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High-denomination banknotes - Cash talk

2016-03-08 12:20:00

Getting rid of big banknotes is not as easy as it sounds

Mar 5th 2016 | ZURICH

A SIGN on the door of a Wild Bean caf in Zurich shows the nine different cards

accepted for payment inside. Below the logos is a picture of a purple bank

note, crossed out in red. From behind the counter, Aymen Kandil explains that

for everyday transactions, thousand-franc notes are not so good .

Although many merchants will not accept them, the SFr1,000 ($1,000) note makes

up over 60% of all Swiss cash in circulation. It is the most valuable banknote

issued by a Western country and is worth twenty times its weight in gold.

Rather than being a way of paying for things, it is meant to act as a

convenient store of value. In 2008, as banks were failing and the value of most

assets collapsed, demand for the SFr1,000 note jumped by 16%, having grown by

only 1-4% in previous years.

Yet lawmen suspect that most high-denomination notes are in the hands not of

jittery savers, but of criminals. Good data on the use of such notes are scarce

their anonymity is one of their attractions. But a report in 2010 from a

British police unit that focuses on organised crime claimed that only 10% of

500 ($542) notes were used for legitimate purposes. A report from Europol

recounts how criminals will sometimes pay more than face value for high-value

notes because of how convenient they are to transport. And it seems telling

that the 500 note accounts for around 30% of euros in circulation, yet 56% of

Europeans surveyed by the European Central Bank say they have never seen one.

David Lewis of the Financial Action Task Force, an international body that

co-ordinates efforts to prevent criminals using the financial system, says big

notes are used mainly in drug- and people-trafficking, money-laundering and

racketeering. Finance for terrorism is another concern. A courier for jihadists

caught travelling to Turkey in 2014 with 40 500 bills ( 20,000) in her

underwear would have needed knickers of epic proportions to transport the same

sum using 100 notes.

To make life difficult for criminals, Britain has barred banks and

money-changing firms from providing 500 notes; the biggest British note is a

mere 50 ($70). Canada started withdrawing its C$1,000 note (then worth $670)

from circulation in 2000 for the same reason. Singapore is phasing out the

S$10,000 note, the world s most valuable (worth $7,100). The ECB seems to be

moving in a similar direction. In early February it announced an investigation

into the use of the 500 note.

The ECB will report to euro-zone finance ministers by May 1st, but resistance

to scrapping the 500 note is already strong. Some (particularly in Germany)

fear that the withdrawal of big notes is a precursor to the eventual abolition

of cash, and thus a vast increase in the state s power to pry and meddle. There

are other benefits to the state from getting rid of high-value notes than

hitting big-time criminals. Withdrawing them could help fill government

coffers, by making tax-avoiding cash payments more awkward. It might even

grease the wheels of monetary policy, by making it easier to impose negative

interest rates. Yet the slippery slope argument need not hold: Canada still

has smaller notes, long after it binned the C$1,000 bill.

A weightier concern is that the process of eliminating big notes has less

impact on criminals the more slowly it proceeds. But central banks are

reluctant to cancel or even put an expiry date on notes, for fear that this

would undermine trust in those left in circulation. Instead, they tend to ask

commercial banks to filter out the offending notes whenever they receive any.

That is what Canada did in 2000 and, 16 years on, some 20% of C$1,000 notes

remain in circulation.

Moreover, getting rid of one kind of big note will have only limited impact as

long as there are others in circulation, points out Peter Sands of Harvard

University. He would like to see the ECB scrap the 200 and 100 notes as well,

and the Federal Reserve withdraw the $100 bill, which would be a huge

inconvenience to drug-traffickers moving money across the Mexican border.

The Swiss National Bank has stated categorically that it has no plans to get

rid of high-value notes, so criminals will have at least one option for the

foreseeable future. As Mr Lewis says, Whatever you do, the problem is going to

get pushed somewhere else. Nonetheless, he continues, What you re doing is

making it harder for criminals to smuggle cash and easier for authorities to

detect them. That is nothing to sneer at.