eNews September 26, 2013

September 26, 2013


News Briefs

  1. Companies Giving Risk Management Higher Priority amid Greater Uncertainty
  2. APG Alert: Inland Empire Distribution
  3. Gaming Operator Solvency Issues Not Just a Northeast Problem
  4. Visa, MasterCard Cap Merchant Processing Fees in France
  5. Firm Unveils Ten Chapter 9 Red Flags
  6. Re-Shoring is Real


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Companies Giving Risk Management Higher Priority amid Greater Uncertainty

A new report published by Accenture found that risk management is figuring into more and more companies' decision-making processes as they continue to adapt to continued economic uncertainty. Accenture's Global Risk Management study for 2013 found that 98% of firms surveyed have given a higher priority to risk management now than they did two years ago, and that 81% of risk managers discuss risk regularly with their company's board of directors.

Since the recession and credit crisis of the late 2000s, business leaders have increasingly embraced the risk management function, and this trend shows no signs of easing in a global economy where every positive piece of market data seems to have an asterisk next to it. To deal with this near-constant uncertainty, many companies have looked toward risk managers to assess and mitigate future threats to their business in all aspects of their operations. For example, the 2013 Accenture study found that risk management is increasingly being integrated with other company functions, most notably budget and forecasting, financing and mergers and acquisitions decisions, strategic planning and, to a lesser extent, performance management and new product development.

"Overall we found that organizations across all regions are operating in a new and rapidly-changing landscape with legal, business and regulatory risks expected to rise the most overall in the coming few years," said Accenture Global Managing Director of Risk Management Steve Culp. "To meet these challenges, companies are elevating the role of risk management. They're integrating it into their corporate strategies and their increasing level of involvement directly with the board of directors."

"There's also an increased level of senior management involvement in the risk management function partly in response to the continuing economic volatility, which applies additional market pressures onto existing business models and requires risk capabilities to measure, monitor and effectively mitigate," he added.

Still, the Accenture study found that there is more room for improvement in how companies manage risk, with respondents reporting that there were wide gaps between how important companies considered the management of specific risks and how capable they were of actually managing them. For example, while respondents said the risk management function was 99% important to achieving regulatory compliance goals, they also rated their average current capability for managing such risks at just 29%.

- Jacob Barron, CICP, NACM staff writer

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APG Alert: Inland Empire Distribution

NACM's Asset Protection Group (APG) issued an alert this week pertaining to a company operating by the name Inland Empire Distribution.

The reasons for the alert, according to APG are an abnormally low Market Presence Indicator (MPI) score along with an extreme spike in recent credit activity. According to APG, "the corporation was listed in January 2013 as an aged shell company for sale by a well-known provider of these services. At that time the entity was named Eagle Creations LLC. Its listed incorporation date was 2008 and it had a sale price of $3595."

The shell company was purchased between March 2013 and July 2013, which is when the corporation's registered agent was changed from the shell company provider in Wyoming to Omri Ekadar in California. By September of this year, the registered agent was again changed, this time to Russell Holdder. APG could not find an individual by that name in California. By July 2013, the corporate name was changed to Inland Empire Distribution and its application listed a start date of 2008. The company's website was just registered in July 2012.

The company was attempting to purchase large quantities of high-fraud-risk tablets, although the main lines of business listed on the company's website are juices and smoking products. There is a "general merchandise" tab on site, but it displays an otherwise blank "coming soon" page.

The main California Secretary of State website merely shows an incorporation date of 2008 for Inland Empire Distribution, LLC, and a status listed as "active," a fact that reveals the dangers of not using a service, like NACM' APG, that provides dynamic Secretary of State information.

If you have experience with the subject company or require additional information, please contact APG at APG@verifraud.com or call (480)529-2049.


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Gaming Operator Solvency Issues Not Just a Northeast Problem

As noted in a February eNews story, the glut of gaming operations in the Northeast United States has faced a significantly increased potential for bankruptcies, like that of the one-year-old Revel operation in Atlantic City. It seems industry problems aren't limited to the Northeast or Las Vegas either, as market saturation, especially in a still lackluster economy, start to become apparent in the U.S. South.

In September, Moody's Investors Service downgraded the Tunica-Biloxi Gaming Authority's (TBGA) corporate family rating, probability of default rating and senior unsecured note rating. Moreover, its credit rating outlook is positioned as "negative," according to Moody's. The biggest issue is too much new competition and not enough gamblers to go around.

"The downgrade reflects TBGA's earnings decline since the opening of two new gaming facilities within a 90-mile radius of TBGA's Paragon Casino," Moody's noted. "TBGA's leverage is higher than Moody's prior expectations due to more lost visits to new competitors than originally expected and overall weaker gaming demand due to higher unemployment in the local economy." Moody's added that it questions the Authority's ability to meet debt obligations in 2014 and 2015, as well as its potential for refinancing debt.

Problems began to show earlier for the Northeast. Maryland and Ohio are new players in the gaming industry thanks to voter referendums, with at least two more locations opening in the former within the next year in Baltimore and the Washington, D.C. area. They joined relative newcomers Pennsylvania, West Virginia and Delaware, in addition to the many longtime operators of Atlantic City, NJ and those on tribal land in Connecticut. All are pulling business from each other, and few would argue about the glut in this region and, seemingly, others.

- Brian Shappell, CBA, CICP, NACM staff writer.

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Visa, MasterCard Cap Merchant Processing Fees in France

Visa and MasterCard reached an agreement this week with the French competition authority to slash card processing fees for merchants. As of November 1, MasterCard will cut its interchange fees, referred to by the competition authority as interbank fees, by 49%, from an average rate of 0.55% per transaction to a maximum of 0.28%, and Visa will cut the same fees by 44%, from an average rate of 0.50% to the same 0.28% maximum.

The agreement applies only to merchants and consumer credit card users in France, but also puts the European Union's third-largest market in lock-step with a proposal put forth by the European Commission this summer that would cap processing fees on all EU credit card transactions at 0.3%.

"For both MasterCard and Visa, the amount of interbank fees is set collectively between each payment system and its respective members. While jointly setting the rate may not necessarily be reprehensible in itself, the amount of such fees must nevertheless by justified by objective factors," said the competition authority in a news release. "Ultimately, it will be the consumers who will benefit from this reduction in interbank fees, through the repercussions on retail prices of the savings in bank fees that merchants will be able to obtain from their banks."

While the new rules are specifically geared toward consumer transactions, the European Commission's definition of a consumer does not necessarily exclude certain smaller companies, and the Commission's directives are firm in the belief that certain "core provisions" of proposals and regulatory changes, such as those enacted by the French competition authority, should always apply regardless of the status of the user.

In either case, the approach taken by France, and the EU in general, to regulate the way in which credit card processing fees are set by the world's two largest card networks looks remarkably strident when compared to similar efforts in the United States. Merchants continue to fight for a reduction in fees via the U.S. judicial system, most recently in a hearing over the pending final approval of a $7.25-billion antitrust settlement against Visa and MasterCard that many merchants believe doesn't go far enough to reduce their processing costs.

Regardless of the agreement's final approval, in the hearing, held in the U.S. District Court in Brooklyn, presiding Judge John Gleeson wondered aloud if the fight over interchange fees in the U.S. would ever be solved without comprehensive federal legislation. While a proposal to firmly cap credit card interchange fees was ultimately scrubbed from the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, similarly sweeping policy changes have been easier to come by in France and the EU.

- Jacob Barron, CICP, NACM staff writer

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Firm Unveils Ten Chapter 9 Red Flags

As predicted by NACM sources months ago, the Detroit municipal bankruptcy filing is shining a light on Chapter 9 like no other filing before it. If the city is ruled eligible, it will likely continue to highlight the issue, as the complicated filing is sure to drag on in the courts for a lengthy period of time even before any plan to emerge from bankruptcy protection is finalized.

Bob Durante, leader of the Americas Solutions and Services Team for S&P Capital IQ Risk Solutions, shares opinions espoused earlier this year by Bruce Nathan, Esq., partner with Lowenstein Sandler LLP, among others, that pension-related costs are a deep and ongoing problem. And it's not just for Detroit and other municipalities that filed in California and Central Falls, RI. While unveiling S&P Capital IQ's 10 Warning Signs of Potential Municipal Bankruptcy, Durante noted that any city showing at least half of the following signs should be considered a high-risk candidate, and one that requires increasing scrutiny from potential creditors:

  1. Late budget adoption or late receipt of audited financial statements
  2. High degree of senior administrative turnover
  3. Government showing lack of willingness to support debt
  4. Unemployment exceeding 10%
  5. Income level short of 75% of U.S. average
  6. Tax base market value short of $50,000 per capita
  7. Total debt service exceeds 25% of expenditures
  8. Unaddressed exposures to large unfunded pension obligations
  9. Limited capacity or willingness to cut expenditures
  10. Overall general fund balance short of 1% of expenditures, or general fund deficit

- Brian Shappell, CBA, CICP, NACM staff writer

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Re-Shoring is Real

At least according to the latest survey from the Boston Consulting Group. They asked about 200 executives from some of the largest companies in the United States and got some startling results. The survey showed that 21% had already pulled facilities from China and relocated them in the U.S. and another 35% indicated they are considering taking that step in the next year or two. If one adds in near shoring, the numbers double with almost 50% moving operations to Mexico and 60% considering it.

The reasons for this shift are simple enough. Wages are going up in China along with most other production costs and the nation is losing its low-cost edge. Without that advantage, the challenges of operating in China are no longer worth it. The bureaucracy can be horrendous; labor disputes are common as is theft of intellectual property. There are few legal rights and the role of the political system can be oppressive. It is even hard to get financing as the state banks have been ordered to cool the economy down to some degree. This doesn't mean that China is going to hollow out anytime soon, but the drift from the U.S. to China has halted—at least for now. There are always steps China could take to become popular again.

Source: Chris Kuehl, PhD, Armada Corporate Intelligence


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