Why Money Launderers Love $100 Bills

The episode explores the paradox of cash circulation, revealing that 85% of the $2.4 trillion in cash consists of $100 bills, despite a decline in cash usage for daily transactions. This high supply of cash exists alongside low demand, raising questions about its role in the economy.

Money laundering is estimated to account for 2 to 5% of global GDP, translating to $2 to $5 trillion laundered annually. This estimate, originating from a late 1990s guesstimate by Michel Candesu, highlights the uncertainty surrounding the scale of criminal activities. Despite efforts to combat money laundering since then, the criminal economy has not diminished, as criminals continue to evade regulatory measures.

The global compliance costs for anti-money laundering legislation reach approximately $200 billion each year, a sum that could address world hunger and provide clean water and sanitation. Criminals prefer concentrated forms of value that are difficult to verify, such as expensive watches, and engage in cash smuggling, with an estimated $25 billion smuggled into Mexico annually. Trade-based money laundering is also significant, involving around a trillion dollars each year.

Chinese money laundering networks have become sophisticated over the past 10 to 15 years, driven by wealthy individuals seeking to move money outside of China, constrained by a $50,000 annual limit. Laundering through casinos has become prevalent, with the Vancouver model illustrating how wealthy individuals exchange large amounts of cash outside casinos.

Carousel fraud, costing Europe about 50 billion euros annually, allows criminal gangs to reclaim VAT that was never paid. The UK has effectively addressed this issue through a coordinated multi-agency approach, while the design of value-added tax in the EU has been implicated in facilitating such fraud.

Central banks have not clarified the discrepancy between the amount of banknotes printed and their actual use as a store of value. The Federal Reserve estimates that about 65% of dollar banknotes are outside the United States, while the European Central Bank suggests that around half of euro banknotes are outside the euro zone. This raises questions about the destination of these large quantities of banknotes.

The average American adult possesses approximately $430 in cash at any given time, yet there are over $7,000 in banknotes for every person in the U.S. Central banks view the system of issuing large denomination bills, such as the $100 bill, as functioning well, despite concerns about its role in facilitating financial crime.

The $100 bill is particularly favored by criminal organizations, including cartels in Colombia and Mexico, due to its liquidity and acceptance. Kenneth Rogoff emphasizes the need for collective action to combat money laundering, suggesting that an international agreement is necessary to eliminate large denomination bills effectively.

The current anti-money laundering system is criticized for being expensive and ineffective, generating excessive paperwork for financial institutions without adequately addressing financial crime. The original intent of suspicious activity reports was to provide real-time intelligence for law enforcement, but this goal is not being met, as law enforcement agencies lack sufficient resources to act on these reports.

There is skepticism about whether countries are willing to tackle money laundering today. While some debate the effectiveness of cryptocurrency in this context, cash remains a predominant tool for criminals. If the U.S. were to eliminate $100 bills, it is predicted that criminals might simply shift to using 200 euro bills instead, indicating the challenges in addressing the underlying issues of money laundering.