Governments should consider scrapping high denomination banknotes to combat financial crime and tax evasion, including paying tradespeople in cash, a former bank boss has said.

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% of their tax income, according to a paper by Peter Sands, the former chief executive of Standard Chartered who advises the British government. Yet efforts to stem the flows by catching perpetrators or detecting payments result in less than 1% of illicit flows being seized.

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Eliminating €500, $100, SFr1,000 and £50 notes would scrap a method of payment favoured by wrongdoers, even though it made little sense for legitimate users, Sands argued. Cash was useful for small transactions, such as buying a cup of coffee, or for pocket money, but it could be lost or stolen and people preferred electronic payments for big transactions, he said.

“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 was a strong case for scrapping notes worth $50 or more, and that there was even an argument for eliminating notes below that threshold. But governments should start by looking at dropping the highest value notes.

“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,” he said. “The incentive is 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.”



Sands’s idea is not new. Last week, Mario Draghi, the president of the European Central Bank, said its policy on issuing €500 notes was under review 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% 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 rising 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.