Scrap high-denomination banknotes to cut crime, says Sands

Big-figure notes and bills are handing criminals a ready-made advantage over enforcement agencies, says banking guru

Former Standard Chartered boss Peter Sands has called on governments and central banks around the world to put an end to the use and availability of high-denomination notes, arguing they play a central role in crime and corruption.

In a report for Harvard Kennedy School titled Making it Harder for the Bad Guys, Sands states that not only are high-figure notes and bills intrinsic to serious, criminal processes, such as money laundering, they often prevent investigators from detecting those activities.

By keeping these notes in circulation, Sands points out, governments are handing criminals a ready-made means of covering their tracks, and therefore a constant advantage over enforcement agencies.

According to figures from a UN analysis, quoted in the report, the scale of financial crime even as far back as 2009 had already reached $2.1 trillion – equal to 3.6% of global GDP.

“Cash is a highly attractive payments mechanism and store of value for tax evaders, criminals and those who give or receive bribes,” Sands writes. “No other payment mechanism simultaneously provides anonymity for payor and payee, leaves no trace of transactions and is so widely accepted. Some currencies, most obviously the US dollar, are accepted virtually everywhere in the world.”

Contentiously, Sands suggests that the abuse of high-denomination notes cannot be allowed to continue at a time when official tracking and validation methods, of the types regularly used by corporate treasurers, are struggling.

“Indeed,” he writes, “official and banking-industry efforts to counter money laundering through more rigorous ‘know your customer’ procedures and transaction surveillance appear to be having significant, unintended consequences, increasing costs and inconvenience for legitimate users, and driving certain segments and geographies out of the formal banking system.”

He adds: “These effects appear most marked in cross-border remittances, SME access to trade finance and correspondent banking. To the extent that such flows divert to informal channels (such as hawala for cross-border remittances), the underlying objective of enhancing surveillance is defeated.”

Below the macro level of the broader financial system, the report also highlights evidence of everyday, town-centre firms routinely using high-denomination notes to keep transactions off the books, such as:

  • A clothing retailer that buys and sells 50% of its inventory in cash;
  • Jewellery and antiques businesses that buy inventory from individuals and estates for cash, then sell it on for cash; and
  • Flower businesses that purchase seeds for cash, pay employees in cash and sell their wares at farmers markets for cash.

In a further example, first-hand testimony quoted from a small-business owner states: “If [customers] pay with cheque or Visa, I record it. [But if someone] comes in and… spends over $40 in cash, it’s entered into the computer as an invoice in progress. End of the day, I get a separate printout of all the invoices in progress, and they’re erased from memory. I take the cash home. Never deposit the cash, ever.”

At its most extreme, Sands notes, such behaviour can manifest as what he calls “grand and systemic” corruption. “By withdrawing funds from the banking system and moving and storing them in cash,” he writes, “corrupt officials and politicians seek to break the link with the original source.”

He adds: “The ongoing FIFA scandals are illustrative. It appears that some payments of hundreds of thousands of dollars were made in cash. In other instances, payments were routed through front companies, with the recipients then converting the money into cash, or wiring them to other accounts.”

For Sands, the $100 bill, together with the €500, £50 and CHF 1,000 notes, would be good places for governments and central banks to start in any future efforts to scrap problematic paper money.

“The case for eliminating high-denomination notes has been made before,” he writes. “Some extremely high-denomination notes have been eliminated in recent years, such as Canada’s $1,000 note in 2000 and Singapore’s $10,000 note in 2014. But issuance volumes for the notes most commonly used in illicit activity, such as the €500 note and the $100 bill, continue to rise. Why should this time be different?”

For an alternative view of the know your customer framework, read this previous article from The Treasurer.

Download Sands’ full report here.

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