eNews February 27, 2014

February 27, 2014


News Briefs

  1. Situation in Ukraine Remains Fragile
  2. Germany Closer to Implementing Late Payment Directive, but Will It Matter?
  3. Executive Order Aims to Streamline US Goods Exports
  4. Report: Senior Management Increasing Global Efforts to Combat Money Laundering
  5. Bankruptcy Roundup: Solar, Detroit
  6. Panama Canal Work Resumes after Weeks of Stoppage


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Situation in Ukraine Remains Fragile

Despite former President Viktor Yanukovich's exit and the opposition's pledge to hold elections before the end of the year, Ukraine's situation remains fragile. Most recently Russian President Vladimir Putin ordered an unexpected military ground exercise near the border with Ukraine, displaying the nation's military might as pro-Russian protesters demonstrated on the Crimean peninsula against the still-tenuous political situation in Kiev. But aside from military superiority and other actions Russia can take to interfere with the establishment of Ukraine's new government, it has a whole host of other tools it can use to squeeze its western neighbor economically as well.

Ukraine's fortunes are still tightly connected to Russia, which has a routine when it comes to clamping down on its satellite states through trade policy. "Even though it looks like things have calmed down a little bit, the economic crisis is still full blown," said Carolyne Spackman, vice president and country risk economist with American International Group, Inc. (AIG), describing the situation in Ukraine. "There has been a trade backlash in Russia," she said, noting that in addition to cutting back on the disbursement of a now-suspended $15 billion bailout for Ukraine, Russia has also made it harder for Ukrainian goods to enter the country. "And, of course, Russia takes more of Ukraine's exports than any other country," Spackman said.

The other question for Ukraine is Russia's control over the nation's gas prices. "Russia could raise the gas prices if they decide to, but I haven't seen anything concrete occurring there yet," Spackman said. "There are some potential problems if you're producing for Ukraine. Your cost of energy is something to worry about, and getting your product to market. Those are the major issues for the country as a whole."

- Jacob Barron, CICP, NACM staff writer

Spackman will offer more insights into the global economy at FCIB's Spring Roundtable, scheduled for March 12 in New York. To learn more about the program, or to register, click here.

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Germany Closer to Implementing Late Payment Directive, but Will It Matter?

Reports out of Germany indicate the government may be inching closer to in-country implementation of the European Union's Directive 2011/7/EU, the Late Payment Directive. Germany was one of the final holdouts among the 28-member bloc and an important one, given its stature in the Union. Still, many are skeptical that, even with the Germans on board, the Directive will be all that effective or widely used.

The Directive, by almost all admissions among credit professionals and economists polled, is having a minimal impact on B2B credit and collections. It was designed to put an EU-wide framework behind the enforcement of tough regulations for prompt payment to creditors. Minimal application of the Directive could be traced, perhaps, to the slow implementation by the standard-bearing economy of Germany. If Germany is serious about implementation, it could become more useful, but any massive impact of businesses invoking the Directive and taking action against a debtor still appears quite unlikely. 

"You look after your important partners, otherwise they might spend the money with our competitors," said Angela Bradbury, ICCE, global finance business lead at Innospec, Inc. "I'm not taking someone to court for $5,000 if they spend $8 million per year…unless the law says I have to and it is enforceable. I've threatened to take two people to court in the last five years, but never have." She added that continually assessing risk and paying attention to customer's red flags, among other procedures to avoid problems, will always trump being able to point to conditions of this Directive or any other.

Michael Andreasen, ICCE, corporate working capital process manager at TNT Express, and David Vermylen, global credit manager of petrochemicals with BP Chemicals Limited, both noted the Directive's minimal impact, but did say that, at the very least, it has symbolic value and represents an attempt to "do the right thing." Vermylen also said that, in theory, it could be somewhat helpful one day regarding the bullying tactics by large buyers. Still, it is unlikely the Directive will ever rise to the importance its government framers suggested prior to its passage.

- Brian Shappell, CBA, CICP, NACM staff writer

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Executive Order Aims to Streamline US Goods Exports

President Barack Obama signed an Executive Order last week that aims to simplify some of the administrative hoops companies have to jump through to move goods across the border. Titled "Streamlining the Export/Import Process for America's Businesses," the order most notably sets a firm December 2016 deadline for the completion of the International Trade Data System (ITDS), an electronic information exchange that will allow businesses to quickly transmit data required for export by various US agencies.

In a statement, the White House said that the ITDS will cut processing and approval times from days to minutes for small businesses that are the least equipped to navigate the nation's often burdensome export regulations and reporting requirements. "Today, businesses must submit information to dozens of government agencies, often on paper forms, sometimes waiting on processing for days to move goods across the border," the White House said. "The ITDS will allow businesses to electronically transmit, through a 'single-window,' the data required by the US government to import or export cargo. This new electronic system will speed up the shipment of American-made goods overseas, eliminate often duplicative and burdensome paperwork and make our government more efficient."

The order also requires the government to partner with non-government stakeholders to build more efficient business processes and improve border management policies. As such, it provides for the expansion of the Border Interagency Executive Council (BIEC), which will be responsible for improving coordination among the dozens of agencies involved with import and export requirements, and with other stakeholders.

According to US Trade Representative Michael Froman, the order builds on the World Trade Organization's (WTO's) Trade Facilitation Agreement, which placed binding commitments on the WTO's membership to take steps to expedite movement, release and clearance of goods shipments. "In December, WTO members committed to smart steps that will ease the flow of trade and make it possible to support more jobs and families through international commerce," Froman said. "Today, we're ensuring that American companies and workers face fewer hurdles sending made-in-America goods to global customers."

- Jacob Barron, CICP, NACM staff writer

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Report: Senior Management Increasing Global Efforts to Combat Money Laundering

More senior managers at financial institutions are prioritizing anti-money laundering (AML) efforts than ever before, according to a new report from KPMG International. Nearly nine in 10 respondents (88%) said that AML issues are at the top of the agenda for senior management after being squeezed out by other competing priorities in similar studies conducted in the past decade. In 2011, only 62% of respondents considered it a top priority.

A firm majority (84%) of respondents considered money laundering a high-risk area when they assess their entire business for potential risk exposures, further emphasizing how seriously management deems failures to meet the regulatory requirements. In North America, 67% of the respondents indicated AML is high risk.

"With regulatory fines now running into the billions of dollars, AML has never been a higher priority for senior management at financial institutions," said Teresa Pesce, head of AML Services for the Americas Region for KPMG. "Significant changes are being made by leaders of financial institutions in response to increasingly far-reaching global AML regulations, revision of the Financial Action Task Force’s recommendations and the US Foreign Account Tax Compliance Act. These initiatives are quickly changing AML from a standalone, and sometimes siloed function under compliance, to an increasingly complex and cross-functional endeavor involving legal, risk, operations and tax."

Compliance costs continue to balloon for financial services firms, rising at an average rate of 53% for banking institutions, which exceeds the 2011 edition of the report's previous prediction of an increase of 40%. Most of a company's AML budget is being invested in transaction monitoring systems, updating and maintaining know-your-customer (KYC) reviews and recruitment, according to the report. Still, satisfaction with transaction monitoring systems remains low, as only just over half of survey participants said that their system was able to provide a complete picture by monitoring transactions across businesses and jurisdictions, and 35% of respondents said they considered their systems inefficient and not effective.

- Jacob Barron, CICP, NACM staff writer

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Bankruptcy Roundup: Solar, Detroit

The continued problems of the alternative energy industry again went on display with Suntech Power Holdings Corporation's somewhat unusual bankruptcy petition. The solar panel producer, based in China but incorporated and now liquidating in the Cayman Islands despite having no operations in that area and less than 1% of stakeholder value based in the United States, is attempting to file Chapter 15 in the US Bankruptcy Court in New York.

A small group of Suntech creditors in the US tried to force a Chapter 7 involuntary bankruptcy late last year, but Suntech eventually succumbed to pressure from Chinese banks for previously defaulting on nearly a half-billion dollars in bonds. Solar industry companies across the globe have struggled amid outsized supply-demand ratios in the business. Ironically, companies based in the western world had long-criticized Chinese companies for price undercutting amid allegations of illegal subsidies from its government.

The messy Detroit Chapter 9 municipal bankruptcy case looks like it will be resolved at a rapid pace. Judge Steven Rhodes set a potential bankruptcy plan confirmation hearing in the case for July to the chagrin of several creditors trying to slow the proceedings down. Creditors and two of the three largest US credit ratings agencies criticized the early city reorganization plan for putting considerations of public workers and retirees before those of creditors, especially bondholders. Moody's Investors Service predicted a particularly high potential for a "cram-down" on creditors.

Detroit stands as the largest municipal bankruptcy case in US history and is under close scrutiny nationally because of its potential implications for many cities also struggling with escalating debt problems tied primarily to retiree benefits such as pensions and health insurance.

- Brian Shappell, CBA, CICP, NACM staff writer

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Panama Canal Work Resumes after Weeks of Stoppage

With the trade economies of many US port cities and emerging nations in the west eagerly awaiting the timely opening of an expanded Panama Canal, a worrisome standoff between the Panama Canal Authority and the Spanish company hired to build a new lock system has ended.

After nearly two months of gridlock in negotiations and a work stoppage spanning most of February, the critically important work on the Canal expansion resumed after a preliminary deal was struck between Grupo Unidos por el Canal (GUPC) and the Panama Canal Authority late last week. The Authority reportedly agreed to make payments owed to GUPC from December when some funds were withheld due to massive cost overruns on the immense project. It is estimated that GUPC's work is on pace to exceed the original cost of the project by a whopping 50%. NACM Economist Chris Kuehl, PhD said it is a widely-held belief that much of the expense is corruption related and goes to "the highest levels of the project."

It was of considerable importance to stakeholders tied to the expansion, and those expected to enjoy better access and less expensive shipping options as a result, that the effort get back on track. "The project is expected to be a boon for activity from shippers based in the Western United States and some Latin nations," Kuehl said. "Short of a quick resolution, this could have jeopardized the goal of having the expanded Canal open by 2015."

- Brian Shappell, CBA, CICP, NACM staff writer


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