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Outlook 2012

Europe in the Driver’s Seat
By Ted Howard Much as global markets want to forget about Europe, it will continue to drive markets in 2012. Add to this continued regulation pressures and more searching for returns. Like most years of the financial crisis, the new year continues to be challenged by issues of the preceding one. In fact the 2011 to 2012 transition is, sadly, almost exactly like that of the 2010 to 2011 transition: sovereign debt worries, regulations and the US economy. But for 2012, we get a slight variation. That’s because with the US economy now seemingly on the mend, it’s now down to the euro’s survival along with regulation (and its impact on banking). And as per usual, lingering in the background since the beginning of the crisis is the now perennial challenge of where to put company cash. And if those main drivers aren’t enough, there are also the issues of the banking business in general (see related story p. 2) and new tax policies (see related story pp. 14-15). OH! EURoPa During the final months of 2011, world financial markets were daily roiled by events in Europe. And by the end of the year, there almost was collective panic attack among corporates and others that some sort of breakup of the eurozone or at least one country exiting—namely Greece—was not only possible but all but certain. Suddenly treasurers and other risk managers wanted to know what would happen to things like financial and business contracts, legal jurisdictions, supply chains and bank accounts if the euro suddenly disappeared or the drachma suddenly reappeared. Although the scary coverage has died down, in 2012 Europe finds itself in exactly the same position as late 2011; that is, in an uncertain state with the possibility of a breakup or that a country exits, still high. Already in January the euro is slipping, Italian bond yields are skulking around 7 percent (and Fitch Ratings thinks Italy is the biggest threat to the eurozone); S&P is in downgrade mode, recently cutting France a notch with other eurozone countries also in its sights; Germany is auctioning bonds with negative yields and even Hungary threatens to roil financial markets. Of course Greece is the main antagonist, where the economy continues to deteriorate, so much so that it could eventually sink the 130bn euro ($165.2 billion) bailout that European leaders agreed to in October. So for 2012? MNC Treasurers concerned with their liquidity and currency exposures to Europe should continue the risk-mitigating strategies begun in late 2011. These include a detailed risk assessment and an exploration of other ideas as to how to best mitigate eurozone risk. As gleaned

Featured Meeting Summary: Asia Treasurers’ Peer Group

JANUARY 2012 Outlook 2012: Europe in the Driver’s Seat
By Ted Howard

Europe will continue to drive markets in 2012. Add to this continued regulation pressures and more searching for returns. page 1

Keeping Tabs on Investment Banking
By Joseph Neu

Banks may ditch past practice for profit growth and a focus on what works in current reg environment. page 2

Best of iTreasurer.com
Capital Flow Vol Set to Balloon; China Looks to West on Regs; More pages 4-5

If EURoPe Can JUst Make It THRoUGH 2012…
35% 30% 25% 20% 15% 10% 5% General Government Gross Financing Requirements (% of GDP), 2012 – 2014

Impairment Accounting Measure Inches Forward
By Dwight Cass

2012

2013

2014

FASB and IASB slowly refining the standard, but this more realistic accounting approach will hit bank capital. pages 12-13

Complying with FBAR and FATCA
By Geralyn Frances

Netherlands

Portugal

Germany

Belgium

Austria

Finland

Ireland

0%

Get treasury staff ready and provide corporate support via tax, legal or human resources to ease the confusion. pages 14-15

Cyprus

Source: Bloomberg and Citi Investment Research and Analysis

continued on page 3

Greece

France

Spain

Italy

EDITOR’s NOTEs
Founding Editor & Publisher Joseph Neu Managing Editor Ted Howard Contributing Editors Anne Friberg, CTP Bryan Richardson, CTP Advisory Board Andy Nash SVP, Treasurer Ahold Finance Group James Haddad Corporate Vice President Cadence Design Systems Chris Growney Principal, Director of Sales & Marketing Clearwater Analytics Susan Stalnecker VP & Treasurer E. I. DuPont Co. Peter Marshall Partner Ernst & Young LLP Adam Frieman Partner Etico Capital LLC David Rusate Deputy Treasurer General Electric Company Martin Trueb Senior VP & Treasurer Hasbro, Inc. David Wagstaff Managing Director, Head of US Tech, Media & Telecom HSBC Securities (USA) Inc. Michael Irgang Senior Director, Financial Risk Management McDonald’s Corporation Arto Sirvio Director, Treasury Center Americas Nokia Peter Connors Partner Orrick, Herrington & Sutcliffe LLP Robert Vettoretti Director, Treasury and Financial Management Services PricewaterhouseCoopers LLP Doug Gerstle Assistant Treasurer Procter & Gamble Susan A. Hillman Partner Treasury Alliance Group LLC Michael Collins Managing Director, Head of Corporate Equity Derivatives Wells Fargo Securities, LLC Academic Advisors Gunter Dufey University of Michigan Donald Lessard Massachusetts Institute of Technology Richard Levich New York University The company and organizational affiliations listed above are for identification purposes only. Advisors to International Treasurer are not responsible for the information and opinions that appear in this or related publications and web sites. Responsibility is solely that of the publisher. ISSN:1075-5691 • Vol. 18, No. 11 © 2012 The NeuGroup, Inc. 135 Katonah Avenue • Katonah, NY 10536 (914) 232-4068 • Fax (914) 992-8809 subscriberservices@itreasurer.com www.iTreasurer.com SUBSCRIPTION INFORMATION Published Monthly. Annual subscription rates are $295. International Treasurer is a publication of The NeuGroup, Inc.

Bank relationships

Keeping Tabs on Investment Banking
By Joseph Neu
n November we noted the message coming from banks that the euro crisis was helping to ensure that all major global banks would find it necessary to implement Basel III, by and large, over the course of 2012— i.e., this year rather than 2015. In the rush, they will also be ditching much of what they have done in the past to drive profit growth and become more focused on what works under new regulatory capital requirements. Each week since then, we have seen signs that this message was for real. Treasurers not yet on top of how the rush to adapt banking business models, investment banking especially, to a post-Basel III and crisis-ravaged world had best do so quick.

I

Look at tHe SWiss
Treasurers wanting to get up to speed swiftly should start with a look at the two big Swiss banks. Troubled by efforts to boost investment banking, almost from the start, both Credit Suisse and UBS announced substantial changes to their business focus on that side of the house even before the 2008 crisis, and did so again with their third quarter earnings announcements. Helping them to make these decisions are Swiss banking regulators, who have been the most forceful in applying new capital and liquidity requirements, going beyond even the Basel international standards. “I would have preferred it if the regulators had just told us to get out of the investment banking business,” one former Swiss bank treasurer told us last year. Instead, they have turned the screws on capital and liquidity requirements to such an extent that it has become clear that Swiss banks cannot earn high enough returns to offset the risks of business conducted regularly in the past. As a result, the Swiss banks are well ahead of their peers in shifting their business models to become more capital efficient and de-leveraging in response to new regulatory norms. UBS shed 44 percent of its riskweighted assets (RWA) from the end of 2007 through last September and Credit Suisse shed 33 percent, according to Bloomberg. By comparison, Bloomberg indicates that the 15 largest European banks on average increased RWA by 12 percent over the same period. They’ve also been leading in slashing investment banking staff, which is notable

given recent news of banks like SocGen and RBS slashing investment banking positions. With their peers scrambling to catch up, the Swiss banks are even pitching their early response (which they at first forcefully resisted) as a competitive advantage in today’s environment. “Our status as a first mover in adapting our business model puts Credit Suisse in a position of financial strength,” was the first major point CEO Brady Dougan made on the bank’s third quarter earnings call in November. Adding that this is “a differentiator clients, counterparties and investors recognize.” UBS CEO Sergio Ermotti delivered a similar message at an investment day later that same month: “We believe our industryleading core capital position gives us a significant competitive advantage and puts UBS ahead of our global banking peers.”

not all aboUt yoU
Another consistent theme with the Swiss bank CEOs is how important the term “clientfocused” is to their strategies. As a client, however, before getting too big-headed about banks being all about you, note the other bit about being capital efficient. Banks will indeed be all about you so long as they can earn consistent profits on business that isn’t as capital intensive—today, that means something around a 15 percent ROE. After all, they are no longer going to be making up the difference by trading both with and against you, along with what they do on your behalf. Digging into the Swiss banks’ earnings presentations as their “client-focused” capital-efficient strategies continue to evolve will also be instructive. From what’s been presented so far, the fixed-income divisions will be the hardest hit, and anything involving long-dated unsecured trades or CMBS origination is gone. All credit products will evolve and any corporate lending will focus increasingly on core strategic bank franchises. Advisory work will grow and be aligned along more global coverage interfaces. Client flow business, including FX, derivatives and equity trading will also continue (but with ever greater emphasis on electronic platforms). Both Swiss banks will favor their asset management businesses heavily, too.

OUTLOOK 2012
Outlook, continued from page 1

from several conference calls with NeuGroup peer group members at the end of 2011, these strategies include: n Reviewing redenomination risks of existing contracts, including currency repayment. n Reviewing legal language of all financial contracts to see if local or international law presides. n Revising contract language, where possible, to address revaluations and include transition language in all new documentation. n Reviewing with CFO your commercial relationships and considering possible alternative supply sources and/ or changing your invoice currency. n Using natural hedges where possible; while this does not eliminate devaluation risk, it can reduce it and there would be fewer financial contracts to deal with. n Limiting durations of financial contracts so no significant positions exist. n Reviewing counterparty risk, monitoring CDS spreads; diversifying partners. n Repatriating in-country cash balances to less volatile regions. n Checking treasury/accounting systems for ability to handle valuation changes, dual currencies and the reporting. Given that this is all new territory— both from a legal, contractual and market perspective—the challenges are not easy. The company’s relationship banks can be advisors in this regard, as no doubt they also are preparing for the prospect of a breakup. Despite all the consternation and

wondering whether Europe will or won’t collapse, most observers feel a breakup or even an exit is unlikely. Currently eurozone leaders are hammering out a new treaty to tighten up the financials of the European Union. They feel they are making progress but given the seeming lack of urgency, it’s best for treasurers to forge ahead with their contingency plans. ReGUlatoRy BURdens While Europe probably takes the prize as 2011’s Theme of the Year award, another theme could be Dodd-Frank Delay. According to law firm Davis Polk, by the end of 2011, 200 deadlines had come and gone and regulators have only been able to meet 51 of them. Concerning the derivatives portion of Dodd-Frank, the CFTC, the SEC and other regulators have missed 67 deadlines and finalized only 26 rules in 2011, according to Davis Polk (see chart page 6). Meeting deadlines for central clearing also looks doubtful. A 2009 G-20 mandate was for all standardized OTC derivative contracts to be traded on exchanges or e-trading platforms as well as cleared through central counterparties “by end2012 at the latest.” Observers like ISDA have hinted that this might not happen. Regulators’ progress hasn’t been helped by politics. For instance, the CFTC’s has severe budget woes. Earlier in 2011, the White House requested $308mn for the CFTC in its fiscal 2012 budget—a big increase from its previous $202mn budget. But Congress effectively froze the

agency’s budget in December, giving it just $205mn. However, in a deal struck in mid-December, the CFTC reportedly will get an additional $10mn for staffing. So what’s in store for 2012? Dodd-Frank and Basel III, the two 800 pound gorillas of the regulatory world, will continue to hold sway. In the US, there will definitely be some rule finalizations from US regulators, but the slow pace is expected to continue. “We expect to see several key final rules in the first quarter, including the allimportant entity definitions and the enduser exemption from mandatory central clearing,” said Sam Peterson, Senior Advisor, Derivatives Regulatory Advisory Services at Chatham Financial. “We’re still waiting on the final rule for margin requirements for non-cleared derivatives, although it’s now expected that this won’t be released until after the G-20 has come to agreement on standards” for them. The G-20 meets in Mexico in June. Mr. Peterson said that treasurers should keep an eye on the US Treasury Department, which has yet to finalize its proposed determination exempting FX forwards and FX swaps from most of the regulatory requirements. Another important issue, he said, concerns the treatment of inter-affiliate or intra-group transactions and what regulatory requirements will apply. “The timing for this is not clear,” he said. The CFTC also proposed phasing in the implementation and the enforcement of four regulatory requirements—
continued on page 6

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Capital markets

Capital Flow Vol Set to Balloon
conomists like to view the evaporation of international capital flows during the 2008 financial crisis as a symptom, not a cause, of the distress. Prior to the crisis, capital flows had grown steadily, from 5 percent of world GDP in 2002 to 17 percent in 2007, before collapsing to 1 percent in 2008. The authors of a Bank of England paper argue that projected changes in the size and nature of capital flows between now and 2050 will, in fact, challenge policymakers and could create more crises. This underlying instability in the global financial system needs to be considered carefully by treasurers and strategic business decision makers at MNCs. The paper, “The future of international capital flows” by William Speller, Michelle Wright and Gregory Thwaites, contains simulations derived from GDP convergences and demographics. The simulations suggest a number of possible outcomes over the next four decades: n The overall size of external balance sheets relative to GDP of the G20 countries in aggregate increases from a ratio of around 1.3 to 2.2. n The distribution of external assets shifts to emerging markets. By 2050, more than 40 percent of all external assets are held by the BRICs (Brazil, Russia, India, and China), up from the current 10 percent.

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Non-G7 annual capital outflows are simulated to be more than twice the size of G7 outflows by 2050. By this time, India and China would represent almost half of all annual gross capital outflows. n India’s national saving rate—already high—increases from 38 percent to 50 percent in 2050. In Germany, France, the UK, and the US, the saving rate is below 10 percent in 2050. n Global current-account imbalances (the sum of deficits and surpluses) rise from around 4percent of world GDP to around 8 percent at their peak. While such massive macroeconomic shifts will have profound strategic consequences for corporate business plans, they will also require treasury to be nimble enough to deal with whipsawing currency flows. The two are, of course, related, and the problem illustrates the importance of having treasury at the strategic decision-making table.
n

Regulatory watch

China Looks to West on Regs
hile China may be looking doubtfully at some of the West’s financial regulations and laws—like Fatca, for instance: “You want us to do what?”—the country appears to be enthusiastic about the prospect of adopting Basel III and other regulations. At the October meeting of the recently launched NeuGroup Asia Treasurers’ Peer Group, several members and guests noted that China is beginning to adopt Western standards when it comes to regulation. One attendee who presented on China’s regulatory environment said that not only is China looking at the regulatory initiatives of the West but is also attempting to influence their shape. “China is almost too keen on Basel III,” he said. For example, the capital cushion for top international institutions was promoted actively by China, and the country has plans to accelerate its adoption of Basel III (though few Chinese financial institutions are yet considered internationally significant).

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More iTreasurer Online!
For more valuable articles published on our web site visit iTreasurer.com. Latest postings include: n Dealing with Lingering EuroDisintegration Fears: Deloitte and ACT publish treasury guide to euro breakup contingency planning. n Fat Chance for Fatca? The world wakes to the burden of coming Fatca requirements; the IRS stands firm. n China-Japan FX Deal One More Step for Yuan. China and Japan FX deal will help globalize RMB and help MNCs better manage currency risks.
4 International Treasurer / January 2012
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The same holds true for derivatives reform, especially concern surrounding credit derivatives. Amid the Basel III, Dodd-Frank creation process, many observers speculated that banks and financial companies would move their derivative trading operations to less restrictive parts of the world—some suggested Asia would be the destination. However, the last year has shown otherwise. For instance, just about all of the major trading centers in Asia are implementing, or planning to implement, OTC derivative-clearing initiatives in an effort to make the market more transparent. China, India, Hong Kong, Singapore, South Korea and Japan are looking to create central clearing entities for derivatives trading. Another development concerning China is the increasingly less direct approach of its State Administration of Foreign Exchange (SAFE) in ensuring compliance and even guiding adherence to its rules. Increasingly, SAFE is relying on banks to act as its intermediary and gatekeeper, with severe penalties for those that fail to do so. This frees up regulators to work with banks and even some corporates to better shape and understand the practical ramifications of regulations, which should be good news for corporate players in the Chinese market. In this way, SAFE is also starting to take more of a backseat to the PBOC, including on issues related to the use of dim sum bond proceeds in mainland China. The central bank will also be watching closely how the growth of the CNH market will impact its liquidity management and monetary policies onshore. Compliance with rules and regs will continue to be a major challenge in emerging markets in the coming year and beyond, especially in the larger economies that have multiple government agencies and ministries in charge of various aspects of the business “playing field.” It is therefore important to navigate the different bodies in ways that will maximize the chances of a positive outcome and never assume that just because a particular infraction has been met with look-the-other-way enforcement in the past, this will continue

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to be the case. Political winds change and targets do too.
Banking relations

EMEA Lending Trends Highlight Bank Relationships
urope, Middle East and Africa lending volumes in 2011 were the highest since 2007, topping $1tn, according to Thomson Reuters. But retrenchment in the syndicated loan market during the second half of the year showed the wisdom of sourcing overseas financing locally, wherever possible The first half drove the volumes, before the eurozone crisis flared up in August and bank regulators began releasing details of their proposed capital requirements. Companies in general were not looking for acquisition or growth financing. Rather, some $753bn of loans were refinanced, 28 percent more than in 2010, Thomson noted. Market conditions deteriorated sharply in the second half, as banks began selling portfolios to raise regulatory capital. But their distribution of business changed also: there was a marked decline in loans made to developing

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economies, especially the Middle East and Africa, in favor of lending to entities in banks’ home jurisdictions. This provides yet more proof that MNCs should be seeking to finance their overseas initiatives in local markets, wherever possible. While the top tier banks say they will be there for their clients even in the worst of times, their retrenchment in the fourth quarter indicates otherwise.
Risk management

Spreading the Collateral Load

B

ack in the good old days European sovereigns were “premier counterparties”—the ones able to call the shots when it came to collateral agreements. Because of their size and status, European sovereigns (ES) demanded collateral from dealers in a one-way credit support annex (CSA) but never had to post it themselves. But with ES’s in crisis these agreements need to be two-way—that is, sovereigns should now put up collateral too, according to a group of financial trade groups. In a recently published paper, the groups—the Association for Financial Markets in Europe (AFME), the

International Capital Market Association (ICMA) and the International Swaps and Derivatives Association (ISDA)—write that with the one-way structure, dealers are on the hook for billions of dollars; and with proposed Basel III requirements on capital, liquidity and a coming credit value adjustment surcharge, one-way agreements will drain even more liquidity from an already thin market (see related story “The Collateral Shortage and Corporations” at iTreasurer.com). The groups’ recommendations for two-way CSAs come at a time when banks face increasing pressure to hold more cash to buffer against another financial crisis. But banks maintain that holding these bigger cushions would force them to pass on costs to their clients and otherwise raise prices on certain transactions. “The Associations believe the use of one-way CSAs by ES has created meaningful credit risks in the financial system and has also drained liquidity from the banking system,” the groups said. And because dealers usually hedge expected potential exposure risk with interest rate and FX products, they will “attract significant capital charges under proposed Basel III rules.” Two-way CSAs would not only solve all of these issues, the groups said, they would also increase transparency.

ComPanies PUt in Place FinancinG Initiatives In CHina

Distributor Financing Banker’s Acceptance Bill Discounting N/A L/C Discounting A/R Discounting 20% 20% 30% 30%

60%

DISTRIBUTOR FINANCING POPULAR Nearly 70 percent of members of the NeuGroup’s recently launched Asia Treasurers’ Peer Group are pursuing customer finance initiatives. Most are offering distributor financing. The overall push for increased customer financing comes as China opens up more sectors to foreign investment. According to the Chinese Government, the goal is to encourage investment in strategic emerging industries.

Source: NeuGroup Peer Research; ATPG, Fall 2011 For additional information visit iTreasurer.com
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International Treasurer / January 2012 5

OUTLOOK 2012
Outlook, continued from page 3

central clearing, trading, and documentation of and margining requirements for non-cleared trades. Based upon the type of entities entering into the derivative transactions, these requirements will likely be phased in over the course of the first half of 2012 (see IT, October 2011). Basel III is the other big ape. Its liquidity and capital requirements will start to really sting banks in 2012. That’s because although the rules don’t start to kick in until 2015, banks dealing with the crisis have been encouraged to begin complying now—if they hadn’t already in 2011. One bit of good news is that the Bank for International Settlements, the entity writing the Basel rules, recently said banks will be able to dip into the liquidity buffers during times of stress. For treasurers, the new buffer requirements will surely raise the cost of doing business as banks pass on the cost to their corporate clients. That’s because all of the necessary reengineering of bank balance sheets will likely create credit scarcity; thus corporates can expect to pay more for bank credit. This will eventually force treasurers toward disintermediation and down more attractive funding paths. These will include tapping capital markets and squeezing all they can out of working capital enhancement projects. This is already happening in Europe where banks are weakest. There, companies are bypassing banks altogether,

according to the Financial Times, and raising cash via the bond market. CasH and investinG For several years now corporate cash and investment managers have been straining to find suitable places to put company cash. In 2011 corporates started to break out of their risk-averse stances and in 2012, this will continue. “I think much of the ‘put the money under the mattress’ strategy has abated,” said Chris Growney, director of sales and marketing at Clearwater Analytics. He said this was basically because companies cannot sit on low return accounts forever and interest-rate levels are likely to remain low for some time. As a result, Mr. Growney said many companies are outsourcing money in separate accounts and taking risks on the margin but not at the core. This is particularly true of companies that are cash-flow positive. For them it is important “that the investments are diversified because current assets plus the forecast free cash flow ensure a lot of money will be tied up in extremely low-yielding investments.” In general Mr. Growney said, companies are exiting mutual funds and going into separate accounts, which can have a range of product types, but are generally the traditional corporate cash investments such as short-term government, corporate and some asset-backed

products. “Rotation to separate accounts is both a focus on better control and visibility, and on transparency of the investments,” he said. At several NeuGroup peer group meetings in late 2011, treasurers were told they might improve returns by using non-MMF mutual funds and exchange traded funds. Nonetheless, the focus will remain on not losing money. “People hate getting zero returns, but it’s still better than negative returns,” said a treasurer at US MNC. Despite this view, his company was exploring new assets, including euro commercial paper—”A1, P1 and F1 only.” This provides liquidity “and a few basis points,” he said. “And every basis point is precious in this (low) rate environment.” The treasurer was also looking into “seasoned bonds,” for instance, a 10-year note with 18 months to maturity. These explorations will continue, with the overall goal, as the above treasurer noted, “to be able to get your money back from wherever it’s been put.” *** So just like last year, 2012 will be a challenge to treasurers, as they continue to navigate the choppy waters churned up by the chaos of the financial crisis. Regulation and finding yield will occupy much of their time while a teetering Europe will a remain a looming presence in the background.

Title VII PRoGRess on ReQUiRed RUlemakinGs
Title VII Progress CFTC Progress
1 17 3

As of December 1, 2011 SEC Progress

4 59 22 1
2

23

3 25

12

Values Refer to Number of Rulemaking Requirements

Missed Deadline: Proposed

Missed Deadline: Not Proposed

Future Deadline: Not Proposed

Finalized
Source: Davis Polk

6 International Treasurer / January 2012

n

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AsIA TREAsURERs’ PEER GROUp
2011 Pilot meeting briefing

Asia Treasury Challenges
The NeuGroup Launches Treasury Peer Group in Asia
The pilot meeting of the Asia Treasurers’ Peer Group, sponsored by BNP Paribas, brought together thirteen companies across a variety of industries—pharma, consumer goods, manufacturing and tech. Topics discussed included: 1) Offshore RMB Market and Opportunities. One member discussed his company’s dim sum bond issue. Key Takeaway: The process of issuing offshore bonds is becoming more streamlined; banks can help clear hurdles for use-of-proceeds onshore as well as the transfer of funds. 2) Capital and Liquidity Management. A discussion of member companies’ approaches and a market overview by the BNP’s C.G. Lai. Key Takeaway: As cash builds up in the region, a concern is the lack of available investment options. MMFs are developing but the small sizes mean MNCs run up against policy limits. 3) Dealing with Asia’s Rules and Regs. Two reps from Clifford Chance shared their insights on India and China. Key Takeaway: Both countries have a multitude of governing bodies with sometimes overlapping jurisdictions. It’s important to understand their motivations and their powers. 4) Implementing eBAM in Asia. Jan Dewaele from SWIFT and Pole Yu from IT2 talked about the status of SWIFT-enabled solutions for eBAM. Key Takeaway: Paperless account management (including for the account-opening process) is still a ways away, but some progress is being made.
Sponsored by:

Offshore RMB Market and Opportunities
As a result of the continuing internationalization of the RMB, there is now an opportunity to raise funds via CNH bonds – or “dim sum” bonds—offshore for foreign companies needing funds in China (where they are not allowed to issue onshore RMB bonds). Further, the offshore RMB market and the increasing use of the currency in international trade will have a dramatic impact on regional and even global liquidity management and other treasury activities. One member company walked the group through his company’s dim sum activities. Key TakeaWays 1) Checklists help. The presenting company had the experience of testing the market before. The company’s representative noted that the process of issuing dim sum bonds is getting easier but despite this, learning from prior issuers can save headaches. Documentation, process and the right partner are important, he said. His lessons learned include: ■ Plan and start early; ■ Understand your funding requirements well (as you will want to match these to the SAFE discussion at the earliest stage); ■ Good partners (banks, legal) make a difference; Program documentation (get these right from the start); ■ Understand regulatory aspects vis-a-vis internal requirements/policies (the issue should be tailored to the market requirements and internal adjustments may be needed); ■ Teamwork (members should have the right functional expertise); ■ Take a project management approach (assign someone to work through all elements of the task, which can take about 4.5 months). 2) Hurdles to use proceeds on- and offshore are decreasing. The member presenting on this topic noted that the process for issuing dim sum bonds isn’t significantly different from issuing in any other market but the regulatoryapproval process is somewhat different, especially if you want to use the funds onshore. Regarding the use of proceeds, there are a number of ways that bank partners can be helpful, both in clearing the regulatory hurdles for use onshore and through account structures to ease the transfer of funds (e.g., using nostro accounts). Going forward there may be more uses for RMB offshore as Chinese partners become more open to accepting payment offshore and the currency gains acceptance in international trade. 3) Look for greater flexibility in re-invoicing. With re-invoicing platforms on the ascendancy

— ATPG presenter on how China is adopting Western regulatory standards.

China is almost too keen on Basel III.

Facilitated by

For more information: www.NeuGroup.com
© 2012 The NeuGroup. This information is sourced from the Asia Treasurers’ Peer Group.

pEER INsIgHT: ATPG
INCENTIVE SCHEMES FOR TREASURY CTRS in Asia, MNC treasuries can switch currency of billing for China affiliates to the offshore RMB and then re-invoice to better manage FX risk and move it offshore where it is cheaper. 4) More flexible terms are possible. Switching to offshore RMB to transact between Chinese affiliates onshore and those offshore also allows treasury to extend terms with fewer restrictions and use the wider window to lead and lag. While traditionally interco terms were set at 90 days, in the offshore currency they can push past 210 days and only need to register with PBOC via their website when they reach 160-day terms. 5) Change to RMB as invoice currency not as straightforward as you think. Exporters benefit from tax rebates and use the SAFE approval to support their claims. With a switch from USD to RMB as invoice currency, the SAFE process would go away and they would have to claim their rebates using a different process. This partly explains the slow adoption of RMB as invoice currency on behalf of Chinese exporters. However, experience with the alternative process will probably ease this reluctance. Another reason is the ability to cushion the pricing to protect against FX losses. On the flip-side, this cushion is a reason for many US importers to want to switch: to reduce the cushion and take control of the FX risk management. oUtlook: Offshore RMB opportunities look ready for real growth and treasurers should be prepared to take advantage. With Aussie commodity exporters seriously considering switching to RMB invoicing, the market could really take off; it’s growing rapidly already. BNP Paribas said that two-way flows from Chinese exporters and importers will become the norm soon. The list of eligible enterprises that can settle merchandise exports in offshore RMB has already expanded from 365 to 67,359. This expands the range of use in L/C guarantees and discounting. With a Singapore clearing license expected soon this will expand the alternatives for trading and settlement and further grow liquidity depth. BNP Paribas: Long Presence in Asia BNP Paribas has a 150-year history in the region, and has the local presence, capabilities (including corporate finance, equities, fixed income and commodities, along with day-to-day banking) and licenses needed to serve most of the needs of its clients. With a long history of client-focused growth approach in Asia and relationships with several member companies already—in Asia or other regions—BNP Paribas has plenty of scope to win more business going forward. A believer in standard processes and leveraging SWIFT, the bank stands to benefit from corporates’ desire to be bank-agnostic on the processing side.

A session on treasury incentive schemes confirmed that Singapore has actively sought to maintain its lead in incentive matters. A regional treasury center coupled with the headcount of a manufacturing or R&D facility provides unbeatable tax incentives. Penang/ Malaysia and to some extent Indonesia have sought to import Singapore’s ideas but there are other disadvantages. One trend to watch is what incentive regimes PRC companies avail themselves of, starting with the PRC treasury vehicles. OUtlook: Participants particularly noted the tax advantages that can be negotiated with Singapore if companies not only locate a treasury center and other white-collar work like R&D there, but also provide bluecollar opportunities like manufacturing. As MNCs increasingly look for cost reduction, significant tax savings become an important factor.

AfteR a TWo-MontHs Decline, RMB VolUmes TURn HiGHeR

Hong Kong China Other Countries
11%

+1,028%

4% 13% 11% 6% 85% 82% 83% 78% 81% 81% 80% 5% 14% 6%

3% 29%

7% 16% 77% Nov 2010

10% 15% 12% 7% 75% 81% Dec 2010 Jan 2011

15% 11% 74% Feb 2011

15%

7%

14% 7%

15% 7%

13% 6%

14% 5%

78%

79%

68%
Oct 2010

Mar 2011

Apr 2011

May 2011

Jun 2011

Jul 2011

Aug 2011

Sep 2011

Oct 2011

Nov 2011

Source: SWIFT. Customer initiated and institutional payments, sent and received, based on value1

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pEER INsIgHT: ATPG
Capital and Liquidity Management
The participating companies represent a slice of the MNC market that has advanced from its establishment phase, is growing rapidly and has begun to generate significant cash piles in certain places. The question for these companies is what to do with the cash. Unlike Europe, pooling is not widely available and much of the cash is building up in countries with restrictions on cross-border movement. Moreover, western MNCs are long USD, while many Asian firms are short USD as liquidity in the region’s chief trade currency is becoming more restricted. This sets the stage for MNCs to consider providing liquidity to suppliers and customers. However, they must also have a keen eye on development of the offshore RMB market and its emerging role as a currency of billing in conjunction with cross-border trade. Key TakeaWays 1) Look closely at working capital improvement opportunities. Several participants noted their companies’ emphasis on improving cash flow through working-capital initiatives. The pre-meeting survey revealed that many more participants are involved on the customer financing side than the supplier side, but new opportunities are emerging that should change this trend. The challenge on the supply side is getting people on board internally, which often means treasury needs to get procurement to see things its way. 2) Assess the impact of bank balancesheet and liquidity constraints. An increasingly inhibiting factor on working capital financing is that banks are finding themselves needing to pull back from offering their balance sheets. While it is important for them to have skin in the game (this helps with the quality of their credit risk evaluations), corporates should be prepared to step in when banks pull back. This could be a use for excess cash in the region, for example. Going forward, as BNP Paribas’ Mathew Harvey, Managing Director and Global Head of Technology Coverage, pointed out, there are several creative ways to push forward with supply-chain and other working-capital financing initiatives despite banks’ need to be stingier with their balance sheets. Trade insurance is another starting point. 3) Countries with higher funding costs/ yields are unfortunately the more restrictive. Fueling desires for cash-recycling innovation in Asia is the fact that countries with the highest Libor rates—China and India—are highly restrictive in terms of cross-border cash movements. As BNP Paribas’ C.G. Lai pointed out, opportunities are therefore more likely in the middle-tier rate countries such as Taiwan. Singapore and even Hong Kong will also benefit as liquidity gets attracted and this will likely be met with lending growth as well. Banks can try to serve as intermediaries for settlement across their books, but country regulators are catching on and making it more difficult to exploit branch vs. local subsidiary structures, with increasing requirements for the latter. 4) Where to find investment or deposit vehicles that meet your comfort level. This seemed to be a universal challenge with the group. On the one hand, concern with bank risk has more and more treasurers looking for alternative places to put excess cash. The level of desperation has risen to the point of corporates considering banking licenses to give them access to the deposit windows at central banks. And on the money market front the relatively small size of funds leaves treasury concerned about the percentage of assets their investments would make up, which in most every case runs counter to policies. All would like to see larger funds emerge and more of their peers take the plunge, perhaps all at once, to help rectify this situation in Asia. It’s a classic chickenversus-egg problem. J.P. Morgan was reported to be particularly aggressive in promoting itself as a place to park excess cash. oUtlook: Excess funds or lack of funds is not an either-or situation for most companies. Rather, most have excess funds in some places and would like to deploy it in others but cash might be trapped because of regulatory restrictions on transfers. Where it is trapped, meanwhile, the local market usually offers few acceptable investment options, and opportunities to use cash in other ways, like through tax-arbitraged intercompany funding, are lost. While the pre-meeting survey revealed that only a minority of participants were pursuing tax-driven affiliate financing, the success of some companies in this area suggests that more MNCs should explore these options.
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SWIFT’s Jan Dewaele gave an overview of where SWIFT-enabled solutions for eBAM stand, while Pole Yu from IT2 shed light on how the TMS side of an eBAM solution could look. Key TakeaWays 1) Paper documents are still a fact of life. Paperless account management (including for the accountopening process) is still a ways away, but some progress is being made. 2) Not for making new friends. For the foreseeable future, eBAM may be a solution for account maintenance, or opening or closing an account with a relationship bank, but it is unlikely that it will become a vehicle for establishing accounts with new relationships, largely for know-your-customer rule reasons. 3) How good is your own eBAM process? Not all the onus for effective bank account administration is on banks or SWIFT. On the in-house side, the most natural place to keep bank-account related details is in the TMS. Many TMSs have already achieved integration with SWIFT and offer important tools like audit and control features in addition to their workflow tools. 4) Don’t standardize to the fullest list of requirements. The eBAM Central Utility that SWIFT is piloting

eBAM in Asia

(continued on p. 10)

International Treasurer / January 2012 9

pEER INsIgHT: ATpg
Dealing with Asia’s Rules and Regs Regimes
(continued from p. 9)

is essentially a central database of all bank/ country account requirements and variants to XML standards for electronic communication of account-management related information. But the big fear from the group was that this would push banks toward adopting the most onerous bank’s requirements in each market, rather than the minimum requirements of the central bank. They want substantial corporate input on the pilot, and corporate voices to be weighed equally. OUtlook: Perhaps the SWIFT Central Utility will go some way toward its goal of providing a “source of truth” about central-bank requirements so that practitioners know how to meet the minimum prerequisites. MNCs are not waiting for eBAM to make progress. Many are centralizing bank account administration and even creating centers of excellence for such activities within treasury operations or shared services centers.

Rahul Guptan and Paul Landless of Clifford Chance’s Singapore office shared some of their expertise on the regulatory ins and outs of India and China, and highlighted the different regulatory agencies, the reach of their powers and jurisdictions in the two countries. Key TakeaWays 1) Beware India’s regulatory uncertainty. India has a large number of government agencies and sub-departments that exercise influence over the environment in which companies navigate their businesses. Unfortunately, some have overlapping jurisdictions and some agencies do not interpret the law in the same way. Coupled with the agencies’ wide-ranging powers to investigate businesses for perceived infractions, India is a country in which to tread carefully. It was noted that with some agencies, it is better to approach on one’s own behalf—RBI, for example, is business-friendly and wants to promote foreign investment—while with others, it is better to go via legal counsel, a bank or other expert advisor. 2) China is adopting Western standards. China is looking at the regulatory initiatives of the West and is even attempting to influence their shape. “China is almost too keen on Basel III,” Paul remarked. For example, the capital cushion for top international institutions was promoted actively by China and the country has plans to accelerate its adoption of Basel III (though few Chinese financial institutions are yet considered internationally significant). The same holds true for derivatives reform, especially concerning credit derivatives.

3) China’s SAFE is working more through partner banks. Another development concerning China is the increasingly less-direct approach of SAFE in ensuring compliance and even guiding adherence to its rules. Increasingly, SAFE is relying on banks to act as its intermediary and gatekeeper, with severe penalties for failure to do so. This frees up regulators to work with banks and even some corporates to better shape and understand the practical ramifications of regulations, which should be good news for corporate players in the Chinese market. 4) PBOC is more assertive. In this way, SAFE is also starting to take more of a backseat to the PBOC, including on issues related to use of dim sum bond proceeds in mainland China. The central bank will also be watching closely how the growth of the CNH market will impact its liquidity management and monetary policies onshore. oUtlook: Compliance with rules and regs will continue to be a major challenge in emerging markets, and especially in the larger economies that have multiple government agencies and ministries in charge of various aspects of the business playing field. It is important to never assume that just because a particular infraction has been met with look-the-otherway enforcement in the past this will continue to be the case. Political winds and targets change. And places like India actually do have impartial justice systems that offer recourse. It's also untrue that regulatory bodies are only looking to prevent reasonable business conduct.

CONCLUSION & NEXT STEPS
Asia is the most significant driver of growth for a large group of multinationals and deserves all the focus it is currently getting. Treasury’s mandate is an extension of the needs that arise from business expansion in the region, and coupled with the rapidly changing business and regulatory environment, this also makes Asia deserving of treasury’s focus. The caliber of resources needed to solve the region’s many challenges combined with its growth also speak to Asia treasury centers taking on more than their initial share of global treasury activities and increasingly scaling up for global reach. It will be
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To LeaRn MoRe

Contact: Joseph Neu 914-232-4069 jneu@neugroup.com or Anne Friberg 212-233-2628 afriberg@neugroup.com

interesting to monitor the balance of regional and global topics on future meeting agendas. Already, the ATPG pilot event covered a wide range of topics and it is likely that many of them will be revisited over the coming meeting cycles. The participants have decided to transition the ATPG from its pilot phase to a membership peer group with two meetings per year consistent with The NeuGroup’s US and European models. As group members, they would prefer an April/October meeting schedule and continue to meet in Singapore. Planning for the April event will begin in early 2012.

10 International Treasurer / January 2012

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Treasurers’ Group of Thirty-2 Peer Group
October 26-27, 2011

2011 Fall Meeting

We would like to thank the participants at the 2011 Fall Meeting of The Treasurers’ Group of Thirty-2 Peer Group for their open dialogue and relevant contributions to our discussions. Your active involvement continues to make the T30 a highly valued contributor to our network of forums for peer knowledge exchange. Thank you!
The T30-2 is a NeuGroup meeting alternative.SM

Sponsored by:

Facilitated by:

ACCOUNTINg & DIsCLOsURE
Financial instruments accounting By Dwight Cass FASB and the IASB are slowly refining the standard, but this more realistic accounting approach will hit bank capital— and could cause lenders to pull in their horns even more. The last time the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) made reportable progress on their financial asset impairment project was before the August 2011 flare-up in the European sovereign debt crisis. Revelations about the extent of European banks’ exposure to dodgy PIIGS debt, and how this has imperiled not only the banks but the euro itself, have cooled some of the enthusiasm for an accounting move that, while perhaps more realistic and useful for investors, will almost certainly squeeze bank capital by requiring more loan-loss provisioning at an earlier stage in an asset’s deterioration. Given the sluggish pace of the impairment project (and most of the other joint FASB-IASB initiatives) and growing disillusionment among US accountants and standards-setters regarding the overall goal of accounting convergence, banks may not have too much to worry about. The earliest a new standard could be implemented is in 2013. And more refinement needs to be done before the standards-setters issue the next exposure draft on this subject, expected some time in the first half of this year. The existential threat to European banks last autumn from sovereign credit risk that current accounting standards did not require them to acknowledge shows that getting impairment accounting right is and should remain a priority. Nonetheless, if banks squawk loudly enough, regulators on both sides of the Atlantic, who have already proven themselves willing to fudge stress tests and hide massive bank funding programs, might cast a gimlet eye on the project. Banks are concerned that the proposed “three-bucket” impairment standard, by recognizing expected losses before they have been incurred, will force them to boost their loan loss reserves earlier, at the expense of capital, which will already be stretched by Basel III and related measures. Ernst & Young, in a survey of 10 large European banks it conducted in August 2011, stated: “All respondents told us that the threebucket credit impairment approach will have a significant impact on the level of provisions held. Some organizations also believe that provisions will often be greaterthan-expected loss calculations used for capital adequacy tests and therefore will result in a reduction of the surplus of regulatory capital over required capital levels under Basel III.” If so, banks will have to raise even more capital than currently projected under Basel III and national “finishes”, further gutting their returns on equity and making it more difficult to lure in shareholders. The three-bucket credit impairment approach will have a significant impact. The fear is that banks, with their risktaking nails soon to be clipped further by regulators, will become extremely leery of the sort of capital-intensive activities for which corporate treasurers regularly turn to them. Alone ToGetHeR The impairment project is picking up steam just as US regulators are becoming leery of further convergence. The quality, they say in private, of IFRS standards is a major concern, and they would prefer to keep US GAAP than peremptorily hitch the US accounting standards to IASB rules when the benefits of such a move are

Impairment Accounting Measure Inches Forward

PRoGRessive ImPaiRment
NOVEMBER 2009
Exposure Draft on Loan Impairment

JANUARY 2011
Supplementary Document on Asset Categories IASB and FASB proposed dividing loans into a good book and a bad book depending on their credit risk.

JULY 2011
Deliberations Begin on Three Buckets Approach

DECEMBER 2011
More Agreements Elaborating Bucket Approach Boards decide trigger for moving out of first bucket will be deterioration in 12-month forecast of expected losses.

IASB addresses impairment of financial instruments carried at amortized cost. Proposes provisioning based on lifetime of expected losses.

Based on comments on the SD, boards begin considering a three-bucket bad book, with each bucket holding progressively impaired assets.

Sources: FASB, IASB web sites

12 International Treasurer / January 2012

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ACCOUNTINg & DIsCLOsURE
beginning to seem increasingly theoretical. But this project is of particular importance, given the difficulty investors and counterparties had during the financial crisis when they attempted to glean the true health of the banks. So even if overall FASB/IASB convergence gets back-burnered, coordinating the handling of financial asset impairment will remain a priority. PricewaterhouseCoopers partner Gregory McGahan and senior manager Jivka Batchvarova wrote, in an update they issued after the December meeting, “Both boards continue to strive to achieve convergence in this area as constituents believe that achieving convergence on the impairment model is critical. The tentative decisions made this week indicate that the boards may be one step closer to achieving this goal.” Kick tHe BUcket Banks have a number of concerns about the impairment approach, reflected both in their responses to the E&Y survey and in their comment letters. A leading worry is ensuring the bucket approach can be coordinated with their internal credit modeling and management. This means they oppose a “bright line” approach, which would decree some threshold trigger for moving an asset from one bucket to another. The FASB and IASB have provisionally agreed to allow banks latitude in this area. Another concern is the possibility that the rule forces a move from Bucket One to Bucket Two too soon, in cases where the loan may recover and be moved back into the first bucket. Banks told E&Y in its survey that this will “create significant volatility in the income statement,” and that, “Institutions are also concerned that this would lead to significant volatility in regulatory capital, which is likely to be pro-cyclical rather than counter-cyclical.” Another bank concern is with the three-bucket approach itself. Banks’ operations are often set up for a good-book, bad-book taxonomy, and about half the respondents to E&Y’s survey last August said the cost of the switch to three buckets was not justified by any benefit such an approach might yield. With IASB and FASB making notable progress on the impairment standard, despite the languid pace and the worries of the banks, it would be well for corporate treasurers to keep a close eye on the developments over the next six months, to get a feel for how the standard will emerge, impact banks’ capital and therefore banks’ interest in extending their balance sheets.

BUCKET BUSINESS
At their joint meeting in mid-December, the IASB and FASB boards made the following decisions regarding the joint impairment accounting standard. The boards: n Decided that the objective of the first bucket would be to capture the losses on financial assets expected in the next twelve months. Previously, they had considered 12 and 24 months. The banks in Ernst & Young’s survey unanimously backed the 12-month option, saying the approach aligns better with existing Basel II expected loss forecasts and other forecasts they perform. n Agreed to measure the lifetime expected losses on the portion of financial assets on which a loss event is expected over the next 12 months. n Agreed that the financial assets would move out of Bucket One when “there is a more than insignificant deterioration in credit quality since initial recognition and the likelihood of default is such that it is at least reasonably possible that the contractual cash flows may not be recoverable.” n Decided that recognition of lifetime expected credit losses would be based on the likelihood of not collecting all the cash flows, rather than using a loss-given-default method. n Agreed to offer examples of when recognition of lifetime expected losses would be appropriate. n One big problem with deciding when to move assets out of Bucket On is how to bundle small ones together in a rational manner. The boards decided upon the following principles: > Assets are to be grouped on the basis of ‘shared risk characteristics’. > An entity may not group financial assets at a more aggregated level if there are shared risk characteristics for a sub-group that would indicate that recognition of lifetime losses is appropriate. > If a financial asset cannot be included in a group because the entity does not have a group of similar assets, or if a financial asset is individually significant, an entity is required to evaluate that asset individually. > If a financial asset shares risk characteristics with other assets held by an entity, the entity is permitted to evaluate those assets individually or within a group of financial assets with shared risk characteristics.

The US accounting standard setter responded in November to the SEC’s “condorsement” approach to the convergence of US GAAP and IFRS, saying it needed to be amended to avoid the loss of regulatory authority. The condorsement proposal, floated by the SEC in May 2011 in a staff paper, essentially would: 1.  Incorporate IASB standards into US GAAP 2.  Transfer oversight authority from single regulators (such as the SEC) to a multinational regulator 3.  Cede much of the design of accounting standards to the IASB, with FASB given the chance to “endorse” rules once they’re complete and before they are applied in the US (hence “condorsement” from convergence + endorsement) The trouble with this is FASB would be forced to make a yes-or-no decision at the end of the process, rather than having control all along, and would therefore be somewhat “railroaded” into endorsing rules it might not be entirely comfortable with. Condorsement also reduces FASB and the SEC oversight authority. And the plan would rapidly set up international governance, which given the IASB’s mixed record on timely rule design, seems unwise. In its November comment letter, FASB argued for more authority for national standard setters, more independence for rulemakers in general—a reference to the IASB’s politically charged decision making, and more influence for FASB staff within the IASB.

FASB fiGHts To PRotect its TURf

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TREAsURY AND TAXATION
Global taxes

Complying with FBAR and FATCA
By Geralyn Frances Getting treasury staff ready for new tax laws and providing support via tax, legal or human resources can ease the chaos and confusion these new laws will bring. Complying with US tax regulations continues to be a challenge for corporate treasury. And with every new year comes the inevitable task of tax return preparation. But for treasurers and their staffs who manage corporate foreign bank accounts, the requirements for 2012 filing will become downright onerous. The new requirements, when combined with stricter IRS due diligence, are increasing the personal financial risk of treasury practitioners and need close attention. For instance, closer scrutiny on FBAR compliance is expected and the new IRS form 8938 needs to be prepared along with 2011 income forms. Also, FATCA, which requires individuals to file a statement with their income tax returns reporting foreign financial assets, will have implementation guidelines out soon. Here is a brief review of FBAR and the new 8938 tax form, as well as ideas for assisting your treasury staff to ensure they are meeting their tax reporting obligations. RaisinG tHe baR WitH FBAR The Report of Foreign Bank and Financial Accounts, or FBAR, is a by product of the Bank Secrecy Act of 1970 and later the US Patriot ACT of 2001, and was first introduced as a device to assist in cracking down on tax evaders as well as exposing criminal activity such as terrorist funding. In 2004 the penalties were increased to their current levels; a maximum civil penalty for a FBAR violation the greater of $100,000 or 50 percent of the balance in a foreign account at the time of the violation. Penalties can be as high as $10,000 for each violation and criminal activity can result in additional fines and/or five years in prison. The account filing requirements are individual in nature, so where there exist multiple “owners” of one account, each one is required to report the account sepa14 International Treasurer / January 2012
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rately on their individual tax form 90-22.1. FBAR is not an income tax return and is not mailed with any income tax return; the deadline for filing is June 30, 2012. Also, the form must be received on or before June 30 to be considered filed, not just postmarked on that date, and requests for time extensions to file your FBAR will not permitted. “Current FBAR rules will impose a significant reporting burden on financial professionals.” — Salome Tinker, AFP However, if you find yourself missing the filing deadline it is best to file as soon as possible and include an explanation as to your tardiness in order to present yourself in the best light. Penalties are stiff and a proactive approach to breaches, past and present, is your best bet to limit, or possibly waive, your costs of noncompliance. Remember that besides civil penalties, there may be criminal penalties for non-filing. Consulting with your tax advisor—corporate tax departments can also be helpful—is the best way to approach any voluntary disclosure. NeW 8938 tax foRm For year-ending 2011 tax reporting, the IRS has introduced form 8938. The form is far more extensive than the original draft and US individual taxpayers must now attach it to their Form 1040 individual income tax return if they have foreign financial assets that exceed a specific threshold. This threshold varies depending upon filing status, but the IRS has the authority to set the threshold as low as $50,000. For the new Form 8938, the minimum failure to file penalty is $10,000 plus a penalty of up to $50,000 for continued failures after IRS notification. For a US individual who is required, but fails, to file both an FBAR and a new Form 8938, the penalties can be imposed for both

omissions; that creates very real personal liability. And there are additional penalties for non-disclosure on income related to these accounts as well. Because individuals in the treasury and other parts of finance deal extensively with foreign banks accounts—often a regular part of their job—some voices in the industry are speaking up against the excessive personal risk these requirements place on those groups. A September 2011 Association of Financial Professionals comment letter to the Financial Crime Enforcement Network and the IRS expresses this concern, and requests that the US Treasury “reconsider its current guidance and exempt, or provide filing relief, from the FBAR reporting requirements to those US persons with signature or other authority over, but no financial interest in the foreign bank or financial account of their employers.” “Current FBAR rules will impose a significant reporting burden on financial professionals who are not the intended focus,” said Salome Tinker, AFP’s director of governance, accounting and compliance. Treasury should also adopt retroactive filing relief, she added. GUilty Until PRoven Innocent The question is will the IRS back down and consider revising some of the new tax regulation as it pertains to foreign activity? The increased work entailed in managing tax exposures for foreign banks and financial institutions is expected to be onerous, so much so that the Canadian Prime Minister met recently with representatives of the US Department of Treasury to discuss the detrimental impact and costs FATCA will have on Canadian banks. And there are rumblings from China that it plans to ignore the initiative altogether. But, despite the outcry by Canada and other countries concerned with the overly burdensome nature of the new FATCA requirements, the IRS is forging ahead.

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TREAsURY AND TAXATION
Some believe there is just too much at stake for them to not pursue tax evaders, even if unpopular means are employed. By some counts, about $8bn in outstanding tax revenue could be collected via FATCA compliance over the next decade. So, until proven innocent, financial institution clients are assumed “guilty” with a 30 percent withholding penalty imposed for non-compliance. On a brighter note, FATCA has been pushed back from the original implementation date and is now scheduled to take effect in June 2013. In addition, the IRS commissioner has noted recently that two main issues remain 1) other countries’ laws that may preclude reporting of certain information to foreign countries and 2) differences in implementation and administration of withholding requirements. As such, new implementation guidelines have been promised in the next few months. EasinG tHe ConfUsion Meeting either requirement has caused considerable havoc and lots of confusion within treasury departments, particularly FBAR; and the concern of treasury staffs is justified; personal financial risk and criminal penalties are at stake. Therefore: n Be sure to communicate early in the year any personal disclosure requirements, including all tax forms, deadlines and implications for non-compliance. n Delivering information to employees early will help avoid revisions to their personal tax returns. n Pay special attention to new staff members or those with new roles and responsibilities that may be facing FBAR requirements for the first time, as well as any temporary or contracted workers. n Human resources departments may be of assistance ensuring past employees are also provided with required documentation to complete forms. Individuals will start to prepare 2012 tax forms soon. Communicating with those treasury staff it will impact, providing corporate support, via tax, legal or human resources, will go a long way in easing some of the confusion created by FBAR and the new tax requirements, and one would hope result in 100 percent compliance. As for FATCA, there are some wrinkles for the IRS to iron out; however, this will be the year that financial institutions and corporates will start preparing for 2013 compliance.

THe HUnt foR Us taxPayeRs Goes Global
The federal government’s two latest tax initiatives to increase compliance among US taxpayers with overseas assets is seen as onerous by many treasury practitioners. Here’s how the two laws compare, according to the American Institute of CPA’s.

FATCA FORM 8938
Filing Deadline Minimum Filing Threshold Who Must File Penalty For Not Filing April due date (extension allowed), with tax return $50,000* Individuals Civil: Up to $10,000 for each 30 days of non-filing, plus others; criminal penalties may also apply

FBAR FORM TD F 90-22.1
June 30, to special unit of Treasury Department $10,000 Individuals, estates, trusts, U.S. business entities Civil: Up to the greater of $100,000 or 50% of account balance in year of violation, plus others; criminal penalties may also apply

TYPE OF ASSETS TO DISCLOSE Accounts at a foreign financial institution, owned directly Accounts at a foreign financial institution, signature authority but no financial interest Direct ownership of stock in foreign corporation Foreign partnership interest, such as offshore hedge fund or private equity fund Interests in foreign financial assets with joint ownership Interest in foreign financial assets, constructively owned Yes No Yes Yes Yes, and each joint owner must report separately Yes for some Yes Yes No No Yes, and each joint owner must report separately Yes, if ownership is greater than 50% of the entity

* Threshold applies to aggregate value of all affected assets, as of 12/31/2011. Range is from $50,000 for a single taxpayer living in the US to $400,000 for couples filing jointly who live overseas. There are higher thresholds for intra-year asset values.
Source: American Institute of CPA’s, as of December 1, 2011

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International Treasurer / January 2012

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Join a Peer Group Today!
The Treasurers’ Group of Thirty 1 and 2 n The Tech20 Treasurers’ Peer Group 1 and 2* n The Bank Treasurers’ Peer Group  n The Engineering & Construction Treasurers’ Peer Group n The Internal Auditors’ Peer Group n The Corporate ERM Group
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These are challenging times so don’t look for solutions alone

The FX Managers’ Peer Groups 1 and 2 n The Global Cash and Banking Group n The Treasury Investment Managers’ Peer Group n The European Treasurers’ Peer Group n The Latin American Treasury Managers’ Peer Group n The Asia Treasurers’ Peer Group
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* Indicates groups in their pilot phase.

To learn more, go to www.neugroup.com/peergroups
or contact Joseph Neu (914) 232-4069
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jneu@neugroup.com