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Bank of England

The Spectre of Capital Controls - Never Say Never

In this article Keith talks about the impact of exchange and confiscation controls during his 46-year career.

Over the last couple of weeks governments have been announcing various gradual exit strategies from lockdowns in your previous article you spoke about the risks for our clients as the global community deals with COVID-19. Are there lessons to be learned from past crises which we can factor into today's planning or are the problems so entwined with COVID-19 that previous models have to be discarded?


When I spoke about 'the new normal' in an earlier article I said each crisis has its own individual underlying causes but the impact and effects are often very similar. Look at the events of early June following investment market crashes there is always a recovery and historically those recoveries have often been more rapid than investors anticipate but those recoveries are accompanied by volatility.

Many portfolio managers were getting nervous about the extent of the recovery and guess what the prospect of an anticipated second wave of COVID-19 the Dow Jones fell 7% and other markets followed suit to a lesser or greater degree. That's a short term predictable event and I would hope our clients are long term investors who don`t expect to predict those short-term events.

Our business is about long term relationships and planning and there are longer term risks that we should be aware of. One of the lessons I have learned over the years is 'never say never' to history repeating itself. My biggest concern is the level of government debt that is being created globally.

Perhaps the greatest concern is the legacy of debt we will be leaving the next generations but that's a subject for another time. The obvious threat is no secret the spectre of inflation. Post the 2008 financial crisis economists were worried about the bailouts that governments financed with debt but so far almost 12 years later that has not happened.

I mentioned what happened in the 1970s when the UK government had to go cap in hand to the IMF but the debt figures now make US$3.9bn and the post 2008 figures look like petty cash. Let's not forget that in last year's general election Boris Johnson led the Conservatives in securing a substantial majority by successfully persuading the electorate that his Labour opponents' government spending plans were reckless. The COVID-19 rescue packages globally albeit caused by the humanitarian crisis would in normal circumstances re regarded as even more reckless.


Yes you're not alone in those concerns but when you say 'never say never' what risks do you have in mind?

The risk I want to highlight today is capital controls and capital confiscation both of which I have witnessed during my career. First of all let's cover capital or 'exchange' controls as they are sometimes called. Capital controls are usually introduced as emergency measures by governments when capital outflows threaten the value of the national currency.

It's not inconceivable in the face of the COVID-19 crisis that a government could get its finances in such a parlous state that investors and depositors lose confidence in the domestic currency and capital flows out to other financial centres with a catastrophic effect on the value of the exchange rate of that currency.

In effect this puts that country's citizens in a financial 'lockdown'. Exchange controls still exist around the world and I had direct experience of those in the UK before the 1947 Exchange Control Act was suspended in October 1979.

Very briefly UK citizens were restricted to 25 cash in foreign currency if they travelled abroad on holiday or business they could only purchase foreign investments by purchasing 'investment currency' from the Bank of England which was normally priced at a premium between 25-40 % over and above the market exchange rate (the 'dollar premium') and on sale of the investment 25% of the premium was retained by the Bank of England.

It was very restricting and bureaucratic 750 people worked in the Exchange Control Department. In Guernsey, Jersey and the Isle of Man we needed exchange control approval before we could set up structures for non-UK clients. I can't tell you how liberating it was to be able work with clients without the bureaucracy of exchange control but the inconvenience was minor in comparison to other effects elsewhere and this is the focal point of my concerns. Here are a few examples of client situations I have seen:

  • One country which still has exchange controls is South Africa. Admittedly those are less draconian than they used to be but particularly during the years of apartheid many South Africans who would have wanted to emigrate were unable to do so because they were unable to take sufficient capital with them to establish themselves and their family in another country.
  • Conversely in a neighbouring country Zimbabwe expatriates who had spent their career in the country often retired to the UK or other European countries with pensions being paid from Zimbabwean pension schemes. A worsening economical situation led to tightening of exchange controls a rapidly deteriorating exchange rate for the Zimbabwean dollar and in 2008 hyperinflation. I knew of people who had no alternative but to return from retirement in Europe to Zimbabwe as their pensions and assets locked in Zimbabwe had devalued so much against other currencies that they could not survive financially in retirement.
  • Many other EU member states also had exchange controls in some form until relatively recently and even today some of those states operate controls requiring foreign citizens to remit funds out of the country.


Exchange control can be a potential minefield if you get caught up in it but capital confiscation sounds more frightening what experience have you had of that?

When I say 'never say never' the most recent reference point for this is very recent in 2013. It happened in Cyprus (an EU member state) as a result of several factors including Cypriot banks' exposure to local property companies the Greek government debt crisis and the Cypriot government's bond credit rating being reduced to junk status. Cypriot client bank deposits in excess of 100000 were subject to a 'haircut' or one time levy. It applied both to local residents and foreign account holders. These measures were part of a 10 bn bailout agreed by the Cyprus government with the EU. Estimates vary but some calculate the total amount of the haircut at 48% of Cyprus bank deposits. For confidentiality reasons I cannot disclose the exact circumstances but I had direct experience of two clients having substantial monies trapped in Cyprus banks and in one case the monies were literally deposited shortly before the haircut announcement. Fortunately in one case the funds were eventually released in full and in another case a partial release was negotiated.


How can we help our clients in protecting against these types of risks?

PraxisIFM operates in 17 jurisdictions and we have a global clientele. Financial centres must have a solid foundation of good regulation prudent government and a range of expertise in private client and wealth management which international high net worth clients will expect to protect their interests. Preservation of wealth can be a complex subject but working in conjunction with the network of intermediaries and professionals which our Group has developed over decades we have the depth of expertise to work with clients to find the best structure to suit their requirements.


Please note that this article is intended to provide a general overview of the matters to which it relates. It is not intended as professional advice and should not be relied upon as such. Any engagement in respect of our professional services is subject to our standard terms and conditions of business and the provision of all necessary due diligence. © Praxis 2023

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