There's No Place Like Home: Taking Treasury Global
Companies often experience culture shock when venturing into other countries and continents simply because there’s no place like home. Whatever the nature of the expansion – new distribution outlets, overseas sourcing or foreign manufacturing – you’re sure to encounter different business practices and tax regimes, a new regulatory environment and terms of trade, as well as unfamiliar customs and taboos.
Every company has policies that govern various aspects of its activity – investment, risk management, hiring, etc – in its home country. These policies provide a framework within which the company’s officers can work. Some of these, such as the investment policy, can be exported to new markets as is. Others need adaptation. For example, in the US, employees may be terminated at will. In many European and Latin America countries, an employer must notify local regulators before firing an employee. Differences such as this should be addressed in the hiring policy.
Your company undoubtedly also has policies that govern treasury operations – including money management principles, security requirements, reporting standards, audit controls, and bank relationship management. Many of these policies can and should be applied to expansion markets, with adaptations as needed. You should also define the relationship between the home office and overseas offices and how company resources, including cash, IT staff, and bank systems, will be used.
The first step in establishing treasury operations outside the home country is understanding the modus operandi of corporate treasury at headquarters. International operations should parallel domestic operations in scope and underlying objectives. Areas to consider are:
International expansion comes with certain risks. Some of these can be foreseen and effectively managed, others can be extremely difficult to assess. Before venturing abroad, you would be wise to consult with experts to analyse the following risks:
For companies operating in multiple countries, there are three basic approaches to global banking that can be taken:
A global bank with a presence in many countries may be the correct approach if it is truly global in its banking platform and reporting system. Many ‘global’ banks have different depository platforms and reporting systems in different countries. Without complete cross-country integration, you may as well work with multiple in-country banks.
Working with multiple in-country banks, however, presents its own challenges, particularly when it comes to opening accounts. Rowan Companies, a US-based equipment manufacturer and drilling services provider with operations in 11 countries can vouch for that. “We tried to open a bank account in one country and it took us close to six months,” said Michael Boykin, assistant treasurer.
Foreign banks have their own due diligence and know your customer (KYC) policies, which can be onerous. In some countries, for instance, bankers are required to meet in person with either a principle owner/signor of the account or a client-designated legal counsel. Where this is the case, you’ll need a passport and a plane ticket.
Regardless of the difficulty, you may need in-country bank accounts for physical reasons, such as when a foreign subsidiary requires local branch services, or regulatory reasons – some countries require companies to hold a certain amount of capital in the country to do business there. Your home-country bank may be able to help you through the in-country account opening process. By bringing its own knowledge and global banking partner network to bear, it can provide introductions to in-country banks, streamline processes, and accelerate timelines. However, there is no quick and easy way to open foreign accounts. Be prepared to be patient.
Some treasury departments fear that foreign accounts will reduce visibility into and control over their global cash pictures. The Active Network may have found the best of both worlds – in-country accounts and at-home control. Based in San Diego, California, the growing company provides online registration and payment technology plus marketing solutions to sponsors of participatory events worldwide. As it expands into more countries, treasury manager Michael F. Rocklin keeps the company’s cash close to home. “We have local bank accounts in countries where we legally have to, but all payments come into and are made out of multi-currency accounts (MCAs), so we can keep the control here with our domestic bank,” he said. Multi-currency accounts are offshore accounts that allow The Active Network to collect registration fees and pay event sponsors in the currency of the country where the event takes place.
In most countries, banks charge fees at the time a transaction takes place or invoice them on a regular basis. US banks, in contrast, apply an account analysis approach to charging for services. US regulations do not permit the payment of interest on commercial account balances, with certain exceptions. Globally, banks commonly pay interest on balances and that interest can offset fees charged.
Fees associated with payments in foreign currencies vary widely and can be an unpleasant surprise to the unaware. In many countries, banks playing a role in the payment process may take what are called ‘lifting’ fees to compensate them for their work. This can result in the beneficiary receiving a lesser amount than expected or intended. Talk to your domestic bank about ways to prevent this from happening.
Payment instruments and their usage also vary widely from country to country. A case in point: cheques. While declining in number, cheques still account for nearly 30% of payments in the US. In European countries, 95% of all commercial payments are made by electronic funds transfer. Most countries’ payment systems include the following:
Within Europe a pan-regional infrastructure exists for euro payments. Wires flow through one of two systems – TARGET 2 or EBA Euro 1 – and ACH payments through the single euro payments area (SEPA) Credit Transfer (SCT) environment. Over time, the expectation is that the reach of SEPA will be extended to provide more product coverage and to take over from national clearing schemes that, for the most part, are still in place. Variables to consider in handling global payments and receipts include:
A well-defined strategy for managing the cash held in bank accounts throughout the world will help maximise the returns on your company’s cash assets. Information is critical to this process – your banks must be able to provide you with timely and detailed information on the accounts you hold worldwide. Ideally, this information will flow through a single bank to streamline and simplify analysis.
You can manage liquidity manually or automatically. The former requires greater oversight but is straightforward to set up and manage. Automated solutions for zero balancing and notional pooling are offered by many banks and can work with an overlay structure to allow funds held with local banks to participate.
This area is often heavily regulated and also may have significant tax implications depending on the jurisdiction within which you are operating. You should spend time with your banking partners to understand what is possible from the product perspective before engaging with your tax advisors to understand the fiscal implications for your company.
Technology touches all aspects of a company’s activities. When expanding globally, technology should connect your company’s offices and operations rather than causing a disconnect between them. Decisions regarding technology should take account these factors:
Companies increasingly use enterprise resource planning (ERP) or treasury management system (TMS) platforms to help them manage a variety of internal tasks, including accounts payable and receivable. Integration between bank applications and these platforms is key to error-free processing. Banks are beginning to offer plug-and-play adapters to speed and simplify the integration of their customers’ ERP platforms with bank systems. SWIFT for Corporates offers a way for companies to move to a single, robust, standardised channel for communication with multiple banks.
The ubiquity of McDonald’s and IKEA, Coke and croissants can make the world feel somewhat homogeneous and far-away places seem much like home. Yet it is still the differences, not the similarities, which distinguish individual countries and cultures. When expanding abroad, it is the differences that can lead to a smooth move or a problem-fraught misadventure.
Planning and research are key to successful global expansion, as are the right partners. Enlist the advice of your tax advisors, legal counsel, IT team, and banks. Set expectations and goals, and monitor your progress toward meeting them. A timeline is important, but so is flexibility as rules, regulations, and political situations are continuously changing as the global economy evolves.
To quote Dorothy from The Wizard of Oz: “We’re not in Kansas anymore.” The further your company ventures from home, the more challenges it will face and the more opportunities it will encounter. Be prepared for both.