Governments should consider scrapping high denomination banknotes such as the £50 note to combat financial crime and tax evasion, including paying builders in cash, a former bank boss who advises the UK government has argued.
Criminals move more than $2tn (£1.4tn) around the world each year, corrupt payments amount to $1tn and tax evasion robs countries of up to 70 per cent of their tax income, according to a paper by Peter Sands, the former chief executive of Standard Chartered. Yet efforts to stem the flows by catching perpetrators or detecting payments result in less than 1% of illicit flows being seized.
Eliminating €500, $100, SFr1,000 and £50 notes would scrap a method of payment favoured by wrongdoers but that makes little sense for legitimate users, Sands argued. For small transactions, such as buying a cup of coffee or pocket money, cash is useful but cash can be lost or stolen and people typically prefer electronic payments for big transactions, he told The Guardian.
“High denomination notes are arguably an anachronism in a modern economy given the availability and effectiveness of electronic payment alternatives. They play little role in the functioning of the legitimate economy, yet a crucial role in the underground economy. The irony is that they are provided to criminals by the state,” Sands said in his Harvard Kennedy School paper, “Making it harder for the bad guys”.
Sands said there is a powerful case for scrapping notes worth $50 or more and that there was even an argument for eliminating notes below that threshold. But he said governments should start by looking at doing away with the highest value notes.
He said: “Ask people in the United Kingdom when they last used a £50 note, the highest sterling denomination, and the most common answer is to pay a builder or plumber. The incentive is tax evasion, since payment in cash makes it easier for the individual to avoid VAT of 20 per cent; and if the builder pays his workers in cash, he in turn avoids employment taxes and they avoid income tax.”
Sands’s idea is not a new one. Last week, Mario Draghi, president of the European Central Bank, said the ECB was reviewing its policy on issuing €500 notes because of concerns they were widely used by criminals. British banks and money exchange businesses stopped issuing the notes in 2010 after a report showed criminals accounted for 90 per cent of demand.
Scrapping high-value notes would not eliminate crime and corruption but doing so would increase criminals’ costs and make them easier to detect, Sands argued.
Sands quit Standard Chartered last year after mounting bad debts caused profits to tumble, damaging a reputation built up when the emerging markets bank came through the financial crisis relatively unscathed.
He was one of the architects of the banking bailout in October 2008 and is the lead non-executive director for the Department of Health. The former McKinsey consultant also provides informal advice to 10 Downing Street on matters such as changes in the labour market
