Foreign Bank Account Holders in Russia: Legal Duties and Reporting

May 31, 2023

BRACE Law Firm ©

Evolving currency regulation legislation, along with sanctions imposed against Russia, significantly impact not only the ability to transfer funds but also the duties of owners of accounts and deposits in foreign banks under Russian law.

All interactions with a bank occur based on a bank account or deposit agreement. In accordance with Russian civil law, under a bank account agreement, a bank undertakes to accept and credit funds arriving at an account opened for a client (account holder), to follow the client's instructions regarding the transfer and withdrawal of corresponding amounts from the account, and to conduct other transactions on the account. [1] Under a bank deposit (deposit) agreement, one party (the bank), having accepted a sum of money (the deposit) from the other party (the depositor) or received for the depositor, undertakes to return the deposit amount and pay interest on it under the terms and in the manner provided for by the agreement. Unless otherwise provided by law, at the request of a citizen-depositor, the bank must transfer funds to the account specified by the depositor instead of issuing the deposit and interest in cash. [2]

Foreign banks are defined as banks located outside the territory of the Russian Federation and established in accordance with the laws of foreign states.

Prohibition on Opening and the Ability to Hold Accounts in Foreign Banks

As a general rule, Federal Law No. 173-FZ dated December 10, 2003, On Currency Regulation and Currency Control (the "Law on Currency Regulation") or (the "Law No. 173-FZ") allows residents to open accounts (deposits) without restrictions in banks and other financial market organizations located outside the Russian Federation. These organizations must be authorized by their governing law to provide services related to attracting and placing funds or other financial assets from residents for storage, management, investment, and (or) other transactions in the interest of the resident, or directly or indirectly at the resident's expense. Residents may also perform fund transfers without opening a bank account using electronic means of payment provided by foreign payment service providers.[3] However, holding an open account or deposit in a foreign bank imposes a range of duties, prohibitions, and restrictions that must be observed to avoid unforeseen liability.

Federal Law No. 79-FZ dated May 7, 2013, On the Prohibition for Certain Categories of Persons to Open and Have Accounts (Deposits), to Store Cash and Valuables in Foreign Banks Located Outside the Territory of the Russian Federation, and to Own and (or) Use Foreign Financial Instruments (the "Law No. 79-FZ") established prohibitions for specific categories of citizens.

Based on Article 2 of the Law No. 79-FZ, the following persons are prohibited from opening and holding accounts (deposits), storing cash and valuables in foreign banks located outside the Russian Federation, and owning and (or) using foreign financial instruments:

1. Persons holding (occupying):

• State positions of the Russian Federation;
• Positions of the first deputy and deputy Attorneys General of the Russian Federation;
• Positions of members of the Board of Directors of the Central Bank of the Russian Federation;
• State positions of the constituent entities of the Russian Federation;
• Federal civil service positions, the appointment to and removal from which are carried out by the President of the Russian Federation, the Government of the Russian Federation, or the Attorney General of the Russian Federation;
• Positions of deputy heads of federal executive authorities;
• Positions in state corporations (companies), funds, and other organizations established by the Russian Federation based on federal laws, the appointment to and removal from which are carried out by the President of the Russian Federation or the Government of the Russian Federation;
• Positions of heads of urban districts, heads of municipal districts, heads of other municipal entities performing the powers of heads of local administrations, and heads of local administrations;
• Federal civil service positions, civil service positions of the constituent entities of the Russian Federation, positions in the Central Bank of the Russian Federation, state corporations (companies), funds, and other organizations established by the Russian Federation based on federal laws, and specific positions based on labor contracts in organizations created to perform tasks assigned to federal state bodies, where the exercise of powers involves participation in the preparation of decisions affecting the sovereignty and national security of the Russian Federation, and which are included in lists established by the relevant regulatory legal acts.

2. Deputies of representative bodies of municipal districts, municipal districts, and urban districts exercising their powers on a permanent basis, and deputies holding positions in representative bodies of municipal districts, municipal districts, and urban districts.
3. Spouses and minor children of the persons specified in points 1 and 2.
4. Other persons in cases provided for by federal laws:

• Federal Constitutional Law No. 4-FKZ dated November 6, 2020, On the Government of the Russian Federation;
• Federal Law No. 79-FZ dated July 27, 2004, On the State Civil Service of the Russian Federation;
• Federal Law No. 342-FZ dated November 30, 2011, On Service in the Internal Affairs Bodies of the Russian Federation and Amending Certain Legislative Acts of the Russian Federation;
• Law of the Russian Federation No. 3132-1 dated June 26, 1992, On the Status of Judges in the Russian Federation, etc.

However, the prohibition on opening and holding accounts (deposits) in foreign banks located outside the Russian Federation does not apply to persons holding state positions of the Russian Federation or federal civil service positions in official representations of Russia located outside the territory of the Russian Federation, official representations of federal executive authorities, or positions in representations of state corporations (companies) and organizations created to ensure the activities of federal state bodies, nor does it apply to the spouses and minor children of these persons.

Notifying Tax Authorities of Account Opening

The Law on Currency Regulation provides that residents must notify tax authorities at the place of their registration of the opening (closing) of accounts (deposits) and changes in account (deposit) details in banks and other financial market organizations located outside the Russian Federation. This notification must occur no later than one month from the date of opening (closing) or change of details, using the form[4] approved by the Federal Tax Service (FTS). In the event of late notification, tax authorities impose administrative liability.[5]

The tax authority at the place of a resident's registration is:

• For a resident legal entity — the tax authority at its location or the tax authority where it is registered as a largest taxpayer;
• For a resident individual — the tax authority at their place of residence (or place of stay if the resident has no place of residence in the RF) or the tax authority where they are registered as a largest taxpayer. If a resident individual has no place of residence (place of stay) in the RF, the notification is submitted to the tax authority at the location of their real estate (or one of several real estate objects at the resident's choice).

If a resident individual has no place of residence (place of stay) or real estate in the RF, notifications of opening (closing) and changes in account (deposit) details in foreign banks and financial organizations are submitted to any tax authority of their choice.[6]

Notifications may be submitted to the territorial tax authority in person or through a representative, sent by registered mail, transmitted electronically via telecommunications channels, or through the taxpayer's personal account. A notification must be submitted for each individual account.

If notifications are transmitted electronically via telecommunications channels, they must be signed with an Enhanced Qualified Electronic Signature (UK(E)P) of the person submitting them or their representative. If transmitted via an individual taxpayer's personal account, they must be signed with the individual's enhanced unqualified electronic signature.

For mobilized persons, [7] the deadline for submitting notifications of opening (closing) and changes in account (deposit) details in foreign banks and financial organizations is extended until the last day of the third month following the month the partial mobilization period ends or the mobilized person is discharged from military service under the grounds established by the Presidential Decree. [8]

Duties of Owners of Deposits and Accounts in Foreign Banks

The primary duty of owners of accounts and deposits in foreign banks is to notify the authorities of the opening of such accounts and deposits. Additionally, residents must submit to the tax authorities at the place of their registration reports on the movement of funds and other financial assets on accounts (deposits) in foreign banks and financial organizations, as well as reports on fund transfers without opening a bank account using electronic means of payment provided by foreign payment service providers. These reports must be accompanied by supporting documents and submitted in the manner established by the Government of the Russian Federation in consultation with the Central Bank of the Russian Federation.[9] Failure to comply with legal requirements regarding reporting leads to adverse consequences; for example, the late submission of a report resulted in a company being held liable under Part 6.3 of Article 15.25 of the CAO RF.[10]

Non-credit financial organizations must submit these reports and supporting documents to the Bank of Russia simultaneously with their submission to the tax authorities. [11]

Reports and supporting documents must be submitted in electronic form in accordance with the procedure for interaction between the Bank of Russia and non-credit financial organizations. [12]

Resident individuals who did not notify tax authorities of the opening (closing) or change of details of their foreign accounts, or did not submit movement of funds reports, and whose total stay outside the Russian Federation in the past calendar year was 183 days or less, are required to:

• Notify tax authorities of the opening (closing) or change of details of their foreign accounts using the FTS-approved form by June 1 of the calendar year following the expired year;
• Submit reports on the movement of funds and financial assets on foreign accounts and on transfers via foreign electronic payment means.

Additionally, upon closing foreign bank accounts, residents must notify the tax authorities at their place of registration no later than one month from the date of closure.

However, since 2020, citizens are exempt from submitting reports if the foreign bank is located in an EAEU member state or a foreign state (territory) that participates in the automatic exchange of financial information, [13] provided that:

• The total amount of funds credited to (withdrawn from) the account during the reporting year does not exceed 600,000 rubles or the equivalent in foreign currency;
• Or the account balance at the end of the reporting year does not exceed 600,000 rubles or the equivalent in foreign currency, if no funds were credited to the account during the reporting year.

In all cases, crediting funds to and withdrawing funds from resident accounts (deposits) opened in foreign financial organizations authorized to attract and place resident funds or assets for storage, management, investment, or other transactions shall be carried out without restrictions. [14]

Voluntary Notification of Account Opening

Federal Law No. 140-FZ dated June 8, 2015, On the Voluntary Declaration by Individuals of Assets and Accounts (Deposits) in Banks and on Amending Certain Legislative Acts of the Russian Federation (the "Law No. 140-FZ") was adopted to provide legal guarantees for the safety of capital and property of individuals, protect their property interests (including outside the RF), and reduce risks associated with possible restrictions on the use of Russian capital in foreign states.

Under the Law No. 140-FZ, an individual may submit a declaration containing information about foreign bank accounts (deposits) that they are required to notify the tax authorities about under the Law on Currency Regulation. The deadlines and stages for submitting the declaration are defined in Article 5 of the Law No. 140-FZ:

• From July 1, 2015, to June 30, 2016 (first declaration stage);
• From March 1, 2018, to February 28, 2019 (second declaration stage);
• From June 1, 2019, to February 29, 2020 (third declaration stage);
• From March 14, 2022, to February 28, 2023 (fourth declaration stage).

The declaration form and filing instructions are established in Annexes 1 and 2 to the Law No. 140-FZ. Each declarant may submit a declaration only once during each stage. Unless otherwise provided by law, the repeated submission of a declaration or the submission of an amended declaration during each stage is not permitted.

A person is exempt from administrative liability if they submitted a special declaration under the Law No. 140-FZ during the corresponding stage.[15]

Special Economic Measures in Connection with Unfriendly Actions of Foreign States

In response to the unfriendly actions of the USA and associated foreign states and international organizations — which contradict international law and involve restrictive measures against Russian citizens and legal entities — the President adopted several regulatory acts to protect the national interests of the Russian Federation. Specifically, starting March 1, 2022, residents are prohibited from crediting foreign currency to their foreign accounts (deposits) and from transferring funds without opening a bank account using foreign electronic payment means. [16]

These provisions of the Presidential Decree apply if the crediting of foreign currency or fund transfers involve residents transferring funds received as dividends from shares in Russian joint-stock companies or profit distributions from Russian limited liability companies, business partnerships, or production cooperatives. [17]

When a resident transfers foreign currency from their accounts in an authorized bank to foreign bank accounts, the authorized bank must verify, based on information provided by the resident, whether the funds represent dividends from Russian joint-stock companies. The resident may provide this information in any form. If the funds are dividends from Russian joint-stock companies, the authorized bank must refuse the transaction. Furthermore, the ban on crediting dividends from Russian joint-stock companies applies regardless of the transfer method. [18]

By decision of the subcommittee of the Government Commission on Monitoring Foreign Investment in the RF, resident individuals are permitted to credit funds from dividends of Russian joint-stock companies or profit distributions from Russian LLCs, partnerships, or cooperatives to foreign accounts opened in banks that are subsidiaries of authorized banks, within the overall limits established by the Bank of Russia. [19]

Liability for Failure to Provide Information

According to Clause 7 of Article 12 of the Law on Currency Regulation, residents with foreign accounts (deposits) must submit a movement of funds and financial assets report with supporting documents for each account. Exceptions apply to resident individuals of diplomatic missions, consular offices, permanent missions to international organizations, and other official representations of the RF located abroad.

The submission by a resident to the tax authority of a notification of opening (closing) or change of account details in a foreign bank or financial organization in violation of the deadline and (or) in an improper form carries an administrative fine:

• For citizens: 1,000 to 1,500 rubles;
• For officials: 5,000 to 10,000 rubles;
• For legal entities: 50,000 to 100,000 rubles.[20]

Court cases regarding administrative liability include:

• Resolution of the Arbitration Court of the West Siberian District dated October 3, 2022, No. F04-4640/2022 in Case No. A45-810/2022 regarding vacating liability under Part 2 of Article 15.25 of the CAO RF. The request was denied because the offense was confirmed and the statute of limitations was observed; however, because the company was a micro-enterprise and the offense was a first-time occurrence, the fine was replaced with a warning.
• Resolution of the Arbitration Court of the Moscow District dated November 24, 2021, No. F05-28546/2021 in Case No. A40-60199/2021 regarding vacating liability under Part 2.1 of Article 15.25 of the CAO RF. The request was granted because the court found no evidence of the alleged administrative offense (failure to notify of a foreign brokerage account).

The failure of a resident to submit a notification to the tax authority regarding the opening (closing) or change of account (deposit) details in a foreign bank or financial organization carries an administrative fine: [21]

• For citizens: 4,000 to 5,000 rubles;
• For officials: 40,000 to 50,000 rubles;
• For legal entities: 800,000 to 1,000,000 rubles.

An example of a successful challenge is Resolution of the Ninth Arbitration Appellate Court dated August 24, 2021, No. 09AP-46746/2021 in Case No. A40-60199/2021, where the tax authority failed to prove the elements of the offense, and the request was granted.

The failure of a resident to submit a report on fund transfers without opening a bank account using foreign electronic payment means, when such reporting is mandatory, carries an administrative fine for citizens, officials, and legal entities in the amount of 20% to 40% of the funds credited to the electronic means of payment during the reporting period: Resolution of the Fourth Court of Cassation of General Jurisdiction dated September 2, 2022, No. 16-6044/2022 regarding vacating liability under Part 1 of Article 15.25 of the CAO RF. The request was denied because the offense was confirmed by inspection reports, protocols, and financial documents [22].

Holding accounts and deposits in foreign banks imposes additional duties on owners to notify the FTS of opening/closing such accounts and to submit movement of funds reports. Given the economic measures imposed against Russia, legislation is changing rapidly. Consequently, foreign account holders must monitor currency legislation to minimize the risk of liability for violations.

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References

1. Clause 1 of Article 845 of the Civil Code of the Russian Federation.
2. Clause 1 of Article 834 of the Civil Code of the Russian Federation.
3. Clause 1 of Article 12 of the Law No. 173-FZ.
4. Order of the FTS of Russia dated April 24, 2020, No. ED-7-14/272@.
5. Decision of the Arbitration Court of the Krasnoyarsk Territory dated April 7, 2021, in Case No. A33-36712/2020.
6. Order of the FTS of Russia dated April 12, 2018, No. MMV-7-14/214@.
7. Sub-clause "g" of Part 1 of the Resolution of the Government of the Russian Federation dated October 20, 2022, No. 1874, On Support Measures for Mobilized Persons.
8. Decree of the President of the Russian Federation dated September 21, 2022, No. 647, On Declaring Partial Mobilization in the Russian Federation.
9. Resolution of the Government of the Russian Federation dated December 28, 2005, No. 819.
10. Resolution of the Arbitration Court of the Volga District dated January 26, 2022, No. F06-12943/2021 in Case No. A12-11197/2021.
11. Clause 1 of the Directive of the Bank of Russia dated September 2, 2021, No. 5911-U.
12. Directive of the Bank of Russia dated October 5, 2021, No. 5969-U.
13. Order of the FTS of Russia dated October 28, 2022, No. ED-7-17/986@, On the Approval of the List of States (Territories) Participating in the Automatic Exchange of Financial Information.
14. Directive of the Bank of Russia dated December 24, 2019, No. 5371-U.
15. Resolution of the Moscow City Court dated August 5, 2019, No. 4a-3244/2019.
16. Clause 3 of the Decree of the President of the Russian Federation dated February 28, 2022, No. 79.
17. Decree of the President of the Russian Federation dated July 5, 2022, No. 430, On the Repatriation by Residents — Participants of Foreign Trade of Foreign Currency and the Currency of the Russian Federation.
18. Letter of the Bank of Russia dated August 9, 2022, No. 03-12-4/7594.
19. Extract from Protocol No. 78/1 of the meeting of the subcommittee of the Government Commission on Monitoring Foreign Investment in the Russian Federation dated August 10, 2022.
20. Clause 2 of Article 15.25 of the CAO RF.
21. Clause 2.1 of Article 15.25 of the CAO RF.
22. Clause 1.1 of Article 15.25 of the CAO RF.