In 2014 Russian lawmakers amended RF Law No. 173-FZ1  (the ˈCCLˈ) by adoption of RF Law No. 218-FZ2  (ˈLaw 218-FZˈ).  Amongst other changes, Law 218-FZ removed the exemption from reporting for Russian resident individuals3  (‘RRIs’) regarding their foreign bank accounts, including deposits (‘Foreign Accounts’).

This has serious implications for RRIs with Foreign Accounts, regarding reporting and potential liability for failure to do so. The new reporting obligation will in turn make RRIs subject to possible detection of (and fines for) violations of permitted-source rules on Foreign Accounts. It is essential for RRIs to know and understand these rules.

Background

Readers will recall, from 2003 the CCL initially required RRIs to report annually to Russian tax authorities on the balance of their Foreign Accounts at the beginning of each calendar year. After several years, this requirement was abolished. For 7 years, RRIs enjoyed the absence of any reporting on Foreign Accounts. RRIs were only required to notify their tax agency about the opening of a Foreign Account within a month (though RRIs have often overlooked even this).

Meanwhile, the CCL always required Russian resident corporate entities to report on movements in their Foreign Accounts. It was not until December 2005 that the RF Government issued Decree No. 8194  on the exact reporting procedures for Russian resident corporate entities’ Foreign Accounts.

Now

The CCL (as now amended) obliges the RF Government to introduce a formal reporting procedure for RRIs’ Foreign Accounts. As before, the CCL itself provides no details on the exact procedure for reporting.  The RF Government was thus told to ‘put the regulatory meat on the legislative bones.’ Although Law 218-FZ was adopted in mid-2014 and stated the RRI reporting obligation would apply as from 1 January 2015, as of today the RF Government has yet to issue such procedure.

In sum, the law requires RRIs to report on their Foreign Accounts. But there is no official regulatory procedure yet for this, including on the periodicity of such reporting or the required supporting documentation. The good news for RRIs is that for now, the RF Code of Administrative Offences (the ‘Code of Administrative Offences’) establishes no formal administrative liability (and hence no penalty) for RRI’s failure to report.

Okay, so why should I worry?

Obviously, the exemption on RRI reporting was not abolished with the intent that it merely be reinstated (though stranger things have happened). Russian regulators are keen to know what their citizens own abroad for various reasons (fiscal and political). Knowing about movements of funds on RRIs’ Foreign Accounts was less relevant when there were fewer permitted sources of crediting funds into such Foreign Accounts (the main source being debiting such amounts from Russian individuals’ own onshore accounts).5

But given current fiscal pressures on the federal budget, authorities will likely want to look to all possible courses of income - including fines on RRIs for currency-control violations.

Interestingly, at present two draft laws are being considered by the RF State Duma which would amend article 15.256  of the Code of Administrative Offences7:  one would increase penalties for failure to report on movements of funds on Russian resident corporate entities’ Foreign Accounts. Neither mentions RRI reporting. Most likely, the originator of the two draft laws (the RF Government) understands RRIs’ inability to comply with reporting is owed to its own failure to meet its regulatory mandate.

The RF Government did publish in September 2014 on its main internet portal8 a proposed draft law to amend article 15.25 of the Code of Administrative Offences and introduce penalties for RRIs for not abiding with reporting requirements. This draft, which has not yet been officially submitted to the RF State Duma, foresees it would become effective as from 1 January 2016. Whilst not explicitly stated, it appears the RF Government intends to establish annual periodicity for RRI reporting (as compared to quarterly reporting for Russian resident corporate entities).

If these draft laws are ultimately adopted, the penalties for RRIs may be on the level of RUB5,000 (ca EUR75 at present exchange rates) for an individual reporting violation and RUB40,000(ca EUR600) for repeat violations occurring within one year following the first violation.

RRIs are bound to ask, if there are no reporting obligations as such yet, why should I worry? And if the penalties are so low, what’s the big deal?

Whilst reporting obligations cannot yet be met in practice, when they are finally adopted there is a high likelihood these will be for calendar year 2015. They may well include supporting documentation obligations requiring RRIs to disclose operations on their Foreign Accounts which (as innocuous as they may seem) constitute formal violations of the permitted-source rules. For example, whilst interest, dividends, rental and other current income from investments may generally (with some exceptions) be credited to Foreign Accounts, sales proceeds from the exits from such investments are not (and formally, before being credited to Foreign Accounts, must be routed directly from the source first to the RRI’s Russian bank accounts and only then credited to the RRI’s Foreign Accounts – a highly impractical procedure which most RRIs and their foreign counterparties and banks disregard). The RRI’s potential liability for such operations, if detected, would be a fine in the amount of 75-100% of each unlawful operation. This creates a potential ticking time bomb for any RRI whose financial arrangements are not strictly in line with the CCL (and particularly more so if the RRI is of political interest to authorities). RRIs must therefore strive immediately to become compliant with the CCL’s recently-broadened (though still highly impractical) permitted-source rules.

Conclusion

Based on the above, one may conclude that the RF Government will probably consider 2015 to be a relevant reporting period. It also seems likely that the RF Government will require RRIs to report annually.The absence of a formal RRI reporting procedure makes it practically impossible for RRIs to file a Foreign Account report at present9

Correspondingly, no penalty currently exists for RRIs’ failure to report timely. Thus, RRIs should not yet worry about reporting but nonetheless keep a close eye on the likely imminent adoption of a filing requirement in early 2016 in respect of calendar year 2015. This may well include a supporting document obligation as regards all movements on RRIs’ Foreign Accounts during 2015.  RRIs must understand the potential liability to which this could expose them, including under permitted-source rules, as regards their 2015 financial arrangements.