Peter Sands, the former chief executive of British multinational and financial services company Standard Chartered, states that central banks must terminate the issuance of £50, $100 and €500 bills to reduce the circulation of fraudulent transactions.

Sands’ new report titled “Making it Harder for the Bad Guys: The Case for Eliminating High Denomination Notes”, published by Harvard Kennedy School, proposes the central bank eliminate high value currency notes to reduce illegal money flows, tax evasion and financial fraud.

“Our proposal is to eliminate high denomination, high value currency notes, such as the €500 note, the $100 bill, the CHF1,000 note and the £50 note. Such notes are the preferred payment mechanism of those pursuing illicit activities, given the anonymity and lack of transaction record they offer, and the relative ease with which they can be transported and moved. By eliminating high denomination, high value notes we would make life harder for those pursuing tax evasion, financial crime, terrorist finance and corruption.” – Peter Sands

The report states that illegal money flows exceed $2 trillion annually, with the majority of the transactions deriving from the purchases of illicit goods such as drugs and weapons. Sands further emphasizes that high value currencies play a minimal role in the functioning of an economy, yet a significant role in the underground economy.

Global Financial Integrity (GFI), which produces high-caliber analyses of illicit financial flows and advises developing country governments on effective policy solutions, estimates that in 2013, illicit financial flows from developing countries totaled $1.1 trillion, recording a staggering, 275 percent increase since early 2004.

While GFI and Sands estimate that trillions of U.S. dollars are spent by terrorist groups, corrupt politicians and banks to smuggle cash through borders, they believe that electronic payment mechanisms such as Bitcoin are more efficiently used to settle transactions.

“In the underground economy, the reverse is true. High denomination notes are the payment instrument of choice for those evading taxes, committing crimes, financing terrorism or giving or receiving bribes. Cash offers anonymity, leaves no transaction record and is universally accepted. High denomination notes are the form of cash which enable large sums to be paid, moved and stored with minimum cost and detection risk. From the criminals’ perspective, high denomination notes are far more attractive than bank transactions, Bitcoin, gold or diamonds.” – Peter Sands

As demonstrated by the graph provided by Sands above, cash, diamonds and gold are the only truly anonymous forms of money in existence today. Because of the lack of mobility in gold and diamonds, cash has been the highly preferred method of payment over the last few decades. Because of its low transaction cost, immediacy of value transfer, complete anonymity and untraceability, nearly $1 trillion worth of fiat money is used by corrupt politicians and financial organizations annually.

Every year, the World Bank Group’s Enterprise Surveys conducts an international survey with more than 130,000 firms across 135 countries, to evaluate and establish the level of corruption and bribery involved with governments and federal agencies. According to their newly released corruption data, around 17.2 percent of companies and organizations around the world have experienced at least one bribe payment request in recent years. Moreover, Enterprise Surveys stated that the around 26.1 percent of the companies were required to bribe government officials or agencies to secure contracts.

Sands explains that the elimination of high value currencies and the implementation of popular electronic payment mechanisms, such as Bitcoin, could significantly reduce bribery and government corruption worldwide.

Since some extremely high denomination notes have been eliminated in recent years, such as Canada’s $1,000 notes and Singapore’s $10,000 note, Sands believes that his proposal is reasonable, considering the rising levels of financial fraud and money laundering.

“Electronic payment mechanisms continue to become more available, accepted, flexible and cost-effective. Since most people in most countries already use such alternatives rather than high denomination notes when they make high value payments, they clearly work. Given these technological advances, high denomination notes are no longer required to facilitate the smooth functioning of the legitimate economy.” – Peter Sands

Since most currencies, such as the euro, have several high denomination notes including the €500, €200 and €100 note, Sands and his team of researchers are proposing the governing body eliminate the highest note first, observe the effect, and remove the others from the financial system over the next few years.

As large currency notes become eliminated, both commercial and central banks would lose some seignorage income and thus, leading financial organizations and banking groups will most probably reject Sands’ proposal.

Seignorage income is the revenue for a government when the money that is created is worth more than it costs to produce it. However, some financial experts worry that implementing the elimination of high value currency notes to reduce the number of payments related to crimes and fraudulent activities may lead banking institutions and financial establishments to become even more corrupt, as they would seize the power to process and settle fraudulent transactions for corrupt organizations and individuals without any evidence to trace the transactions.

Photo 401kcalculator.org / Flickr(CC)