious. The latter are the reason that FBAR (Foreign Bank Account Reporting) was established in the first place: Money laundering is a dirty business.
The Supreme Court gets Involved
Sometimes, people have so many accounts that they seem to lose track of them, even forgetting them wholesale. This seems to have happened to one Alexandru Bittner, a naturalized US citizen from Romania. He didn’t report a single one of his Romanian accounts. “I didn’t know I had to.” Apparently, none of his counselors did either. Even if your failure to report was not willful, you must pay a penalty of up to $10,000. This is supposed to encourage reporting; no more wiggling out. Extra penalties are for those who evade reporting purposefully. Now the big question is, should this penalty be assessed only once for each reporting period, or per each bank account per reporting period? The law is not clear and the Supreme Court is currently hearing the case. For Bittner the difference is between a fine of $50,000 (for five years of delinquent reporting) or $2.72 million (for the 272 omissions from those five reports).
The Curious Dictionary Law Defense
Bittner relies, inter alia, on the interpretation of singular and plural words, as defined in the Dictionary Law. This says, “In determining the meaning of any Act of Congress, unless the context indicates otherwise—words importing the singular include and apply to several persons, parties, or things; words importing the plural include the singular…”. The upshot is that the defendants want to see a single fine applied to all instances of forgotten bank accounts per reporting period.
Indeed, this case goes beyond the straightforward application of the Dictionary Law; otherwise, the Supreme Court would not be hearing it.
What’s the relevance of foreign bank account reporting to estate planning?
Why do estate planners care about this? The Amicus Brief from ACTEC (American College of Trust and Estate Counsel) spells it out: Persons who are required to report foreign bank accounts are those “… who hold direct interests in foreign accounts, indirect interests in such accounts through trusts of which they are grantors or beneficiaries, and signature authority over such accounts as holders of powers of attorney, trustees or executors… Multiple persons may have reporting obligations for the same account, and the non-willful failure to satisfy these obligations can result in multiple penalties being imposed with respect to those accounts.”
ACTEC acknowledges that this issue is not before SCOTUS but cautions that increasing the number of penalties would make the situation much worse for the trust context.
The issue for the Supreme Court: Fine once or fine often.
Now, what exactly is the issue? The issue is one of culpability. Let’s assume that you have 10 foreign bank accounts, and you do an annual FBAR report but forget to report one of the accounts. Have you substantially fulfilled your reporting requirements for the year? Now, let’s add first, one, or two or three other ‘forgotten’ bank accounts. How about now? Are you still in compliance? What if 9 accounts are rather small and the balance of the forgotten account is very large, dwarfing the balance in the other accounts?
I think this thought experiment makes it clear that for practical reasons, and for reasons of tracing money laundering, every single account is important.
I previously predicted that SCOTUS would decide that fines are to be levied for every unreported account per year. Anything else would run counter to the spirit and purpose of the law and would introduce an impractical element of discretion in setting the fines.
But what did they actually decide?
In a split decision (5 to 4), SCOTUS decided, based on a textual interpretation, that there is only one fine per reporting period. The dissenters (fines for all forgotten bank accounts) use similar arguments to the ones I mentioned above. Read it all here Supreme Court holds FBAR penalty is imposed per report, not per account.
