The Return of Capital Controls
What are capital controls?
Capital controls are government imposed restrictions that regulate the flow of capital into or out of a country. Most westerners have limited experience with these restrictions even though these restrictions remain a daily reality for billions of people in emerging markets.
Examples
Present day South Africa is a perfect illustration of how capital controls function differently for residents versus nonresidents:
Non-Residents:Face minimal restrictions and can move capital freely with basic paperwork
Residents:Subject to strict limitations. There is a $55,000 annual discretionary allowance per adult for travel, studies, gifts and online shopping
Foreign Investment Allowance:Just over $500,000 per person per year
Most South Africans aren't significantly affected by these limits but the above demonstrates how controls typically start modest before gradually tightening and how capital controls disproportionately impact the wealthy.
The Policy Shift Enabling Capital Controls
In 2022 the International Monetary Fund quietly introduced new measures that fundamentally changed the global framework for capital controls. These changes received little media attention but represented a significant shift in policy.
Key Changes
1. National Security Justification:Countries can now impose capital controls if deemed in the interest of national or international security.
2. Preemptive Implementation:The IMF endorsed implementing capital controls preemptively
This preemptive authorization gives extraordinary power to politicians, central bankers and government aligned corporations. These powers are ripe for abuse and the powers have historically been taken advantage of.
Why this matters now
The convergence of these recent changes makes capital controls increasingly likely. We have seen the following already:
- • Increase in fiscal pressures across western nations
- • Rising geopolitical tensions and national security concerns
- • Growing economic nationalism and calls for domestic investment
- • Potential capital flight from major markets like the United States
- • The weaponization of tariffs suggesting capital flows may be next
The Many Forms of Capital Controls
AML & KYC Requirements
Anti-Money Laundering (AML) and Know-Your-Customer (KYC) checks represent a form of soft capital control already affecting Western citizens:
- • Payments of a few hundred dollars held up for AML checks
- • Constant KYC updates required every few months
- • Extensive due diligence consuming significant time and resources
- • Banks freezing accounts or refusing transactions without explanation
These measures are considered soft capital controls because they began targeting only major financial players moving significant capital but now affect ordinary citizens conducting routine transactions.
Cash Transaction Limits
Many Western countries have already quietly implemented restrictions on cash use:
- • Cannot carry more than $10,000 across borders without declaration
- • France limits cash payments to €1,000
- • Similar restrictions exist across Europe with varying thresholds
These nominal limits will increasingly become more suffocating as inflation continues to erode currency values.
Exit Taxes
Exit taxes represent a harder form of capital control and are used to discourage citizens from leaving with their hard earned capital.
Germany's Exit Tax System
Germany pioneered the exit tax system in the early 1920s. The system is so punitive that many wealthy Germans find it impossible to leave which has effectively made them financial prisoners within their own country.
Canada's Departure Tax
Citizens of Canada that decide to leave must pay taxes on all unrealized capital gains. This creates a powerful disincentive to emigrate.
USA Exit Tax
The USA exit tax is a tax on the worldwide assets of an individual with $2m+ net worth. Similar to Canada, the tax is on unrealized gains on worldwide assets.
Foreign Exchange Spreads
Some countries impose significant spreads on currency exchange to discourage capital outflows:
- Italy in the 1970s-1980s: Imposed up to 20% spreads on financial transactions
- West African Countries: 5% premium when converting local currency to euros for outbound transfers
- Ecuador: 5% exit on funds sent abroad from domestic bank accounts
Countries with soft Capital Controls
Some countries maintain no formal capital controls but make outbound transfers administratively difficult:
Turkey's Approach
- • Online banking mysteriously "doesn't work" for large transfers
- • Required in person bank visits with extensive documentation
- • Lawyer involvement for large amount transfers
Belgium's Banking Difficulties
Multiple clients report significant challenges transferring money out of Belgium despite no official capital controls being in place in the country.
Why Capital Controls Target The Wealthy
Capital controls typically affect only the top 10% of asset holders. This strategic targeting serves multiple purposes and minimizes political resistance by exempting the other 90% of the population. The average person can still take vacations to nearby countries for the time being and conduct financial transactions. As time passes, capital controls tend to tighten slowly and affect more of the population.
What starts as limitations on the top 10% gradually encompasses wider segments of the population. The pattern is consistent across countries and over time periods. The playbook is to start small to avoid resistance and then broaden the scope incrementally.
The Fiscal Pressure Factor
Most Western countries face severe fiscal challenges with mounting debt levels. Governments will need to raise revenue and the top 10% of wealth holders represent an obvious target with substantial capital that can be taxed.
This sequence is predictable:
- Implement controls on capital movement
- Trap capital within national borders
- Increase taxes on immobile capital
- Gradually expand scope to affect more people
Capital controls enable and maximize taxation by preventing populations from escaping.
Why Cryptocurrency isn't the solution
Cryptocurrency began as a payment system designed to operate outside government control. It was designed to offer a potential escape route from capital controls. However, the crypto industry has largely embraced government oversight in exchange for legitimacy, mainstream acceptance and rising valuations.
The Core Solution: Geographic Diversification
The fundamental strategy for protecting against capital controls is geographic diversification of assets. Do not keep all your wealth in a single jurisdiction regardless of how stable that country currently appears. The only way to deal with capital controls is diversification. Nobody can read the future but what you have power over is spreading your assets among several jurisdictions.
It is extremely important to get multiple residencies and citizenships while these pathways are open. The psychological value of spreading your assets and having multiple residencies/citizenships cannot be quantified.
The 10% Risk Threshold
If there were even a 10% chance of being unable to use your capital as you wish would you take significant steps to manage that risk? The actual probability of capital controls affecting wealthy westerners is substantially higher than 10%. This justifies considerable effort in preparation and diversification.
The Cost of Inaction
The Russian investors who held significant ADRs and the Russian billionaires who kept all of their capital in London during the Russian and Ukrainian conflict had their assets frozen. The costs of preparation pale in comparison to the potential losses from being caught unprepared.
Final Thought
Capital controls exist on a spectrum from minor inconvenience to complete asset freezes. Intelligent preparation dramatically reduces vulnerability. Ensuring you have accessible assets in multiple geopolitical jurisdictions provides crucial financial freedom and security. The psychological value of multiple residencies and citizenships for the investor and the investor's extended family can protect legacy and ensure safety in times of peril.
Visit www.retirementcitizenship.com to learn more about obtaining residencies/citizenships to protect yourself.
