Half of UK banknotes used to fund shadow economy
The Guardian, September 17, 2015
Bank of England report reveals that only half of notes in circulation are used legitimately, with remainder linked to drug dealing and prostitution.
At least half of all UK banknotes in circulation are being used for purposes such as drug dealing, prostitution and dodgy business deals, or are being held abroad, according to a Bank of England report.
It said that no more than half of banknotes are being used for legitimate purposes, with the rest used to fund the “shadow” economy or held overseas.
The so-called shadow economy encompasses a range of illegal activities, from drug dealing, prostitution, smuggling, fraud and human trafficking, plus legitimate activities that are concealed from the authorities, such as “off-the-books” business deals and cash-in-hand payments for goods and services such as building work where the aim is to escape paying tax.
In an extraordinary admission, the Bank said: “The evidence available indicates that no more than half of Bank of England notes in circulation are likely to be held for use within the domestic economy for legitimate purposes.
“The remainder is likely to be held overseas or for use in the shadow economy. However, given the untraceable nature of cash, it is not possible to determine precisely how much is held in each market.”
The shadow economy is estimated to be around 10% of the UK’s GDP, although it is reckoned to be half the level of Greece and Italy.
The new Bank report follows earlier studies that have suggested that 11% of UK banknotes in general circulation are contaminated with cocaine.
Criminals and tax evaders will often hoard cash, said the Bank, which added that articles in the media reporting on the seizure of large sums during police raids “suggest the values involved may be sizeable”.
But it added that official data suggested that activity in the shadow economy had not seen significant growth over the last few years.
It is not just criminals who are hiding away supplies of cash: the Bank said its research indicated that within the legitimate domestic economy, at least £3bn was being hoarded by UK citizens. “People may choose to save their money in a safety deposit box, or under the mattress, or even buried in the garden, rather than placing it in a bank account,” it added. However, it acknowledged that this may be an underestimate of the true situation.
Figures for how much cash is in circulation per head will also come as a surprise to people used to taking out just £20 or £30 out of a cash machine at a time. The Bank of England said: “There is now the equivalent of around £1,000 in banknotes in circulation for each person in the United Kingdom.”
However, the equivalent figures for the US and Australia are higher, at £2,500 and £1,220 respectively.
Predictions about the death of cash as consumers switch to contactless payments are premature, said the Bank. It said that while cash usage will drop, it will be around for many years to come.
The report added: “Over the next few years, consumers are likely to use cash for a smaller proportion of the payments they make. Even so, given consumer preferences and the wider uses of cash, overall demand is likely to remain resilient. Cash is not likely to die out any time soon.”
Nevertheless, a few countries are seeing dramatic falls in cash usage. The Bank said people in Sweden can now buy almost anything using alternative payment methods, and noted that homeless street vendors there who sell a magazine similar to the Big Issue were able to accept payment via a debit or credit card, while it was common for Swedish children to be paid their pocket money electronically.
In the next few years new banknotes for the £5, £10 and £20 denominations will be launched. The notes will be made of a polymer substrate – a cleaner and more durable material – and will incorporate security features that will strengthen their resilience against the threat of counterfeiting.