Opinion Leaders' Digest 99-13
Date: Apr 9, 1999
Author : Han-Eung Kim, Former Deputy Director of Finance Training Center

The way to prohibit flight of capital abroad

According to a recently arrived foreign magazine, the Erricson, one of the famous mobile phone manufacturer in Sweden, plans to move its headquarters to London, and the ABB, the jointly owned company by Sweden and Switzerland is considering for similar decision. The Allianz, Germany's no. 1 insurance company, also tries to move its international business abroad. The main reason for changing their business place is to get out of high tax.

Failure of Britain's Labor Party

At this frontierless age for enterprisers, it is natural that companies are looking for tax haven to avoid high tax. And in 1970's, though the move of company or capital was strictly controlled, there was same tendency to make away with business abroad in order to escape from high tax, in different forms from today's.

We can find an apt instance in Britain during 1974 to 1979. At that time the party in power was Labor Party led by Prime Minister Wilon and his successor Prime Minister Callahan. They openly declared their policies to "soak the spots off the rich". The tax rates were extremely high and the foreign exchange was rigidly controlled to avoid capital flow abroad by the rich.

However, the result was very disappointing to the ruling party. Then the antagonistic atmosphere towards the rich was surging in London, and accordingly the technique of money laundry was intensively advanced. Once it was even wondered by reaching artistic stage, so the rich had no difficulty in escaping their money overseas by making use of such techniques.

The novel ideas for money laundry

'The Laundrymen' described marvelous ways of money laundry developed from former ages and thereafter. For example, here is one of the extraordinary ideas used for escaping small fund.

One man was struck with a bright idea to carry money abroad. He planned to pretend seriously wounded with his legs and wear the plaster cast with money around leg. To make sure of his excellent scheme, he booked his flight and called airport authority to reserve a wheel chair by excusing his broken legs.

But on the very day of his deparature, the airport authority received a mysterious call informing that somebody was trying to carry a lot of money in bandage. As a matter of course, the airport official wanted to inspect the man wearing the plaster cast especially.

The airport official requested to remove the bandage, but the man strongly rejected and claimed to consult with his lawyer. His lawyer arrived and heated argument was continued. Finally the lawyer was persuaded and advised his client to accept the body search. The flight already left, and feeling the world against him and being disappointed by his lawyer, he had to allow the body search helplessly.

To their astonishment, even a penny was not found in the bandage. Of course, the airport official had to apologize hundred times. The man declared openly to make a complaint against the official, airliner, and even the government for violating human right and he totally lost his temper and left the airport after noting the related names.

The very next day he arrived at the airport with the plaster cast again. Of course, no airport official dared to search his body and rather had to treat him with the best kindness to escort him into the plane. Whether he really carried his money with himself or how much money was carried is unknown.

This kind of carrying money with oneself cannot be so helpful for escaping big capital. To move big money abroad, the commodity exchange was used. The money laundryman establishes a company inside and outside of the country to deal with the commodity exchange in London.

Then the person who wishes to escape capital abroad opens an account with the money laundryman's headquarters in London and the one who is supposed to receive money (This can be a ghost created by the money laundryman) opens an account with overseas branch of money laundryman. Next, the business relation between two starts through the commodity exchange by purchasing and selling coffee or sugar for instance. The person inside country and the person abroad continue to buy and sell coffee or sugar, and the person inside country sustains a loss almost continuously and the person overseas makes profit successfully.

Like this, the capital moves legally from loss-suffering domestic resident to profit-making overseas resident and when the goal is reached, a measure is taken to stop further transaction. That is, both accounts are closed. Since everything is legally processed, there's no way to reveal the money laundry unless any direct information is provided by the staff or the interested parties.

Reform of Thatcher's government and its lesson

Those who had enjoyed the artistic stage of money laundry, suddenly in 1979, encountered a danger to go bankrupt or to give up business. When Thatcher rose to power, she immediately carried out a drastic reform to abolish the foreign exchange law to liberalize flight of capital abroad by anybody without limit. Under the new circumstance, no one would try to escape the capital by paying a ten percent or more commission to money laundryman.

As very well known, because 'Thatcher's innovation' relaxed restrictions on companies and lowered tax, Thatcher's government did not suffer from capital escape abroad even after abolishment of the foreign exchange law. Foreign capitals rather rushed in like a flow and built the foundation of today' Britain.

From this instance, we can learn that the restrictions or other compulsory measures to control foreign exchange have little chance of success and, what is worse, such device only exhausts the national economy. Furthermore, it is quite more difficult to find solution when such restrictions worsen corruption.

It is not only the high tax that incites flight of capital. Regulations on business activities have same effect as tax. Whatever reason it is, if the operation cost is higher than in other country, any enterpriser would intend to move business abroad especially when it is no difficult matter as now. According to precedents in advanced countries, companies tend to escape when they are bothered by the government under the name of "support".

What Korea should do

Above mentioned factors worked a lot in backing of Korean companies' considerable moving abroad no matter of the company size. There are numerous factors in Korea such as high taxes, irritating regulations, rent-seeking of officials and politicians, high wages, the thrived unions, and so on.

Under such circumstances, it is inept to make cynical remarks by blaming flight of capital for non-patriotic behavior. If an enterpriser views that he shall meet a better chance when the political situation changes, it is reasonable for him to reserve some capital in "secure" overseas for the time being with hope for the future.

'The Laundrymen' was published in 1994. In this book, the numerous ways of money laundry or flight of capital are described, and no one knows how many techniques are newly developed afterwards. Under the name of 'work out', to interfere in companies by way of the Financial Supervisory Service, the Fair Trade Commission, and banks, is liable to stimulate flight of capital overseas as the Labor Party did in Britain.

If the best condition is given for business, no enterpriser will try capital escape abroad. In this respect, the best way to prohibit flight of capital abroad is to introduce 'Thatcher's revolution'.

(The view expressed here is the author's personal view. It is not the official view of the CFE.)