Capital Flight
Capital flight is the rapid movement of money out of a country by residents and investors who fear devaluation, inflation, confiscation, default or political instability. It drains foreign exchange reserves and often triggers the controls it was trying to escape.
Also called: flight of capital · capital outflow surge
Ordinary capital outflows are part of a healthy economy: companies invest abroad and savers diversify. Capital flight is different in motive and speed. Money leaves because holders expect to lose by staying, and each departure makes the next more likely, since every conversion out of local currency uses up reserves and weakens the exchange rate.
It moves through whatever channel is open. Bank transfers and portfolio sales come first. When capital controls close those, flight shifts to mis-priced trade invoices, cash, informal transfer networks and, increasingly, dollar stablecoins bought on peer-to-peer markets.
For a payment company this is a compliance problem as well as an economic one. A corridor that suddenly attracts large outbound volume from a stressed market may be carrying flight capital, and helping customers evade exchange controls can be an offence in the sending country even when the business is licensed elsewhere.
In practice
The line between flight and lawful diversification is drawn by the sending country's rules. The same transfer can be legal one month and prohibited the next.
See also
- Capital ControlsCapital controls are government limits on moving money into or out of a country, or on converting its currency at the official rate. Imposed by a central bank or finance ministry, they determine whether a payment corridor is workable at all, and in which direction.
- Foreign Exchange ReservesForeign exchange reserves are the foreign-currency assets a central bank holds and can use at short notice: deposits and government securities in major currencies, gold, Special Drawing Rights and the country's reserve position at the IMF.
- DollarizationDollarization is the use of a foreign currency, usually the US dollar, in place of or alongside a country's own for saving, pricing and payment. It can be official policy or something households and firms do on their own.
- Parallel Market RateA parallel market rate is the rate at which a currency actually trades outside official channels, in a country where the official rate is not obtainable. In a tightly controlled market it is often the only rate at which real business clears.
- Trade-Based Money LaunderingTrade-based money laundering (TBML) is the use of trade transactions to disguise and move criminal proceeds or to shift value across borders, most often by misstating the price, quantity or nature of goods on the documents.