August 14, 2014
The trickledown effect of the Ukraine-Russian conflict may not have shown up fully in monthly economic growth statistics, but it seems to be paving the way for a shakeup, especially for trade. As the European Union and the United States continue to levy sanctions on Russia for its perceived role in the growing unrest in Ukraine, several Latin American nations, at the protest of EU leaders, seem to be preparing to fill the trade void.
The EU publicly announced plans to meet with several South American nations, notably Latin powerhouses Brazil and Chile, in the hope that such nations will not directly help Russia avoid the pain of the EU/US sanctions amid allegations of defiance and sovereign violations. The problem is there is money to be made as a result of Russia becoming an increasingly sizable trading partner, so much so that Ecuadorâ€™s president bluntly noted that it doesn't need US or EU permission to become more active in trade with Russia. Argentina, which has a long trade record of not allowing conflicts in Europe to affect business decisions, has also noted a keen interest in the monetary opportunity and an unsurprising disinterest in worrying about how the US and EU leadership view the move.
Meanwhile, the growth outlook for Germany appears ready to sour rapidly even as last month's statistics showed strength in what is undeniably Europe's standard-bearing economyâ€”and perhaps for good reason. The German economy depends heavily on exports, and Russia has been among its most important destinations for the goods its companies produce. Russia also has been providing nearly half of all energy/fuel Germany imports, which has the potential to become a massive issue once the winter months arrive. It will be doubly apparent if Germany does not experience a second consecutive historically mild winter. If "as Germany goes, so goes Europe" is held with any regard, the conflict and international political gamesmanship could threaten what has been a long-awaited rebound in the European growth trajectory.
- Brian Shappell, CBA, CICP, NACM staff writer
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Despite its stunningly opulent, less than two-year-old structure overlooking the Atlantic Ocean, the Revel casino is scheduled to shut its doors after failing to find a buyer. Revel, in bankruptcy for the second time in its short life span, is targeting mid-Septemberâ€”within days of two other Atlantic City gaming shutdowns, Trump Plaza and Showboatâ€”to completely cease operations.
Revel showed noticeable problems with its business model from the start, from overspending to its initial smoking ban to ignoring the glut of competing gaming operations in neighboring states. A large American appetite for gaming or not, operators are now facing the reality that there is not enough demand for everyone to thrive or even survive without solvency issues in a landscape of legalized gaming throughout the US Northeast corridor.
Because of this, Atlantic City may increasingly become a candidate for municipal bankruptcy down the road. Moody's Investors Services has already cut the cityâ€™s credit rating several times, with a two-step cut to junk status coming as recently as late July. Moody's noted that competition in the gaming industry, especially in Maryland and Pennsylvania, is likely to have a continual and steepening downward effect on tax money collection there. Atlantic City is as classic an example of a one-industry city as virtually any in the United States. As casino revenues shrink and resulting unemployment continues to skyrocketâ€”the Revel closure alone equates to more than 3,000 lost jobsâ€”there is reason to be wary of the prospects for a short- or mid-term recovery.
In other Chapter 9 news, the languishing Stockton, CA case appears to be heading toward a critical decision point. The city's most recent plan to exit Chapter 9 bankruptcy aims to shortchange creditors much more than pensioners, but US Bankruptcy Judge Christopher Kline has questioned, to the chagrin of the California Public Employees Retirement System (CalPERS), why retiree obligations such as pension payments and health care costs are not also being considered for cuts and treated as other debts. With former employee obligations a scourge on budgets in debt-laden municipalities across the country, significant cuts to pension obligations stemming from this or other big cases (Detroit, San Bernardino, etc.) could provide a template for future Chapter 9 filing considerations.
- Brian Shappell, CBA, CICP, NACM staff writer
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The constant attention devoted to the Chinese economy over the last few years has tended to obscure that Japan is still the third largest economy in the world and only about $2 billion smaller than China (Japanese GDP is about $6 billion and China is at $8.3 billion).
The hike in the sales tax imposed earlier in the year became the great experiment and a cause for intense scrutiny by other nations that have been facing some of the same issues as Japan. The latest numbers show that the hike has been largely responsible for a 6.8% decline in GDP. It slammed the consumer and the business community far harder than many expected and now the issue is whether this is a short-term reaction or something more permanent.
Japan remains as export dependent as ever and lately that has not served it very well. There had also been some expectation of increased capital investment in Japanâ€”from both domestic and international sourcesâ€”but that surge may be tapering off already. The problem is that investors are not seeing a fast-growing domestic economy that they want a part of and there is concern that exports will continue to lag. Japan is one of three nations where almost a fifth of the population is over 65. This does not bode well as far as consumer spending is concerned and that has now started to push the investors away.
There will also likely be a big drop in housing as the Japanese take stock of their financial position. The decline is expected to be almost 10% and that will be the worst showing since the recession and the first time in nine quarters that housing investment has slumped.
All of this negative data will put pressure on the government to take steps, but there are no longer many options. There is no real capacity for another bout of Abenomics and there are now fears that business, investors and the consumer will start to anticipate stagnation and that would almost guarantee its arrival.
SOURCE: Armada Corporate Intelligence
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Signed by Pennsylvania Gov. Tom Corbett this summer, the mandates within the state's SB 145 will go into effect on Sept. 7, ushering in significant changes for subcontractors and material suppliers working on residential projects. The new law is considered a lose-lose for subcontractors and suppliers by NACMâ€™s Secured Transaction Services' Chris Ring and prominent Pennsylvania attorneys.
In essence, the change affects the dollar amount of the lien that a subcontractor or material supplier can file, basing it on the amount of the funds owed from the property owner to the general contractor. The subcontractor's lien rights will now be limited to the amount still owed to the contractor or general contractor. Nicholas Krawec, Esq., partner at Bernstein-Burkley PC, noted that the amount could, and usually will be, less than the amount owed to the subcontractor or supplier. He said "it's a big deal" and matters will be even worse in instances where the homeowner has made full payment.
Ring explained, saying, "Essentially, subcontractors and material suppliers have no lien rights if the property is or is intended to be used as the residence of the owner or subsequent to occupation by the owner or a tenant of the owner."
Krawec noted that, historically, Pennsylvania was not a defense of payment state. That changes next month in a state that increasingly seems to favor developers over subcontractors or suppliers. Also, with this being an election year in Pennsylvania, lawmakers are more apt to curry to voting homeowners who have long complained that they should not be dragged into disputes between general contractors and subcontractors/suppliers over payments. However, that was one of the only methods of recourse against general contractors in the state.
"When it takes effect on Sept. 7, if the owner has paid the contractor in full, it will kill the subcontractorâ€™s lien rights," Krawec said.
Krawec also drew attention to the statutory change focused on priority in an open-ended mortgage, citing: "Any lien obtained under this act by a contractor or subcontractor shall be subordinate to the following...an open-end mortgage, the proceeds of which are used to pay all or part of the cost of completing erection, construction, alteration or repair of the mortgaged premises secured by the open-end mortgage where at least 60% of the proceeds are intended to pay or are used to pay all or part of the costs of construction. Previously, the statute stated that all proceeds (not just 60%) had to be used to pay for finishing construction."
Krawec believes these statutory changes represent a loss all around for contractors and suppliers. Those in the industry in Pennsylvania need to be prepared to address this new issue in very short order.
- Brian Shappell, CBA, CICP, NACM staff writer
To learn more about the new law, click here to read Krawec's related blog article.
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Generally, the topic of fraud in B2B credit and finance is about those on the outside trying to perpetrate crime against your company through website hacking or direct business dealings like bustout scams, shipping to "legitimate" addresses and other methods. But, as noted below, it's important to remember that employees in finance are responsible for good portion of occupational fraud. That is, the people who steal from their employer or clients.
Here are some current statistics on occupational fraud and the characteristics of a fraudster to keep in mind, according to a recent study from the Association of Certified Fraud Examiners (ACFE):
- The higher the perpetratorâ€™s level of authority, the greater fraud losses tend to be. Owners/executives only accounted for 19% of all cases, but they caused a median loss of $500,000. Employees, conversely, committed 42% of occupational frauds, but only caused a median loss of $75,000. Managers ranked in the middle, committing 36% of frauds with a median loss of $130,000.
- Collusion helps employees evade independent checks and other anti-fraud controls, enabling them to steal larger amounts. The median loss in a fraud committed by a single person was $80,000, but as the number of perpetrators increased, losses rose dramatically. In cases with two perpetrators the median loss was $200,000, for three perpetrators it was $355,000 and when four or more perpetrators were involved the median loss exceeded $500,000.
- Approximately 77% of the frauds in the study were committed by individuals working in one of seven departments: accounting, operations, sales, executive/upper management, customer service, purchasing and finance.
- The vast majority of occupational fraudsters are first-time offenders; only 5% had been convicted of a fraud-related offense prior to committing the crimes. Furthermore, 82% of fraudsters had never previously been punished or terminated by an employer for fraud-related conduct. While background checks can be useful in screening out some bad applicants, they might not do a good job of predicting fraudulent behavior. Most fraudsters work for their employers for years before they begin to steal, so ongoing employee monitoring and an understanding of the risk factors and warning signs of fraud are much more likely to identify fraud than pre-employment screening.
- Most occupational fraudsters exhibit certain behavioral traits that can be warning signs of their crimes, such as living beyond their means or having unusually close associations with vendors or customers. In 92% of the cases we reviewed, at least one common behavioral red flag was identified before the fraud was detected.
More on ACFE research on occupational fraud and a useful infographic is available here. More on fraud, as it applies to credit risk, can be found in Business Credit magazine archives, the NACM Resource library and other resources at www.nacm.org.
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Employment Connections for the Business Credit Community
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