On September 1st 2015, the French government lowered the cap on cashMoney in physical form such as banknotes and coins. More payments from €3,000 to €1,000. The new rule applies both to business-to-consumer and business-to-business transactions; consumer-to-consumer transactions are not affected. For non-residents, the limit is €15,000.
France is one of the first countries to have introduced restrictions on cash payments as early as 2001. However, particularly in the wake of the Global Financial Crisis, many countries have followed the French lead as illustrated by the table below. In Germany, a plan to introduce a limit on cash transactions has been met with fierce resistance across the country. The economic weekly magazine made this their cover story in February titled “Save Cash”.
These measures are generally adopted in order to reduce tax evasion and the shadow economy. In the case of France, when the government lowered the cap from € 3,000 to € 1,000 in September 2015, it announced that the measure was aimed at reducing fraud, money launderingThe operation of attempting to disguise a set of fraudulently or criminally obtained funds as legal, in operations undeclared to tax authorities, and therefore not subjected to taxation. Money laundering activities are strongly pursued by authorities and in most countries, there are strict rules for credit institutions to cooperate in the fight against money laundering operations, to declare and report any transactions that could be considered suspicious. More and the financing of terrorism. It goes without saying that these objectives are both legitimate and necessary. And there is no doubt that some tax fraud is perpetrated in cash, but does it justify limiting cash payments?
There is a debate on where to draw the line between the privacy and freedom of paying in cash and the security and traceabilityThe tracking of a product through its industrial or commercial life, by monitoring its location at all times. More of digital payments. But there are also questions regarding the efficiency of these measures: are the rules followed? Do they contribute to reduce fraud? Are they detrimental to the economy?
Are the rules followed?
It seems pretty easy to work around the rules e.g. by the splitting the transaction if it exceeds the threshold. Of course, that is easier for a restaurant bill than for a car. Alternatively, bring a foreign friend to foot the bill. Indeed, several countries (including France or Spain) impose different limits for residents and non-residents: € 2,500 in Spain for residents and €15,000 for non-residents. According to Edoardo Beretta «In fact, there is no plausible economic reason to justify this decision, which explicitly discriminates French residents who are, after all, the main fiscal contributors to the French State budget.» It also poses the challenge for the merchant of identifying a non-fiscal resident: are they supposed to check their tax declarations?
Do they contribute to reduce fraud?
Until now, no evaluation of the efficiency of cash limitations has been undertaken. However, there does not appear to be any correlation between the size of the shadow economy and the adoption of restrictions as illustrated by the table below. Austria, which has the smallest shadow economy in Europe imposes no restriction, whereas Bulgaria which has the largest has set a cap of just over € 5,000. Mordechai Fein, former head of the CurrencyThe money used in a particular country at a particular time, like dollar, yen, euro, etc., consisting of banknotes and coins, that does not require endorsement as a medium of exchange. More Department at the Bank of Israel, points out that «One indication that essential economic or social aspects were not accounted for is the wide discrepancy of cash restriction ceilings among countries.» In particular, one could expect that restrictions on cash payments would only shift tax evasion towards other, more sophisticated methods.
Are they detrimental to the economy?
In other terms, do cash restrictions prevent legitimate transactions? On the one hand, there is no perfect substitute for cash. In a face-to-face environment, the credit or debit card is the most widely used non-cash payment instrumentDevice, tool, procedure or system used to make a transaction or settle a debt. More; however, not everyone carries a card. But even for those who do, there are also limitations on the value of payments, which are typically in the area of a few thousand euros. Not to mention that card transactions carry a cost, for the merchants but also for the user in the case of international transactions. As for account-based payments, they do not offer real-time settlementThe discharge of an obligation in accordance with the terms of the underlying contract. In e-transfers the settlement may take days, whereas cash settlements are instantaneous and irreversible. More, which is a challenge in case you are purchasing an item in a store.
On the other hand, there are also transactions where consumers wish to protect their privacy or protect themselves from paymentA transfer of funds which discharges an obligation on the part of a payer vis-à-vis a payee. More fraud. Reuters reported that in Italy, jewellery sales fell by up to 30% the last four months of 2011, following the introduction of the € 1,000 cap. Many foreign buyers refuse to use payment cards and prefer to go shopping elsewhere.
These measures also create a perception of suspicion, for cash transactions and cash users in general, even if the transaction is within the authorised limit.
In conclusion, it appears that there is little or no evidence that restricting cash payments contributes to curb tax evasion or moneyFrom the Latin word moneta, nickname that was given by Romans to the goddess Juno because there was a minting workshop next to her temple. Money is any item that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular region, country or socio-economic context. Its onset dates back to the origins of humanity and its physical representation has taken on very varied forms until the appearance of metal coins. The banknote, a typical representati... More laundering. And these measures could also have a negative impact on consumption. There is a need to evaluate the efficiency of these policies.
 The Irreplaceability of Cash and recent Limitations on its Use : Why Europe is off the Track, Edoardo Beretta, Università della Svizzera italiana
 Cash : Down but Not Out, Mordechai Fein