THE FINANCIAL FLOWS OF
TRANSNATIONAL CRIME AND
TAX FRAUD: HOW MUCH CASH
IS USED?
Studien\Cash\2017\CrimeTaxFraudCash.ppt
Mai 2017 © Prof. Dr. Friedrich Schneider, University of Linz, Austria
o.Univ.-Prof. Dr. Dr.h.c.mult. Friedrich Schneider
Department of Economics
Johannes Kepler Universität Linz
[email protected], www.econ.jku.at/Schneider
1 of 29
Mai 2017
1. INTRODUCTION
The use of cash is under political pressure. The claim
is:
(1) It stimulates and supports shadow economy,
crime and terrorist activities and
(2) is risky, old fashioned and unnecessary.
In this lecture I concentrate on
(i) a scientific investigation, whether we have
evidence for (1) and
(ii) how much cash is used for criminal activities
today.
Mai 2017 © Prof. Dr. Friedrich Schneider, University of Linz, Austria 2 of 29
OVERVIEW OF THE LECTURE
2. The Legal Use of Cash
3. Cash versus Illegal Activities
3.1 Cash and the Shadow Economy
3.2 Cash and Crime
3.3 Summary of the Findings
4. Conclusions: Cash and Civil Liberties
Mai 2017 © Prof. Dr. Friedrich Schneider, University of Linz, Austria 3of 29
1. INTRODUCTION
1. INTRODUCTION
I have three goals: I want to discuss
(i) the relation between Cash and the Shadow
Economy,
(ii) the relation between Cash and Crime and
(iii) the relation between Cash and Civil Liberty.
Mai 2017 © Prof. Dr. Friedrich Schneider, University of Linz, Austria 4 of 29
2. THE LEGAL USE OF CASH
2008 2014
Purpose User Share of
total EUR bn
Share of
total EUR bn
Domestic
transaction balance
Households,
non-bank
companies
33% 250 30% ↓ 305
Banks‘ vault cash Euro area banks 8% 60 6% ↓ 61
Holdings outside
the EMU
No sectoral
information 20% 150 23% ↑ 230
Domestic cash
hoarding
Households,
non-bank
companies
39% 300 41% ↑ 420
Total value of euro
banknotes in
circulation
All users 100% 763 100% 1017
Source: Mai, H. (2016), p. 4.
Mai 2017 © Prof. Dr. Friedrich Schneider, University of Linz, Austria 5 of 29
Table 2.1: Use of euro banknotes in circulation – estimates in 2008 and
2014
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Figure 2.1: Cash-ratio across 28 European countries; average 2011-20151)
18.0
23.4
25.3
27.0
28.7
33.8
34.2
38.5
41.9
43.9
46.8
48.1
50.5
50.6
65.0
67.8
69.0
69.0
69.3
70.9
73.6
78.0
84.8
86.8
88.8
00 10 20 30 40 50 60 70 80 90 100
Denmark
Sweden
France
United Kingdom
Finland
Netherlands
Portugal
Luxembourg
European Union
Belgium
Euro Area
Ireland
Estonia
Austria
Germany
Hungary
Lithuania
Czech
Poland
Latvia
Slovakia
Croatia
Romania
Bulgaria
Greece
Malta 64.3
Slovenia 57.4
Cyprus 56.0
Italy 53.2
Spain 51.4
Euro Area 48.8
1) The ratio is defined as the ratio between the amount of ATM withdrawals (proxy of cash
use) and the sum of total payments including those through residents’ points of sale (POS).
Source: Piccardi and Levi (2017), who draw on ECB data. Mai 2017 © Prof. Dr. Friedrich Schneider, University of Linz, Austria
3. CASH VERSUS ILLEGAL ACTIVITIES
1) Cash cannot be traced – which makes cash attractive for
transactions related to the shadow economy, bribery, crime,
and finance of terrorism.
2) “Shadow economy” refers to business activities “off the
books” which are legally allowed but not recorded in order
to avoid tax and social security payments, and to avoid
labor market regulations.
3) Hence, classical criminal activities like drug dealing,
trafficking, fraud, counterfeiting of merchandise, etc. are in
most cases not part of a shadow economy.
Mai 2017 © Prof. Dr. Friedrich Schneider, University of Linz, Austria 7 of 29
3.1 Cash and the Shadow Economy
3.1 Cash and the Shadow Economy (cont.)
Source: Own calculations.
Mai 2017 © Prof. Dr. Friedrich Schneider, University of Linz, Austria 8 of 29
Figure 3.1: Share of cash payments versus the size of the shadow
economy (averages over 2013-2014)
AU
AT
BE
BG
CA
HR
CZ
DK
EE
FI
FR DE
HU
IE
IT
JP
LV
LT
LU
MT
NZ
NO
PL
PT
RO
SK
SI CY
ES
SE
CH
TR
US
0
5
10
15
20
25
30
35
0 10 20 30 40 50 60 70 80 90 100
Sh
ad
ow
ec
on
om
y i
n %
of
GD
P
Share of cash in % of total payments
Corr=0,50
GR
1) Germany and Austria are cash-intensive countries with
relatively small shadow economies. In Sweden, cash
payments have become rare but the country still has a
median sized shadow economy.
2) Given these inconclusive findings and in order to fulfill the
ceteris paribus conditions, an econometric investigation is
undertaken: We know, shadow economy is driven by tax
burden, regulation, quality of public institutions, and tax
morale.
But how is it with the use of cash and/or cash limits?
Mai 2017 © Prof. Dr. Friedrich Schneider, University of Linz, Austria 9 of 29
Is cash a reliable indicator of size of shadow economy?
3.1 Cash and the Shadow Economy (cont.)
Mai 2017 © Prof. Dr. Friedrich Schneider, University of Linz, Austria 10 of 29
Source: Own calculations.
3.1 Cash and the Shadow Economy (1st
investigation)
Table 3.1: Simulation results; static ones; no adjustment
procedures are assumed!
Simulations with standardized effects
Decrease Effect
GDP p.c. 10% decrease ↓ Shadow economy increases by
18.4% ↑
Share of
cash
payments
10% decrease ↓
Shadow economy decreases by
2.01% ↓
No cash
payments
Drops to 0! Shadow economy decreases by
20.1% ↓
Cash limit no significant effect
[Introduction of
cash limit]
[ Shadow economy decreases by
1.59 percentage points]
3.1 Cash and the Shadow Economy (3rd
investigation)
N=1.056 interviews, representative for the Austrian population. Source: Market Linz, May 24 to June 9, 2016.
Mai 2017 © Prof. Dr. Friedrich Schneider, University of Linz, Austria 11 of 29
Figure 3.2: “Imagine there would be no cash anymore. What would you have
done in the following situations?”
33%
13% 13%
41%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
I would have alsodemanded the service and
simply paid cashlessly
I would have alsodemanded the service, but
would have paid moreattention to a correct tax
treatment
I would have NOTdemanded the service
I would have agreed onanother anonymous
payment method with theother party like vouchers or
gifts
answers in %, basis: persons who
paid in cash for the services or
craftsman activities because it is
anonymous
3. CASH VERSUS ILLEGAL ACTIVITIES
1) Similarly, the use of cash is often blamed as the main
reason for bribery/corruption and crime activities.
2) In many countries, the simple equation of “much cash,
much bribery” seems to hold true in media stories.
3) In countries such as Switzerland, Germany and Austria, low
levels of perceived public sector corruption and bribery
coincide with a high share of cash in total payments and/or
a low number of cashless payments per person.
Mai 2017 © Prof. Dr. Friedrich Schneider, University of Linz, Austria 12 of 29
3.2 Cash and Crime - Corruption
Source: Own calculations.
Mai 2017 © Prof. Dr. Friedrich Schneider, University of Linz, Austria 13 of 29
Figure 3.3: Share of cash payments as an indicator of corruption
(averages over 2014-2015)
AT BE
CA
HR
CZ
DK
EE
FI
FR
DE
GR
BG
JP
LV
LT
LU
MT
NL
NZ
NO
PL PT
SI
CY ES
SE CH
IT
AU
US
30
40
50
60
70
80
90
100
0 20 40 60 80 100
Tra
ns
pa
ren
cy C
orr
up
tio
n P
erc
ep
tio
n In
de
x (
the
h
igh
er,
th
e le
ss
co
rru
pti
on
)
Share of cash in % of total payments
Corr=-0,72
TR
SK
UK
3.2 Cash and Crime – Corruption (cont.)
Mai 2017 © Prof. Dr. Friedrich Schneider, University of Linz, Austria 14 of 29
Source: Own calculations.
3.2 Cash and Crime – Corruption (cont.)
Table 3.2: Simulation results on TCI Transparency Corruption
Index (the higher the value, the lower corruption)
Standardized effects Simulations
Rule of law +10 percentage
points
Increase of 6.1 percentage points of
the TCI
Less corruption
Economic
freedom
+10 percentage
points
Increase of 5.0 percentage points of
the TCI
Less corruption
Share of cash
payments
-10 percentage
points
Increase of 1.8 percentage points of
the TCI
No cash
payments
Drops to 0! Increase of 18 percentage points of
TCI
Less corruption
Cash limit=1 Not significant!
Figure 3.4: The money laundering procedure: three-stage-model
3.2 CASH AND CRIME – MONEY LAUNDERING
Mai 2017 © Prof. Dr. Friedrich Schneider, University of Linz, Austria
Banks
Restaurants, Casinos,
Taxi corruption
Precious metals dealer
Investment in real estate
Currency exchange office
Concealment of the
illegal origin of assets /
money through complex
financial transactions
Offshore-banking
Underground-banking
Transferring funds
abroad
Fake/shell companies
Fake transactions
Transfer of laundered
money in the
economic cycle
Conversion of cash into
bank money or other
assets Investment in
- Hotel chains
- Casinos
- Supermarkets
- Restaurants
- Companies
- Company investments
by loans
Placement
(mostly cash)
Layering
(little cash)
Integration
(no cash)
1st STAGE 2nd STAGE 3rd STAGE
Source: Bayer (1993, p. 33) and Schneider, Dreer, Riegler (2006, p. 34) and own remarks.
15 of 29
Table 3.3: Methods of money laundering and the use of cash
3.2 CASH AND CRIME – MONEY LAUNDERING (CONT.)
Mai 2017 © Prof. Dr. Friedrich Schneider, University of Linz, Austria
1) Wire transfers
(no cash)
Money launderers move funds around in the banking system all
over the world. Often these funds go through several banks and
different jurisdictions.
2)
Cash deposits
“Smurfing”
(only cash)
Money launderers deposit cash advances in bank accounts. Due to
anti-money-laundering regulations they often ‘structure’ the
payments, i.e. break down large to smaller amounts. ( ‘smurfing’.)
3)
Informal value
transfer systems
(IVTS)
(mostly cash)
Money launderers on the one side rely on other transfer providers,
such as the Hawala or Hindi, and on the other side on IVTS shops
(mainly selling groceries, phone cards or other similar items).
4) Cash smuggling
(only cash)
Money launderers mail, FedEx or simply carry cash from one
region to another.
5) Gambling
(mostly cash)
Casinos, horse-races and lotteries are ways of legalizing funds.
The money launderer can buy (for ‘dirty’ cash) winning tickets – or
in the case of casinos chips – and redeem the tickets or the chips
in a ‘clean’ bank check.
6)
Insurance
policies
(no cash)
Money launderers purchase single premium insurance, redeem
early (and pay a penalty) in order to receive clean checks to
deposit.
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Table 3.4: Methods of money laundering and the use of cash (cont.)
3.2 CASH AND CRIME – MONEY LAUNDERING (CONT.)
7) Securities
(no cash)
Usually used to facilitate fund transfers, where underlying security
deals provide cover (and legitimate looking reason) for transfers.
8)
Business
ownership
(only cash)
Money is laundered through legitimate businesses, cash-intensive
operations, such as restaurants, are especially well suited for
laundering; one of the most often used methods!
9)
Shell
corporations
(little cash)
Money launderers might create “fake” companies exclusively to
provide cover for fund moves without legitimate business
activities; one of the most often used methods!
10) Purchases
(mostly cash)
Real estate or any durable good purchases can be used to launder
monies.
11)
Credit card
advance
payment
(only cash)
Money launderers pay money in advance with dirty money, and
receive clean checks on the balance from the bank
12) ATM operations
(only cash)
Banks might allow other firms to operate their ATMs, i.e. to
maintain and fill them with cash. Money launderers fill ATMs with
dirty cash, and receive clean checks (for the cash withdrawn) from
the bank.
Summary
“no” or little cash: 4 cases
“only” cash: 5 cases
“mostly” cash: 3 cases
Source: Unger (2007, pp. 195-196) and own remarks. 17 of 29 Mai 2017 © Prof. Dr. Friedrich Schneider, University of Linz, Austria
Table 3.5: Cross-border flows of global ‘dirty money’ (including financial
and tax fraud), in trillion USD; cash 10-15% (own calculation for
2010)
3.2. CASH AND CRIME – Money Laundering (cont.)
Mai 2017 © Prof. Dr. Friedrich Schneider, University of Linz, Austria
Source: UNODC (2011, p. 34).
Variable
2000-2005 extrapolated to 2010
low high in % of GDP
2000-2005 low high
mid-
point
Overall amounts
laundered (including financial
and tax fraud)
1.1 1.6 2.9 - 4.3 % 1.9 2.6 2.25
Of which “pure”
traditional
criminal
component (in % of overall)
0.3
(27%)
0.5
(31%) 0.9 - 1.5 %
0.6
(32%)
0.10
(38%)
0.8
(35%)
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Table 3.6: Proceeds of transnational crime and the use of cash (time range
2003-2009)
3.2 CASH AND CRIME
November 2015 © Prof. Dr. Friedrich Schneider, University of Linz, Austria
Source: UNODC (2011, p. 36) and own remarks.
Kind of Crime
(2003-2009)
Billion
USD
In % of total
proceeds Sources
Drugs (cash 80%) 320 50.0 % UNODC, World Drug Report 2005 (data refer to 2003)
Counterfeiting
(cash 30%) 250 39.0 %
OECD, Magnitude of Counterfeiting and Piracy of
Tangible Products, 2009
Human trafficking
(cash 50%) 31.6 5.0 %
P. Belser (ILO), Forced Labor and Human Trafficking:
Estimating the Profits, 2005
Oil (cash 10%) 10.8 2.0 % GFI estimate based on Baker 2005 (quantities) and US
Energy Information Administration (prices: 2003- 2010)
Wildlife (cash 50%) 7.8 – 10.0 1.4 %
GFI estimate based on Francesco Colombo, “Animal
Trafficking – A Cruel Billion-Dollar Business,” Inter
Press Service, September 6, 2003; Coalition Against
Wildlife Trafficking, World Wildlife Fund
Timber (cash 50%) 7.0 1.1 % GFI estimate for 2009 based on Seneca Creek and
Wood Resources International, OECD
Fish (cash 50%) 4.2 - 9.5 1.1% GFI estimate for 2010, based on Norwegian national
advisory group against organized IUU-fishing (FFA)
and United Nations Food and Agriculture Organization
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Figure 3.5: Framework for analyzing the costs of cybercrime
3.2. CASH AND CRIME – Cybercrime
Mai 2017 © Prof. Dr. Friedrich Schneider, University of Linz, Austria
Source: Anderson, et at. (2013, p. 270), and our remarks.
20 of 29
Defense
costs/Infrastructure
costs
Indirect costs Cost to
society
Criminal
revenues,
profits
Direct losses of the
society/Cybercrimes
Table 3.7: Estimations of the cost/proceed components of cybercrime; year 2010-2012
Type of cybercrime (in % of total cost); year 2010-2012 UK
Est. (in bn $)
Global Est.
(in bn $)
Ref.
period
1. Cost of genuine cybercrime (e.g. online banking fraud) in bn $ 0.164
(0.9%)
3.50
(1.6%)
2. Cost of transitional cybercrime (e.g. online payment card fraud)
in bn $
3.07
(6.7%)
44.20
(19.8%) 2010
3.Cost of cybercriminal infrastructure (e.g expenditure on
antivirus) in bn $ 1.24
24.84
(11.9%) 2012
4. Costs of cybercrime against public institutions
4.1 Welfare 1.90 20.00 2011
4.2 Tax fraud 12.00 125.00 2011
4.3 Tax filing fraud -- 5.20 2010
SUM of 4 in bn USD (in % of total costs) 13.90
(75.7%)
150.20
(67.5%) 2011
SUM of 1 – 4 in bn USD (in % of total costs) 18.37
(100%)
222.70
(100%) 2011
In percent of total crime proceeds 1,100bn worldwide (100%) 20.3%
Source: Anderson et al. (2013, pp. 294-295) and own calculations.
3.2. CASH AND CRIME - Cybercrime
Mai 2017 © Prof. Dr. Friedrich Schneider, University of Linz, Austria 21 of 29
1) Political measures limiting the use and circulation of cash
would certainly raise the transaction costs for international
crime, but as the profit margins are very high this would
probably only lead to a moderate decline (5-10%) in
international criminal activities.
2) Moreover, the size of financial and tax fraud is roughly
estimated to be about twice as large as the proceeds from
traditional crime (drugs, human trafficking), and these flows
do not rely as heavily on cash transactions as suggested by
scandals like the Panama Papers.
Mai 2017 © Prof. Dr. Friedrich Schneider, University of Linz, Austria 22 of 29
3.2 Cash and Crime (cont.)
3) Both FATF and Europol studies demonstrate the
importance of cash for money laundering schemes
based on reports by authorities from many
jurisdictions.
4) However, it might well be that that law enforcement
agencies are simply more prepared and successful
in detecting illegal cash movements than illegal
(cashless) financial flows.
Mai 2017 © Prof. Dr. Friedrich Schneider, University of Linz, Austria 23 of 29
3.2 Cash and Crime (cont.)
3. CASH VERSUS ILLEGAL ACTIVITIES
1) Figures on crime proceeds and criminal use of cash are rare and
often contain large errors (double counting problem!).
2) The available evidence suggests that restrictions on cash use
will reduce profits from crime but it will certainly not eliminate
them.
3) Reduction in cash or introduction of a cash limit:
Shadow Economy Reduction between 2.0% and 20% (no cash)
Corruption Reduction between 1.8 and 18.0 percentage
points (no cash!)
Crime Reduction between 5% and 10%
Mai 2017 © Prof. Dr. Friedrich Schneider, University of Linz, Austria 24 of 29
3.3 Summary of the findings
3) Other means of storing and transferring illegally
obtained assets without leaving many traces are
already in use. They include:
the transport of other physical valuables (e.g.
prepaid instruments, precious metals, diamonds),
using false identities and faked firms,
criminal middlemen and shell companies to facilitate
cashless transfers via regulated entities like the
banking system, money transmitters or online
payment service providers.
Mai 2017 © Prof. Dr. Friedrich Schneider, University of Linz, Austria 25 of 29
3.3 Summary of the findings (cont.)
4) Also, funds can be moved through traditional or new,
alternative transfer systems like hawala or private
virtual currency shemes.
5) Finally, technical progress, especially cyber money
(bitcoin), and other electronic means are rapidly
changing our payment habits and hence will be
heavily used by criminals, too.
Mai 2017 © Prof. Dr. Friedrich Schneider, University of Linz, Austria 26 of 29
3.3 Summary of the findings (cont.)
4. CONCLUSIONS: CASH AND CIVIL
LIBERTIES
1) For liberal societies the importance of cash has much
deeper aspects than the “pure” economic ones.
2) Cash reflects a fundamental relation between the
citizen/taxpayer and the state (authority):
Using cash means freedom, independence, and personal
fulfillment of a citizen, who does not want a “state”
intervention.
3) The voices calling for a limitation or abolition of cash argue
that tighter and more comprehensive state control over
individuals’ financial flows and funds will fight effectively
crime, shadow economy and terrorism, but there is only
some empirical evidence!
Mai 2017 © Prof. Dr. Friedrich Schneider, University of Linz, Austria 27 of 29
4. CONCLUSIONS: CASH AND CIVIL
LIBERTIES (CONT.)
4) Anonymous cash makes tax evasion easier, especially
by those who cannot afford to shift their funds abroad.
However, “easy” cash is clearly not the main reason
for tax evasion.
5) As cash is neither the motivation nor reason for crime,
shadow economy or terrorist attacks, its abolition will
not lead to a large welfare gains.
6) In a no-cash regime a country-wide power strike
lasting a few days would lead to a complete break
down of all electronic payment systems with severe
consequences for the economy and civil society.
Mai 2017 © Prof. Dr. Friedrich Schneider, University of Linz, Austria 28 of 29
JOHANNES KEPLER
UNIVERSITÄT LINZ
Altenberger Straße 69
4040 Linz, Österreich
www.jku.at
THANKS FOR
YOUR ATTENTION!