Definition of Capital Flight

When a person or entity decides to move their money out of their countryThis phenomenon is popularly known as capital flight and it is a reality of the globalized world.

Why is it produced?

The main reason is the economic instability of a country. This instability generates a certain fear regarding bank reliability, as has happened in the recent years in Argentina with the phenomenon of the corralito, and in countries such as Cyprus or Greece entered deep crisis.

How do you make such a move, and what does it entail?

Long ago this operation was done directly, for example by introducing the physical money in a briefcase and taking it to a bank in another country for deposit. In the present This procedure is not the only one, since the banking system allows you to send money through a transfer of a Bank national to another foreigner. In this way, the movement of capital can be done as long as it is carried out within the framework of the law.

In those cases in which the money sent outside national borders is related to tax evasion, with the

economy submerged or with some crime, capital flight must be done with the classic briefcase (bank transfers leave a trail and illegal activity would be easily detected).

Obviously, the natural destination of capital flight is a tax haven, that is, a country in which there is no Income is taxed and bank secrecy is maintained and in this way the arrival of money is encouraged Foreign. In order for the capital flight process to have legal coverage in tax havens, there are so-called offshore companies, a mechanism that allows the evasion of money without the need to use the system of the briefcase.

Ultimately, there are two types of capital flight, legal and illegal.

Consequences of capital flight

The distrust in certain economies it is the main cause of this phenomenon. As for the consequences that it produces are diverse: it directly affects the national GDP, reduces the capital reserve in the banking system, a rise in interest rates and a decline in investment national.

These negative effects on a country's economy create the need to combat capital flight.

Photos: Fotolia - rudall30 / javieruiz

Issues in Capital Flight