Thursday, February 22, 2018

Sub-Saharan Africa Is Really Poor, Part Two

Transparency International has released its Corruption Perceptions Index 2017.  (Click on link)  The map reveals that Sub-Saharan Africa encompasses the most corrupt countries of any region or continent in the world.

Scroll down to the last country on the list, which is perceived as the most corrupt country in the world.  Twenty of the 37 most corrupt countries are located in Sub-Saharan Africa.  These are the same countries that are the poorest in the world.

Decades of post-independence financial aid, foreign experts, celebrity visits, and scores of university centers on African studies in North America and Western Europe have made little headway in reducing corruption.

Secretary of State Rex Tillerson is scheduled to travel to Africa in March 2018.  It will be interesting to observe his comments and press conferences with heads of states of those countries he visits.  And, what policy changes, if any, he recommends to President Trump.

Wednesday, February 21, 2018

Cash And Carry, Or Who Wants Which Countries’ Paper Money To Conduct Criminal Activity, Launder Money, And Evade Taxes?

An increasing number of monetary authorities and economists around the world are recommending that high denomination banknotes be removed from circulation on the grounds that they underwrite criminal behavior, money laundering, and tax evasion. 

Using the most current data I could find, (1) I recorded the amount of currency in circulation for nine hard-currency countries or zones (save China) that are freely convertible in world markets, (2) converted them into U.S. dollars, for purposes of comparison, at exchange rates of February 18, 2018, and (3) divided each country’s currency by its population to derive the amount of paper money in circulation per capita.

Here are the per capita ­­U.S. dollar values in descending order.

Switzerland        $9,165
Japan                   7,334
Singapore             5,982
United States        4,940
Eurozone              4,173
Australia               2,430
Canada                 1,859
United Kingdom    1,575
China                      654

Below I discuss efforts at withdrawing large denomination notes from circulation in several of the foregoing countries.

Switzerland

Swiss Franc (CHF) 1000 notes constitute 62.3% of the value of Swiss currency in circulation.  Most is held and used outside Switzerland.  CHF200 and CHF100 notes make up another 30.6%.  Although retail  prices in Switzerland are higher than in neighboring countries, small denomination notes of CHF10, CHF20, and CHF50 amount to only 6.9% of Swiss paper money in circulation.

Swiss banknotes are recalled from circulation and cease being legal tender when all the denominations of a new issue are put into circulation.  A statutory period of 20 years after the date of recall allows holders of the previous series to exchange them at full nominal value at the Swiss National Bank (SNB).

The sixth banknote series (the predecessor to the current eighth series) was issued in the 1970s and withdrawn from circulation effective May 1, 2000. These banknotes can still be exchanged for the new series until April 30, 2020. After this date, the banknotes lose their value or, at most, may gain collector's value. The SNB will only recall the notes from the eighth series 20 years after the last denomination of the ninth series has been issued, sometime in the future.  Going forward, in April 2017, in agreement with the SNB, the Federal Council proposed that the exchange period be abolished.

Switzerland has no current plans to remove its CHF1000 banknote from circulation.

Singapore

The largest denomination note in circulation is the Singapore $10,000 (interchangeable with the Brunei $10,000 note), which the Monetary Authority of Singapore (MAS) ceased printing and issuance on October 1, 2014.  The S$10,000 note is being gradually withdrawn from circulation to “reduce the risk of money laundering.”  The notes will likely remain legal tender until they slowly get returned as they are damaged.  Singapore continues to print and issue new S$1000 notes.  The MAS estimates that as much as 80% of Singapore currency, largely its high denomination notes, is held and used offshore, chiefly in Indonesia.

Other Hard Currencies

The US $100 note constitutes 79% of the value of all U.S. currency in circulation.  Few Americans use $100 notes in daily lawful transactions.  Estimates range from 50-80% of $100 banknotes are held and used outside the United States.

The 500, 200, and 100 banknotes constitute 49.2%, with the €50 euro note 41.7%,  of the value of euro notes in circulation.  Despite the fact that US$100 notes are the preferred high denomination note for illicit activities, money laundering, evading taxes, or as a store of value in countries with unstable currencies, the European Central Bank nonetheless decided to cease production and issuance of new 500 euro notes at the end of 2018.  Those remaining in circulation will, for the time being, remain legal tender and retain their value.

Since May 12, 2000, Canada has been withdrawing its C$1000 notes from circulation on the grounds that they were being used for organized crime and money laundering.  As of 2014, C$100 notes were 53% of the value of all notes in circulation and C$50 a modest 16%.  The rest was small denomination notes.

By value, £20 bank notes represent 59.2% of the value of UK currency in circulation. The £50 pound note constitutes 21.3%, which suggests that the highest valued U.K. note is not a criminal’s preferred choice.  (It’s interesting that Scottish banks and the monetary authorities of Gibraltar and Jersey, which are in a currency union with the Bank of England, issue £100 banknotes.  These £100 notes are fully backed by deposits of sterling securities with the Bank of England and can be freely exchanged with its notes, but the amounts in circulation are too small to serve the purposes of money laundering or tax evasion.)

The Reserve Bank of Australia (RBA) reports that 300 million A$100 notes are in circulation (more than three times the number of A$5 notes).  Together with the A$50 note, the two denominations account for 92% of the value of all Australian paper money in circulation.  RBA officials believe that only about a quarter of the A$100 banknotes are in general circulation among the public.  Since few Australians report using or seeing A$100 notes in daily transactions, public officials believe that most are used for money laundering, drug deals, off-the-books payments such as home improvements, or hidden away as a store of wealth from prying eyes.

The Bank of Japan publishes the total value of its bank notes in circulation, but not the separate value of its ¥1000, ¥5000, and ¥10,000 notes, worth respectively a bit under $10, $50, and $100 respectively.  Over 70% of consumer purchases in Japan are transacted in cash.  Japanese are slower to adopt debit cards, credit cards, and other non-cash payments in everyday life.

Finally, China’s largest note, the Chinese Yuan (CNY 100), is worth $!5.77, which makes it unsuitable for large off-the-books transactions.  It may be that Alipay, Tenpay, and other digital payment systems will reduce cash transactions and eliminate the need for new higher denomination notes.

As part of the nuclear agreement with Iran, President Obama transferred $1.5 billion in cash to Iranian officials in the still of night.  Payment consisted of US dollars, euros, and Swiss francs.

Did Obama unwittingly aid Iranian criminal activity and money laundering?