Capital controls are making a come-back

But it’s not too late to prepare

The free movement of capital is being curtailed the world over as globalisation is in retreat and the world fractures into competing power blocs. Capital controls can have a devastating impact on your wealth, but it’s not too late to protect yourself.

In March 2022 the International Monetary Fund (IMF) made two very significant, but largely unreported, policy decisions:

  • Nations can implement capital control measures pre-emptively.

  • Capital controls can now be implemented for national or international security.

These changes represent a major break with previous policies and could have huge future implications for the free movement of capital across borders.

Is your business reliant on the free movement of capital internationally? Do you plan on moving your assets to a different jurisdiction at some point in the not-too-distant future? Do you invest overseas? If you answered ‘yes’ to any of those questions, these changes could have a considerable impact on your future – and, under some circumstances, even prove existential.

Do you trust your country’s politicians to exercise these new powers responsibly? History shows us that the state is reluctant to set aside new powers once it has acquired them. Income tax in the United Kingdom was supposed to be a temporary measure to help fund the war against Napoleon – 200 years later and the British are still saddled with it.

The pandemic demonstrated that even something as basic as freedom of movement can no longer be taken for granted. But the next lockdowns could be of the financial kind, as state bureaucracies seek to increase their tax-take in the face of record public debt and soaring spending commitments.

Make no mistake, the world order is in a state of transformational change, and we are in the midst of a paradigm shift the likes of which only happens once in a generation or more. But rest assured, there ARE solutions and even opportunities open to those who have the foresight to act now to protect their wealth and their future prosperity.

We’ll discuss what can be done later in the article, but first we need to understand what’s coming…

What are capital controls?

Capital controls are any measure taken by a government, central bank, or other regulatory body to prevent or limit the flow of foreign capital in and out of the domestic economy. Examples of capital controls can include taxes, tariffs, legislation, volume restrictions, and market-based forces. Such measures may restrict the ability of domestic citizens to acquire foreign assets (referred to as capital outflow controls) or foreigners’ ability to buy domestic assets (capital inflow controls).

This short video provides a useful overview of capital controls in action, along with some of the pros and cons:


Capital controls: a brief history

Capital controls are nothing new. During the 1930s, limits on the cross-border flow of capital became commonplace in countries with major economic problems stemming from the Great Depression, as governments attempted to restrict the flow of scarce resources. After World War II and the introduction of the Bretton Woods system, capital controls became an accepted part of the global financial system. However, when US President Richard Nixon broke the dollar’s convertibility with gold in 1971, this unleashed the era of fiat money, which saw countries with floating currencies gradually lift controls.

During the 1980s and ‘90s, with the arrival of the free-marketeer Thatcher and Reagan governments, a new consensus emerged. Economists generally agreed that the removal of capital controls was advantageous from an economic growth standpoint in that it facilitated the allocation of capital where the best returns were on offer.

In practice, this tended to mean large capital inflows into developing countries, but the flipside to this boon was that it made these economies vulnerable to a change in sentiment. The first challenge for the new consensus came in the form of the Asian financial crisis of the late 1990s, and by 2010 the IMF was ready to acknowledge that capital controls could be effective under certain circumstances.

That was something of a watershed moment for the world, as it paved the way for capital controls in developed countries like Greece, Iceland and Cyprus during the fallout from the great financial crisis. The IMF’s latest policy amendment on the matter is simply tacit recognition that capital controls have now become normalised and that free movement of capital is increasingly coming under threat.

Capital controls are back

It’s probably uncontroversial to state that the global order is in a state of flux right now. Increasingly, the United States is seeing its status as global hegemon challenged as the world splits into separate blocs, with the US and the European Union on one hand and China and Russia on the other.

The breakdown of Pax Americana spells bad news for global financial and economic integration, as it was the pervasive influence of the US that was the major stabilising factor under which the forces of globalisation took hold in the 1980s and ‘90s. The re-emergence of power blocs is globalisation in reverse.

We can see this playing out right now in the Ukraine. Nobody is going to shed a tear for the Russian oligarchs who found themselves in the wrong place at the wrong time, but the asset seizures and censures we’ve witnessed on both sides has served as a warning that everyone is at the mercy of the state when it comes to their personal wealth.

If we accept that the world is becoming a more volatile and unpredictable place, then it’s probably only realistic to expect more frequent crises – financial and banking collapses, wars, chronic economic problems (soaring inflation is a recent example). These are the conditions under which governments have historically resorted to capital controls.

Do you still think: “It can’t happen where I am”?

There are numerous examples of capital controls being implemented across Europe in recent years:

  • Iceland‘s imposed capital controls in October 2008 during the banking crisis to prevent massive capital flight and currency collapse. The controls were in place for more than eight years, primarily because of the risk of large outflows of domestic holdings of the failed Icelandic banks.

  • In 2015, capital controls were imposed in Greece during an impasse between the EU and IMF and the Greek government. This led to a three-week closure of Greek banks and draconian limits placed on cash withdrawals. Capital controls were only completely lifted four years later.

  • Cyprus was the first EU country to implement capital controls after a run on its banks in 2013. The measures lasted for two years.

These are just a few examples from developed European countries – capital controls tend to increase in their frequency and severity as we look further afield (just ask someone living in South America!).

What’s more, these are relatively benign examples of capital controls. As governments become desperate in a crisis, they tend to resort to more punitive measures.

  • “Official” exchange rates: This is where the government sets a currency exchange rate that is less favourable than the market rate (enabling it to pocket the difference). This can also apply to commodities like gold.

  • Taxation: We already accept import duties on a variety of foreign goods, which is clearly a distortion of the free market. But what about the import and export of capital? How would you feel about paying, say, 20% tax when transferring money into a foreign bank account or buying foreign investments? In Germany, for example, many business owners are already facing a situation where they would be unable to afford to emigrate due to punitive levels of taxation on historic profits.

  • Restrictions, regulations and prohibition: Restrictions might be places on the amount of foreign currency or gold you can own, or even the amount of domestic currency you can take out of the country. In a more extreme scenario, governments could implement outright prohibition, as the US did with private gold ownership in 1933 during the Depression. It only repealed this legislation in 1974.

These are just a few of the tools that desperate governments can use to confiscate the wealth of their citizens. Such measures will always be pitched as a means to restore “stability” and “confidence”, but in essence they are a means in which to isolate and confiscate private wealth on behalf of the state.

Capital controls are often a precursor to something much worse, such as a currency devaluation or a “bail-in”. It’s therefore imperative that you’re prepared well in advance – and crucially before the initial measures are implemented, by which time it will already be too late.

How To Prepare For Capital Controls

In one word: diversification. Nobody wants to be 100% exposed to a particular country or jurisdiction, only to see their wealth and independence evaporate on the back of punitive measures by the government. In today’s world, international diversification is an absolute must-have – but specifically you should be looking for a particular kind of jurisdiction.

We are not talking about so-called tax havens, many of which will put you on the radar of the authorities and could ultimately result in your assets being stranded. We’re talking about sensible diversification into jurisdictions with impeccable pedigree when it comes to protecting private property and providing an excellent service at the highest levels of international best practice.

There are the obvious candidates such as Switzerland and Monaco that fit the bill. But the island of Guernsey, which is home to Sarnia Asset Management, is one of the best kept secrets as a destination for international capital and it offers a pathway to the entire English-speaking world.

So what sets Guernsey apart from the crowd?

  • Part of the Channel Islands, which sit in the English Channel between Britain and France, Guernsey is neither part of the UK nor the EU. Although it does owe allegiance to the English sovereign (monarch), Guernsey is fiercely independent and has its own unique island culture. Hallmarks of this culture include a non-partisan parliamentary system, low levels of state intervention in private life (low taxation and government spending) and hundreds of years of political and economic stability.

  • The financial sector accounts for one-third of Guernsey’s GDP, meaning that it would be unthinkable for Guernsey to abandon the free flow of capital, which would spell disaster for its economy. It is in Guernsey’s interest to maintain an open and transparent financial industry.

  • Guernsey is an OECD White-Listed jurisdiction, which means it abides by the highest international standards in adopting a more robust approach to less scrupulous offshore jurisdictions, this is crucial.

  • Debt to GDP is very low (c. 20% of GDP), meaning its fiscal position is in good shape when compared to profligate European states.

Would you like to learn more? Sarnia Asset Management was set up with the idea of helping investors to legally protect their wealth. Our entire infrastructure is Guernsey-based, including custody of the securities our funds invest in. We can offer investors advice on how to use Guernsey as an additional pilar in their wealth diversification and asset protection. Reach out to us if you’d like to have a personal conversation about it.

Disclaimer: This blog is intended for informational purposes only. This blog is not intended to invite, induce or encourage any persons to engage in any investment activities and is not a solicitation or an offer to buy or sell any stock, investment product or other financial instruments. If in doubt, please seek financial advice from an independent financial adviser. Sarnia Asset Management is licensed by the Guernsey Financial Services Commission (GFSC). Past performance is not an indication of future returns. Investments carry risk, including the risk that you will not recover the sum that you invested.


By James Faulkner

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