May 2017 – Final Report Report on the Debate Regarding EU Cash Payment Limitations Critical analysis and review Contact: [email protected] 1 Website: www.o-c-o.net Report on the Debate Regarding EU Cash Payment Limitations Critical analysis and review by Nikos Passas Northeastern University, Boston Vienna Centre for Corporate Governance and Business Ethics Basel Institute on Governance President of the OCO –UN Board Contact: [email protected] 2 Website: www.o-c-o.net Table of Contents Table of Contents ......................................................................................................................................... 3 Executive Summary .................................................................................................................................... 4 Introduction ................................................................................................................................................... 5 The Presentation of the EU Initiative .................................................................................................... 6 Inception Impact Assessment ............................................................................................................. 6 The IIA Questionnaire .......................................................................................................................... 7 The stated goals of the EU initiative: More Effective Control of Serious Crime? ................ 8 Terrorist Finance in the European Context ............................................................................... 8 Other Serious Crime and Money Laundering ........................................................................ 10 Law Enforcement Needs ................................................................................................................... 13 Negative Impact of CPL ......................................................................................................................... 14 Legitimate international movement of large amounts of cash ...................................... 14 Lower Cost ............................................................................................................................................. 15 Privacy ..................................................................................................................................................... 16 No Cash, Higher Risks ....................................................................................................................... 16 Potential Abuse ..................................................................................................................................... 18 Trust ......................................................................................................................................................... 18 Monetary Dysfunctions ..................................................................................................................... 20 Safety Valve .......................................................................................................................................... 21 People and systems are not ready for CPL ............................................................................. 22 Victimization of the Vulnerable ..................................................................................................... 22 Popularity and Freedom to Choose ................................................................................................ 23 Better management and accountability ................................................................................... 24 Sociability and Generosity ................................................................................................................ 25 Concluding remarks ................................................................................................................................. 25 References ................................................................................................................................................... 27 Endnotes ...................................................................................................................................................... 33 Contact: [email protected] 3 Website: www.o-c-o.net Executive Summary The Inception Impact Assessment (IIA) is ill-conceived, not grounded on firm empirical evidence and harmful to both crime control and the legitimate interests and rights of the EU citizens. The action under discussion is presented as a measure against terrorism finance, serious crime and tax evasion. The problem is that these criminal acts correspond to very different methods, volumes, perpetrators, causes and control challenges. Cash Payment Limitations (CPLs) are nowhere near a panacea that can address all of them and cannot make any of them go away magically. Even when each of these crime challenges are considered on their own, the empirical linkage of CPLs to effective controls is not there. The evidence from EU countries with CPLs in place shows higher levels of informal economy, corruption, tax evasion and terrorism risks than those without. There is substantial evidence of non-cash very serious and organized crime, while the amounts needed and used by terrorists in European are usually very small in cash transactions, way below the thresholds under consideration. In fact, determined offenders will shift to other methods and become more sophisticated, posing new problems to controllers. Displacement and incentives for better organized crime may well be the main products of such measures. At the same time, a long list of negative consequences are very likely to happen: transaction costs will go higher, privacy will be undermined, trust to institutions may be weakened (the power of state, financial, commercial and data-mining entities increases, even though there is plenty of evidence of abuse and serious violations in the past), the potential for abuse and basic rights violations grows, bank-runs and post-crisis bail-in regulations place citizens’ savings at risk of devastating losses. In addition, there may be monetary policy dysfunctions, risk of property losses for savers, and legitimate cash industry interests will be harmed. Moreover, the news risks and problems will apply to the most vulnerable parts of the population (elderly, migrants, unbanked, etc.). As the world leaders are pledging since 2008 to better control the financial Leviathan, such policy will provide them with extra powers. The world, including most parts of Europe, is not ready for this push towards cashlessness (requirements for which include universal access to financial services, financial literacy, infrastructure, technological support, broad cultural acceptance, etc.). Cash is extremely popular (80% prevalence in monetary exchanges for the 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, such as the recent ransomware, etc.). Cash is also deeply rooted in people’s culture. In the recent bank-run cases (Argentina, Cyprus and Greece to some extent), communities have Contact: [email protected] 4 Website: www.o-c-o.net created their own paper currency to supply the need for a physical and trusted means of exchange. Legal tests of the IIA thus fail: no proportionality, no subsidiarity, vague respect for basic human rights and fundamental harm to the freedom to enjoy one’s property in peace. In short, both internally (the EU does not comply with its own better regulation principles, conventions and fundamental normative framework) and externally (the ineffectiveness of the measures and the collateral damage they will cause) the IIA on EU- wide CPL is on rather thin ice. Instead of considering policies with little or no effect on stated objectives, the key aim ought to be the construction of a demand side approach to serious crime problems. That is, a strategy based on a solid understanding of the root causes and key drivers of terrorism, serious crime and tax evasion. Supply side approaches have not worked in the past (cf. drug trade) and will be ineffective in the future too. In addition to smart-policing that takes advantage of new control options, available intelligence and better cooperation within and across countries, well thought- out financial controls can indeed be helpful and effective. Remember: good law enforcement and community policing is the best counter-terrorism. Thus, the EU IIA is unsupported, out of proportion and therefore should not be imposed on Member States against the will of the people, whose interests the suggested policy would undermine rather than protect. Introduction The European Commission announced a public consultation on the 1st March 2017 with respect to cash payment limitations (CPL) following the adoption of the action plan of the 2nd February 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”. The goal of detecting, monitoring and investigating serious crime is beyond dispute, but there are serious doubts as to whether CPL would advance this cause substantially nor that any incremental benefit would be without considerable negative effects. Cash is popular, safer and serves a long list