The UK is urged to scrap high donomination Bank notes

Posted by Neil Greenhill in Banking on 17 February 2016 - Neil is a Senior Credit Analyst at checkmyfile

A former boss of Standard Chartered Bank has urged Governments to end the production high denomination bank notes and remove them from circulation, with the intention of reducing financial crime and tax evasion. This was the conclusion of a research paper written by Peter Sands, who also advises the UK government.

The research paper found that criminals move more than £2tn around the world and avoid leaving a paper trail by using physical cash. Other findings were that £1tn of corrupt payments are made in cash each year and that some countries lose up to 70% of their tax income through tax evasion, which is often facilitated by high denomination bank notes. Despite the efforts of law enforcement agencies, it is believed only 1% of the illegal cash flow is seized.

Although there are legitimate reasons for high denomination notes any disruption caused to legitimate users, by removing these notes from circulation, electronic payments could be used as an alternative for large transactions. Any disruption to those with legitimate needs would be insignificant compared to the beneficial disruption of criminal organisations and those evading tax.

Sands provided the example of the €500 notes. The European Central bank is to review its policy on providing such high denomination notes after some banks claimed 90% of the demand for them was from criminals.

Commenting on his research paper Sands states, “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”.

Continuing, he gave an example of a common situation which could lead to tax evasion in the UK, “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,” explaining that this incentivises “tax evasion, since payment in cash makes it easier for the individual to avoid VAT of 20%; and if the builder pays his workers in cash, he in turn avoids employment taxes and they avoid income tax”.

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