Cash Management with International Activities
|Cash Management||Reporting and Compliance|
|Finance (Including Payroll)||Research Compliance (Federal and Local)|
|Human Resources||Risk Management (Safety and Security)|
Cash needs for an international program abroad come in many different forms, from paying local contractors and vendors to supporting students trips. Due to restrictions on cash crossing borders and opening foreign bank accounts, there are many challenges with meeting the cash needs of programs, especially due to the often urgent timeframes of the cash needs in areas that aren't always in major cities.
Many universities have corporate cards, direct billing arrangements, and banking relationships already established for domestic travel needs, and many of these options can be used for international activities as well. But often they are not sufficient for all programs needs. A major university with an international footprint should be working with one or more of the recognizable global banking institutions. Multiple banking partners may be necessary if the university is operating in multiple regions because even global banks are limited in their ability to offer services in certain regions. Global banking partners can offer increased capabilities for operational efficiencies and internal control, such as online tools and reporting capabilities. Many banks can also offer transfer services to certain countries where regulations allow.
The following is a matrix of possible options for managing cash needs abroad.
Options for Managing University Cash Needs Abroad
University bank accounts
When opening, maintaining, or closing bank accounts abroad the university must be aware of and comply with any related U.S. and host-country laws and reporting requirements. Failure to comply with these laws may lead to fines and/or reputational damage. The university should consult with legal counsel in the home and host country prior to opening a bank account outside the United States. Treasury should be given the opportunity to review the banks in the host country and make appropriate recommendations. Stakeholders within the university should be aware that opening a bank account outside the United States may take many weeks or even months due to the potential need to establish a legal entity in that country and to other factors.
Internal policies and procedures must be established designating who is authorized to open, make changes to, and close bank accounts controlled by your institution. (These authorized individuals typically will be in cash management and/or treasury management.) The opening of any institutional bank account should require the approval of the university President/Chancellor, Provost or CFO. Policies and procedures should also include information on how to select and approve individuals to represent your institution as authorized bank account signers inside and outside the United States. You will not only need authorized signatories but also authorized administrators of the accounts. You can also consider setting multiple signature limits depending on the type of account and location of the signatory. Authorized signers located outside the United States may be employees of your institution or in some cases may be designated agents.
Policies and procedures should further include information on reconciling bank accounts outside the United States. They should indicate the data to be included in reconciliations and when and how to send the reconciliations to cash management. Reconciliations should identify differences between the bank balance of the foreign bank account statement and the university's general ledger account (rather than just reconciling activity from the bank statement to receipts).
Policies should specify that authorized signers in host countries may not delegate their authority without prior written approval from the relevant financial executive and from cash management. Authorized signers should be notified that the IRS may require them to file a personal Report of Foreign Bank and Financial Accounts (FBAR). See additional discussion in Statutory Compliance and Reporting, in the Report of Foreign Bank and Financial Accounts section.
Finally, policies and procedures should include information on closing bank accounts outside the United States in the event of program closure or for other reasons.
Corporate cards are the most desirable option for funding business travel and in certain cases costs of a program. Corporate cards provide a safe means of payment, and they are incorporated into the university process of expense reimbursement under accountable plan or similar home-country reimbursement rules. The university should review the policies of the corporate cards as some international needs may conflict with the existing policy. In addition, the fees associated with international transactions and currency needs should be reviewed. Pre-paid cards can be handed out like cash and are good for short-term trips and assignments.
Another option is "reloadable" cards, which may need a line of credit and need to be set up under a separate tracking system.
Cash advances to employees are most often used for travel costs that have not yet been incurred and thus cannot be reimbursed. There is, however, growing use of cash advances to fund program expenses as well, which increases the difficulty of obtaining adequate documentation. Examples of this include cash payments to very short-term contractors often used for research projects.
University policy often requires the collection of receipts to support the expenditure of funds. Policies requiring receipts or documentation for all cash expenditures by employees are often consistent with the accountable plan rules of the IRS. Inadequate documentation can lead to a taxable income situation for an employee receiving advances in addition to inadequate controls over cash disbursement of university funds and the administrative burden of maintaining a cash advance process.
Examples of policies or procedures which may be required of employees receiving advances include:
- The cash funds will be locked in a secure place at all times.
- The employee/custodian may not delegate responsibility for the funds.
- If the cash funds are no longer required, they must be returned to the finance office promptly.
- All cash advances must have proper back-up and supporting vouchers (i.e. invoices and receipts) and will be made in accordance with the current university policies.
- At all times the total of the receipts plus the cash must equal the advanced cash balance.
- In order to replenish the funds with an additional cash advance, a listing of disbursements must be submitted to the finance office, complete with supporting receipts, account coding and proper authorizing signatures.
Taking cash on airplanes
There are legal, control, and personal safety implications of employees taking larger sums of cash in the course of their travel to assist with their cash needs in a foreign country. This is also known as "cash in a suitcase."
The legal requirements generally involve official declaration of the cash to immigration officials above certain limits rather than laws that limit the amount that can actually be carried. In the United States, for example, federal law requires travelers to declare currency in excess of $10,000 to a U.S. Customs Inspector upon entry or exit from the country.
The limit is a little higher for the European Union (EU) at 10,000 euros. Other countries, however, are lower than the $10,000 set by the United States, such as China, whose limit is currently at 20,000 RMB or about $3,000.
Failure to declare currency in accordance with local laws may result in seizure of the currency and/or criminal prosecution. Limits on monies leaving countries also vary and are not necessarily the same as the rules for cash being brought into a country.
Currency generally included in these declarations includes:
- Currency notes and coins
- Bank drafts
- Checks of any kind, including traveler's checks
Declaration forms are typically available at the airport or port of entry or exit from a country, or they may be downloadable to complete ahead of travel.
Opening personal bank accounts
Another common method of funding cash needs abroad is for an employee to open a personal bank account in a foreign country at a bank convenient to the activity's location. This has certain advantages, but it is not a recommended option since it is generally not good practice for individual employees to conduct university business through a personal bank account.
The advantages of this approach are convenience for making local payments, reduced exchange rate fees, efficiency of funding (such as wires from the home country), and avoiding taking cash while traveling. But this also entails advancing funds to an employee, which means the control is passed to the employee prior to the payments being made on behalf of the university.
If an institution uses a personal bank account for university business it is important to have another employee's name on the account in the event one of the employees becomes incapacitated and university funds would then become inaccessible. Personal tax implications discussed in the cash advance section above also are still present for all individuals named on the account as well if the employee does not keep adequate documentation and promptly file with the central expense administration of the university following disbursement.
Opening a personal bank account is often easier than opening a university or corporate account. No legal entity registration is necessary, but banks often require a passport, proof of address, and income details (pay slip or other means of proving financial position). A bank also can sometimes open an account within one to three business days if in the account is set up in person, but it can take longer if the bank is processing an application by mail.
In addition, a university should be cautious with countries where there is little or no official banking supervision by a responsible government or other governmental regulatory agency. The funds deposited on behalf of the university may not be protected in these countries.
Finally, per FBAR reporting the opening of a bank account in a foreign country may subject a U.S. citizen-as defined by the IRS-to annual reporting requirements to both the IRS and the Department of Treasury regardless of whether the purpose and use of the account are strictly for purposes of the university.
Managing currency fluctuation for an academic program
(Please note: This section is not intended for the management of endowment assets but rather academic programs whose objective is to maintain more predictable cash flows for the budgetary management of programs whose expenditures are primarily in a currency other than that of the home campus.)
Currency exchange rates are a common issue for international programs whose budgets are derived in the home-country currency with expenditures paid in a host-country currency. Fluctuations from the home-country currency can often result in unexpected gains and losses for academic programs. While gains are a welcome windfall for already tight budgets losses can often be very damaging to the academic purpose of an international program. There are some practical ways to reduce currency risk and the alternative of a currency hedge such as a forward contract.
Practices that can be employed in lieu of currency hedging to minimize currency risk or the impact of currency fluctuations to budget predictability due to currency fluctuation include:
- Minimizing cash holdings in currencies other than the home-country currency, and funding programs from the home currency on a shorter-term basis(e.g., monthly or quarterly).
- Structuring contracts with third parties or subcontractors in the home-country currency whenever possible, particularly when paying with sponsored funds that will be received in the home-country currency.
- Budgeting for modest currency exchange losses each year regardless of market speculation to minimize the impact of losses.
Currency hedging may also be considered. Hedging, however, should only be considered for budgetary considerations and not for speculative purposes by academic administrators. Conditions which should be present for hedging considerations:
- Predictable cash outflows (six months in advance of a new fiscal year) on a quarterly basis can be established with some degree of accuracy, ideally during the university budgeting process.
- Outflows will be in a foreign currency, but funded by the home-country currency either from endowment assets, current-use gifts, or other domestic funding sources.
- Foreign currency being expended is fixed and predictable (i.e., outflows will not be in multiple currencies).
- Minimum budget thresholds should be established. Due to administrative costs and transaction fees hedging may not be practical unless the size of a program budget justifies the effort. A suggested amount may be budgets of $100,000 or more.
Pros of engaging in an academic program hedging practice:
- Budget predictability in home currency.
- Relatively inexpensive transactional costs (when compared to large program budgets).
- Universities can often leverage current banking relationships established by the treasury offices within the central administration.
Issues that may arise when engaging in an academic program hedging practice:
- Inconsistent application of the hedging practice will almost always result in losses over the long term. (See additional discussion below.
- Cash outflows for the year may be difficult to predict accurately for most programs.
- Administrative support is required and may be an incremental increase to current infrastructure.
The issue of "inconsistent application:" A hedging practice that is not applied consistently will almost always lead to currency losses over the long term. If a hedging policy is employed by a university it should be required to be applied consistently over a minimum time period of at least five years or more.
Hedging decisions, when left to the discretion of the administration of an academic program, are often made in reaction to a period of a weakening or strengthening home currency. If the home currency of a university begins a cyclical swing in a negative direction and budget losses are incurred, a hedging practice may be employed reactively after losses have already been incurred. Conversely, once the home currency appreciates against the foreign currency, resulting in losses from the hedge, decisions will often be made to discontinue the hedging practice. This reactive application of a currency practice will almost always result in losses over the long term.