In November 2016, the Indian government suddenly decided to demonetise 86% of the value of cash in circulation. This sudden move led the economy to a complete standstill as people spent days lining up at banks and ATMs scrambling to exchange their old “worthless” notes and deposit them in a bank account.
In December 2016, President Nicolàs Maduro of Venezuela announced the immediate withdrawal of the 100 bolivar note. Widespread protests and looting ensued until the use of the banknote was extended until after the new year.
One might think that governments should learn from these examples before tampering with cash payments. However, the temptation is always there. And it is a strong one.
On 23 January 2017, the European Commission published a Proposal for an EU initiative on restrictions on payments in cash. The initiative is part of the Commission's Action Plan to further step up the fight against the financing of terrorism, published on 2 February 2016 in a Communication to the Council and Parliament.
Ten countries - out of 28 EU members states - have already implemented restrictions which range from € 1,000 to € 12,673. For the Commission, "The existence of cash payments limitations in some Member States, and their absence in other Member States, creates the possibility for criminals and terrorists to bypass the restrictions. Furthermore, such diverging practices among Member States regarding restrictions on cash payments create an uneven playing field and these differing restrictions create distortions of competition in the internal market, with some activities moving across borders to elude the cash restriction."
No one will dispute the need to step up the fight against terrorism. But is this the right approach?
The Commission itself recognizes that “there remains the lack of readily available and solid evidence on legitimate vs illegitimate cash transactions. It is difficult to quantify the legitimate or illegitimate use of cash.”
The financing of the terrorist attacks which took place in France in January and November 2015 have been analysed in detail by the Center for the Analysis of Terrorism, a leading European Think Tank on the analysis of terrorism. The report - The Financing of the Paris Attacks (in French) - concludes:
- The January attacks against Charlie Hebdo cost € 26,000 and were funded essentially thanks to consumer credit fraud, including two car loans.
- For both attacks, the perpetrators used a mix of payment instruments including money transfer services and anonymous pre-paid cards.
The report states “Anonymous reloadable pre-paid cards enable anonymous transactions up to €2,500, including over the internet. Anonymity is guaranteed at all levels, from the purchase of the card, to its reloading, making it the ideal payment instrument for the perpetrators of the 2015 attacks.”
Another report published by Deutsche Bank Research entitled Cash, freedom and crime - Use and impact of cash in a world going digital stresses that "abolishing cash will not eliminate profit-driven crime". The report shows that in Sweden where cash is declining, the number of detected money laundering cases has increased tenfold between 2008 and 2015.
The Commission proposal kicks off with an impact assessment which is being prepared in collaboration with other departments of the Commission. An online public consultation is now open until 31 May.