The opening session of the governance, accounting and compliance track at the Association for Financial Professionals AFP Conference 2012 was from Steven Dreyer, managing director and lead analytical manager at Standard & Poor’s (S&P) who unveiled the new ratings system that S&P is going put into effect before the end of the year. “It is imminent and will be here soon,” confirmed Dreyer to gtnews after his presentation entitled ‘Management and Governance Credit Factors’.
S&P will explicitly score insurance companies and non-financial corporations on management and governance criteria in the future under its new ratings system, where as these factors were previously only implicit. So you will not only get a triple B or a single A rating for your company in future, for example, but also a stated assessment of whether S&P considers the management and governance of a corporation as:
Dreyer went on to explain what corporations, and their treasurers, have to do to get these assessments – such as a single A Satisfactory rating, for example – by outlining the criteria that S&P will use under its new ratings system. Issues such as the effectiveness of companies financial reporting and transparency will scored against metrics, and the internal control environment will be assessed alongside other defined topics. Any delays or mistakes in filings, for instance, could lead to a weak rating.
“We’re putting management and governance together into one overall score,” explained Dreyer, “so if you have great management but poor governance you will suffer.”
“It’s a fine-tuning of existing procedures, a new approach if you like [rather than a revolution],” he continued in an interview with gtnews after his presentation.
In response to questioning about whether this new system was designed as a response to concerns raised about the validity and rigour of credit ratings agencies’ (CRAs) procedures after the 2008 financial crash, Dreyer admitted that: “It’s not going to be easy to implement this and we will need to make a judgement call against our criteria after first explaining it [at shows like this].”
Regulations: AML and Protecting Your Business
The huge US$340m fine against Standard Chartered bank, imposed earlier this year in August by US regulators for breaking sanctions by facilitating trading with Iran, has made anti-money laundering (AML) a hot topic for many finance professionals. The spectre of organised financial crime and ever-increasing regulatory burden in this area is one of the primary challenges facing corporate treasurers at the moment, with the US Patriot Act and other such rules mandating specific actions and safeguards from corporations and their banking partners.
John Farrell, senior vice president (SVP), Financial Services CGI, and James Fried, assistant treasurer at Timex Group, outlined the key responsibilities that respectively fall on both communities to achieve compliance in the next governance, accounting and compliance track session entitled ‘Combating Money Laundering: Are you Managing Your Company’s Risk’.
The former listed the “alphabet soup” of government agencies and regulations that treasurers have to be aware of and comply with:
- OFAC: Office of Foreign Asset Control. This has more than 5,000 entries on it covering banned people and countries.
- SDN: Special Designation Nationals. This is an alert, concerning people of interest, that treasurers should always take notice of immediately.
- FinCen: The Financial Crimes Enforcement Network is part of the US Department of the Treasury and enforces the US Patriot Act, which seeks to restrict criminal and terrorist funding, among other things.
- FAFT: The Financial Action Task Force is an inter-governmnetal body covering AML.
- FCPA: The Foreign Corrupt Practices Act is designed to battle global bribery and corruption by following the money trial.
There are many many more, as Farrell admitted. “Remember that the AML and Know Your Customer [KYC] rules also cover corporations,” added Fried, after it was pointed out that many of the above mentioned regulations are bank-specific. “Corporations must do KYC and ensure they don’t deal with banned people.”
The red flags that treasurers should look out for advised Fried, include:
- If people are reluctant to give you any information.
- A deal or transaction involves a product outside the counterparty’s normal line of business.
- If service offerings are declined like maintenance and records.
- Abnormal supply routes and if freight is forwarded, leaving its final destination unclear.
“If the customer won’t supply the final delivery address this is a major red flag,” added Fried. “Always maintain your documents and files, and protect yourself with good due diligence. The government won’t care about your excuses – you need to be able to demonstrate a good process and good practice.”
The concluding speech on day three of the AFP conference was given by Dr Robert Gates, the 22nd US Secretary of Defence and ex-head of the Central Intelligence Agency (CIA), who served eight different presidents. He provided an overview of his leadership philosophy and the present political scene and started with a pointed joke when he commented that “it was a pleasure to be here in Miami; it’s a pleasure to be anywhere except Washington DC where so many people are lost in thought because it is such unfamiliar territory to them.” The barbed comment drew an audible gasp from the audience, while he’s next one about “people in Washington walking down lovers lane holding their own hand”, drew a laugh.
As to what threats to saw to the world – and its economy – Gates talked about the threat from a growing China, which he said is sometimes exaggerated, while still stressing that the lack of democracy means its leadership needs to grow a middle class to stay in power. The country is also susceptible to nationalistic fervour as the recent dispute with Japan proves, and this may well manifest itself more as its export-led economy slows due to the slowdown in the world economy.
China’s constant search for oil, gas and minerals around the globe was also a national security issue and something for businesses’ to think about too as it is driving up the oil price, added Gates. Iran’s nuclear programme and the threat it poses to Middle East peace and the oil price was also referenced by Gates in a wide-ranging overview of the prevalent political and economic threats.
“I was tasked with assessing and mitigating risk when at the CIA and as defence secretary so I understand risk,” added Gates when discussing his business qualifications, which he admitted were somewhat lacking although he was previously chairman of Fidelity. He invited the audience at the AFP conference to remember never to be too confident in your risk assessments, and always to remain probing and nimble in case a fast response is needed. “We are all in the business of trying to predict the future,” he added. “I’ve spent my entire career in public service trying to do it and I’ve become quite modest.” Wise advice indeed for the corporate treasury audience, but some boldness is needed if companies are to advance – indeed the opening theme of the AFP conference was to be bold. Finding the correct balance is the challenge.
Show Reaction Quotes
“I’ve really enjoyed the AFP Conference 2012, particularly the financial planning and analysis [FP&A] track, which is not something I’ve really focused on before,” said Sharon Petrey, assistant treasurer at Coca-Cola, when asked for her highlights of the show. “FP&A really forces you to throw out traditional budgeting activities and reactive routines and to rely more on forecasting procedures. It changes the formula, and forecasting should be to the forefront for treasurers as it is such a critical function. I found the session entitled ‘Using Scenario Planning to Become Future Ready’ on Monday 15 October, headed by programme director Steve Player as part of the Beyond Budgeting Round Table, and featuring Mark Regier, a chartered financial analyst [CFA] manager at Dimensional Fund Advisors, to be particularly helpful.
For the new chair of the AFP of Canada, Alberto Nunez, treasurer at the I Am Gold Corporation, he was just looking forward to starting his two-year tenure as head of the group. “I want to encourage more members and have been encouraged to see many of them here in Miami,” he said, when explaining his plans for the future to gtnews, which also includes growing the number of people with the AFP’s certified treasury professional (CTP) qualification.
In regard to the actual show, Gareth Lodge, a senior analyst with Celent, noted that, “while electronic bank account management [eBAM] is still a hot topic of conversation for many, there does seem to be a growing number of people who are underwhelmed and unimpressed with what’s happened in its development so far; perhaps a C- for effort, but no more. I think the conversation needs to be retrenched into what the benefits of eBAM can be before we get too hung up on the standards piece.”
For Steve Bullock, vice president and general manager of IT2 Treasury Solutions, eBAM was also a hot topic of conversation at the AFP Conference 2012. “Treasurers want to know when a wider number of banks will be ready, but they are also taking things into their own hands,” he said. “While banks and other stakeholders in the eBAM initiative are watching to see who will jump first, there is an increasing consensus that now is the time for treasurers to push forward. We see people ambitious to secure the benefits not just of eBAM, but in the process of actually implementing central bank account management, or BAM. With visibility of accounts, signatories and cash comes the ability to manage who has what bank account, to manage country, counterparty and foreign exchange [FX] exposure risk within policy. And with the eurozone crisis top of mind for some globally focused US treasurers, plus the added chore of FBAR compliance, BAM and eBAM are being recognised as powerful propositions.”
“We’ve seen lots of buzz this year around mobility,” added Bullock. “The high level session on reporting to the board with David Bernstein, SVP and CFO of Carnival, really caught the zeitgeist. On the floor of the conference this was reflected in desire to understand options for more responsive, smarter and real-time tools. There is real appetite for secure mobile technology, and a ‘want-it-now’ treasury worldview. Put it this way: I was carrying a tablet with a treasury solution accessible with it, so it was always going to be a demanding event. I’m now not far off losing my voice through two days of excited debate on the topic of mobility and new ways of working.”
For Michael Bosacco, vice president of treasury solutions at SunGard’s AvantGard, speaking from the company’s stand on the exhibition floor: “The conference reaffirmed our SunGard research, which shows that corporate treasurers are increasingly focused on more sophisticated risk [and associated mitigation practices].”
The treasurer at the National Council on Compensation Insurance (NCCI) in the US, Craig Ehrnst, brought the conversation back to the core purpose of any conference, which is to inform and to encourage debate and knowledge-sharing among peers. “General James Conway’s comments, on leadership during Monday’s executive institute lunch will help to shape AFP Conference attendees into rational global treasury leaders – he was, after all, the 34th Commandant of the US Marine Corps.”
Other show highlights for Ehrnst included the delicious Cuban food available in the many bars and restaurants in Miami Beach and the hot sunny weather. A happy notion that many of the attendees would no doubt share, as they headed towards the exit, perhaps already thinking about next year’s conference in Las Vegas and what might be the highlights and jackpot topics of conversation and trends there.
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