Daily Management Review

Unwelcomed Banknotes: Why EU Wants to Withdraw €500 Bills


After the terrorist attacks in Paris, The European Central Bank came to think if it's time to get rid of the €500-bills. Large banknotes has long been associated with the Mafia, they are used for bribes, carried in suitcases and stores are reluctant to accept them.

Two years ago, customs officials at Heathrow airport London arrested a smuggler, who was carrying € 20 th. in his pants – there were 40 bills of € 500. He was heading to Turkey to meet with a member of the "Islamic State." In 2015, a woman with 64 latex capsules in the stomach arrived in Colombia. Each of the capsules contained five 100-dollar bills.

Transporting large bills of money is very convenient. € 1 million in the € 500 banknotes weighs about 2 kg and can be fit in a handbag. $ 1 million in $ 100 bills is a little more than 10 kg – you would need a small suitcase then. If the sum is greater or denominations are smaller, you will need a sack.

Larry Summers, the US Treasury Secretary under President Clinton, encouraged the European authorities to abandon the € 500 nominal value back in the 90's. Yet, they started to think about it only after the recent terrorist attacks in Paris.

According to Europol, a third of the cash turnover in the EU (€ 307 billion) accounts for € 500 banknotes, although the population barely use the bills. The police says that the source of illegal cache is Luxembourg. In 2013, the country has issued € 87.5 billion, which is twice its GDP. For comparison, Germany’s index is 16%, Italy - 9%, France - 4%. Yes, Luxembourg is an offshore with a giant banking sector, yet Europol is still surprised why would they need so much cash. By the way, the Luxembourgers themselves  mostly use plastic cards.

The British have similar suspicions. The Serious Organised Crime Agency (SOCA) estimates that in 2010, 90% of all 500-euro banknotes sold at exchangers fell into the hands of criminals. The British have much stricter rules for the cash: the highest denomination issued by the Bank of England - £ 50. Above that, there are debates on the abolition of the bills constantly ongoing in the country.

Financing of terrorism is not the main thing for which large bills are used. According to the FATF (Financial Action Task Force on Money Laundering), illegal transportation of cash by 30% relates to the drug trade, 25% - tax avoidance, and 10% - corruption. Preparation of the attacks accounts for less than 10%.

As for the scope of the transportation, here are the European Commission’s data for the years 2007-2009: individuals declared € 80 billion at the borders with EU, and € 1.6 billion were withdrawn. A recent study by Harvard Kennedy School contains the following figures: $ 2 trillion in the illegal movement of cash fall on international crimes, $ 1 trillion – on corruption. In spite of the large investments in financial intelligence, only 1% of the flow is stopped by the authorities. According to the study, illegal cash transportation will be significantly more expensive in the absence of large bills.

Terrorists and drug traffickers are not the only ones who will mourn € 500 banknote. Along with 100-dollar banknotes, much of the developing world uses 500 euro bills to store savings due to the unreliability of currencies. This explains why the denominations of $ 100 account for 78% of the US money issue (just over $ 1 trillion), whereas Americans are inclined to credit cards. According to the Harvard study’s surveys, only 5.2% of Americans have "Benjamins" in the purse, and 56% of the euro area have never had € 500 bills in their hands.

EU and America are not alone with their "expensive" bills: many developed countries keep them in circulation. Switzerland produces a bill of 1,000 francs ($ 1006), which also goes for export; it accounts for 92% of the total issue of money in the country. Singapore had recently released a banknote of 10 thousand local dollars (about $ 7 thousand.). However, it ceased to be printed in 2014, leaving only bills with lower denomination. A similar pattern is observed in Hong Kong, which has a 1-thousand banknote in circulation ($ 130). Although it accounts for 50% of emissions from local residents, it has no success among local citizens. A different picture in Japan. There's also a lot of large bills in circulation: 10 thousand yen (about $ 90) accounted for 92% of emissions, but the Japanese, like the Germans, are very fond of cash and this bill is rarely used outside Japan.

Researchers from Harvard argue that the large bills are needed primarily for money laundering, tax evasion and corruption. No wonder the US has decided to get rid of especially large denominations back in the middle of the last century. Banknotes of $ 500, $1 thousand, $10 thousand were officially phased out in 1969 on the orders of President Richard Nixon. They are still accepted in banks today, but it’s nearly impossible to see them in daily circulation. Only notaphilist are interested in those bills, and their actual cost is far from nominal. To compare, Canada had officially stopped to let a bill of 1,000 Canadian dollars only relatively recently, in 2001.

Almost each country associates refusing large denomination banknotes with the fight against the Mafia. For example, Singapore in 2010 started alluring casinos, what led to sharply increased turnover of illegal cache with 10th-bills. They are actively used in neighboring Indonesia for money laundering, which is why the local authorities asked Singapore to speed up the withdrawal of the bill. By the way, the largest Indonesian bill is 100 thousand rupees, that is, 10 Singapore dollars. Therefore, bribing in the local currency is even harder than in small euro bills.

Almost none of the developing countries issues large banknotes. Chinese 100 yuan worth $ 16, thousand Indian rupees - $ 15, 200 Turkish lira - $ 35, thousand Mexican pesos - $ 60, and so on.

Another way to deal with the illicit cash market, besides eradicating large denomination, is to set a price limit for purchases in cash. It is € 1 thousand in France, € 2.5 thousand - in Spain, € 3 thousand - in Italy. There are no restrictions in Germany and Austria, as well as in Slovenia, Cyprus, Iceland, Latvia and Lithuania. The restrictions in the Scandinavian countries and the UK exist only in practice. For example, the government of Denmark allows restaurants, shops and gas stations do not accept cash, and one cannot buy bus tickets without a credit card in London.

Law-abiding citizens have nothing to fear - if the income is legal, and the taxes are paid, any limitations in terms of cash flow will not produce any discomfort.