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Limitations of Cash Payment Limitations

Nikos Passas's picture
Back in March 2017, the European Union Commission announced a public consultation about a possible introduction of cash payment limitations (CPL). This follows the adoption of an action plan dated 2.2.2016 “against the financing of terrorism”. This action plan suggests that because “payments in cash are widely used in the financing of terrorist activities” we should explore “the relevance of potential upper limits to cash payments”. It has also been argued that a “cashless” or “less cash” society would be good for convenience and facilitation of payments, shorter remittance timelines and better management of monetary and tax policies.
However, there are serious doubts that CPL would advance substantially the worthy cause of controlling serious crimes, while any incremental benefit would come with considerable cost and externalities. Cash is often used by extremists and organized criminal groups, but not declared. Barter deals and non-cash means are also common. The misconduct of corporate and white-collar actors can have devastating economic, social, environmental, health or security effects, but cash is most often not involved at all (e.g., sub-prime, LIBOR, sanctions violations cases). Tax evasion and “lawful but awful” tax avoidance schemes that shift the burden of social contributions to lower-income and less privileged members of society involve accounting frauds, offshore and tax haven jurisdictions, legal manipulations or simple non-reporting violations. CPL is no panacea and would not make such diverse social problems disappear; it may in fact render some of them more sophisticated and harder to detect.

On the other hand, CPL may bring about higher transaction costs, undermined privacy, weakened trust to institutions, basic rights violations, bank-runs and bail-in regulations that place citizens’ savings at risk of devastating losses. Expatriates’ options for developmentally vital remittances would be constrained, and fund flows to needy and fragile communities potentially disrupted or diverted to less monitorable channels. In addition, there may be monetary policy dysfunctions, losses for savers (negative interest rates), and harm to legitimate cash industry interests. Moreover, these challenges will affect the most vulnerable parts of the population (elderly, migrants, unbanked, remittance recipients etc.).

One should not sacrifice legitimate economic interests and livelihoods, human rights, migrant remittance options, freedoms and the strong cash preferences of the people for what is likely to be imperfect transparency and, in some respects, more challenging policing work. The world, including most of Europe, is not ready for this push towards cashlessness given the lack of universal access to financial services, financial literacy, adequate infrastructure, technological support, broad cultural acceptance, etc. Cash is extremely popular (80% prevalence among people in Europe), supports sociability and good management of personal affairs, and provides a safety valve in times of crisis (downed systems, wars, natural disasters, cyber attacks/ransomware, etc.). Cash is also deeply rooted in people’s culture.
CPL would be disproportionate, would unnecessarily centralize powers, undermine human rights and the freedom to enjoy one’s property in peace. Instead of considering ill-advised policies with little or no anticipated effect on stated objectives, the aim must be the design of demand-side approaches to serious crime problems. Europe needs a strategy based on a solid understanding of the root causes and key drivers of terrorism, corruption, organized crime and tax cheating, and genuine political will to implement it effectively.
A more detailed paper on this debate can be downloaded here.

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