Since the beginning of the coronavirus crisis, a global drop in the use of cash has been highlighted by many newspapers, among which Le Monde and The Financial Times. This article focuses on the interest of criminals for cash: although financial innovations and digital currencies bring in infinite possibilities to launder money, cash remains the main tool for launderers.
“Cash plays a big role in crime.
I think there’s a reason cash is king”
by Elena Susini
Economist at Harvard, Kenneth Rogoff has written extensively on the benefits of a potential cash phasing out. As most people use cash for small transactions, the elimination of large denomination bills could have a significant impact on the levels of criminality: less tax evasion, less black markets, less thefts, less insecurity for employees who do not have to handle large amounts of cash anymore and last but not least, less money laundering and terrorism financing. “It’s easier to avoid tax in Germany than in the U.S.” says Rogoff, referring to cash preponderance in German transactions. According to the author of The Curse of Cash, eliminating large bills would make it more difficult to “conduct business under the table”.
Therefore, there is a reason why the European Central Bank put an end to the issuance of €500 denomination bank notes in 2018. Indeed, a paradox came to light regarding the amount of high denomination notes circulating in the economy. Although they were not used in transactions, €500 bank notes still represented one third of the money in circulation in 2014. The 2015 report of Europol shows that, even if cash payments were declining, the total value of euro bank notes was growing! €500 bank notes went from representing €70 bn in 2002 to €300 bn in 2014. The report illustrates the example of Luxembourg, one of the most cash-averse countries in the European Union: the Central Bank of Luxembourg reported in 2013 that the issuance of banknotes had grown of 14.6% in one year (corresponding to an increase of €11.2 bn). The amount of paper money issued by the Central Bank of Luxembourg therefore had reached €87.5 bn, which represents more than twice the GDP of the country. Then, a doubt was raised: what were all these banknotes used for?
First of all, cash can be a form of income. Drug and human trafficking, racketeering and theft are known to generate cash profits. A drug dealer for example can be paid with numerous low denomination notes by his (her) customers. These proceeds then require to be laundered in order to be placed in the legal economy without betraying their source. Cash can be sometimes present in very high amounts; however, as it is material, it can occupy a large volume and be therefore difficult to hide. Cash can also be a product of criminal activity and not a proceed of the latter. Counterfeiting, for example, is economically convenient when costs of production are inferior to the denomination produced.
However, cash can also represent a concealment. Cybercrime, such as phishing or hacking, identity fraud, compromising of bank cards and online frauds do not produce cash but money on a dematerialized form. Surprisingly, to conceal the source of their digital proceeds, criminals often resort to cash. Indeed, Europol confirmed in 2014 that almost all predicate offences were linked to the use of cash in at least one phase of the process of money laundering, whether they were readily cash generating crimes or not.
How do launderers resort to cash? The most common modus operandi is the one that combines e-mules, cash withdrawals and wire transfers. Money mules are individuals who are recruited by criminals to help them laundering money; they are usually the ones that most handle cash in the whole process. The latter is relatively easy to understand. After the commitment of a crime, money is transferred to the account of a mule. As this clearly leaves a trace that could be followed by investigators, the mule withdraws the money in cash before transferring it overseas using a money transfer service, such as Western Union, MoneyGram, or PayPal. The mule must be fast and operate before the offense is detected in order to break the link between the crime and the proceeds. He or she usually keeps a commission of 5%. The mule handler network then collects the Western Union payments of different mules and transfers them to the criminal, keeping a service commission.
In January 2020, three men were arrested by the National Crime Agency for being involved in money laundering operations linked to a malware attack on a Maltese bank. In total, 13 M€ of funds had been removed from accounts and transferred to other accounts in the rest of the world. For example, around 800 000 pounds were transferred to an account in Belfast; in the following hours, card payments and cash withdrawals were made from this account, in order to acquire high value goods, such as purchases at Harrods and Selfridges (London), several Rolex watches, a Jaguar and an Audi A5. The account had finally been blocked after 340 000 pounds had been spent. This reveals that criminals use digital tools in conjunction with cash and that, even with the rise of cybercrime, money laundering methods stay traditional.
One question remains pending: Why cash?
Laundering tools have a certain number of factors in common. Generally, they perform three functions: hiding the origin and true ownership of the money; keeping direct or indirect control over the money; modifying the shape of the proceeds in order to either diminish the volumes occupied by large amounts of cash or break the link between the source and the beneficiary of the funds. Cash fulfils all these requirements, as it belongs to the individual who detains it: it is a bearer negotiable instrument. It is impossible to know the origins of the capital or the intended beneficiary of a transaction; in other words, cash is anonymous.
Anonymity has a key role in allowing launderers to use the functions of money – among which means of payment and store of value – to serve their own purpose. It allows criminals to use an impersonal and valuable asset in order to make payments, by this way avoiding any traceability. Furthermore, this asset also allows criminals to store value anonymously, thus maintaining unaltered their purchasing power through time. Therefore, all the attributes of cash are significant for money launderers, but it is only anonymity that fully allows the two functions mentioned above – means of payment and store of value – to be instrumental for criminal purposes.
Nevertheless, other means of payment could also be characterized by their anonymity and, according to the german politician von Notz, reducing cash in order to fight crime – for example through the progressive elimination of large bills – would be “like using a cannon to shoot little birds”. Following von Notz’ statement, fraudsters do not need cash to make illicit transactions, as they have at their disposal many different instruments, from virtual currencies to structured finance innovations. However, this reasoning can be argued.
Firstly, according to Olsen, the shift to a cash-free society is a market-driven process, not a hunting party. Digital payment systems are already in place and are recognized as being more efficient and convenient than cash; thereby, cards, online payments, mobile applications or online wallets are gradually replacing paper money. Capgemini’s reports show that cashless payments have more than doubled in ten years and according to the Economist, Scandinavian countries, but also UK or Canada are very close to becoming cash-free; in Norway, cash accounts for only 6% of purchases by value! This trend has moreover been accelerated by the coronavirus crisis, as evidenced by The Financial Times and Le Monde, among other newspapers.
Then, according to Simona Mulinari in Cyberlaundering: Riciclaggio di capitali, finanziamento del terrorismo e crimine organizzato nell’era digitale, the anonymity associated to digital means of payment is imperfect: each electronic payment system could potentially be made completely traceable, as each transaction, even if for a very short time, generates some records, regardless of whether this element is subsequently destroyed or hidden with cryptographic techniques. Understanding the interest of criminals for cash is straightforward as the total lack of traceability is traditionally associated with paper money.
We can conclude underlining that it is difficult to describe the link between money laundering and cash: the latter is neither a laundering method nor an illegal commodity; rather, it is a legal facilitator that launderers can use. If little birds cannot be prevented from flying, they should be traced very closely. In other words, investigators or enforcement bodies should take advantage of technological evolutions; the digital transition is a race that rewards those who first are able to create, understand, and use a technology. This last point is to be intended both upstream – prevention, i.e. implementation of a regulation for new means of payment – and downstream – repression through sophisticated investigation systems. However, the degree of transactions’ traceability lies between the needs for the protection of financial privacy and public order’s requirements.
Would the hypothetical model of a cashless society be a solution to get rid of crime? Certainly not, but it would probably lead to a transformation of its multiple forms.
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Capgemini, 2016 & 2019
European Central Bank. (2016, May 4). Press release: ECB ends production and issuance of 500euros banknote. Retrieved from European Central Bank – Eurosystem: https://www.ecb.europa.eu/press/pr/date/2016/html/pr160504.en.html
Europol. (2014). Results of Europol Survey to MS ML Units on the Use of Cash as an Instrument to facilitate Money Laundering.
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