FBAR Problem: 6 Year China Bank Account Statements for Streamlined Procedures?

This is an very interesting case we have entertained just recently, and I am very delighted to share the experience with friends and clients from USA, who may also get involved in such a situation.

I. Background

An American citizen (used to be a Chinese immigrant to USA) died in China suddenly. The major estate in China comprised two bank accounts opened with two different banks in China with an aggregated balance of more than USD 10 million. The decedent did have a valid will appointing his daughter, the only beneficiary, to be his executor and administrator for his global estate. The will was properly probated in USA and the daughter was granted and appointed as the personal representative for the estate.

When the daughter approached us for inheritance of his father’s estates in China, the bank deposits, we were not aware, nor was the client, of the potential FBAR (report of foreign bank accounts) problem. We generally remind our clients from USA of potential tax issues when it comes to inheritance of high value real properties in China. We have no experience with FBAR despite that I personally know this FABAR and FATCA issues faced by overseas American citizens.

We managed to get the inheritance done and transferred the bank deposits into the bank account opened by the beneficiary daughter in China.

In the meantime, the daughter being the estate administrator has to deal with taxation in USA, and she was apparently reminded of FBAR problem associated with his father’s bank accounts in China: his father had never reported balances of two China bank accounts to IRS. As an administrator for his father’s estate, she was loaded with the responsibilities to deal with FABAR mess: a possible maximum penalty up to 50% of the total USD 10 million.

II. Key Issue: 6 Year Bank Account Statements

Since we helped the client getting the inheritance done, natually, the client asked us for help. It is too much to pay that penalty if the streamlined procedure cannot be applied in this case.

It is the first time we entertain such an inquiry and indeed, there has no precedent cases published in China yet.

Under current laws in China, an heir or testamentary beneficiary can go to the bank to obtain a 6 months account statements for the bank account owned by the decedent prior to the date of the death of the decedent. We tried to work out the problem without going to court with the two banks, and none of them agreed to print out the statements for our client unless there is a court order requesting them to do the same.

We were forced to choose to litigate against the banks. Indeed, we are not sure whether the local courts in Shanghai will ever accept filing of such a case. What is the legal basis for the beneficiary to request the bank to provide that long time account statements? It is not clear!

We initially tried to file the case over the counter, the filing judge frowned upon the case, and raised doubts over whether this matter should ever come to their court at all. After getting rejected, we managed to file the case online.

The trial judge assigned to this case called us complaining that this matter should not be entertained by the court, and they have not handled any case/claims like this.

Knowing the potential difficulty on their part, we made a concession with the judge that we will withdraw the case provided however that the judge will issue a court order requesting the banks to provide 6 year bank account statements. The judge finally agreed.

An perfect end to all parties involved here!

III. Legal Implications on Similar Matters in the Future

While for this client, we have managed to achieve the desired outcome of obtaining the bank account statements required for purpose of FBAR streamlined procedure, but what about similar matters in the future? What if we can no longer be able to file such a case since the courts may be on alert for similar matters?

During our discussion with the judge of Shanghai court, we learned that there are two primary concerns and difficulties which the court is wary of:

1. right to privacy of the decedent. Indeed, in exhange for the court to issue the court orders to obtain the bank account statements, we are required to undertake that we shall not use the statements for other purposes. The judge mentioned the issue of decedent’s privacy contained in those account statements. Basically, it referred to the fact that in such account statements there may be money transfers to other people, for example mistresses of the decedent, which would otherwise be buried together for good with decedent in history. I am not 100% sure about the validity of such a concern. In China, if the dececent makes substantial gift to mistress or lovers out of the couple’s community properties, the other spouse will be able to claw back such gifted assets.
2. The court orders are issued to the daughter who is both beneficiary and administrator of the estate bank deposits, and the judge also said if the administrator is not a beneficiary or an heir of the estate, he may not be able to issue the court search order at all, because the legal status of being an administrator is the legal result of a US court probate proceeding, and such foreign court orders regarding estate administration and inheritance are generally not recognized in China. We have discussed this legal dilemma in the past.

As you can see, there are still many questions and doubts over a similar case in the future esp where a foreign estate administrator (who is not an heir or beneficiary) is invovled. However, I am not that pessimistic, as I do believe there may still be possible to convince the Chinese courts to proceed with such a case for the following reasons:

1. while Chinese courts won’t recognize the legal status of administrators appointed by foreign probate courts, we may still apply to Chinese courts to appoint the same foreign administrator to serve as the administrator for China estate, this is rather a procedural issue, and it is very likely that the foreign administrator can be installed as the administrator for the China estates, unless there is a big fight among heirs or beneficiaries.
2. The legal basis for an administrator to obtain such 6 year bank account statements to mitigate the liabilities of the estate is the inherent power that is carried with any estate administrator. This is thought to be a problem to a Chinese judge simply because in China estate administration (this concept of estate administration itself is pretty new in China, introduced into law only in China Civil Code enacted on January 1, 2021) often doesn’t invovle many tax issues. It is not a mission impossible to convince a Chinese judge to such a realization.

But I must say it is not easy nut to crack whatsoever if we have to forge ahead in the court room.