Asset Protection

How to Avoid Capital Controls

Understanding Capital Controls: Implementation, Impacts, and Personal Protection

Last week, I had a call with a successful entrepreneurial client who was deeply worried about capital controls.

She had worked for many years to build up an eight-figure nest egg and didn’t want to lose it to a predatory government through outrageously higher taxes or being forced to convert some of her investments into bonds from a bankrupt federal government. She certainly didn’t want to run the risk of outright confiscation.

In her case, the solution is to be found in diversification; to get assets beyond the reach of capital controls by moving them internationally.

But frankly, I don’t think I did a very good job of explaining that to her. So for her benefit, and for all of our readers, I thought I’d take a few minutes to address this topic. Specifically:

  • what capital controls are,
  • why they are becoming more likely in the US,
  • signs they’re already here, and
  • practical ways to get your savings out of harm’s way while you can.

What are capital controls?

Capital controls are government measures to regulate the flow of money into and out of a country’s economy. These measures can include taxes, tariffs, outright bans, or restrictions on foreign investments, currency exchanges, and cross-border financial transactions.

How Likely Are Capital Controls in the US?

Capital controls are imposed for various reasons, which I’ve outlined below.

All of these factors are affecting the US right now at various levels.

Yet whether Uncle Sam will impose traditional capital controls at some point is up for debate. After all, Americans have benefited immensely from an open and (mostly) free economy where capital can move across borders.

Still, the signs aren’t great.

Economic Crisis

A significant financial crisis, such as a severe recession or a collapse in the dollar’s value, could prompt the US government to consider capital controls.

It’s happened in the past — the forced sale and ban on privately owned gold during the Great Depression, for example.

Global Financial Instability

Increased global financial instability might lead to capital controls, especially involving key trade partners or major economies.

The International Monetary Fund (IMF), in particular, suggests a growing acceptance of capital controls under specific circumstances. This could influence US policy decisions.

Political Pressure

Domestic political pressure to protect jobs and stabilize the economy could lead to calls for capital controls.

Different Forms of Capital Controls

Capital controls come in different forms, but usually fall into one or more of the following buckets.

Outbound Capital Flow Bans

This is probably the most well-known one — you’re limited (or banned entirely) from moving money outside the country.

Exchange Controls

In this case, the government restricts buying and selling foreign currencies. They may set an official exchange rate and limit the amount of foreign currency that can be purchased or held by residents. A black market almost inevitably springs up.

Another version is to have different exchange rates for different types of goods and services, as well as imports and exports.

Transaction Taxes

The government makes cross-border financial transactions so expensive that the market decides it’s not worth it.

Investment Restrictions

The government limits inbound capital flows. This can include caps on foreign ownership of domestic assets or restrictions on domestic entities investing abroad.

Administrative Approval

A country’s government requires citizens or foreign investors to get permission before they can make certain investments in that country.

How the US Government Approaches Capital Controls

Broadly speaking, the US simply can’t implement such obvious capital controls as long as the dollar is the world’s reserve currency. If they did, it could cause the dollar to lose that status, which would be catastrophic for both Americans and the world economy.

So instead, they’ve had to be sneaky. They:

  • Encourage foreigners to continue to use the dollar and invest in the US.
  • Make it hard for Americans to move their money overseas.

To do that, they’ve created a very large number of rules on how you can move your money offshore, how to report it, how it will be taxed.

Not only that, but these rules now force any foreign financial institution that wants to do business with Americans to build an entire compliance department to deal with US issues — most notably through the provisions of the Foreign Account Tax Compliance Act (FATCA).

The effect has been profound. Most foreign banks no longer accept US clients unless there’s a connection to the country (a residency permit, a corporate structure, citizenship). They don’t want the hassle.

From the American investor side, it’s closed off the most common way people went offshore even a decade or so ago.

But that’s not to say there aren’t still options. And it’s just as important — if not more important than ever — to move even a small bit of your portfolio overseas.

How to Protect Yourself Against Capital Controls

The key word is diversification. What you can do will depend on your net worth, what your current portfolio looks like, and what you’re trying to accomplish. The following is a list to kickstart your thinking process.

(By the way, this is the sort of thing we do in our Private Wealth planning. Feel free to book a free, no-obligation call with an Associate to see if our services are right for you.)

Investible Assets: Less than $1,000,000

Diversified Investments: Spread your domestic investments across different asset classes. Although this won’t protect you against capital controls on its own, it will give you a measure of protection against the effects if capital controls are put in place.

Take Assets out of the System: Store cash, precious metals, and other inflation resistant goods at home or in a safe place you can reach locally.

Foreign Bank Accounts: Consider opening a bank account in Canada. They will still allow US clients to open an account with a low minimum. You will need to make a personal visit though.

Precious Metals: Invest in offshore allocated and/or segregated gold or silver. Minimums for some of these services are low — as little as $100 in one case.

Investible Assets: $1,000,000 to $5,000,000

International Asset Management: Consider moving a portion of your assets to an international asset manager. They can get those holdings out of the dollar and into investments that aren’t so tied to the US economy.

Second Citizenship: Consider a second passport from a country as an insurance policy.

International Real Estate: Consider purchasing a property in a foreign market. But, a warning — make sure the purchase fits into your overall planning. Avoid impulse buys that can be a nightmare from a US planning perspective. (We work with plenty of clients who’ve made such investments and ask us to help fix it.)

Foreign Bank Accounts: Banks in countries like Switzerland, Austria, or the Cook Islands still offer bank accounts to non-resident US clients, with minimums starting at $250,000.

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Investible Assets: $5,000,000 to $10,000,000

Private Investments: Consider foreign investments into private deals. You give up a liquidity in exchange for an asset that is much more resistant to future capital controls. Just be aware that you’ll need a good accountant to deal with more complex reporting requirements to Uncle Sam.

International PPLI (Private Placement Life Insurance): Explore an international PPLI policy to move assets out of your estate entirely. Insurance protections are generally quite strong compared to other asset protection options. They can protect against future capital controls as well (at least, on the assets already in the policy by the time capital controls come into effect.)

Foreign Bank Accounts: As you have more money to invest, safer banks in other reputable countries may be willing to accept your business. However, this is done case-by-case and often involves the help of a specialist firm to make introductions.

Offshore Trusts and LLCs: Consider offshore trusts or LLCs to better ringfence your assets from each other and move them out of harm’s way.

Investible Assets: More than $10,000,000

Family Offices: Consider working with an overseas family office. They will be able to build you a custom solution that builds structures, portfolio management, and asset diversification into something that helps you avoid capital controls in any one country. They will also take care of all compliance and reporting issues to Uncle Sam.

About The Author

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We have 40+ years experience helping Americans move, live and invest internationally…

Need Help?

We have 40+ years experience helping Americans move, live and invest internationally…

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