In recent years, an increasing number of EU Member States have introduced restrictions on payments in cash, in order to combat illegal activities (especially terrorist financing and money laundering) as well as tax evasion and the shadow economy in general. These measures fit in the broader AML/CFT framework and are, by those countries that have implemented them, seen as complementary to EU Directives on combating money laundering and terrorist financing (most recently the ‘4th AML Directive’) and the Regulation on physically transporting cash across borders (the ‘Cash Controls Regulation’). Currently no upper limits to cash payments are in place at the EU-wide level. In its Action Plan for strengthening the fight against terrorism financing, the Commission already signalled upper limits to cash restrictions could be further explored as an additional initiative to complement the current European AML/CFT framework (see COM2015(50)).
This initiative would aim at addressing two shortcomings that are identified as arising from the current situation. First of all, diverging national restrictions weaken the effectiveness of national measures, as they can be exploited by displacing illegal activities from a Member State with cash payment restrictions to those with more lenient or no cash payment restrictions. In addition, an initiative would seek to address distortions of competition in the Internal Market that have arisen from the different rules applying to cash payments between Member States, as these may negatively affect certain business sectors in countries with cash payment restrictions, to the benefit of their competitors in neighbouring countries without such restrictions.
This impact assessment first analyses the stated problems arising from the current situation. It first revisits the arguments and evidence for the linkage of cash with illegal activities and tax fraud. It then reviews and analyses the evidence gathered on the displacement of illegal activities from Member States with cash payment restrictions to those without, the so-called ‘forum shopping’. Finally, an assessment is made of the distortionary effects on competition in the Internal Market generated by the divergences between national measures. To this end, the displacement of revenues between cash-intensive businesses in neighbouring countries is analysed econometrically.
The CEPS team working on the study was led by Willem Pieter de Groen and included Matthias Busse and Antonella Zarra. This study was conducted by CEPS in collaboration with Ecorys and commissioned by the Directorate-General for Economic and Financial Affairs of the European Commission. The opinions expressed in this document are the sole responsibility of the authors and do not necessarily represent the official position of the European Commission. The original study is available on the European Commission’s webpage.