It is very difficult for treasurers to manage the global cash needs of an organisation when there are significant outflows from manufacturing plants or service centres located in non-restricted jurisdictions and significant inflows into jurisdictions with FX regulations and cross-border restrictions.
This is not just a matter of being unable to access cash for interest expense accounting – a potentially greater issue is being unable to use that cash to offset outflows. Unfortunate treasurers have found themselves dealing with situations where restrictions were not duly accounted for at the time of entering that market or were introduced without sufficient notice to allow implementation and adjustment to the business model.
Patrícia Baptista Nabiço, Group Treasurer at Portuguese data science company Feedzai has extensive experience of repatriating funds, informed by her banking background. She notes that Africa dominates the list of challenging countries in terms of FX regulations, followed by Asian countries such as Pakistan, India, Indonesia, Papua New Guinea, China and Vietnam.
“One of the strategies for addressing these challenges is to open communication channels with tax consultants, external legal counsel and (when possible) regulators as well as banks with significant presence in those markets and have regular calls for market and regulatory updates,” she says. “It can also be useful to create guidelines for each market with all applicable regulations and update these regulations regularly across the organisation.”
Baptista Nabiço recommends defining standard business models for these markets which take into consideration the challenges created by the regulations and cross-border restrictions and making sure any deviation to the approved business model is justified, documented and has a mitigation plan in place.
“For example, if a customer insists on paying to a legal entity incorporated in Egypt for something that is manufactured in the UK and should be a direct sale from the UK subsidiary and collected there, there should be a plan to ensure all documentation required by FX regulations is available to allow the intercompany payment from Egypt to UK in order to avoid trapped cash in Egypt,” she says.
Baptista Nabiço acknowledges internal stakeholders do not always appreciate the complexity of cash repatriation in certain markets.
“Some will try as much as possible to execute commercial orders which are liquidity risk-free and when that is not possible – for reasons like generation of permanent establishment risk, for instance – they will coordinate in advance with treasury teams on the mitigations to be implemented, which are often as simple as making sure all transactions are documented, licensed or registered to enable cross-border transfers later during execution,” she says.
However, this is not a standard behaviour and when commercial teams are assessed based on orders booked without considering where the cash is going to land and whether it is going to be trapped, this can encourage quick wins.
In this scenario, negotiations on better terms like splitting out- and in-country scopes or addition of compensation for FX depreciation clauses do not take place and deals are locked in with terms that generate repatriation challenges not immediately visible for other teams to manage and handle later.
“I see behaviours improving and an understanding of repatriation challenges when leaders make it clear to their teams that getting orders and collecting cash are important, but collecting the cash where it can be used for outflows is critical,” she adds. “Adding metrics around reduction of restricted cash is instrumental to ensure accurate liquidity and funding plans for a global organisation.”
