Why scrapping the 鈧�500 note may not help counter terrorism
This article by , Professor of Business History and Bank Management, and , was originally published on . Read the .
The president of the European Central Bank has said that the bank is considering as the big bill is being increasingly seen as 鈥渁s an instrument for illegal activities鈥�, according to ECB president, Mario Draghi. But there is little proof that scrapping the 鈧�500 note will improve chances of clamping down on nefarious transactions.
There are only two denomination notes in the world that have a higher value than the euro, namely the 10,000 Singapore dollar (about US$7,000) and the 1,000 Swiss franc (about US$1,000). The highest denomination banknotes in other parts of the world are generally worth around US$100. The 鈧�500 is therefore particularly attractive both for conducting cash business transactions and as a store of value. Its popularity can also be attributed to its relatively stable exchange rate, the fact that it is accepted everywhere and the large number of central banks that can police counterfeits.
The show that demand for the 鈧�500 note has grown since the financial crisis. In Greece, there is due to fears of a banking collapse. When just 20 notes equate to 鈧�10,000, it鈥檚 easy to transport and hide large sums.
The note is also popular in Germany, the country that led support for the 鈧�500 note when planning for the euro . Germany wanted a note that corresponded with its currency at the time 鈥� the deutschmark 鈥� as high value cash transactions in Germany.
Cash in hand
But there are downsides to keeping the 鈧�500. Cash is relatively anonymous, whereas bank transfers are electronically tracked 鈥� so cash is attractive for crime and money laundering. As an illustration, the equivalent of 拢1m would weigh just over 2kg and could neatly fit in a brief case if it comprised solely of 鈧�500 notes. If this was made up of 拢50 notes (the UK鈥檚 highest note denomination) it would weigh in at .
For obvious reasons, there is no reliable data on the use of cash in illegal activities, but a and his colleagues from Harvard鈥檚 Kennedy School of Government estimated that cash finances 55% to 60% of total proceeds from illegal cross-border trade in drugs, counterfeit goods, human trafficking, oil, wildlife, timber and fish. Of these, trade in illicit substances represents the lion鈥檚 share in terms of estimated annual volume (US$320 billion a year) and the share financed by cash (as much as 80%).
The 鈧�500 note鈥檚 popularity with criminals means it has been dubbed 鈥渢he Bin Laden鈥�. Thus, although this note accounts for 28% , many merchants in Europe .
Unforeseen consequences
The European Commission is probing the links between 鈧�500 and criminality while the European Anti-Fraud Office has also expressed concerns over the 鈧�500 note used in fraudulent activities. Following the terrorist attacks that took place in Paris in November 2015, the European Union is clamping down on all means of payment . The UK government, which sits outside the eurozone, already decided in 2010 to prohibit exchange offices from selling the 鈧�500 , mainly as a result of the which indicated that 90% of the notes were found to be used in criminal activity.
Removing the 鈧�500 will affect criminals mostly by increasing their transaction costs. It will also improve the traceability for law enforcement officials by making it more difficult to physically conceal the cash and by increasing the number of notes required to complete a transaction. But getting rid of the 鈧�500 note without global cooperation to remove large denomination in other currencies may result in criminals merely substituting the 鈧�500 with another high denomination note.
Criminals will not be the only ones affected. Those with a high preference for cash for its anonymity and for being outside of the financial system are likely to oppose the move, . It is a fine balancing act to weigh the need for government surveillance with the right to privacy 鈥� and clamping down on criminals will affect law-abiding citizens too. There is also the risk that focusing on its ability to reduce crime fails to consider the underlying causes of this underground activity in the first place.
As a practical and easier to implement measure, the ECB could consider placing limits on the value of cash transactions across all eurozone countries. Currently, these are in place in France (鈧�1,000), Spain (鈧�2,500), and Italy (鈧�2,999.99). The German Finance Ministry has recently announced plans to ban cash payments of more than 鈧�5,000. Farther afield, Mexico has had limits on cash transactions in pesos and dollars . This is designed to limit money laundering and tax evasion on large scales but there is scant evidence of the effectiveness of these cash-curtailing measures at fighting illegal transactions.
Whatever the ECB decides on the 鈧�500 note鈥檚 future, it will be an interesting reflection on how democracy within the eurozone operates 鈥� and the transparency with which these decisions take place will indicate the extent to which the ECB values the right to information and freedom of choice. It epitomises how money is also subject to the freedom versus security debate that is fast becoming one of the quintessential quandaries of the 21st century.
Publication date: 1 March 2016