Exchange Rates, Bank Processes, Affect International Employee Pay

Payroll professionals need to take into account currency exchange rates and international banking standards as part of ensuring that organizations with employees in multiple countries are properly paid, a strategy leader said.

The process of moving money from one country to another for fulfilling payroll obligations also is affected by banking regulations of the countries from which the payments to employees originate and the banking regulations of the countries where the employees have established accounts to which amounts are to be deposited, said Catherine Honey, vice president of strategic partner relations with Safeguard Global. Strategies for completing cross-border payments to employees also need to take into consideration the amounts of money to be transmitted, the speeds by which the transmissions are to occur, and the fees and transfer formats applicable to these transactions, she said.

In determining the strategies an organization will implement to achieve successful cross-border payments to employees, payroll professionals should recognize that countries’ requirements pertaining to transferring money from a source to a destination are designed to guard against fraud, financing of trafficking, funding of terrorism, and money laundering, Honey said June 25 during the American Payroll Association’s 2020 Virtual Congress.

Exchange Rate Considerations

The currencies used in the countries where an organization’s employees operate need to be readily known by that organization’s payroll professionals, who also need to know how to efficiently exchange the currency of a country from which payments to employees originate to the currencies of other countries where employees have established bank accounts, Honey said.

Exchange rates between one currency and another can change multiple times a day, which can complicate payroll budgeting because of uncertainty as to what exchange rates generally will be in effect during a particular day of operations in the foreign exchange market. Especially because payments that originate in one country and that are to be sent to employees in another country often need to be initiated a few days in advance to ensure accuracy and legal compliance, organizations should use foreign exchange forward contracts (FX forwards) to lock in currency exchange rates in advance to provide greater budgetary certainty and streamline payments, Honey said.

An FX forward enables an organization to apply the exchange rate between two currencies when the FX forward is established toward the conversion of one of those currencies into the other on a future date, Honey said. Organizations may want to avoid establishing FX fowards particularly far in advance of the intended conversion of one currency into another because of the chance the exchange rate between two currencies could become particularly more favorable for them over time, she said.

Transactional costs associated with exchanging currencies are based in part on the volumes of currencies to be exchanged, although some banks and foreign exchange companies charge a flat fee or a percentage, with the terms of the costs sometimes open to negotiation, she said.

International Banking Standards

When an organization seeks to transfer money from one country to another, it is common for the organization to need to identify internationally recognized alphanumeric designations for the banks and specific bank accounts involved in the transaction, Honey said.

Employers therefore often need to identify a bank by providing its SWIFT Code or BIC, with SWIFT an abbreviation for Society for Worldwide Interbank Financial Telecommunication and BIC an abbreviation for Business Identifier Code.

Each bank account involved in the transaction often needs to be identified with an International Bank Account Number (IBAN), which identifies details regarding the applicable bank and location and contains a maximum of 27 alphanumeric characters for accounts based in Europe and 35 alphanumeric characters for accounts based outside Europe, Honey said.

However, when banks engage in mergers, acquisitions, or other forms of structural reorganization, this can cause their SWIFT Code or BIC to change, Honey said. Banks might not always clearly inform their clients of when changes to SWIFT Codes or BICs occur, she said.

“It always makes sense to regularly and periodically check with your bank to ensure the codes did not change,” otherwise this could cause intended cross-border payments to be misdirected or stalled, Honey said.

To help ensure that cross-border payments to an employee will be properly processed, it is auspicious for an employer to attempt to send a test payment, perhaps of U.S. $100, to the account whose details the employee provided, with a test amount that was successfully transmitted able to be credited with regard to the next payment to the employee, Honey said.

An employer’s test payments in advance of the deadlines for making payments to employees in other countries can help the employer avoid penalties for failing to timely pay them, Honey said.

Employers based in the U.S. also should periodically check data maintained by the Office of Foreign Assets Control (OFAC) to ensure that they do not inadvertently send money to countries for which sanctions are in effect or to individuals or organizations designated by the OFAC as unable to receive such payments because of their activities, Honey said. Employers based in other countries would want to ensure that they similarly uphold the international payment restrictions established by the governments of those countries.