American economist and Harvard professor Lawrence Summers recently signed an article on the Financial Times about the phasing out of the €500 note entitled “Europe is right to kill off the criminals’ favourite banknote”. Whether he actually wrote the piece himself is debatable, as any of his students would be able to question the integrity of it as well as its intellectual interest.
The article praises the ECB for killing the €500 note, which according to Summers has an “important role facilitating illicit activity” although this assertion is never proven in the article. Associating large bills with criminality is a mistake, as today most criminal activities are happening online and through electronic means of payment, not through cash. Yet no one suggests getting rid of credit cards.
Indeed, the article never addresses what “criminality” is being talked about. Recently, terrorism financing has been closely studied and authorities have realised that terrorists are using much more complex ways of transferring large amounts than crossing borders with duffle bags full of cash. That doesn’t really happen any longer, because criminals can employ other means. The website Perspectives on Terrorism studied six of the most widely-used methods to transfer cash for terrorism purposes: cash couriers; informal transfer systems (like hawalas); money service businesses; formal banking; false trade invoicing; and high value commodities.
“When terrorists move money, they choose methods that take into account issues of: volume, risk, convenience, simplicity, costs, and speed,” wrote the study’s authors, Michael Freeman and Moyara Ruehsen.
“Not all methods are capable of moving an equal volume of funds. Methods like formal banking, hawalas, and money transfer businesses can theoretically transfer an infinite amount of money in a single transaction. In contrast, moving bulk cash is limited by the size and weight of the cash being transferred.”
Adding the risk factor, it quickly becomes evident that moving bulk cash isn’t the method used by terrorists. In fact, during last November’s terrorist attacks in Paris none of the weapons or explosives was bought using cash.
In 2009, an investigation carried out by the Australian Transaction Reports and Analysis Centre (AUSTRAC) determined that funds were being sent from Australia for use by the Somalia-based terrorist group, al-Shabaab. No cash was ever used in that process; money was remitted with false names to obscure the money train.
In 2014 and 2015 Australian authorities feared that money being transferred from Australia could be used for terrorism in Somalia as well. Most of the terrorism financing now travels around the globe without even one single banknote.
These kind of transfers – along with Bitcoins, hawalas, offshore bank accounts, phantom businesses or the dark-web – are used much more for organised crime, from terrorism to drugs, weapons or human trafficking. It is true that small criminality probably uses cash, but seriously – how often is a €500 banknote proffered when buying drugs or stolen items?
The truth is that the €500 note was mostly used for hoarding – and the banks don’t want you to do that. All the money consumers store ‘at home’ isn’t bringing them any interest and they don’t like that. Slowly erasing the high-value note will not only cost millions of euros to European taxpayers, it will also make it harder for them to freely stock their money in cash. Today, only 3.2% of euro banknotes are €500 bills; however they represent 30% of the total euro cash stock value.
So if you want to store your cash at a safe deposit in a bank, it will become more expensive because of the cash volume. In a recent FT article, the paper’s Frankfurt correspondent, Claire Jones, wrote: “It would cost just €60 to store €3m in €500 notes at in a safe-deposit box at Deutsche Bank for a year. To store the same amount in €50 bills – in a bigger box – would cost €380.”
For the ECB to scrap the €500 note, without consulting its users and only to serve banks, seems to create resistance – especially in countries like Germany which has a ‘culture of cash’. In fact the note was mostly created for Germans to replace the 1,000 D-Mark (worth €511.29 at the time). As Jones noted in February this year Bild, Germany’s highest circulation newspaper, published a letter for readers to send to finance minister Wolfgang Schäuble in protest at plans to limit cash purchases to €5,000. “Cash means liberty,” stated the letter, “Cash means independence from banks, technology and fees.”
Yet we are likely to be slowly deprived of that freedom. Behind these political decisions are the major lobbies of banks, but also the stakeholders in electronic and online payments which are today joined by the GAFA (Google, Apple, Facebook, Amazon) that are launching their own online payments and wallet methods – and soon their own banking systems?
Erasing the €500 note is not killing terrorism, but it may be killing our freedom to dispose of our money the way we want. This decision affects people from all walks of life, from those individuals banned from holding bank accounts to citizens who have lost their trust in banks after the multiple crises and are afraid to lose their cash next time around.
If you are still wondering why so many people are telling us why it’s ‘good’ to get rid of the €500 note (or even cash in general) look closer, they might have some interest in the banking business – just like Mr Summers, a Bildergberg Group member and speaker for Goldman Sachs, JPMorgan Chase, Citigroup, Merrill Lynch and Lehman Brothers. Let’s see which banknote is next on the list.
There has been an uptick of treasurers inquiring about interest rate risk management in recent months as interest rates in the US and UK have started to show a rise in momentum, said Chatham Financial at the annual Bellin treasury conference.
The global economy has seen about eight years of growth, but we are starting to see the end of this which is triggering some volatility in global markets, Stefan Bielmeier, DZ Bank, argued in his keynote speech at the Bellin annual 1TC conference. Other speakers discussed blockchain, cyber crime and netting.
A series of governments are now very worried about the idea of bitcoin and these currencies because customers would be able to make sustainable ongoing transactions and payments without having to ever introduce the use of a typical financial model or banking system. To combat this potential threat, several countries including major central banks like the Bank of England and the Bank of Israel will be launching their own version of a cryptocurrency. This could bring big advantages to customers.
PSD2 is set to remake the EU payments marketplace. This deliberate public policy exercise is going to regulate and demonstrate what next generation financial crime competencies must be and cement the standard going forward.