Your sales guy has done research on the demand for your product in the jurisdiction known as the country of Never-Ending Profits. There is a huge demand! Terrific, but can you get your hard earned profits out?
The ease of converting and transferring currency is an important consideration for businesses investing in a foreign economy. In financial investment terms, “repatriation” is the process of converting a foreign currency into the currency of one's own country.
A number of organizations such as the International Monetary Fund and the World Bank scrutinize the economic and financial policies of jurisdictions around the world. Ideally, each jurisdiction makes a commitment to pursue policies that are conducive to orderly economic growth and reasonable price stability and to avoid manipulating exchange rates for unfair competitive advantage.
However, a jurisdiction with balance of payment issues may need to conserve foreign exchange to pay for basic goods and services. The result for the foreign investor is that the jurisdiction may not be willing or even able to grant foreign investors an unrestricted right to make international monetary transfers.
Such a jurisdiction might restrict monetary transfers through regulation by:
limiting the extent to which local currency can be converted into foreign currency
controlling the rate that can be obtained for such a transaction
limiting the types of currencies with which payments may be made
reducing transferability of a currency off-shore and repatriation of profits off-shore.
The practical immediate impact to the company is that it may face challenges converting payments from local customers, obtaining materials from outside the jurisdiction, paying expats in foreign currency, and servicing foreign debt. The longer term impact will be on repatriating investment profits.
Regulatory restrictions may range from heavy restrictions to administrative requirements. The following provides a rough breakdown of currency conversion restrictions in some jurisdictions.
Even prior to the most recent economic collapse, Venezuela has maintained strict currency controls.
In Brazil, accounts can only be kept in local currency (Brazilian Reais, R$). For a Brazilian importer to remit funds to a seller in the U.S., the importer must purchase the corresponding foreign funds through an exchange contract at a bank authorized by the Brazilian Central Bank.
South Korea does not routinely limit the repatriation of funds but it does reserve the right to do so in exceptional circumstances (e.g., potential harm to its international balance of payments, excessive fluctuations in interest or exchange rates, or threat to the stability of its domestic financial markets).
There may be a perception that a particular jurisdiction has rigid controls but it may actually be a result of delay on the part of the private sector in keeping up with the jurisdiction’s deregulation process and/or the lifting of international sanctions. For example, the transfer of money in and out of Burma/Myanmar has been difficult because many international banks have been slow to update their internal prohibitions on conducting business there.
The World Bank (Iab.worldbank.org) and the U.S. Department of State (http://www.state.gov/e/eb/rls/othr/ics/2015/index.htm) are useful resources for additional jurisdiction-specific information.
Legal impediments to currency conversion and remittance should not be deal breakers. It is important for the legal advisor to guide the decision makers through the potential obstacles and work together to find acceptable strategies to attain the business goals.
For further guidance in addressing local legal constraints in your foreign investment, contact me at email@example.com