WorldCity Business Magazine

(5) CEO Roundtable: Globalization vs. Regulation

by WC

As companies go global, they are bombarded and sometimes hobbled by government regulation, but they learn to adapt and thrive

Much of the tension in the world today results from globalization butting up against government regulation, said Bob Targ, partner at the law firm Diaz, Reus, Rolff & Targ, summing up the central theme of WORLDCITYS monthly CEO Roundtable held at The Biltmore Hotel in Coral Gables.

Targs colleagues at the table Stephen Flowers, President of UPS Americas, Jorge Granados, founder of LatiNode, and David Berger, regional managing director of NAI Global could all relate to how tensions between the inexorable drive toward economic globalization and the inevitable push-back from governments had impacted their business, but no one more so than Alberto Valdes, CEO and president of The International Bank of Miami.

Our bank was forced out of its international banking niche, because it was simply impossible to meet the government regulations, said Valdes, who listed other casualties Santander, BBV, Barclays, Deutsche Bank, Lloyds Bank of the ramped up anti-money laundering regulations imposed on the U.S. banking industry since 9-11. These and other Miami-based banks have been forced to change their focus or move on. Its difficult to count all the banks that have left, said Valdes.

The International Bank of Miami (TIBOM), one of the oldest community banks in South Florida, was focused primarily on international correspondent banking and private wealth management prior to 9-11. Since then, it has undergone a transformation, shifting its focus to domestic corporate lending and commercial real estate. Still, it continues to be involved in trade finance, some corresponding banking with Central America and private banking. And the cost of compliance, said Valdes is mind-boggling.

Three year ago, he explained, TIBOM had four people in its compliance department. Today, it has 25 out of a total staff of 215. But the cost of compliance doesnt stop there. Every new employee at the bank, no matter what his position, must go through a detailed security screen and attend a compliance training program. Valdes reckons that 70 percent of the banks overhead is related to compliance. It used to be five percent. Of course, the U.S. government had good reason to impose stricter standards on banks to thwart financial crime and terrorist financing. There are tremendous risks of money laundering in legitimate businesses, observed Bob Targ, whose law firm requires that all its attorneys be certified by the Association of Certified Anti-Money Laundering Specialists. Entire industries have been corrupted. The cut flowers business went through it, the textile industries, the computer and electronics businesses

Thats right and those are all my customers, quipped Steve Flowers of UPS, who runs a massive logistics operation that must deal with new government regulations at every turn. The success of Flowers business depends to a great extent on his companys ability to adapt to Customs and other regulations while, at the same time, coaxing governments to harmonize standards and procedures.

Every time I visit a country, I take the opportunity to meet with the chamber of commerce and government officials to discuss issues related to Customs modernization and trade facilitation, said Flowers, who is also chairman of CLADEC (Caribbean and Latin American Express Delivery Conference), the association of logistics companies that works to improve the movement of goods throughout the region.

Flowers noted that, in his business, bilateral and multilateral free-trade agreements were essential for removing uncertainty about government intervention and overburdening regulation. The beauty of the free-trade agreements is the legal language that provides clear guidance for Customs and other regulations to follow. Trade has clearly increased as a result of free-trade
agreements, added Flowers.

From moving money to moving goods to moving informationWe, too, are in a heavily regulated environment, said Jorge Granados, founder of LatiNode a telecommunications carrier that specializes in transmitting voice digitally via the Internet. And, he added, Its becoming totally crazy.

Granados explained that his company is required by the Communications Assistance for Law Enforcement Act (CALEA), which is enforced by the Federal Communications Commission and the Department of Homeland Security, to allow the government to conduct sophisticated electronic surveillance. Government regulations require that we store all our calls and records for five years. As a result, our data storage capacity has to be huge, said Granados, adding that LatiNode invested $2 million to become compliant with the CALEA standards.

As a global company, LatiNode has to comply with onerous regulations in other countries, too. It took three and a half years to get our operating license in Europe, said Granados. Thankfully, he added once you do finally get your license in one country, you are eligible to operate
throughout the European Union.

No one ever said that globalization is easy. Still, despite the heavy hand of government regulation, LatiNode and the other companies represented around the table are not only
surviving, but thriving.

LatiNode recently entered the retail business, offering prepaid long-distance phone service to the U.S. Hispanic market and signing up 150,000 customers in less than six months. It is now venturing into the infrastructure business in Latin America, bidding for licenses to set up CDMA 450 networks in rural areas in Argentina, Mexico and Central America. From humble beginnings in 1999, the Miami-based firm aims to reach the $1 billion annual revenue mark within four years.

UPS is already well beyond the $1 billion mark in the Americas region that Steve Flowers oversees, and his business is expanding rapidly. Five years of growing economies, combined with strengthened currencies, mean that there is increased wealth in Latin America and a huge demand for consumer products, which UPS is happy to deliver.

Today, however, UPS does much more than just deliver. The fastest growing piece of Flowers business is what the company refers to as service parts logistics. For a growing number of customers, such as computer and digital camera manufacturers, UPS provides warehousing, distribution and even repair services. When products are damaged, we pick them up, bring them back for repair and then do the re-distribution.

UPS has set up distribution centers in all the major Latin American markets to provide this kind of full-service logistics. That kind of demand for warehousing and for office space by UPS and many other multinational companies is what drives business for David Berger, who runs the regional
operations for NAI Global, a commercial real estate advisor and broker. NAIs Latin American and Caribbean operation grew by a whopping 30 percent in 2007, with Mexico and Brazil providing the biggest opportunities. Growth is expected to continue apace in 2008.

For The International Bank of Miami, this year saw a continued retraction on the international side, while the growth of the bank on the domestic side has been spectacular, said Valdes. The banks net growth for the year was about 10 percent. As it turns out, however, much of that
domestic business, which grew by over 20 percent this year, is linked to international business. A significant portion of the banks lending is to finance inventory and exports to Latin America. That business has exploded, said Valdes.

As for Diaz, Reus, Rolff & Targ, theres no concern about lack of business. As long as globalization continues to butt up against government regulation, which is an absolute certainty, there will be plenty of demand for his firms legal expertise.