embracing compliance: 5 best practices for treasurers

Part IV:

Embracing Compliance - 5 Best Practices for Treasurers

July 27th, 2017

© 2017 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 2

Craig Jeffery Managing Partner Strategic Treasurer

Today’s speakers

Melody Hart Senior Consultant Strategic Treasurer

Bob Stark VP, Strategy Kyriba


1) Today’s relevant (to treasury) regulatory requirements

2) Leading practices in Regulatory Compliance

3) Framework for monitoring and managing compliance

Today’s discussion

Section 385 SOx (Fraud)

FBAR Hedge Accounting

SWIFT CSP Basel III

PSD2 (APIs) Sovereign Regulations

Top Upcoming Regulatory Requirements


Polling Question #1


Section 385: Implications

Debt and Stock Treated Differently

Documentation Requirements

Proposed Documentation Requirements

System Requirements

Processes/Staff Work • IHB

• Pooling

Potential Impact


Documentation Requirements: – Must be met in order for certain related

party debt instruments to be respected as debt.

– If not satisfied, the instrument would automatically be treated as stock, subject to a reasonable cause exception.

– Debt-equity factors traditionally considered by courts would be irrelevant.

– Taxpayers, however, could not affirmatively use the rule to reduce tax liability.

Section 385: Required Documentation

(https://www.fenwick.com/publications/pages/section-385-proposed-regulations.aspx)

Will affect companies both domestic and foreign in how they treat their debt and stock as well as their documentation process and requirements.


Section 385 – Prepare for Impact

A leading practice: begin documenting now.

1. System. Assess your system’s capability to handle these requirements.

2. Inventory. Track your intercompany debt inventory

3. Template. Create documentation template

• Create master agreement(s)

4. Credit Process. Determine credit process and (debt capacity analysis)

5. Document. Document each intercompany loan

6. Checkpoint. Establish documentation checkpoint

• Inventory

• Credit Analysis


The Context of FBAR BAM

The risk of failing to provide treasury controls (standard of good corporate conduct) represents a significantly higher level of exposure then the well-accepted controller view on bank reconciliation. The default position for treasury visibility and account

controls can not be derived from a simplistic ‘what is the cost-benefit’ query.

Standards of Good Corporate Conduct – Bank Account Management

Standard

Of Good

Corporate

Conduct

Controllers Treasury

Bank reconciliation for all accounts on at least a monthly basis.

Visibility to every operational account on a daily basis.

Account level controls applied via banking services and internal processes.

Transaction level controls applied via banking services and internal processes.

Every Bank Account Represents a Point of Exposure

Bank Account Management is a

major area of weakness for

many organizations.


FBAR is a critical component of a much larger process. Bank Account Management encompasses a broad set of operations.

FBAR & BAM: Looking Under the Surface


FBAR: Context of Requirements

FBAR Overview Steep Penalties for

Violations Who is required to file?

Signatory

Authority

Financial

Interest

Financial Accounts outside the US

Aggregate maximum value exceeds

$10,000

US Person

• A United States person must file an FBAR if that person has a financial interest in or signature authority over any financial account(s) outside of the United States and the aggregate maximum value of the account(s) exceeds $10,000 at any time during the calendar year.

• For violations deemed to be willful, the penalty is the greater of either $100,000 or 50% of the account

• $10,000 fine for violations

considered non-willful • Any criminal Intent

associated with the failure to file an FBAR will result in up to $250,000 in fines, 5 years in prison, or both.

Description: Required reporting by companies and individuals of all foreign accounts owned or on which they have signatory authority. Purpose: Anti-terrorism; anti-money laundering Key Elements of Importance: Individuals must file for 2010-2017 by April 15, 2018. Companies must provide employees the required information.


SWIFT CSP: What You Should Know

• SWIFT’s Customer Security Program (CSP) is designed specifically to support their customers in the fight against cyber attacks.

• The initiative requires action on part of users to comply with the security controls.

• The program requires organizations to “self-attest” against SWIFT’s mandatory security controls using the KYC registry application.

• Users must self-attest their status by December 2017.

• Self-attestation is required for every organization with a live 8-character BIC.

*diagram provided by SWIFT


SWIFT CSP: Control Framework

*diagram provided by SWIFT


Regulation in Europe, effective Jan 2018

Most interesting for corporate treasury: banks must open platforms (via API) for bank reporting and payments

– Affects all US banks doing business in Europe

– Several US banks are planning to make APIs available across entire global platforms

Payment Service Directive (PSD2)


PSD2 → APIs in Treasury Management

Payments Reporting

Trades and

Market Data

Cash Forecast & Payments Journal Entries

Expectation that APIs will replace FTP

‘host-to-host’ connections

APIs streamline other treasury integration; expect to see greater

leveraging of APIs

Treasury Management

System


SOx is well understood by treasury

Audit trails and attestation of controls has been in place for 15 years

Fraud & Cybercrime has forced re-evaluation of payment controls

CIOs asking for more

More refined separation of duties

Monitoring: workflow, audit trails, transactions

Real-time fraud detection

Sarbanes-Oxley


First payment to a new (or newly updated) bank account

Changes to a payment that was imported from an ERP

Split payments below the approval threshold

International payment to a country where there is no known Supplier

Payment not consistent with the amounts / dates of the payment

history

Domestic transfer whose beneficiary’s bank account is located in another

country

Sarbanes-Oxley: adding new fraud scenarios

Creates requirement for real-time monitoring and detection


Posted to General Ledger

Derivative Accounting

Derivative Transactions


Posted to General Ledger

Hedge Accounting

Derivative Transactions

Balance Sheet Account (e.g. OCI)

Profit & Loss Accounts


Document Assess Measure

Document • Why am I hedging? • What am I hedging? • How do I know it is effective?

Assess Prove hedge is going to be

“highly effective” (through effectiveness testing)

Measurement Calculate the effective and ineffective portions (because the values go to different places)

Hedge Accounting


Basel III: Goals & Results

Goals: To further stabilize banking.

• Banks must be able to

withstand a 30 day system-wide liquidity shock.

• To strengthen governance and transparency

Results: Raises the cost of funding in normal times

and ultimately will raise the pricing of

bank products.

• Regulatory changes have direct and

indirect effects on bank profitability.

• Basel III is a banking regulation that has an impact on corporations.


Basel III: Impact

Bank Impact Bank Potential Reaction Corporate impact

Increased Capital requirement, lowering returns

• Increased pricing to obtain higher return

• Increase higher-rated and shorter tenor loans

• Preference for drawn lines • Product/business changes

• Higher banking costs • Credit availability reduced • Increased pressure for ancillary

business • Limit unused liquidity • Loss of banking partner

Increased and higher quality liquidity buffers, increasing costs

• Preference for retail (small) vs. wholesale deposits

• Need for assets with high liquidity • Design of products that consume

less capital

• Lack of availability for short term deposits – shift to longer term deposits, requiring robust cash forecasting

• More fees in lieu of balances • Need for greater visibility and

access to trapped cash


Operational Cash – no significant changes

Cash typically left in the bank

Utilize earnings credit (when available), as implied returns higher than short term deposit options

Not seeing the “move cash around” to maximize earnings credit at all cash management banks that we saw in 2008/2009

Impact of Basel III on Corporate Treasury


Non-Operational Cash – very different landscape emerging

What we may expect

Earnings credit maximized (or close to) by using operational cash

Overnight deposits – either low rates or may not be available at all

Committed term deposits – may offer more yield in return for reduced certainty of on-demand withdrawal (e.g. > 30 days)

Domestic subsidiaries of non-US banks – follow same regulations but are finding ways to offer comparatively high rates

Impact of Basel III on Corporate Treasury

Leading Practices in Regulatory Compliance


Alligator Closest to the Boat

Calibration of Attention

You need a process to handle the alligator.

Timeframe: PROPOSED/ DEVELOPING

Timeframe: FUTURE

Timeframe: NEW

Timeframe: ESTABLISHED

1-3 years

Timeframe: ESTABLISHED

2-5 years +

DIRECT

IMPACT

INDIRECT

IMPACT

FBAR Individual

FATCA

EMIR

Loan Covenants

FBAR Corporate MM Reform

Dodd-Frank 2

Basel IV

Basel III

PII Regulations

PCI

NACHA NACHA

Dodd-Frank 1

Sarbanes-Oxley

Section 385

PSD2

IFRS16

ASC815


1) Adopt a formal framework for managing compliance

2) Ongoing monitoring and calibration of compliance responses as a group

3) Specific monitoring assignments with specific assignments to monitor

4) Leverage tools and software

5) Outsource headaches (especially in the first few years), managing larger items internally

5 Leading practices

Framework for Monitoring and Managing


Compliance Framework Example

Compliance Perspective Sensitivity & Resourcing

Compliance Categories Inventory

Calibration of Compliance Issues

Policy

Monitoring Methods Accountability

Managing & Reporting

Co

mp

lian

ce:

Per

spec

tive

&

Stra

tegy

Co

mp

lian

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Iden

tify

&

Cal

ibra

te

Po

licy

| M

anag

e, M

on

ito

r &

Rep

ort

Positioning

Perspective

Industry

Resources Corp/Treasury

Relevance

Timing

Category Determination

Inventory of Compliance Exposures

Accountability Assignments

Monitoring Methods

Create

Tracking (Status, Preparedness)

Communication Meetings

(Annual, Quarterly)

Accountability Assignments

Leader Follower Minimum: SGCC

Existing Immediate Emerging Industry Specific Direct Impact Indirect Potential/TBD

General Industry Treasury Inventory Management


Monitoring only works if it gets done – Assign specific monitoring tasks to specific people and time frames

– Use SOX-like sign offs to evidence completion

Tools and software exist to make tracking easier – i.e. EBAM/FBAR

Determine when to outsource – If it is a headache, an administrative burden , and does not provide value add,

then outsource and free up Treasury time for more important tasks.

Monitoring and Tools


Polling Question #2


Most financial regulations do not affect corporate treasury, but when they do…impact is significant

Effective compliance is seeing the opportunity for the organization to benefit (e.g. improved bank account controls)

A framework and established compliance process means you are not fighting fires after they start

In Summary

Questions?

Craig Jeffery [email protected]

Melody Hart [email protected]

Bob Stark [email protected]

mailto:[email protected]




Additional resources

eBook: The CFO’s Toolkit - Minimize Risk and Ensure Compliance Download at http://kyri.ba/minimizeriskebook

http://kyri.ba/minimizeriskebook


Thank you for attending!

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embracing compliance: 5 best practices for treasurers

Economy & Finance