the financial flows of transnational crime and tax … · - company investments by loans placement...

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

mailto:[email protected]

http://www.econ.jku.at/Schneider

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.


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.


Table 2.1: Use of euro banknotes in circulation – estimates in 2008 and

2014

6 of 29

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.


3.1 Cash and the Shadow Economy

3.1 Cash and the Shadow Economy (cont.)

Source: Own calculations.


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?


Is cash a reliable indicator of size of shadow economy?

3.1 Cash and the Shadow Economy (cont.)



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.


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


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.


3.2 Cash and Crime - Corruption



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.)



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


the TCI

Less corruption

Share of cash

payments

-10 percentage

points


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


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.)


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.

16 of 29

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.)


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%)

18 of 29

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

19 of 29

Figure 3.5: Framework for analyzing the costs of cybercrime

3.2. CASH AND CRIME – Cybercrime


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


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.


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.


3.2 Cash and Crime (cont.)


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%


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.


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.


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!


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.


JOHANNES KEPLER

UNIVERSITÄT LINZ

Altenberger Straße 69

4040 Linz, Österreich

www.jku.at

THANKS FOR

YOUR ATTENTION!

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