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Why another amnesty for illegal capital flight?

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Why another amnesty for illegal capital flight?

17th September 2010

By: Seeraj Mohamed

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The South African Reserve Bank (SARB) is proposing a second amnesty for South African residents guilty of illegal capital flight. The first amnesty was in 2003. These amnesties may seem a good way to collect revenue by government, but they are the wrong policy at the wrong time.

The amnesty is presented as regularising money held abroad and a reason given for the amnesty is that government is in the process of liberalising exchange controls anyway. People who broke the law are given a second amnesty in a decade when it seems the first amnesty was not very effective. Those South Africans who abided by the law and invested their money in South Africa are sent the signal that government would have tolerated illegal behaviour.

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Further, the debate about liberalising exchange controls has taken a new turn and there is renewed global and domestic support for maintaining and even strengthening capital controls, not only in developing countries but also in developed countries. The big question is: Why is the SARB offering this amnesty now? It would make sense to wait for a time until the outcome of the debate on exchange controls in South Africa is clearer.

Further, it is still not clear whether an amnesty promotes the best interests of South African society at this point. Government and the SARB have not explained the underlying reasons for the amnesty. They have not told the public what their estimates of capital flight were before the first amnesty and before they decided on the current amnesty. While there has been an announcement of an amnesty and a call for responses to the proposal of an amnesty, there has not been a transparent process or much public dialogue on an amnesty.

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Government collected over R2-billion in 2004 from South African residents who declared that they held money abroad in contravention of exchange control regulations. The amnesty provided those guilty of illicit capital flight with the option of paying a fine of 5% of their illicit foreign holdings if they brought the money back to South Africa or a 10% fine if they kept the money abroad.

Very few amnesty applicants returned their money to South Africa – they preferred to pay a 10% fine. As has been stated, the SARB and government did not tell the public what their estimate of illegal capital flight was before the 2003 amnesty. After the amnesty, they did not announce whether they felt that they could now account for a reasonable level of capital held abroad illegally.

My colleagues in the Corporate Strategy and Industrial Development Research Programme and I estimated that average annual capital flight as a percentage of gross domestic product (GDP) from 1994 to 2000 was over 9%. The revenue from the 2003 amnesty amounted to about 0,2% of GDP in 2004.

In other words, the amount of illicit money held abroad by South African residents declared for amnesty was probably four to five times less than the amount that we estimate capital flight to have been in a single year during the five years from 1994 to 2000. There has been no public indication that government or the SARB has taken action against people who did not apply for amnesty or declared only a fraction of their illicit foreign holdings.

The International Monetary Fund recently released a working paper that stated that capital controls would be justified in some countries. The recent international financial crisis caused many economists to rethink their views on capital flight. Recently, the Organisation for Economic Cooperation and Development commented that South Africa should consider using exchange controls. We know that uncontrolled foreign capital flows can be hugely destabilising for a country and can lead to asset bubbles and crashes that can lead to economic recession and increasing unemployment.

Providing an amnesty for capital flight now in light of the rethink on capital controls is really poor timing. If government were to further deregulate exchange controls, it is not clear when all controls of residents would be in place. The poorly transparent process of proposing another amnesty seems to be giving the nod to people who have been engaging in and will continue to engage in illegal capital flight.

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