Financialisation and Illegal Capital Flight

For years illegal capital flight from South Africa has resulted in a staggering loss of wealth for the country. For Ben Fine investigates efforts to curb these flows of wealth. He argues that capital flight not only shifts resources elsewhere as is commonly presumed, it also shifts speculation elsewhere – capital flight is financialised.

By Ben Fine

At the end of March 2011, a High-Level Panel was appointed at the 4th Joint Annual Meeting of the African Union/Economic Commission of Africa Conference of Ministers of Finance, Planning and Economic Development. It was tasked with investigating illicit financial flows and chaired by Thabo Mbeki who had served as South African President from 1999 to 2008, when he was deposed and replaced by Jacob Zuma. As ironic chance would have it, this was precisely the moment when colleagues and I published our assessment of illegal capital flight from South Africa, covering much of the period that Mbeki had been President (Ashman et al, 2011). Our intervention was prompted by the South African Reserve Bank’s declaration of an amnesty, upon voluntary declaration and payment of a token fine, for those corporations that had engaged in such illegal activity, with capital flight, much of it illegal, amounting to a staggering 23% or so of GDP at its height in 2007. We suspect few guilty parties have handed in their smoking guns, not least as past investigations in search of culprits, let alone attention to the issue at all, have been notable for their absence. And, in any case, policy has remained committed to a continuing programme of easing capital controls. In short, as far as the Panel is concerned, it might be thought to be a case of too little, too late, especially with regard to the Chair’s home turf.

In the event, the Panel published its Report early in 2015, AU/ECA (2015). It summarises its own findings as follows, p. 63

1: Illicit financial flows from Africa are large and increasing

2: Ending illicit financial flows is a political issue

3: Transparency is key across all aspects of illicit financial flows

4: Commercial routes of illicit financial flows need closer monitoring

5: The dependence of African countries on natural resources extraction makes them vulnerable to illicit financial flows

6: New and innovative means of generating illicit financial flows are emerging

7: Tax incentives are not usually guided by cost-benefit analyses

8: Corruption and abuse of entrusted power remains a continuing concern

9: More effort needed in asset recovery and repatriation

10: Money laundering continues to require attention

11: Weak national and regional capacities impede efforts to curb illicit financial flows

12: Incomplete global architecture for tackling illicit financial flows

13: Financial secrecy jurisdictions must come under closer scrutiny

14: Development partners have an important role in curbing illicit financial flows from Africa

15: Illicit financial flow issues should be incorporated and better coordinated across United Nations processes and frameworks

This is acceptable as far as it goes but it does not go far in explaining why capital flight has become so extensive, why little has been done about it, and what are its effects. For the latter, there is a presumption that capital flight is as damaging as it is unethical (as if it would be ok if corresponding financial movements were legal – or absolved through payment of a fine?).[1] Significantly, the scale of capital flight is often set against other financial flows and aid, with the implication that it could make a comparable contribution to development, neatly overlooking that the role of such legal and official flows is not always considered positively. For Boyce and Ndikumana (2012, p. 1):

The group of 33 SSA countries covered by this report has lost a total of $814 billion dollars (constant 2010 US$) from 1970 to 2010. This exceeds the amount of official development aid ($659 billion) and foreign direct investment ($306 billion) received by these countries.

Similarly, the flight is set against indebtedness such that, p. 1:

Assuming that flight capital has earned (or could have earned) the modest interest rate measured by the short-term United States Treasury Bill rate, the corresponding accumulated stock of capital flight from the 33 countries stands at $1.06 trillion in 2010. This far exceeds the external liabilities of this group of countries of $189 billion (in 2010), making the region a ‘net creditor‘ to the rest of the world. The stereotypical view that SSA is severely indebted and heavily aid-dependent is not fully consistent with the facts.

These are invaluable points and are complemented by analyses of (proximate) causes:  that, ‘Econometric analysis indicates that for each new dollar of external borrowing by African countries, as much as 60 cents exits Africa as capital flight in the same year’; for Boyce and Ndikumana (2012, p. 8), ‘Oil-rich countries account for 72 percent of the total capital flight from the sub-region ($591 billion). The escalation of capital flight over the last decade coincided with the steady increase in oil prices prior to the global economic crisis’; and Ndikumana and Sarr (2016, p. 1) observe, ‘While the literature has established that external borrowing fuels capital flight … relatively little attention has been paid to the possibility that foreign private capital flows may also finance capital flight.’

Boyce and Ndikumana (2012, p. 14) also offer six reasons why capital flight is damaging; it drains resources for development, raising indebtedness, reducing poverty alleviation, serving as both cause and effect of governance breakdown, worsening income inequality, and consolidating the power of autocratic elites. Implicit in such postures, however, is the presumption of some sort of counterfactual in which capital flight, and its underlying determinants, are reduced with correspondingly beneficial consequences. This is apparent by playing the role of neoliberal devil’s advocate, surprisingly absent from the literature if probably due to the opprobrium attached to illegal activity especially against an ill-defined national interest (and the weaknesses of the attempts to address this and so better for corporates to stay shtum in case licit flight is interrogated as well).[2] For is it not possible to see capital flight as a beneficial attempt to thwart the distorting effects of capital controls? And do not the beneficial effects follow the resources elsewhere but for, or because of, some implicit reliance upon an ill-specified form of dependency theory?

In short, the phenomenon of capital flight needs to be situated in broader and historical analysis. For the former, a start can be made by looking at financial flows more generally, something that is now increasingly understood in terms of financialisation, see Karwowski et al (2018) and corresponding special issue and Bonizzi (2016). Within orthodox circles, especially since, but not originating with, the Global Financial Crisis, two issues have come to the fore. One has been to contemplate the use of capital controls (which should surely extend to illicit movements) although this has been tentative, limited (to targeting short-term inflows so that they cannot become rapidly reversed) and heavily deterred in practice. As Gallagher et al (eds) (2012, p. 47) put it:[3]

the IMF and other ‘establishment’ institutions have not completely abandoned their old ways … the IMF has proposed gaining more influence over the conditions under which capital controls are used; … a web of bilateral and multi-lateral so-called ‘free-trade’ agreements have structured a global ‘capital liberalization regime’ that create barriers for countries to implement capital account regulations even as economists at the IMF say they are useful.

Whilst the IMF’s shifted position on capital controls, described as revolutionary by some, reflects shifted circumstances (the need to prevent contagion from national financial crises rather than merely to prevent or to remedy them through austerity), Gallagher et al conclude that, ‘the transformational, the macroeconomic, and the developmental roles of capital outflow regulation need not and, indeed, are usually not mutually exclusive’, p. 50.

Such broader considerations – than simply viewing favourably the retention of resources otherwise lost by capital flight – leads to the second ‘revolutionary’ shift in orthodox thinking, namely the questioning of the so-called finance-growth (or finance-development) nexus, the presumption that the relationship between the growth of finance and development is unambiguously positive. Unsurprisingly, in the wake of the GFC, such mainstream nostrums have been found to be empirically unreliable or ‘non-linear’, a rather obscure way of accepting that too much finance can become harmful above a certain threshold.[4]

In short, (discussion of) capital flight has become embroiled in an increasingly complex and extensive web of financial developments. This is also important historically. For the incidence of capital flight (and, indeed, the means by which it at least in major part tends to be measured) is through attention to transfer pricing and the presumption that corresponding illicit financial flows are primarily directed at tax avoidance (or the corresponding movement of profits to the jurisdictions where they will attract the lowest taxation). No doubt this remains important but it now dovetails both with the movement of assets for the purposes of speculative activity and with the corresponding proliferation of assets by which this can be achieved. It is not just that capital flight shifts resources elsewhere as is commonly presumed; it also shifts speculation elsewhere.

Thus, capital flight is financialised, and contextualised as both cause and effect. Each of incidence and impact is marked by contemporary differentiated and complex global and national structures, relations, processes and agencies that go beyond elite capture and safe-havening of natural resource revenues or foreign (public or private) inflows. And these need to be specified for the specific post-apartheid condition of South Africa.[5] In this light, as this piece was first being penned, the Zuma Presidency was already under fatal threat as charges of corruption to the extent of ‘state capture’ were coming to the fore. At the centre of such systemic scandals, was the relationship between President Zuma and the Gupta family, the so-called Zupta syndrome. It led to machinations around the coming and going of the stoic neoliberal Minister of Finance, Pravin Gordhan, not so much from tragedy to farce as continuing ricochets between them and, leading at one  point with one of his successor, Malusi Gigaba,[6] announcing a huge state-funded nuclear power programme with the Russians,[7] that presumably had been blocked by his predecessor. Financialisation’s own watchdog soon delivered its verdict, with Moody’s downgrading government long-term issues to Baa3, one grade above junk status.

As chance would have it, these events also coincided with the eruption of a scandal around collusion over traders fixing the rand exchange rate. The relatively independent Competition Commission announced it was charging eighteen banks one of which, Citibank, had already agreed to pay a fine of R70 million, and another, Barclays Africa (Absa) admitted culpability, begged forgiveness, sacked two traders and was to be spared prosecution for cooperation.[8]

There are, however, some remarkable aspects of this increasingly globally acknowledged incidence of collusion around foreign exchange trading. First is that the Competition Commission alleges that the collusion had lasted from at least 2007. Second, named individuals involved in the collusion had already been disbarred from trading elsewhere. Indeed, on these two points:

In January, the US Federal Reserve permanently banned Jason Katz, who worked for BNP Paribas, Standard New York, and Barclays during the period of the commission’s investigation, from participating in the forex market due to his role in manipulating forex prices. This followed an earlier $342m penalty against Barclays for control deficiencies related to forex trading. JP Morgan and Citigroup, which are named in the Competition Commission’s complaint, were among banks that agreed to pay $2.5bn in penalties to the US department of justice for currency rigging. Later that same month, Citibank’s Christopher Cummins pled [sic] guilty to conspiring to fix prices in the department of justice’s long-running investigation into currency rigging.

Third, the Competition Commission had begun its investigations two years previously alongside its other responsibilities for competition across the whole economy, not just finance which are the responsibility of specialised institutions, most obviously the Reserve Bank. Fourth, some of the banks concerned had appealed the actions against them on grounds of its not lying within the jurisdiction of the Competition Commission. Fifth, then, in conclusion, is the staggering inaction of the South African Reserve Bank. In its response to the Commission’s actions, it stated that:

At the time of the launch of the Competition Commission’s investigation, a joint SARB and Financial Services Board (FSB) process was already underway to review foeign [sic] exchange operations of authorized foreign exchange dealers in the domestic market. This review was not informed by any allegations or whistle-blowing, but represented a proactive step on the part of the authorities in response to various other investigations that were being undertaken by international regulators …The review found no evidence of serious and widespread misconduct in the South African foreign exchange market, but saw scope for the improvement in overall market conduct and made several recommendations in this regard. A number of these recommendations are currently being implemented. At the conclusion of the review, it was stated that should any irregularities be revealed as part of the Competition Commision’s [sic] investigation, which link violations in other international financial centres to operations of local authorised dealers, the matters would be followed up and appropriate action would be taken by regulators.  The SARB sees the allegations in a serious light. The SARB will allow the legal processes now initiated to run their course, and will continue to monitor developments closely to inform any action that we may need to embark upon in accordance with our mandate and jurisdiction.[9]

In short, this might be thought to be too little, too late, and the Reserve Bank simply seemed to allow events to run their course in the hands of the Competition Commission without being pro-active itself in a matter that should have been of its vital concern! Given its record over capital flight, this might be thought to be par for the course. It remains to be seen whether the Ramaphosa Presidency leads to any difference…

Ben Fine is professor of economics at the Department of Economics at the School of Oriental and Africa Studies (SOAS), University of London. Ben was a contributor to ROAPE’s workshop in Ghana in 2017.

Featured Photograph: ‘Le manque cruel de capitaux en Afrique Noire’ by Sanou Mbaye (November, 2004).


Arcand, L., Berkes, E. and Ugo, P. (2015) “Too Much Finance?”, Journal of Economic Growth, vol 20, no 2, pp. 104-148, previously IMF Working Paper, Research Department, June.

Ashman, S., B. Fine and S. Newman (2011) “Amnesty International?: The Nature, Scale and Impact of Capital Flight from South Africa”, Journal of Southern African Studies, vol 37, no 1, pp. 7-25.

AU/ECA (2015) Illicit Financial Flows: Report of the High Level Panel on Illicit Financial Flows from Africa, Commissioned by the AU/ECA Conference of Ministers of Finance, Planning and Economic Development.

Bonizzi, B. (2016) “The Changing Impact of Finance on Development”, Fessud Working Paper, no 124.

Boyce, J. (2015) “Capital Flight from Africa: What Is to Be Done?” Statement to the Joint Meeting of the United Nations General Assembly and the Economic and Social Council on Illicit Financial Flows and Development Financing in Africa, United Nations Headquarters, 23 October.

Boyce, J. and L. Ndikumana (2011) Africa’s Odious Debts: How Foreign Loans and Capital Flight Bled a Continent, London: Zed Books.

Boyce, J. and L. Ndikumana (2012) “Capital Flight from Sub-Saharan African Countries: Updated Estimates, 1970-2010”, Political Economy Research Institute, PERI Research Report, October.

Gallagher, K. and J. Ocampo (2013) “IMF’s New View on Capital Controls”, Bretton Woods Project.

Gallagher, K., S. Griffith-Jones and J. Ocampo (eds) (2012) Regulating Global Capital Flows for Long-Run Development, The Frederick S. Pardee Center for the Study of the Longer-Range Future, Boston University.

Goodson, S. (2014) Inside the South African Reserve Bank: Its Origins and Secrets Exposed, London: Black House Publishing.

Karwowski, E., S. Ashman and B. Fine (2018) “Introduction to the Special Section ‘Financialization in South Africa’”, Competition & Change, vol 22, no 4, pp. 383-87.

MACE (2016) “Report of the Ministerial Advisory Council on Energy (MACE) Working Group on Analysis and Recommendations on the Assumptions and Methodologies Adopted in the IRP 2016 Base Case Scenario.

Ndikumana, L. and M. Sarr (2016) “Capital Flight and Foreign Direct Investment in Africa: An Investigation of the Role of Natural Resource Endowment”, WIDER Working Paper, no 2016/58.

Reynolds, J., B. Fine and R. van Niekerk (eds) (2019) Race, Class and the Post-Apartheid Democratic State, Pietermaritzburg: University of KwaZulu-Natal Press.

Thomas, S. (2017) “A Review of the , November 2016 Integrated Resource Plan Update: The Role of Nuclear Power”.


[1] Thus, for Boyce (2015, p. 4):

Debts that fuel capital flight can be considered ‘odious’ under international law. Selective repudiation of odious debt … can prevent the diversion of scarce public resources into debt service payments on loans from which the public derived no benefit. Repudiation of odious debts also would change the incentive structure for creditors, encouraging due diligence and helping to improve the quality of future lending.

[2] Or adopt a strategy of riding out the storm, and making nominal payments, as in recent prominent scandals around tax avoidance in the UK and elsewhere by Apple, Amazon, Starbucks and Google.

[3] See also Gallagher and Ocampo (2013).

[4] See Arcand et al (2015) for example.

[5] See my (co-authored) contributions to Reynolds et al (eds) (2019).

[6] Himself having ploughed his way around state enterprises and other well-placed ministerial posts.

[7] Or within anyone else for that matter, with letters of agreement having been signed, and often renewed, for nuclear cooperation, not only with Russia but also South Korea, China, the USA, Canada and Japan, primarily concerning reactor designs which have not been completed anywhere because of continuing delays and with multiple cost over-runs, Thomas (2017) for a comprehensive overview. See also MACE (2016), the government’s own advisory board on energy provision, which advises against nuclear as more expensive than alternatives and especially renewables, and essentially pointing to an illogical pursuit of nuclear despite its increasing disadvantages. Note also that the Western Cape High Court ruled in April, 2017, that the nuclear agreements with Russia, South Korea and the USA were illegal for lack of constitutionally-required public consultation, see the ‘Court finds nuclear deals unconstitutionalGroundUp (26 April, 2017).

[8] Following statement from Maria Ramos, Chief Executive of Absa, who is both previous Director-General of Finance (top civil servant in the Treasury) and current wife of Trevor Manuel, erstwhile Minister of Finance. See ‘Standard Bank in talks with competition commission in rand-rigging probeEyewitness News (23 February, 2017).

[9] For reports of some juicy, possibly implausible, scandals of (in)actions involving the Reserve Bank, see Goodson (2014).


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