Capital controls: not just for developing countries anymore

Capital controls – those pesky little speed bumps on financial and asset flows – are just something that big multinationals have to be worried about when entering poor countries, right?


Thanks in part to a new patchwork of anti-corruption and tax avoidance legislation, it’s becoming more difficult for even average folks to send even small amounts of money across borders.

I speak from personal experience. I’m a member of a credit union that has just moved from the U.S. to the UK. I’m renting an apartment with my wife, and needed to make two international wire transfers. The first was for the security deposit on the place, which I was sending to my new landlord. My second wire was a transfer from my US bank account to my UK bank account to have sufficient sterling-denominated funds to pay the next month’s rent.

While on paper, these transfers should take only a few business days, the reality was that they were weeks-long sagas in each case. It was a revelation of the extent to which financial flows are not all that free.

In the first case, my bank informed me upfront that I would need certain information, like the name on my landlord’s UK account, and the SWIFT code.

What they did not tell me is that I would need full information about the purpose of the transfer, the nationality of all names on the UK bank account, where they were resident, and even the full name of each account holder.They did not tell me all of these outstanding requirements in one conversation, however.

Each time, I would get through to a customer service representative (during restricted hours of service), answer a battery of initial questions for which I was prepared, and then get stumped on one of the surprise questions. The agent would then stop the interview, and tell me to confer with my landlord to get this information. Due to the time difference, this would take a day or two. Then, I would get back on the phone with the US bank, only to be stumped by what I was assured was always the penultimate outstanding bit of data.

(If some of these questions don’t seem like such big deals, consider that a lot of folks in the UK don’t use their full names, but a series of initials for the first two or three given names. Asking for someone’s name – especially if they’re older – can be a bit intrusive, especially when the initialed name is what is one the bank account.)

In the second case, I was making just a transfer from me to me. Should have been easy, right?

Wrong. The transfer takes 2 to 7 business days (Monday-Friday). If you’re unlucky enough with your timing, that could be almost two weeks. During that period, your US bank debits your account, but your UK bank has not yet credited your account. Depending on the amount you are transferring, this can pose a real liquidity problem.

Unfortunately, my initial attempt at the transfer took the full seven days. Then, due to a clerical error, the funds were remitted (wrong UK account information entered). Due to the restricted working hours (the wire transfer office is only open when the Federal Reserve Bank of New York is), the banks got to me a day or two later to inform me of the problem. Then, I had to start the whole process over … spending up to seven days more just to transfer money to myself.

I was genuinely surprised at the level of bureaucracy involved in what I thought should be simple payments. In my line of research, U.S. government officials often tell us that government policies that restrict the free flow of funds represent excessive intervention in free markets (often at the behest of short-sighted developing country policymakers), and that US policy is to use international deals to restrict countries’ ability to use such tools. I disagreed with the policy prescription, but not fundamentally with the empirics.

But through both old and new policies, the US is putting its own  speed bumps on international finance.

I asked the clerks I was dealing with what factors are leading to the hold-up in funds transfers. They said that new laws like the Foreign Account Tax Compliance Act , the Dodd-Frank Act, and other initiatives require banks to collect more and more information about international payments and financial flows. Add to this to older programs like Fedwire (a government run transfer service), CHIPS (a private service with substantial interlinkages with government) and CLS Bank (a government initiated, privately run settlement company), and you have substantial direct and indirect government involvement in transfers – even in the good old US of A. Thus, even though there is some market demand for being able to transfer funds at all hours of the EST day or night, we’re restricted to when the government wants to open its doors.

Of course, the main difference with these types of financial controls and the kind used by developing countries is that the latter are primarily targeting employment and development indicators, while the US policies do so at best indirectly. In any case, if international agreements began challenging the US government’s role in the private financial sector, I bet the US tune would change.

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