Is the end nearing for the 500-euro note, beloved of gangsters, money launderers and tax evaders?

The likelihood that the valuable bill could soon be struck out of the euro family may be rising after Benoît Coeuré, a member of the European Central Bank’s executive board, told French daily Le Parisien that arguments for keeping the €500 bill are becoming “less and less convincing.”

“We are actively considering the question and will take a decision shortly,” he said in the interview. “The competent authorities increasingly suspect that they are being used for illegal purposes, an argument that we can no longer ignore given the importance of the fight against money laundering and terrorist financing.”

The issue of big notes has been discussed for years, and some bankers and economists have called for a ban on the €500 note (worth about $567) in the name of fighting organized crime and terrorism.
It moved back into the spotlight after Peter Sands, a senior fellow at the Harvard Kennedy School, published a paper on the topic earlier this month. The former chief executive of British bank Standard Chartered PLC STAN, +7.55%  argued that ditching notes of that caliber would make it harder for terrorists, money launderers, traffickers and tax cheats to move large sums of money around without detection.

A Colombian woman arriving at Bogotá’s airport was caught last year after having swallowed 64 latex-covered capsules, each containing five $100 bills, according to the Financial Times. And authorities at London’s Heathrow airport caught a smuggler two years ago who had 40 €500 notes in her underwear and intended to fly to Turkey to meet an ISIS sympathizer, the paper said.
“It’s not often that you come across a policy proposal that is simultaneously easy-to-implement, has a powerful positive impact, and very limited downside. Eliminating high denomination notes is one such idea,” Sands said in the paper.

He further called for the abolishment of the U.S. $100 bill.

European finance ministers are also pushing for new measures to fight financing of terrorism and will meet on Friday to discuss the possibility of the ECB dumping its €500 bill. French Finance Minister Michel Sapin said, according to The Wall Street Journal, that in France the note is used “rather to dissimulate than to buy, rather to facilitate dishonest transactions.”
Some countries have already taken such steps. Canada retired its $1,000 note back in 2000 because it was believed to mainly be used in criminal transactions, while Singapore withdrew its $10,000 note in 2014 to combat financial crime.
However, the ECB until now has largely defended its issuance of the €500 notes. In 2012, ECB boss Mario Draghi described the high-denomination euro bank notes as fulfilling “an important role as a store of value and are a last resort for storing assets both within the euro area and abroad.”

The €500 note is the second-highest currency denomination within G-10 countries, just after the 1,000 Swiss franc bill (worth about $1,029). And some eurozone countries cherish cash. According to a Europol report from last year, the Central Bank of Luxembourg issued notes equivalent to 194% of GDP in 2013, sharply higher than the 16% recorded in Germany and 4% in France.

“Cash remains criminals’ instrument of choice to facilitate money laundering, in spite of the rapidly changing face of criminality and the rise of cybercrime,” Europol said. “Although not all use of cash is criminal, all criminals use cash at some stage in the money laundering process,” it added.

While the criminal aspect is seen as a key reason for the ECB to get rid of big bills, there may also be another, more current element to its consideration — negative interest rates. Effectively charging people for keeping money in the bank makes hoarding cash an attractive alternative. Having access to large bills means it’s easier for a citizen to hold cash, compared with stocking up on low-denomination notes.

To get a sense of the volume, Sands provided this example: A million dollars in $20 bills weighs about 110 pounds and would fit into four normal briefcases. But use $100 bills and the same amount would weigh 22 pounds and fit in only one briefcase. Use €500 notes and the equivalent of $1 million could fit into a small bag.

A third benefit is the expected impact on the euro. Athanasios Vamvakidis, a currency strategist at Bank of America Merrill Lynch, noted that ditching the note would dampen demand for the euro as a store of value, helping to weaken the currency.

“We would expect that abolishing a note that represents almost 30% of the total euros in circulation would be negative for the currency, keeping everything else constant,” he said.

Source: Market Watch