April 25, 2013
The coverage of the tragedy and those responsible for the bombing at the Boston Marathon grabbed the bulk of the public's attention for the last week, and rightfully so. As life returns to some semblance of normalcy for most of the country, however, the impact of such events will continue to be felt by businesses for quite some time.
While noting how the malicious attack has sadly changed so many lives, NACM Economist Chris Kuehl, PhD predicted that, for businesses, the incident will change everything from product shipments to relationships with foreign business contacts in regions often associated with terrorist activity, at least in the short term. "There will be more screening and security of shipments. A lot more attention is already being paid to our shipping clients," said Kuehl. "For most people in business, the reaction will be an inconvenience." Additionally, as seen in stock market levels and knee-jerk sell-offs, such events make investors nervous, tightening cash flow globally.
Such events also speak to the importance of why credit professionals need to be prepared to defend one's company against fraud attempts. While corporate credit fraud is difficult to tie directly to terrorism, Kuehl said that related groups use many of the same fraud and money laundering techniques as more traditional, U.S.-based crime outfits. Either way, businesses still get hit with the consequences. "The cost of contending with all this gets passed down. The expense of security and having systems maintained amounts to a crime tax. It's also time consuming to get back on the 'acceptable' list if you get flagged, if by no one else than the government agencies involved in the episode," he said. "You become viewed as something of a weak link, at best, if not suspected of being an accomplice, at least initially. Either way, there's the perception you don't have your act together." Insurance rate spikes are another likely event.
Meanwhile, Gary Bares, founder and CEO of Verifraud, which runs NACM's Asset Protection Group (APG), said ties to groups in the Middle East are something he is becoming increasingly aware of in fraud monitoring. In one recent case, a fraud discovered by APG resulted in three arrests by federal authorities after the group raised $4 million in its last two known schemes. Two other individuals linked to the investigation escaped arrest and left the United States, eventually traveling to Iran.
"Something like that makes you wonder about that group," Bares noted. "When you see money and individuals going back and forth to countries like Iran, you have to at least wonder where that money is going. You have to believe some of it is going to funding unsavory activity."
- Brian Shappell, CBA, NACM staff writer
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The American Bankruptcy Institute (ABI) held its annual spring meeting last week, and hosted a hearing of its Commission to Reform Chapter 11. The problem with the current reorganization process, according to one witness, is that it's far too expensive.
Wilbur Ross Jr., chairman and CEO of WL Ross & Co., LLC, testified that a preponderance of committees has made it too hard for debtors to afford a Chapter 11 filing, but at the end of the day, the bigger issue is how counsel bills its clients. "I believe that the real flaw is that the compensation system is essentially time based rather than results based," said Ross. "This is true whether the professional's fee structure is hourly or monthly."
Such an arrangement, Ross argued, tends to push the lawyers representing the debtor to explore new avenues that often don't provide that much of a return on the time and money invested. "The second flaw is that unless the debtor is administratively insolvent, a rare occurrence in big cases, there is every incentive for professionals to explore even the most outlandish theories or potential causes of action and no disincentives to do so," he noted. "These factors channel professional behavior toward the direction of hyperactivity and consequently inflate costs."
As a recommendation, Ross suggested that the time incurred by any professionals working on behalf of the debtor be disqualified automatically as billable time, should the time be spent bringing an unsuccessful action. "This would be a more moderate variant of the English system whereby the losing party in a litigation must reimburse the fees of the prevailing party," he said. "That would be going too far in bankruptcy because of the chilling effect it would have, but simply barring billability would force the professionals to make a serious assessment of their probability of success before initiating an action."
Ross admitted that his plan would be unpopular with bankruptcy professionals, but still urged legal changes to make Chapter 11 more available to cash-poor debtors. "Bankruptcy professionals undoubtedly will be unhappy with this proposal, and perhaps they can come up with a better mechanism to solve the problem," said Ross. "But a solution is needed because billing rate increases have greatly outpaced inflation over the years, thereby creating a need for a better way to control costs."
- Jacob Barron, CICP, NACM staff writer
ABI will host another hearing of its Commission to Reform Chapter 11 at this year's Credit Congress. Click here to find out more.
FCIB Annual International Credit & Risk Management Summit in Prague
May 12-14, 2013
The Corinthia Hotel Prague, Prague, Czech Republic
Join us on May 12-14 at FCIB's Annual International Credit & Risk Management Summit to discover insight from distinguished speakers, participate in thought-provoking sessions and network with leading experts and your peers in an educational environment.
• Basel III and the Impact on Working Capital Requirements, Letters of Credit and Guarantees
• Different Security Methods across Europe and Best Practices
• Risk Awareness in Today's Global Trading Conditions
• Early Warning Signals: Keeping a Pulse on Your Counterparties
• The Effects of Global Instability on the Treasury Department
Click here now to register!
To view the entire program, click here.
We look forward to seeing you in Prague!
A new study by Dun & Bradstreet's United Kingdom branch suggests that the European Union Late Payments Directive adopted in 2011 and required to be integrated into national law by March 13, 2013 is already having an impact on payment behavior, at least in Britain.
D&B's statistics noted that British businesses borrowing on terms paid their bills on aggregate two days faster in 2012 than in the previous year. At an average of 17 days late, British businesses' tardiness on terms reached a record level in 2011, according to D&B. The Directive, which was recently updated, is important because it legally sets the basis for reducing the risk and protecting the cash flow of suppliers. It mandates that payments of business-to-business invoices be completed within 60 days, and public authority-to-business invoices within 30 days. However, the D&B study noted that while the Directive should in theory be a win for suppliers, potential conflict exists:
"This legislation makes it easier for businesses to pursue payment, with debtors being forced to incur interest and pay an administration fee if they fail to pay for goods and services within 60 days for business and 30 days for public authorities. While it will help protect some businesses [suppliers], the updated Directive presents new risks for companies [customers] struggling to manage their finances and pay on time, due to the potential interest liability risk."
In addition, to assume the Directive will drastically improve payment habits within the debt-laden EU may be a bit of a leap of faith. Thomas Voller, an attorney with Germany-based Voller Rechtsanwälte and member of EuroCollectNet, said of the EU's interest in altering insolvency laws to make them more consistent throughout the bloc will be difficult if not very unlikely to take hold because of the lack of unity between the nations on business and legal policies. While a different EU effort, Voller's comments on the potential insolvency reform could be applied to the payments Directive as well. "There is a tendency in European law to try to unify the rules and to find a common applicable law for all European states in some areas," he said. "Obviously, this is extremely difficult, and it works only in some special fields."
Whether B2B payment is one of those fields waits to be seen.
- Brian Shappell, CBA, NACM staff writer
Officials from the European Commission will discuss the Late Payment Directive on May 14 immediately following the conclusion of FCIB's Annual International Credit and Risk Management Summit in Prague. For more on Voller's views on EU insolvency laws, read "Moving Targets" in the May issue of Business Credit.
Be among the first to take Financial Statement Analysis, Interpretation and Credit Risk Assessment, an updated version of, and replacement for, the Financial Statement Analysis 2 certificate session.
When: May 18-22
Why: It's the cornerstone of NACM's new Certified Credit and Risk Analyst (CCRA) designation!
Where: NACM's 117th Credit Congress & Exposition
U.S. officials are targeting Vietnam as a key market in the negotiation of a new Trans-Pacific Partnership (TPP). Ministers and business leaders from that country met in Hanoi this week with Acting U.S. Trade Representative Demetrios Marantis to discuss meaningful market access for U.S. exporters, among other wrinkles that need to be ironed out before the TPP can be drafted, signed and implemented.
"The United States values the Trans-Pacific Partnership as an opportunity to support more American jobs through increased trade, as well as to deepen economic integration with our partners across the Asia-Pacific," said Marantis. "Here in Vietnam, we have reaffirmed our commitment to continuing rapid progress in the TPP talks, and to working with Vietnam to get to the ambitious outcomes that are the core of this groundbreaking effort."
The U.S. has also pledged its technical support to help Vietnam distinguish itself from its neighbors and its TPP counterparts, as well as to help the still-burgeoning economy to reach the higher standards set by other TPP negotiating parties, such as Australia, Singapore and newly-minted member Japan.
Since the two countries concluded a bilateral trade agreement in December 2001, trade between the U.S. and Vietnam has grown from about $1 billion to $26 billion. U.S. exports increased 7.3% in 2012, and according to the Obama Administration, there is still room for considerable growth in sectors such as manufactured goods, where top U.S. exports include machinery, and especially agricultural products, such as beef, pork and poultry, as well as soybeans, cereals and cotton. Last year the U.S. exported $1.7 billion dollars' worth of agricultural products to Vietnam, making it the 16th largest buyer of American ag products.
- Jacob Barron, CICP, NACM staff writer
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In one of bankruptcy's more high-profile cases, the trustee in the MF Global Holdings Ltd. case is suing the ousted CEO, a brash former U.S. senator and state governor, for decision-making now seen as reckless.
Trustee Louis Freeh has filed suit against Jon Corzine, former senator and New Jersey governor, and other former MF Global officials on the grounds that they spearheaded massively high-risk, if not inappropriate and potentially fraudulent, actions that led to the company's financial shortfalls and eventual bankruptcy filing. Among Corzine's bigger gambles that fared poorly were widespread purchases of European bonds just as several EU nations were on the brink of a debt crisis and needing international bailout money.
"This is a big deal. The man was a senator and a governor," said Bruce Nathan, Esq., partner at Lowenstein Sandler LLP. "It never hurts creditors if there is any chance that such a claim can lead to a recovery. The chances of some trickle down are good if there is a recovery."
In San Bernardino, CA, the City Council has voted in favor of a new mandate allowing the insolvent municipality to resume paying into the state's pension program while continuing to miss payments to other secured and non-secured creditors. The scenario differs from other municipalities dealing with entitlement and other debt-causing issues in the area, as these communities have negotiated or forced employees and retirees to take benefit cuts instead of shorting bondholders. The city is expected to resume payments to the California Public Employees' Retirement System (CalPERS), the largest pension fund in the country, by July.
Last year, the council voted to halt payments to the pension program temporarily as other cities like Stockton, CA were involved in their own municipal bankruptcies. Stockton was deemed eligible for Chapter 9 by a judge in California earlier this month after meeting the required state criteria that included creditor negotiations. Employee and retiree entitlements have become a financial scourge affecting many cities throughout the nation, and it's only expected to escalate as a result of a rapidly-aging workforce.
- Brian Shappell, CBA, NACM staff writer
Manual of Credit and Commercial Laws, Volume III: Construction Issues—Do You Have the Update?
New for 2013, language and state laws have been updated throughout the entire volume including:
- Chapter on Personal Property Liens
- Chapter on Trust Funds
- Chapters on Liens and Bonds
The entire volume has been updated to reflect the liens, bonds and trust funds applicable to the 21st century!
Watch for future updates of volumes I, II and IV.
Click here to purchase volume III and get more information about the wide array of resources available to today's credit professionals.
Officials in both chambers of Congress took the Patient Protection and Affordable Care Act (ACA) to task recently for the increased regulatory burden it will place on smaller companies. Presenting a stack of ACA regulations over seven feet tall, Sen. Jim Risch (R-ID) noted in a hearing this week that small businesses will be ill-equipped to handle the health care law when the majority of it enters into force next year.
"Small businesses all over the country are trying to find a way to get out from under this, just as all big businesses and medium-sized businesses are doing," said Risch, ranking member of the Senate Committee on Small Business and Entrepreneurship. "The difference is, of course, big and medium-sized businesses have a gaggle of lawyers and accountants who can help them get out from under this. The small businesses have fewer options."
A similar hearing in the House Small Business Committee last week had small business owners testifying to the ACA's cooling effect on business growth and job creation. "The continued rise in the cost of providing health care insurance absolutely stifles my ability to create, provide and sustain jobs," said Kevin Tindall, owner of Tindall & Ranson Plumbing & Heating in Princeton, NJ. "I have yet to understand how we as a nation can continue to state that we need to create more jobs, yet challenge, threaten or even ignore the very mechanisms for job creation."
Fellow witness Douglas Holtz-Eakin, PhD of the American Action Forum noted that the ACA would generate a collective 80 million hours of additional paperwork for businesses. "We can conceptualize paperwork burdens by examining gross domestic product per hour worked," he said. "According to the Bureau of Labor Statistics, that figure was $61.59 in 2011. Thus, ACA's red tape alone costs the U.S. approximately $4.9 billion annually, a figure that will grow as the pace of implementation quickens this year."
To help small businesses vault over the hurdle of compliance, the House Small Business Committee released a guide for companies struggling with the ACA. The full document can be found here.
- Jacob Barron, CICP, NACM staff writer
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