The European Central Bank (ECB), like most central banks around the world, has its hands full when it comes to executing monetary policy to propel economic growth.
The euro area’s growth has been anaemic over the years, exacerbated further by the adverse shock of Brexit, and the ECB has been trying its best to contain the fallout. In May, it took another, less noticeable decision with significant implications. It decided to end the printing and circulation of the ‘Bin Laden’ money. In the Euro area, this title was given to the 500 euro note. Its disastrous repercussions finally led it to be cancelled.
The 500 euro bank note had become a favourite among criminals, money launderers, terrorists and corrupt elements, as is generally the case all around the world with large denomination notes. In Pakistan, the Rs5000 note is considered a godsend by those indulging in corruption. And it’s easy to see why.
They eliminate the problem of carrying too many notes, and thus are less noticeable when they change hands in shady deals. Even if a person puts them in a suitcase or a bag for cross-border transactions, they are still less noticeable. Take the Euro 500 bank note as an example. A bag filled with equivalent to a million dollar of these 500 bills hardly weighs five pounds. In contrast, the equivalent of the same amount in 100 dollar notes would clock in a hefty 22 pounds, something that will be difficult to conceal.
The Euro 500 note started to become noticeable when American intelligence reports pointed to its increasing use in cross-Atlantic illicit drug trade. South American nations like Mexico and Colombia (both have established drug cartels) also saw an increase of this money in drug trade. From being preferred in drug-related activities, this note gradually found likeness in terrorist financing. It was then that it received the moniker of ‘Bin laden’ for becoming popular in terrorist circles.
Terrorists who committed last November’s attacks in France and in Belgium in March of this year were found to have substantial amounts of these 500 bills. By removing this bill from circulation, policymakers hope to choke terrorism financing or at least make it difficult to finance terror.
Members of the European Union are not the only countries where large denomination notes are in circulation. The US once used to have ten, five and one thousand dollar bills. But their printing was discontinued in 1969. Now, the largest denomination money in the US is a hundred dollar note. The Swiss have a thousand franc note, but they strictly regulate its supply.
From a purely financial point of view, large denomination bills are preferred because they are readily acceptable and easily convertible. For example, it would be much easier to get smaller denomination bills in exchange for a 1000 or 5000 rupee note compared to a 10 or 20 rupee note. There may be other advantages that may compel policymakers to print bigger money bills. For example, it’s cost effective to print a 5000 rupee note than 100 rupee bills of equivalent value.
But of late, it is becoming increasingly apparent that the social and economic ills caused by large denomination notes outweigh their advantages. Recently, Peter Sands of the Harvard Kennedy School has documented these disadvantages. Tax evasion, financial crimes, drug trafficking and terrorism financing are major disadvantages to the societies and economies, and these all make extensive use of large denomination money.
Each of these has the ability to cause severe damage to a country. Just take terrorism financing in Pakistan as an example. This scourge has led to more than 60,000 deaths in our country, caused immeasurable damage and made the economy suffer losses to the tune of 120 billion dollars. And our intelligence apparatus has credible evidence that the terrorists are being funded by other governments.
There should be little doubt that big denomination bills (Pakistani or foreign) would be a favourite among terrorists and their financiers since they are difficult to detect and easy to move around. In contrast, imagine the difficulty that terrorists would have had if bills of only smaller denomination were in circulation. Surely they would have found it much difficult to hide and move it. The same is true of tax evaders, drug traffickers and corrupt individuals.
Peter Sands has quoted some remarkable and astonishing figures in his research in order to push the case for strict regulation or putting an end to large denomination bills. According to estimates, money flowing across borders related to financial crimes amounts to $2 trillion, while $1 trillion of monetary flows is related to corruption. Large denomination bills form an increasing portion of these transactions.
For example, around 2006, the Spanish authorities who were investigating the increasing incidence of corruption in the real-estate sector found that the 500 euro bill had become almost a quarter of the total money in circulation.
Precise and credible estimates for terrorism-related finances are not available, but increasing incidences of terrorism around the world indicate that the number is on the upward trend.
Underpinning all this debate about large denomination bills is the close nexus between crime and hard cash. If crime of any nature is to succeed, then the anonymity of its financial transactions is critical to its survival. And in the world of crime and illegal activities, hard cash is the most sought after commodity. This is apparent from real world experience. The first thing that dacoits and robbers demand is hard cash, and then they go for other valuables.
Also, it is a common fact that retailers in Pakistan and many other countries do not accept electronic means of payment (credit or debit cards), and rely on hard cash. That is primarily because if their transactions became known to the tax authorities, it would be easier to trace total sales and make a good guess about their total income.
This unhealthy nexus between crime and cash is also abundant in countries where an undocumented, underground economy is a large part of the total economic activity. Pakistan is a prime example of this phenomenon. Estimates of informal economy vary from at least 35 percent to around 60 percent of the total economic activity.
The implication is the increased burden of taxation on those who are part of the formal economy since no part of the informal is in the tax net. The criminal economy is part of this informal economy, as is evident from the example of Karachi where the informal economy of criminal activities and corruption runs into billions of rupees per day. In these illegal transactions, large denomination bills are the most readily acceptable.
In conclusion, large denomination money is increasingly becoming a nuisance. Research suggests that its economic and social costs now easily outweigh its benefits. In a world where crime and informal economic activity have a strong, positive relation with cash, the presence of this kind of money only serves to give impetus to these illegal activities. Moreover, they are now a preferred payment in the world of terror financing. This, then, represents a problem that the policymakers cannot ignore anymore.
The writer is a freelance contributor.
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