Risk Management, Compliance, and Asset Sales

Over the last 15 years, I have had the opportunity to speak with numerous organizations that are seeking to implement or improve their asset recovery programs. Often, their topics of interest are experience, cost, and what they can expect to recover from the sale of their surplus. While I believe those are important considerations, I always emphasize that compliance and risk management should be their number one priority when it comes to managing and selling surplus. This statement often gets raised eyebrows since most people don’t tie risk and surplus management together. I thought I would outline a few areas to focus on for anyone looking to understand how to build a more compliant asset recovery program.

Legal

In my opinion, the largest area of risk when it comes to selling used and surplus equipment is legal risk. I have seen numerous instances of (avoidable) litigation caused by asset owners taking a laid-back approach to consider the legal aspect of selling their used or surplus assets on the secondary market. In most cases, these issues arise when corporations utilize third-party brokers to manage the transaction and fail to review the terms under which their assets are being sold.

Asset owners should dictate, or at the very least, understand the terms and conditions associated with the sale of their assets. When using third-party brokers, it’s generally a good practice to ask to review the terms and conditions and purchase and sale agreements that buyers will be agreeing to. Proforma invoices should also be reviewed prior to sending to buyers if possible. Typical areas of concern include warranties, terms of payment, terms of removal, use of goods, indemnification, and insurance requirements.

Know Your Customer (KYC) Policies

Most enterprise organizations have stringent KYC policies in place for buyers, suppliers, and partners. Adherence to these policies is also important when it comes to selling surplus since selling company assets to unknown buyers can pose competitive and compliance risks. For example, most companies are concerned about direct competitors buying assets at pennies on the dollar and putting those assets to work against the original owner. However, a more compelling reason to know your customer is to avoid the risk of inadvertently selling company assets to a buyer from a restricted or sanctioned region or entity. An example of such a blunder can be found here.

This is less of a concern for companies that typically sell assets through an RFP or internal sale process since the company is transacting directly with the bidders and has control over who ultimately buys their assets. However, when selling through third parties, brokers, and auctioneers, ensuring KYC compliance becomes more of a challenge. Brokers tend to not disclose their buyer contacts (for obvious reasons) to the asset owners, and this lack of visibility into the buyer markets can sometimes hold potential risk. The only way to mitigate any risk in these situations is to ask the broker upfront about their buyer markets, their willingness to disclose their list of bidders, and whether their bidders are vetted against restricted lists. The less risky approach would be to find a solution that gives you full visibility and access to buyers.

Tax Compliance

Tax compliance is becoming increasingly complex, and tax rules on selling used and surplus equipment are always a grey area. In most situations, the finance teams play an active role in asset disposition since there may be tax implications associated with depreciating and writing off assets. In my experience, auditors tend to be drawn to any irregular transactions when looking for issues, and entries in the general ledger on surplus sales often attract their attention. Therefore, it’s important to ensure tax compliance is buttoned up before a transaction is recorded.

When it comes to sales tax, finance will typically need to have a say in what type of sales tax treatment will need to be applied in any given circumstance. If using third parties or brokers to sell assets, it’s best to understand who is obligated to collect and remit sales tax (in most jurisdictions, it’s the broker), and what type of reporting and supporting documentation will be provided back to the company that would be deemed acceptable to auditors

Environmental & Sustainability Compliance

The industry is progressively moving towards a circular economy, and a comprehensive asset recovery strategy is a key part of a more sustainable supply chain. According to the CAPS Research benchmark, over 60% of organizations mandate themselves to consider sustainable alternatives when it comes to dispositioning surplus.

Since this article is about risk and compliance, I would like to point out that most enterprise organizations still send an incredible amount of usable machinery, equipment, and parts to scrap yards and landfills, which goes against their own mandates. I’m sure this problem is compounded by the absence of an organization-wide asset recovery infrastructure that can streamline surplus discovery, redeployment, and sale. Without a company-wide asset recovery program, it’s nearly impossible to get the appropriate visibility into surplus assets and manage them effectively.