A former bank boss reckons scrapping high-value notes would help fight corruption and crime. It may well happen this time
What weights 50kg and fills four suitcases? One million dollars in $20 notes. What weights 2.2kg and fits into a tiny bag? The same amount in €500 bills.
Now imagine you want to smuggle $1 million accross the border. In which of the two denominations would you rather carry the cash? Unless you’re craving for fitness – and risk – you’d surely go for the latter one.
That, in essence, is what makes Peter Sands think high-value bills are mostly used by the bad guys. The ex-boss of Standard Chartered, an emerging market-focused bank, says wrongdoers see clear advantages in them: cash offers anonymity, leaves no transaction record and is universally accepted; big notes enable large sums to be moved and stored cheaply with low detection risk.
As such, he argues, the €500, $100 and SFr1,000 bills play a key role in assisting large-scale tax evasion, corruption, trafficking and terrorism. A few anomalies lend credit to his suspicions: the European Central Bank (ECB) says the number of €500 notes has grown much faster than other denominations since euro coins and bills were introduced in 2002; Europol recently found that Luxembourg issued €500 bills worth 194 percent of its GDP in 2013, compared with 16 percent in Germany and 4 percent in France.
The largest euro notes now account for 30 percent of all cash in circulation in Europe – despite being refused by most shops. Perhaps it is now coincidence, Sands remarks, that €500 bills are called "Bin Ladens" in the underworld.
A large proportion of them ends up overseas. In most emerging markets the biggest local-currency bills are not worth a lot; a much smaller stash of $100 or €500 notes, by contrast, can help kleptocratic regimes protect their savings or weather hyperinflation. Large denominations are often used for illicit purposes as well. While bribing a junior official may require no more than small change, corruption on a grand scale is harder without big notes. These are sometimes used as a means of payment; more often, they help lender the money after a dubious bank transfer has been made.
Corrupt officials who shun hard currency for local money run the risk of facing cumbersome problems. In 2014, Chinese general Xu Caihou was arrested for taking bribes from subordinates willing to get promoted. Twelve trucks were required to remove the money he'd stashed at home (the equivalent of several millions of US dollars in Chinese currency). The authorities did not say how they first got a whiff of his misdeeds. But with the largest yuan denomination worth about $16, the general may have struggled to store his unlawful income discretely.
Getting rid of high-denomination notes wouldn't kill crime. But the measure, relatively quick and easy to implement, would complicate illicit activities while having little effect on the legitimate economy. And in developing countries the inconvenience would mainly fall on the wealthy anyway, since the use of big bills is massively skewed towards them.
It would help if the policy was adopted simultaneously by major central banks. Which is why Sands suggests including it on the agenda of the next G20 meeting, to be held in China next September. Leaders would first agree to stop printing high-value notes, he says; then they should continue to constrain their use, making it easier to withdraw them from circulation over time. The next tier of high-value bills – the €200 and €100 notes, for instance – should also disappear, though Sands recommends scrapping them in stages.
It is not the first time such an idea is being floated: in 2005, the ECB decided to keep €500 bills in circulation after reviewing their use. But at a time when the West is under renewed pressure to choke off terrorism funding, central banks face a sense of urgency to act. Mario Draghi, ECB president, told the European Parliament earlier this month that the matter was being studied. “We want to make changes”, he said.
Mobsters and corrupt officials could always migrate towards virtual currencies, since regulation of these remains largely porous. But Brussels has its eyes on the problem: the European Commission has tasked a team to study how bitcoin transactions could be brought within the scope of anti-money-laundering rules - a much trickier endeavour than getting rid of physical notes, if you ask me. Surely the researchers are being promised more than a penny for their thoughts.