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The barriers to trading overseas

Author: ICAEW Insights

Published: 05 Jun 2023

Invisible barriers exist to hinder direct trading with overseas countries, particularly in Africa. We talk to Deimos Cloud CFO Grant Mori to find out which UK regulations are holding back faster UK growth.

Red tape is a perennial concern for business, particularly small and medium-sized businesses, which are often the engine of the economy. Indeed, Chancellor Jeremy Hunt admitted in April that UK business taxes were too high, and that growth was needed to reduce the tax burden.

But economic growth in the UK is languishing and prospects remain weak for the immediate future, so it’s no surprise that politicians of all colours are hankering to be seen as pro-business. Nonetheless, the incumbent government is light on concrete policies to boost trade.

But what do those on the coal face of business think? South African native Grant Mori is the UK-based Chief Financial Officer of software engineering company Deimos Cloud. Mori oversees the financial operations in the UK and although he holds no truck with issues such as business rates, because the cloud company Deimos has no physical presence, Mori is concerned about other less visible issues that he feels holds back business, particularly around the banking rules and overseas trading.

Founded in Cape Town, South Africa, Deimos has been working with African companies to implement cutting-edge cloud solutions and nurture technology talent on the African continent. Deimos companies turn over around £15m – of which around £4m comes from the UK – and has around 90 employees in total, two of which are based in the UK. Its primary trading partners are African countries, primarily Nigeria, Ghana, South Africa and Kenya.

Although the UK has no exchange controls restricting the transfer of funds into or out of the United Kingdom, Mori argues that with some financial institutions the rules are vague. UK banks are legally required to comply with anti-money laundering (AML) laws and Know Your Customer (KYC) rules to prevent criminals and terrorists from using financial products or services to store and move around their money. 

“Some of the larger banks really do have ‘exchange controls’ to some extent, especially around Know Your Customer, anti-money laundering, GDPR, that sort of thing. That’s quite limiting,” he says. “What I’ve noticed is there is a hesitancy around dealing with certain countries and I can understand that to some extent. But it’s not knowing what banks are going to ask us. So, I’m hesitant to get Nigerian companies to physically pay us from Nigeria into a UK bank account, for example.”

He acknowledges that there are examples of financial corruption in many of the world’s countries, including the UK, and the need for strict regulations against criminals and terrorists. But Mori says this shouldn’t deter UK businesses from trading with genuine companies in those countries, and that banks should avoid judging all companies negatively in certain countries.

There are legal routes around this problem, Mori says, with overseas companies expanding and setting up operations with banking facilities in other more ‘desirable’ countries such as the UK or US. But he says overseas clients should not have to jump through these complex administrative hoops. 

“I’m often hesitant to ask our banking relationship manager what kind of scrutiny we will get when trading with customers in certain African countries, just in case we miss a trick and customer funds get stuck. What I have noticed is that some overseas companies tend to contract with us from their US operation or UK operation. But it doesn’t always help them because it could just be easier for them to operate via their own country,” he says.

Mori adds that he hasn’t felt the same level of scrutiny or fear when trading with Kenya as with Nigeria, for example. Some banking communications suggest to Mori that he should make sure the proportion of trade is “not too large for your portfolio” without specifying how large is too large. He worries that the issue is a matter of perception and not reality, and at a time of economic challenge in the UK, this is not ideal, he says.

“Often these companies that we deal with have become Africa unicorns, with billion-dollar valuations, but when it comes to actually trading with them then it’s trickier,” Mori says. “It inhibits growth. You spend too much time dealing with administration. You then can’t be frank and swift with your client.”

Official figures show total UK exports to Nigeria for the four quarters to the end of Q2 2022 was £4.3bn, representing 0.5% of total UK exports.

“I find it a bit vague. The UK is allowed to trade with Nigeria, but not too much. Whereas there are some countries where it is not allowed. I expected this more in countries where there are strict exchange controls around flows of amounts of dollars or of local currency. We don't have those limitations here though,” Mori says.

For context, the UK dropped five places in the Transparency International ‘Corruption Perception Index’ in 2022 to be ranked in 18th position, while Nigeria ranks in 150th place out of a total of 180. Kenya ranks 123rd.

It’s the inconsistency between different banks that rankles with Mori as much as the general vagueness of the rules.

Better regulation approach

Mori says he wouldn’t even try to liaise with government ministers because previous attempts by others have gleaned little. However, he says the consultation work ICAEW does with the government is hugely beneficial to him and his work.

The CFO says it’s time for the government to offer a more tailored approach in dealing with business. “I think a more direct approach where you ask for input from companies directly or through industry bodies would be better. I think there could be a simple change. I’m not saying you must now go and duplicate, or spend more taxpayer money, setting up a new department and rehashing everything.”

He also suggests that government could stagger legislation around research and development for SMEs over a number of years to give smaller companies a helping hand. On the recent corporation tax rise to 25%, Mori adds that again the government could have helped out more by staggering the introduction of the rise for smaller businesses.

“£250,000 profit seems low before you hit the full 25%. Could it have been a million pounds for SMEs, for example?”

Mori is positive overall about the UK but wishes the government would nurture the technology sector more, especially given the UK’s geographic location between the US and Europe and Asia, its respected democracy, legal profession, skills and language, among other benefits the UK has to offer.

“If we could compete a little bit with the Silicon Valley buzz around tech – and there is some buzz but it's not so clear or so prevalent – I think the UK could easily be the centre of tech.”

With economic growth the major focus for the government, easing the export of UK goods and services should be a priority. Perhaps it’s time for a wholesale review of business regulation and consideration of whether smaller businesses can be better nurtured.

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