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Limiting the Use of Cash for Big Purchases: Assessing the Case for Uniform Cash Thresholds

Peter Sands, Haylea Campbell, Tom Keatinge and Ben Weisman
Occasional Papers, 8 September 2017
Centre for Financial Crime and Security Studies, AML/CTF, Organised Crime
This paper, a joint project between RUSI and the Mossavar-Rahmani Center for Business & Government at Harvard, explores the pros and cons of imposing 'cash thresholds', including whether they should be introduced at a uniform level across different countries and, in particular, throughout the Eurozone.

For all the hype about electronic payment systems, cash remains by far the world’s most popular financial transaction mechanism. However, over the past year there has been an intensification of the discussion about the role of cash in society. Cash has great advantages: it is familiar; simple to use; and ubiquitously accepted. But cash also has downsides: as cash transactions leave no record, cash plays a critical role in money laundering, tax evasion and terrorist financing.

The purpose of this paper is to provide a critical assessment of the case for cash thresholds – legal limits on the size of transaction for which cash can be used – and to evaluate whether such thresholds should be set at a uniform level across countries. This is a live policy debate within the EU. Some member states, such as France, Belgium and Italy, have already introduced cash thresholds at levels between €1,000 and €15,000. In others, such as Germany, the idea has triggered fierce opposition. 

Thus far, the arguments for such legislation, at least at EU level, have largely been framed within the broader objective of implementing a common counterterrorist financing strategy. The arguments against have typically focused on the infringement of privacy and individual liberty and the belief that such thresholds are a step towards eliminating cash altogether. Yet there has not been much considered assessment of the arguments for and against cash thresholds that looks more broadly at the potential impact of such thresholds on tax evasion and financial crime and the possible disruption of legitimate economic activity.

Key Findings

  • There is a robust underlying logic for why cash thresholds should have a beneficial impact in curbing the illicit use of cash. This is despite the lack of hard empirical evidence that cash thresholds are effective in deterring financial crime. Criminals like to use cash because it is so widely accepted, anonymous and virtually impossible to track. Cash thresholds make it harder to move large volumes of money into or out of the legal economy.
  • Cash thresholds are likely to have most impact on tax evasion and money laundering connected to organised crime, but relatively limited direct impact on terrorist finance or petty crime. Cash thresholds make it harder to avoid taxes on high-value purchases. Cash-based tax evasion, through avoiding VAT or sales taxes, and under-reporting profits, is the largest source of tax evasion in most countries. Cash thresholds also make it much harder and more expensive to launder the cash proceeds of organised crime. Criminals can break up large sums into many smaller transactions (known as ‘smurfing’), but this is more costly and slower. Cash thresholds would have limited direct impact on terrorist operations as these typically involve relatively low-value financial transactions. However, to the extent that cash thresholds impede organised crime, such measures could conceivably help undermine the financing of those terrorist networks dependent on such funding.
  • There appear to be limited downsides to implementing cash thresholds in terms of the impact on legitimate economic activity or concerns about individual privacy. The overwhelming majority of legitimate cash transactions are below the levels at which cash thresholds would be imposed. High-value cash transactions that are not motivated by illegal purpose appear to be rare and only relevant to a small, wealthy proportion of the population. Privacy concerns, while legitimate, seem of less relevance to high-value transactions, since a large proportion of transactions of this magnitude require some recording of personal details.
  • Cash thresholds appear to be an attractive policy option for curtailing the illicit use of cash with limited adverse effects or implementation risks. Thresholds need to be set at a level well above the purchase price of most consumer durables, but low enough to capture the purchase of vehicles and luxury items. This should have an impact on money laundering and tax evasion with little inconvenience to law-abiding citizens.
  • There is a compelling case for setting such thresholds at a similar level in a common currency area, such as the Eurozone, but a much weaker case across countries with different currencies. There is evidence that the imposition of cash thresholds in specific Eurozone countries has driven money laundering transactions into neighbouring countries.
  • It should be possible to generate better evidence of the impact of cash thresholds, particularly if tracking measures are established as part of the threshold implementation. For example, analysis of VAT returns of sectors involved in high-value transactions before and after the imposition of thresholds could provide insights into the impact on tax evasion and money laundering.

Recommendations

  • The EU should pursue the introduction of a maximum uniform cash threshold, at least within the Eurozone. Although setting the initial level of this maximum threshold is not a precise science, a limit in the €3,000–€4,000 range seems not unreasonable.
  • Other countries should consider the introduction of cash thresholds at equivalent levels as a complement to existing measures to combat financial crime.
  • The Financial Action Task Force (FATF) should encourage consideration of cash thresholds among its members, facilitating the transfer of best practices in implementation and impact analysis.

About the Authors

Peter Sands is a Senior Fellow at the Mossavar-Rahmani Center for Business and Government, Harvard Kennedy School, where he focuses his research on topics related to financial markets and regulation, and the financing and economics of global health. From 2006 to 2015 he was Group CEO of Standard Chartered, and from 2002 to 2006, Group CFO. Prior to joining Standard Chartered, Peter was a Senior Partner at McKinsey. He has a BA in Politics, Philosophy and Economics from Oxford University and an MPA from Harvard Kennedy School.

Haylea Campbell is a Research Analyst at RUSI within the Centre for Financial Crime and Security Studies. Her research interests include the development of global sanctions policy, interdisciplinary responses to financial crime and terrorist finance, and the impact of counterterrorist finance regimes on the non-profit sector. She has an LLM in International Law and Security from the University of Glasgow.

Tom Keatinge is Director of RUSI’s Centre for Financial Crime and Security Studies. His research focuses on issues at the intersection of finance and security, including sanctions, terrorist financing, human and wildlife trafficking, and the role that public–private partnerships play in tackling these issues. Prior to joining RUSI in 2014, he was an investment banker at JP Morgan for 20 years. He has an MA in Intelligence and International Security from King’s College London.

Ben Weisman is a candidate for a joint MBA and MPP at Harvard Business School and Harvard Kennedy School. He is also a research associate at the Mossavar-Rahmani Center for Business and Government. Until 2015 he was a senior analyst on the Federal Reserve Bank of New York’s international affairs and strategy team. He has also worked at Citi in the Strategic Intelligence Analysis Group. He has an AB in public and international affairs from Princeton University’s Woodrow Wilson School.

Author

Haylea Campbell
Research Analyst

Haylea is a Research Analyst at RUSI within the Centre for Financial Crime and Security Studies. She joined RUSI in September 2016,... read more

Tom Keatinge
Director, Centre for Financial Crime and Security Studies, RUSI

Tom Keatinge is the Director of the Centre for Financial Crime and Security Studies at RUSI, where his research focuses on matters at... read more

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