Chapter Five

,

Account Management and Structure

THE ACCOUNT STRUCTURE is a critical part of Treasury Design and depends on many factors. These factors include business operating model, type of transactions, cash flows, currencies, Treasury structure and staffing, culture, control elements, and budgets. Some of the decisions to be made in structuring accounts are given diagrammatically in Figure 5.1.

Account structures are linked with the people operating them and systems. Systems make the entire design and setup of accounts quite sticky—once implemented and tested, these systems would be geared up to support a certain kind of structure. More often than not, even a small change in the way accounts are managed results in significant costs and effort involved to change the entire process, since the account structure is one of the bases for the company’s financial operations.

PUTTING AN ACCOUNT STRUCTURE IN PLACE

We now look at some of the considerations for account structures as well as the need and ways to use different kinds of accounts across currencies, resident statuses, and locations. The steps involved in designing, setting up, and maintaining an account structure are given in Figure 5.2.

In the first stage, consideration is given to various aspects, and the needs are discussed and documented. In the second stage, the banking partners are decided on and finalised. In the final stage, the implementation and integration is done.

General Considerations for Account Structures

Some of the considerations for account structures are listed next:

• Organisational structure and business flows: While separate accounts will be needed for separate legal entities, some business units, client segments, or regional operations might warrant separate accounts
• Business processes: risk management settlements, payables, receivables
• Different banks for different services
• Network or reach of the banks
• Special-purpose accounts, such as dividends or escrow
• Special local processes
• Segregation of customers’ funds
• Trust accounts
• Transaction volumes
• Complexity of operations
• Recycling foreign exchange inflows and outflows
• Decentralised management culture
• Location of invoicing and Treasury centres
• Tax advantages
  • Sales tax: Impacts selling and invoicing decisions
  • Withholding tax: Depends on countries of origination and destination, also impacts nonresident payments and borrowing/investment decisions
  • Income tax
  • Tax benefits: Especially for decisions on financial centres/Treasury centres

As part of the Treasury Design spoken of earlier, these elements have to be considered at the time of setup or review. The Treasury policy can also contain the account structure to be used and followed.

Considerations for Multiple Currency Accounts

Any multinational firm needs to deal in different currencies, given a global client, supplier, investor, or service provider base. Hence, operations and cash flows in foreign currencies are inevitable. The question then arises as to whether accounts must be maintained in foreign currency, and if so, where they will be maintained and by whom will they be operated.

Some of the considerations for opening and maintaining foreign currency accounts are listed next:

• Regulatory requirements: With different legal entities in different locations, there could be a mandate to open accounts in the currency of the local entity (in the country)
• Suppliers’ invoicing currency (procurement/supplies in different currencies)
• Products and supplies in the same currency
• Timing of products and supplies payments
• Cost of opening and maintaining foreign currency accounts
• Current and future foreign exchange and rate risks
• Possibility of creating intercompany loans
• Method of foreign currency payments
  • Inflows are used to fund outflows
  • Bought from bank or centralised Treasury
  • Conversion done at local bank

Also, where these accounts should physically reside—whether in-country, at the Treasury centre, or at the home location of the currency (e.g., SGD account in Singapore and GBP accounts in London)—also must be considered, as must be the decision as to whether to use a local bank (in-country), a relationship bank in-country, or centralise with Treasury.

Table 5.1 provides an overview of location and bank alternatives for the design of account structures

TABLE 5.1 Location and Bank Alternatives for Account Structure Design

Considerations for Nonresident Accounts

A nonresident account is the locally or domestically based account of an overseas entity that has been legally incorporated or domiciled elsewhere and does not have a legal resident status in that country.

The resident status of an entity can generally be determined through any of these criteria:

• Location of incorporation
• Legal status of local entity: branch of parent or a permanent establishment
• Registration with local industry bodies
• Registration or status with domestic tax authorities
• Duration of presence in that country

Nonresident accounts usually are in either the domestic currency or the currency of the parent entity.

However, in many countries, the treatment of nonresident accounts from the perspectives of usage, interest, overdraft or lending, and repatriation are generally different from those of locally domiciled entities. In this context, taxes, banking charges, regulatory norms and approvals, concentration structures (pooling), and restrictions on the usage of the money for specific purposes will be different and hence should be considered during process setup.

Regulatory approvals might be required just once or on a case-by-case basis. It becomes the responsibility of the locally based entities (such as the bank or the branch office) to fulfil the regulatory conditions, such are reporting and transaction use. The importance of the banking partner here becomes even more critical: Banks that have good relationships with the regulators have had past history of dealing with such cases. Banks that play the role of trusted advisor to the firm, assist in the process of obtaining relevant regulatory and other approvals, and clarify ambiguity in new situations are likely to be a priority bank for the enterprise (to be discussed in further detail in Chapter 28).

Considerations for Account Ownership

Who owns and operates each account is a matter that needs to be determined during the design of the account structure. Depending on the legal status of each entity and the nature of the operation, ownership can be:

• Single ownership of the operation or legal entity
• Joint ownership
• Centralised ownership

Other aspects to consider prior to deciding ownership are:

• Local regulations and reporting
• Resident status
• Tax status
• Domestic (in-country or local) clearing requirements
• Credit facilities
• Pooling regulations
• Netting capability and regulations

ACCOUNT OPERATION AND APPROACHES

Operating bank accounts is a task that sounds easier than it is. When one combines the operational element of multiple accounts across territories, jurisdictions, time zones, languages, service levels, and cutoff times with managing balances, investments, concentration, the currency element, and unpredictability of flows in a highly controlled environment, the complexity increases manifold.

Maintenance of foreign currency accounts has many angles; some of these include:

• Operations and technology aspects (process)
• Maintenance cost
• Interest-related costs
• Currency-related aspects
• Balance requirements

These aspects are highlighted in Figure 5.3.

Drivers of Account Structure

While other considerations for the account structure are being determined, treasury’s priority will be a key driver for selection of account structure: Does Treasury want to achieve more efficient flows, or does it want to achieve more efficient liquidity? While efficiency of flows is always important in an overall context, a Treasury’s priority tends to slide toward liquidity in times of crisis.

Since the middle path between liquidity and flows cannot be taken easily, one of the two paths would have to wait a little more than the other.

Table 5.2 provides an outline of various aspects of account structure set-up with either path (flows or liquidity) as priority.

TABLE 5.2 Drivers of Account Structure

Aspect	Effective Flows Management	Efficient Liquidity Management
Banks	Domestic banks providing reach and service	Fewer banks
Location of accounts	On-site for easy management locally	Centralised at treasury centre
Number of accounts	One for each purpose for easier tracking and handling and easier business processes	As few as possible
Currencies of accounts	Multiple, in local currencies of payment	Single

Implementation of account structures is an involved process and generally is difficult to roll back or unwind without material cost and disruption to Treasury operations. Hence, the need to get it right at the start is extremely high.

Introducing Simple Account Structures

We now look at some simple structures based on control, location, and the ability to pool money together (see Figure 5.4). The aspect of liquidity and pooling is also introduced here and is covered in detail in Chapters 8 and 9.

Two primary aspects of the account structure—control and location of the accounts—form the basis of these sample structures. Accounts can be controlled locally or by a centralised Treasury. Similarly, accounts can be located in-country or at a central location. The central location can be the currency of the country or the centralised Treasury.

Next we discuss the bases of some of the account structures. When we cover the more advanced themes of pooling and concentration, we superimpose these account structures and explore how the account structure design can be further reinforced through the use of intelligent liquidity tools. Figure 5.5 provides a snapshot of the account structure design with the variation of pooling structures thrown in.

Next we turn to simple account structures and their advantages and disadvantages.

RATIONALISING ACCOUNT STRUCTURES

Regulations of many countries do not allow for either the account location or its control to be outside of the borders of the country. Hence, such regulations may necessitate the single approach of having local accounts managed locally. Treasurers must review the regulations and laws of the countries specifically to determine the applicability of account structures.

Depending on the needs and the nature of payments, it is possible that no one structure will meet all requirements, and a mix of structures can be developed to suit the needs of the group.

Local In-Country Accounts with Local Control

Local in-country accounts with local control make up the basic form of account structure prevalent in many companies. The local subsidiaries have their own accounts and operate them independently, with the numbers and transactions being reported back to centralised Treasury. The policy and authority/limits are governed as per global mandates, but ownership and operation are locally done. Bank decisions are made on the ground or in consultation with headquarters. In the case of requests for proposals (RFPs), global or relationship banks will be awarded the accounts. A sample structure of a centralised Treasury in Singapore (SG), with subsidiaries in Singapore, Hong Kong (HK), and London (UK) is elucidated in Figure 5.6.

This structure provides flexibility and control to the teams on the ground. A good working equation is developed, and service issues and reporting are settled locally. The centralised Treasury is involved from a distance and provides policy support. Control, information flow, and liquidity (use of funds) are aspects in which this structure falls short.

Centralised Accounts with Local Control

Two variants of centralised accounts with local control are discussed. In the first, depicted in Figure 5.7, the accounts of each entity across currencies are domiciled at the location of the currency. Hence, in the example, all USD accounts are held in New York (NY), all Singapore dollar accounts are in Singapore, and all euro accounts are in London. While this increases complexity to a degree by creating another location, one potential benefit is the simple use of header accounts or overlay structures, along with availability of liquidity and funding in that currency.

With the advent of Treasury centres and liquidity across major currencies in different centres, along with seamless funds transfers and banking partner support, there are simpler and more efficient measures by which to attain benefits similar to those provided by this structure.

The second variant is to keep all accounts at central Treasury or the in-house bank, irrespective of currency (see Figure 5.8). The operation is still in the hands of the local team, but the money is concentrated in one location. Cash pooling and concentration structures, discussed later, including using header accounts, could create similar benefits.

Treasury Controlling a Local Account

As depicted in Figure 5.9, accounts located in respective countries can be operated by a centralised Treasury. This provides economies of scale on operations and makes liquidity management easier. Variants of this structure include using a single concentration bank in each country for pooling of funds, and the use of overlay structures and nonresident accounts.

Some concerns with this structure involve language (especially for interface with remote branches of domestic banks), cutoff times, and coordinating paper-based banking documentation.

Treasury Controlling Centralised Accounts

The final simple structure (see Figure 5.10) is a completely centralised one, where Treasury controls the accounts, which are also located centrally. This method can be achieved directly or through pooling structures with cross-border concentration. This method provides synergies of human resources, systems, and, most important, liquidity and is one of the end states of a completely centralised Treasury operations unit.

The hurdles of a centralisation implementation (see the case study on centralisation in Part One) apply here as well, but organisational performance, especially when linked with local subsidiary management goals, can benefit greatly in this context.

EXAMPLES OF ACCOUNT STRUCTURES ACROSS SECTORS

We conclude this chapter with a glance across some sectors and what structures might work for them.

Manufacturing

Given that large sourcing and disbursements are required for plant and supplies, many manufacturing businesses are quite payment intensive and locally operation intensive. Hence, for local procurement and payments, a local control structure with locally based accounts could be more efficient. For global orders, invoicing, and procurement, centralised control and accounts in Treasury might benefit.

Also, liquidity planning for working capital across subsidiaries is generally a strong area of focus; in such cases, additional pooling and concentration features would be implemented.

Technology and Information Technology–Enabled Services

Technology services companies generally have centralised invoicing with hubs for development and information processing. Local payments are usually required only for purposes of local expenses, such as payroll and local procurement. Hence, this operation is relatively easier to control from the centralised Treasury. A centralised structure would create large efficiencies in this context.

Retail

With largely local collections and global procurement and manufacturing, firms in the retail industry could have local accounts managed centrally for collections, with payments and invoicing done centrally. Concentration structures could be used to pool the funds centrally where possible, and local operations of accounts for purposes of payroll and the like could be established; depending on the nature of centralisation, however, a consolidated account management and set of accounts could be beneficial.

Transportation

Transportations companies, especially airlines, operate out of many locations using a single legal entity. Hence, such companies should maintain nonresident accounts that allow repatriability of collections (net of local payment) and proceeds into a central account held at the headquarters or Treasury centre. Since capital is raised centrally, and local payments are limited to fuel, airport-related charges, and salaries in local currencies, with collections being ticketing revenue, a centralised setup with nonresident accounts in the countries could be efficient.

Next we discuss the various payment systems in more depth before delving into float and liquidity and methods to manage them.

SUMMARY

In this chapter, we reviewed the key ingredients of account structure, which is one of the primary drivers of a treasury’s functioning. A flawed account structure could seriously impair the smooth delivery of the monies of a company and cause a serious drag on its resources and efficiency. A well thought out and executed account structure could, however, lay the foundation for a fluid and strong Treasury. We evaluated various accounts and considerations for starting and managing them, as well as different kinds of controls and implementations, discussing relative merits and demerits. Finally, we considered a few sectors in particular with possible account structures that could work well in them.