Cash Pooling - cross border

Commentary

Saudi Arabia and the United Arab Emirates. These two countries draw a lively and enthusiastic participation every time we discuss them: they are important markets, due to their wealth, but they have historically been quite challenging. Despite their strong financial position and stable currencies, their regulations can be difficult to manage – and their position at the heart of a region of massive geopolitical tension adds to the complexities.

Saudi Arabia, while sitting on massive oil reserves, has always been very conservative. It only began allowing 100% foreign ownership of companies in many sectors in 2019: most MNCs worked via distributors, joint ventures and representative offices. So the economy is relatively open, but MNCs often have a weaker presence than would normally be expected. With recent political changes, many rules have been relaxed. Tourism and inward investment are encouraged and there are some truly massive infrastructure investments. As companies establish their onshore presence in the country, they are even required to establish a regional headquarters.

The UAE has always been more open, though this varies amongst the seven emirates which compose it. The two main ones are Dubai, which has always been a major port and trading centre, especially between India and East Africa, and Abu Dhabi. Dubai is the most open, and has traditionally welcomed foreigners and foreign investment: it is where most of our peers have operations – often managing the region - and where it is easiest for them to work.

Corporate Treasury & Banking in Saudi Arabia

Most of our corporate treasury peers are setting up RHQs in Saudi, as required by the legislation. Many of the challenges they face are part of the process of transitioning from an offshore mode of operations using distributors and representative offices, to being fully onshore. To some extent, the same can be said of the international banks.

Though the currency is pegged to the US dollar, and freely convertible, there are challenges:

• Cash pooling is only allowed with official....

Commentary

China is in the news a lot at the moment. Interestingly, this – well attended - call was very much in line with our usual discussions on the country: not a single mention of trade wars or tariffs. On the other hand, there was a lively discussion about all the usual issues related to pooling cash and managing banking relations – issues which show no sign of going away.

All peers on the call reported that business was strong, with most generating cash. They also repeated a theme familiar to people who know China: contrary to the common perception of a highly rigid and regimented society, there is a lot of confusion as to what the regulations actually are, and there are regular inconsistencies in how they are applied. 

This “summary” is long (the full report is 15 pages of granular detail): a lot of details were discussed, and these are generally appreciated. As always, these are the experiences and views of our peers, (lightly) edited for clarity.

The main topics:

• Domestic cash pooling: many, but not all, peers practice this. However, they do all come up against limits related to the equity of the pool header. 
• Cross-border pooling: this is where there is the most uncertainty.
  • There are two main schemes, operating under licences provided by either PBOC (People’s Bank of China) or SAFE (State Administration for Foreign Exchange). These have different quotas, rules and requirements and approval delays. 
  • There has been talk for some time that the two schemes will be merged, but there is little concrete evidence this is happening.
  • It has been suggested that, while existing schemes continue to operate, the approval of new ones has been slowed. Several peers are looking to implement new...

Commentary

With complex countries, we usually think of emerging markets. Japan is one of the most advanced, largest and affluent economies in the world – but it is also a very complex place for foreign companies to operate in.

Usually, the complexity for treasurers comes from regulation. In Japan, this is not the case: the yen is freely traded in one of the deepest markets; cash can be pooled and swept both within the country and across borders; one participant does POBO there; Japanese banks willingly report transactions and balances by MT 940; it has deep and open capital markets; and four of the world’s twenty largest banks by assets are Japanese. Instead, the complexity comes from a very strong culture, which is often not well understood by non Japanese, and which leads to a different way of doing business.

This call, which was well attended and quite animated, went into the challenges foreign treasurers face in this environment. Peers raised the following:

• High bank fees: Japanese banks are reluctant to negotiate these down
• Japanese banks are not used to RFPs for cash management – this is not how the domestic market operates. Many large Japanese companies have strong historical relationships with their banks, which often involve minority shareholdings.
• While MT 940s are not an issue, one participant faced significant issues getting their Japanese bank to implement even a simple host to host communication
• Communications challenges: it can be difficult to find Japanese employees who speak good English – very few bankers in domestic operations speak it.
• The need to carefully manage business meetings: these are usually more formal than in many other cultures: deference to senior personnel is required
• Difficulty managing onshore operations from a remote location: the local online banking tools are nearly all Japanese language only
• The language issue is further complicated by the katakana character set
• Resistance of local teams to change, especially if it involves working with foreign banks
• Complexity in managing relationships and wallet share with Japanese banks, who are often key global providers of credit and FX
• The use of company chops instead of signatures, and the related control issues
• The requirement to use local bank accounts for certain types of tax payments
• Security and confidentiality in Japanese online payment systems is not best in class – one participant had an issue with a single person (not in HR) making all payroll payments
• Repatriating cash via dividends and intercompany loans is not a problem, but it brings the usual complications: the need for retained earnings (one participant’s business receives advance payments), withholding tax and currency hedging cost. 

How to handle these problems?

• One peer did an RFP a few years ago, and awarded

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