What are Blocked Funds?
Cash flows generated by a foreign project that cannot be immediately repatriated to the parent firm because of capital flow restrictions imposed by the host government or money that cannot be transferred from one place to another, usually because of exchange controls imposed by the government of the country in which the Funds are held. Problem of repatriation restriction by host country government which places embargo on transfer of the earnings of the overseas subsidiary. Thus, funds which are not allowed to be repatriated permanently or temporarily are called “blocked funds”. These funds represent cash flows generated by a foreign project that cannot be repatriated to the parent firm because of capital flow restrictions by the host government.
There are various reasons for the host government for blocking the repatriable funds. One such reason is the grim foreign exchange crisis engulfing the host country. In such cases, the government may block repatriable funds of overseas subsidiaries and limit foreign exchange to financing essential imports on other payments. Sometimes political factor is responsible for the blocking of funds repatriable by the foreign entities. This frequently occurs with change in national government which out of political animosity overturns the previous government’s policies and places restrictions on the movement of the funds of the overseas units. A firm may also face the ire of blockage of repatriable profits earned by its offshore subsidiary when it has found flouting local laws and regulations and/or operating to the detriment of local interests.
Blocking of funds can take several forms ranging from non-convertibility of the host currency to prior permission for repatriation of earnings. In between the two, blockage of funds may involve repatriation of only a portion of the funds, repatriation only after a certain time lag, a combination of restrictions on the proportion of funds to be repatriated and the time constraints and absolute ceilings on the total of funds that can be repatriated over a certain period of time.
Prudent management of financial resources of a multinational firms calls for effective utilization of funds blocked across the home turf. A parent firm can make use of certain strategic arrangements for using these funds properly. For example, the subsidiary may be directed to set up a research and development division which incurs costs and possibly generates revenues for other subsidiaries. The parent firm may pursue strategy of transfer pricing in a manner that will increase the expenses incurred by the affiliate. A host country government is likely to be more lenient on money being used to meet local expenses than on earnings remitted to the parent. Another strategic move could be the directive to the affiliate by the parent to borrow from a local bank rather than from the former and repay the interest and the principal out of its local earnings. Charging fees and royalties at higher rate, leads and lags in making payments abroad and payment of dividends at higher rate to local stockholders, can be other direct measures which can be taken to repatriate blocked funds. Instructing an affiliate to reinvest the block funds in the host country in a manner that voids deterioration in their real value because of inflation or exchange depreciation.
Tactics for transferring funds indirectly include:
1. Parallel or back-to back loans
2. Purchase of commodities for transfer abroad
3. Purchase of capital goods for corporate wide use
4. Purchase of local services for worldwide use
5. Hosting corporate conventions, vacations and so on
Two more methods which are gaining popularity in recent years are increasing the value of the local investment base because the level of profit remittance often depends on the amount of a company’s capital. One way to enhance an affiliate’s capital is to buy used equipment at artificially inflated value. The other way is for an affiliate to acquire a bankrupt firm at a large discount from book value. The acquisition is then merged with the affiliate on the basis of the failed firm’s original book value, thereby raising the affiliate’s equity base.
How Funds are Blocked?
A simple explanation of what occurs with blocking is that the bank is forced by the economic sanctions regulations to block a certain fund, amounts of money, or account. At that point, they take those funds and put them in an interest bearing account with very particular properties. The most unique of these properties is that under the sanctions regulations, once the funds are put into the blocked accounts and the funds are blocked, no one is allowed to touch the money except for perhaps the bank under very limited circumstances such maintenance of the account. No one is allowed to touch these funds without the explicit specific license authorization from the Office of Foreign Assets Control. This may cause a bit of a conundrum because financial institutions may overreact to a piece of information and block it. Once it is blocked, even if the financial institution realizes a mistake was made, they do not have the power to unblock those funds until the Office of Foreign Assets Control gives authorization. In very specific types of blocking cases, there may be a general license available for a bank to unblock the funds, common with sanctions regimes or sanctions being lifted in an incremental way, however, this is not commonly the case.
Filing to Release Blocked Funds
Funds can be blocked following a bank’s analysis of a transaction and finding it in violation of a sanction. Generally, the transaction was attempted by a party and one of the banks involved in the transaction, usually the intermediary bank, reviewed the information about the transaction. After conducting a thorough analysis of the transaction, the bank concluded that there would be an apparent sanctions violation if that transaction were to go through. This may also occur if a party involved is on the sanctions list or for some other reason under the economic sanctions regulations. The bank is obligated by the Office of Foreign Assets Control to block these funds.
It can be very frustrating when funds from a transaction or business account are blocked by a bank due to sanction violation issues. Blocked asset attorneys frequently deal with unblocking application cases in order to release your funds back to you and complete the transaction.
Cash flows generated by a foreign project that cannot be immediately repatriated to the parent firm because of capital flow restrictions imposed by the host government or money that cannot be transferred from one place to another, usually because of exchange controls imposed by the government of the country in which the Funds are held. Problem of repatriation restriction by host country government which places embargo on transfer of the earnings of the overseas subsidiary. Thus, funds which are not allowed to be repatriated permanently or temporarily are called “blocked funds”. These funds represent cash flows generated by a foreign project that cannot be repatriated to the parent firm because of capital flow restrictions by the host government.
There are various reasons for the host government for blocking the repatriable funds. One such reason is the grim foreign exchange crisis engulfing the host country. In such cases, the government may block repatriable funds of overseas subsidiaries and limit foreign exchange to financing essential imports on other payments. Sometimes political factor is responsible for the blocking of funds repatriable by the foreign entities. This frequently occurs with change in national government which out of political animosity overturns the previous government’s policies and places restrictions on the movement of the funds of the overseas units. A firm may also face the ire of blockage of repatriable profits earned by its offshore subsidiary when it has found flouting local laws and regulations and/or operating to the detriment of local interests.
Blocking of funds can take several forms ranging from non-convertibility of the host currency to prior permission for repatriation of earnings. In between the two, blockage of funds may involve repatriation of only a portion of the funds, repatriation only after a certain time lag, a combination of restrictions on the proportion of funds to be repatriated and the time constraints and absolute ceilings on the total of funds that can be repatriated over a certain period of time.
Prudent management of financial resources of a multinational firms calls for effective utilization of funds blocked across the home turf. A parent firm can make use of certain strategic arrangements for using these funds properly. For example, the subsidiary may be directed to set up a research and development division which incurs costs and possibly generates revenues for other subsidiaries. The parent firm may pursue strategy of transfer pricing in a manner that will increase the expenses incurred by the affiliate. A host country government is likely to be more lenient on money being used to meet local expenses than on earnings remitted to the parent. Another strategic move could be the directive to the affiliate by the parent to borrow from a local bank rather than from the former and repay the interest and the principal out of its local earnings. Charging fees and royalties at higher rate, leads and lags in making payments abroad and payment of dividends at higher rate to local stockholders, can be other direct measures which can be taken to repatriate blocked funds. Instructing an affiliate to reinvest the block funds in the host country in a manner that voids deterioration in their real value because of inflation or exchange depreciation.
Tactics for transferring funds indirectly include:
1. Parallel or back-to back loans
2. Purchase of commodities for transfer abroad
3. Purchase of capital goods for corporate wide use
4. Purchase of local services for worldwide use
5. Hosting corporate conventions, vacations and so on
Two more methods which are gaining popularity in recent years are increasing the value of the local investment base because the level of profit remittance often depends on the amount of a company’s capital. One way to enhance an affiliate’s capital is to buy used equipment at artificially inflated value. The other way is for an affiliate to acquire a bankrupt firm at a large discount from book value. The acquisition is then merged with the affiliate on the basis of the failed firm’s original book value, thereby raising the affiliate’s equity base.
How Funds are Blocked?
A simple explanation of what occurs with blocking is that the bank is forced by the economic sanctions regulations to block a certain fund, amounts of money, or account. At that point, they take those funds and put them in an interest bearing account with very particular properties. The most unique of these properties is that under the sanctions regulations, once the funds are put into the blocked accounts and the funds are blocked, no one is allowed to touch the money except for perhaps the bank under very limited circumstances such maintenance of the account. No one is allowed to touch these funds without the explicit specific license authorization from the Office of Foreign Assets Control. This may cause a bit of a conundrum because financial institutions may overreact to a piece of information and block it. Once it is blocked, even if the financial institution realizes a mistake was made, they do not have the power to unblock those funds until the Office of Foreign Assets Control gives authorization. In very specific types of blocking cases, there may be a general license available for a bank to unblock the funds, common with sanctions regimes or sanctions being lifted in an incremental way, however, this is not commonly the case.
Filing to Release Blocked Funds
Funds can be blocked following a bank’s analysis of a transaction and finding it in violation of a sanction. Generally, the transaction was attempted by a party and one of the banks involved in the transaction, usually the intermediary bank, reviewed the information about the transaction. After conducting a thorough analysis of the transaction, the bank concluded that there would be an apparent sanctions violation if that transaction were to go through. This may also occur if a party involved is on the sanctions list or for some other reason under the economic sanctions regulations. The bank is obligated by the Office of Foreign Assets Control to block these funds.
It can be very frustrating when funds from a transaction or business account are blocked by a bank due to sanction violation issues. Blocked asset attorneys frequently deal with unblocking application cases in order to release your funds back to you and complete the transaction.