Cash concentration is an established practice for many organizations, especially on an in-country basis.

Cash can be typically swept or zero-balanced to a single header account, where it is available to support the wider business’ working capital with any surplus invested in the external markets.

Companies operating in more than one country often want to manage their cash in a similar manner. Pooling solutions, both physical and notional, are available that make it possible for multinationals to concentrate cash regionally and globally. Yet, there are still multiple hurdles facing multinational corporations that want to concentrate all their cash on a regional or a global basis.

Regulatory Issues

Local tax and financial system regulation can make it difficult or impossible for companies to include certain bank accounts in a cross-border cash concentration structure. Regulations vary between countries, with the most common sources of regulatory restriction on cross-border cash concentration being:

• Currency restrictions. Collectively, currencies that are not freely convertible for foreign currency are sometimes referred to as “blocked” currencies, with examples being the Brazilian real and the Indian rupee.
• Bank capital requirements. Without the right to offset a debit balance with a credit balance in the event that a client fails to repay an overdrawn account, banks may not offer notional pooling without charging for any regulatory capital it has to hold against the liabilities.
• Transfer pricing. OECD transfer pricing guidelines require companies to apply arm’s length pricing on cross-border intercompany payments, such as the intercompany loans created by a physical cash sweep. Treasurers need dedicated processes and systems to document decisions on intercompany credit risk, apply arm’s length interest rates to internal transactions, and have an accurate record-keeping process so that the company can demonstrate compliance with any interested tax authorities. 
• Withholding tax. Many countries apply withholding tax on cross-border payments, which can make it uneconomic to concentrate cash via regular sweeps, although companies will take their own positions on whether it is economical to repatriate cash annually via their dividend policy.

Operational Considerations

Some practical considerations arise from these regulatory concerns:

• The management of non-convertible and less frequently traded currencies. By definition, there is no market for non-convertible currencies, and the lack of a deep market for other, less frequently traded currencies can make these currencies too difficult to include in a cash pool.
• Internal credit risk assessment. In order to set internal interest rates, treasurers will need to determine an internal credit rating for each participating entity so that an arm’s length interest rate can be applied.
• The design of the cash concentration structure. Generally, the greater the number of countries a company has a presence in, the more complex the cash concentration structure will be, not least because market regulation and general market practice can vary significantly between countries.

To concentrate cash across borders effectively, treasurers will need to work closely with internal stakeholders, including tax and business units and external partners (notably banks), to devise the most efficient way of doing so.

Learn more in the AFP Executive Guide “Concentrating Cash Across Borders,” underwritten by Standard Chartered.