Articles (Based on Webcasts)

Cash Management Challenges Abroad

When institutions engage in activities abroad, a key consideration is their cash management practices.  Understanding the challenges in the global marketplace and being thoughtful about cash protocols and policies will go a long way to mitigate risks to both employees and the institution, and ensure a seamless process on the home front. This topic was discussed in a recent NACUBO webcast, "Show Me the Money: Cash Management Challenges for a Global University," given by Bob Lammey, senior director of higher education and non-profits at High Street Partners, and Carrie Nelson, assistant vice president of international finance at Carnegie Mellon University.

As a first step, institutions need to consider how their activities and programs will be funded and how to get cash to their employees who are traveling or may already be overseas. They must think differently about their cash management operations when conducting business abroad, notes Carrie Nelson. For instance, there could be a requirement to register in the country in order to set up a foreign bank account. It also means that the institution may be subject to local laws, regulations, and transaction fees, which it may not have been previously. Institutions must determine who will manage the account and note their possible unfamiliarity with local banking regulations. Furthermore, there may be U.S. regulations and reporting requirements triggered by international transactions. To add to the complexity, domestic banking relationships may not be able to assist with international banking needs.  All these factors should be carefully weighed when entering into the international cash management arena.

The Global Scene

Certain regions around the world, more so than others, compound the cash management challenges, says Bob Lammey. For example, Europe/Oceania is seemingly the most familiar to U.S. banking practices and standards. In South/Latin America, the government often imposes heavy banking regulations, and it may be the most difficult region to locate a bank with a U.S. connection. Likewise, the government heavily regulates Asia, though it is often easier to find banks with a U.S. connection in certain countries-but high restrictions exist on the repatriation of money. In Africa and the Middle East, cash-based transactions are the most common. However, due to the lack of banking infrastructure in many rural areas, credible banking institutions often do not exist, and, as a result, fraud and personal safety issues are more prevalent. There is also a high government ownership of banking institutions and more strictly imposed controls over the movement of international currencies in the Middle East.

In terms of banking partners, institutions with international footprints should work with one or more of the major global banks. In certain circumstances, multiple partners may be necessary if the institution operates in multiple regions. The advantage of working with global banking partners is that they can provide increased capabilities for operational efficiencies and internal controls, such as online transactional tools and reporting services. Many banks can also offer cash transfer services to certain countries where regulations allow. When identifying a foreign bank to work with, it is often helpful to choose one that is affiliated with the institution's U.S. bank and that collaborates with its treasury office, advises Nelson.

Cash Operations

When engaging in cash management practices abroad, five main areas should be considered:

Mitigating risks with cash operations can be done in a number of ways, and it can start on the home front with sound oversight, notes Nelson. She advises that the individual departments on campus, who set up these activities, obtain approval from the provost's office and also work with the international office and/or administration when opening foreign accounts. She also recommends including the treasury/cash management office on any international committees so they can be involved with this process. Working closely with the other departments-such as accounts payable, payroll, human resources, and cash operations-and continually monitoring the activities will help alleviate any issues.  For example, payroll and/or human resources can flag a new employee who is located outside of the United States, and partnering with accounts payable on expense report audits and wires can help flag any violations. In addition, policies and processes should be established that are specific to international operations.  For example, when opening foreign accounts, multiple accounts may be required to separate the funds, such as having a main account, payroll, and gift accounts.  Also, consider maintaining metrics to monitor cash transactions and new currencies. Furthermore, the duties between the U.S. office and the local office abroad should be segregated.

Other key areas to determine upfront include: 1.) a cash management protocol and process for documentation, reconciliation, and approvals; 2.) how to carefully monitor program advances, particularly when the institution does not have a foreign bank account; and 3.) how to implement program cash payments when a foreign bank account exists. While cash advances and locally managed cash payments are not recommended options, preferred practices include using an institution's credit card; wires; and payments through an institution-established, local-entity bank account via check or wire with documented approvals.

Minimizing Risks

Cash management practices abroad are subject to a host of issues, cautions Lammey, such as carrying cash in a suitcase and potential employee tax liability when using personal bank accounts to transact the institution's business. Employee cash advances also increase the overall safety concerns as well as contribute to potentially fraudulent practices with untrained staff using the cash in offices and, due to the lack of controls, foreign partners managing the funds. These potential risks can be minimized, notes Lammey. For example, where possible, wiring payments from the United States is a good practice. Trust accounts may also be an option, since they can be set up by a third party for the benefit of the institution but often do not require a legal registration. Other methods of moving cash include bank transfers (especially for a one-time transfer); reloadable bankcards; and Western Union, which may be especially helpful in remote areas. Furthermore, Lammey recommends using a safe for petty cash in the office as well as inquiring about controls of foreign partners to help prevent fraud.

Using personal bank accounts for the institution's business is not preferred, though it may be better than carrying cash in a suitcase-one issue with carrying cash is that many countries have minimum declaration limits, which may be lower than that of the United States ($10,000). If the institution determines that opening a personal account is warranted, similar controls used for cash advances should be employed, as is having another employee's name on the account in the event of incapacitation. The institution should be aware that there are personal tax implications and reporting requirements for all individuals named on the account, as the IRS could consider the payments taxable income in the absence of adequate documentation on how the funds were used. In countries with a lack of banking supervision by the government, it is imperative to have a reputable bank, since any funds deposited on behalf of the institution may not be protected.

Banking Controls

With banking controls, Nelson says to consider processes that you would not normally implement within the United States. Being thoughtful upfront about the procedures and controls for foreign bank accounts will prevent issues down the road. For instance, ask questions such as: 1.) What is the transaction authority going to be outside of the United States? and 2.) What payments will be authorized on the main campus vs. by international partners? It is a good practice for the institution's senior leadership to approve all new international banking relationships and to designate specific signatory specifications for each account with different signatures within and outside of the United States. Additionally, documentation should be required to support foreign checks, which are then sent to the home office for reconciliation to the bank statement. It is advisable for separate employees to administer the bank account so that there is an adequate segregation of duties on all account reconciliations.

An approval process for international practices may require additional layers for accounts payable, payroll, checks, and wires (via online banking). For petty cash, designate a custodian and use disbursement authorization forms-always accompanied by receipts. All account reconciliations should be approved by a manager, and limits should be set for manual check payments with designated signatories.

In addition to internal controls, the U.S. Government has important global regulatory requirements, which include the following:

Cash Management in Developing Nations

Institutions need to be aware of two common issues-inadequate controls and incidents of fraud-when conducting activities abroad, particularly in developing nations. These issues occur during cash handling, such as when: 1.) A paucity of documentation exists and accounts reconciliation does not occur; 2.) An improper vendor selection process exists during procurement; or 3.) The improper authorization of expense reimbursements occurs. The challenges for institutions include inadequate staff who lack source documentation and who haven't been properly trained to monitor and detect fraud, or properly trained staff in central administration who also lack source documentation (e.g., checks, etc.).

Furthermore when conducting cash management activities in developing nations, the institution has a "duty of care," meaning that it must ensure its employees operate in a safe manner and that it addresses all employee risks. The institution can protect against these risks by ensuring that all employees have the proper training and documentation when entering or exiting a foreign country. For cash advances, certain controls should be in place so that employees have little discretion in the cash handling; a paper trail as well as regular cash counts are paramount. In these areas, carrying cash across borders increases the risk and consequences of random acts, so employees should declare the cash at immigration border control checkpoints vs. being deemed noncompliant.

Finally, institutions must be cognizant of potential tax obligations with foreign governments. Certain types of payments may be exempt from withholding taxes, and tax treaties may provide certain income tax exemptions; overall, it is important to be aware of any tax obligations at the outset.

When institutions engage in international activities, the cash management process can be a challenge due to the unfamiliar banking environment with new regulations, the lack of control over the process, and the potential exposure for fraud, to name a few. The careful planning of cash management protocols, controls, and systems upfront as well as working collaboratively with the respective departments across campus will help reduce the risks and contribute to a successful outcome abroad.