One third of all cash in circulation in the eurozone is now in the form of €500 notes. Suspicions have been raised over Luxembourg, which prints double its GDP in banknotes each year. EURACTIV France reports.

High denomination banknotes have long been seen as a problem, but it took a solid security argument – the financing of terrorism – to galvanise the EU into action.

At a time when the United States, Canada and the United Kingdom have all taken their biggest banknotes out of circulation to help combat organised crime, the continued existence of the €200 and €500 notes is something of a throwback.

The president of the European Central Bank (ECB) told members of the European Parliament on 1 February that his institution would consider the issue. “We are determined not to make seigniorage (the printing of money) a comfort for criminals,” Mario Draghi said.

But this is precisely what happens at the moment.

“Why are there so many €500 notes in circulation when more than half of EU citizens have never even seen one? This has to be an anomaly.” For Igor Angelini, the head of Europol’s Financial Intelligence Group, large denominations are inherently suspicious.

Since the creation of the euro, the number of €500 notes has multiplied by six, while the number of €10 and €20 notes, highly called-for in day-to-day business, has remained stable.

Of the €1,000 billion of cash in circulation, €307 billion, or one third, was in the form of €500 notes by the end of 2015. But little is known about these notes, beside the fact that they are generally refused by shop-keepers and that citizens are hardly aware that they exist.

Piles of cash in Luxembourg

The origin of these notes, a surprising number of which come from Luxembourg, can give a clue as to how they are used.

This small country prints mountains of banknotes every year to respond to the needs of its large banking sector. While most countries print about 10% of their national wealth in banknotes each year, Luxembourg printed double the value of its GDP in cash in 2014 alone.

The country may have an outsized financial sector, “but this mostly handles business finance and asset management, not street markets… there is no good reason why they need so much cash,” a French expert said.

“What is surprising is that Luxembourg is a net producer of notes, but that we then lose track of the flow,” said Angelini, whose organisation wants to deepen its investigations on the subject in collaboration with the ECB. Unlike in France or Germany, the declaration of cash sums over €10,000 entering or leaving Luxembourg is not compulsory, but is done “by request”. According to a Commission inquiry, the country had carried out only 15 checks over a period of two years.

Cash and terrorism

The 2001 terrorist attacks in the United States changed the EU’s approach to controlling the flow of cash. Fears over the financing of terrorism were the main motivation behind the adoption of the 2005 directive, which re-imposed the obligation to declare sums of over €10,000 at the EU’s borders. This directive is not binding for Luxembourg.

Since declarations at the Luxembourgish border are so rare, and have remained stable at the French border, we must logically conclude that almost all the cash printed in Luxembourg stays in Luxembourg – or leaves the country discretely. This situation is all the more surprising as the Luxembourgers are not big users of cash. According to a study by the ECB, they, like the French and the Dutch, prefer bank cards to banknotes.

“Luxembourg is a country that hosts many cross-border workers,” the Luxembourgish Minister of Finance Pierre Gramegna told EURACTIV. He added that Luxembourg had a very small black economy, and that there was no proven link between the printing of banknotes and the illicit use of cash.

€1 million weighs 2kg

But for the police there is little doubt, knowing the extent to which €500 notes simplify the lives of organised criminals and money launderers: €1 million in €500 notes weighs only two kilos, compared to 22 kilos for $1 million.

“There are many links between organised crime and cash. Even with credit card fraud, criminals need to use cash at some point to cut the chain that could lead back to them,” Angelini explained.

This is also one of the avenues of inquiry being pursued in Jean-Claude Juncker’s homeland. Cash may be used as a circuit-breaker in Luxembourg: being withdrawn from a bank account, then reinjected into another. This question has piqued the interest of Europe’s money laundering experts.

In France, where customs officers arrest 1,400 people in possession of undeclared sums of cash each year, there is little doubt over its suspicious nature.

“Cash is a mine of cases. Three quarters of the sums we intercept are linked to cases of tax evasion, and the files are transferred to the tax authorities. But in a quarter of the other cases, we stumble upon organised crime rings: drug traffickers, VAT fraudsters, traffickers of tobacco and counterfeit goods or financiers of terrorism,” said a source from the French customs office.

Euros are also big travellers, and Europol has identified some rather unexpected cash flows, including towards China.

Varied cash payment limits

Cash is not only a problem for Europol and customs. The French ministry of finance has recently banned all cash payments over €1,000. But Belgium has simultaneously done exactly the opposite. Here the cash payment limit has been raised to €7,500 on the pretext that the automobile sector was disadvantaged against competition from Germany, which, like Luxembourg, has no cash payment limit.

Some business sectors, like the recycling industry, are even campaigning for cash to be abolished altogether.

Despite the broadly-shared concerns over the legitimacy of cash and the European Commission’s proposal, as part of its response to terrorism financing, to establish an EU-wide limit for cash payments, any action in this area may take a long time to materialise. If only because the Germans are opposed to it.

“We choose to suffer in silence,” the German Minister of Finance Wolfgang Schäuble said at the French-German Economic and Financial Council on Tuesday (9 February).