So much cash in a cashless society

New Zealanders increasingly think we're moving to a cashless society. So why has the amount of cash held in New Zealand more than trebled in the last 20 years? Lynn Grieveson looks at whether criminals, tradies or abusers of migrant workers are responsible.

Half of New Zealanders think that we won't be using cash in ten years' time, and over two-thirds rarely carry cash now, yet new research shows that the amount of cash in circulation has grown over the past decade, outpacing the growth in GDP.

The Federal Research Bank of San Francisco released research last week into cash use around the world.

After looking at the amount of cash in circulation in 42 economies including New Zealand, the Bank found that in nearly every country the amount of cash being held grew as fast or faster than GDP over the past ten years.

In New Zealand, the amount of cash in circulation rose by 76 percent over the past decade, while GDP only rose by 54 percent - a 21.5 percentage point difference. Over the same period, the average household wage grew only 42 percent.

This increase in cash in circulation gave us a ranking of 27th in the list of 42 countries, which was topped by troubled economies such as Argentina (where the rise in cash in circulation was 769 percent more than the rise in GDP), the Sudan (454.5 percent) the Ukraine (368.2 percent) and Afghanistan (206 percent).

The two outliers in the survey were Norway and Sweden, where cash use is declining.

Why so much cash?

The Bank had some theories for the results, which it conceded "may come as a surprise" given technological innovations in the payments sector and a widely-held view that cash is nearly dead.

In countries in economic and political turmoil it clearly makes sense to have a store of cash. But the Bank suggested that the low interest rates in many countries since the global financial crisis may also be factor, as people worry less about the interest they are losing out on by keeping a stash of cash that could otherwise be in a savings account or investment.

New currency designs, as we have had in New Zealand, can also bump up the amount of cash in circulation.

But it seems unlikely to be a major factor, and the statistics show fewer people carrying cash and ATM use falling. ATM use fell 22 percent in Australia over the past five years, even as the amount of cash in circulation there rose 17.7 percent faster than the rate of GDP growth.

The Reserve Bank's own statistics of "bank notes in the hands of the public" show the value of cash held by the public has risen from around $1.64 billion in 1998 to just over $5.2 billion this year.

However, the number of $1 and $2 coins in the hands of the public has dropped slightly over that time, while the number of large value notes has risen. There are now more than five times the number of $50 notes in the hands of the public, and over four times the number of $100 notes.

In Sweden ... there is a cultural stigma against cash

Yet a Mastercard survey earlier this year found New Zealanders relying less and less on cash.

"Half of New Zealanders don’t think we will be using cash in ten years’ time … and Mastercard expects cash transactions to continue to decrease, with 41 percent of consumers saying they could live without cash and only use emerging payment technologies in just a few years’ time," said Peter Chisnall, Mastercard Country Manager for New Zealand and the Pacific.

"Over two-thirds of New Zealanders have admitted they do not carry cash," he said.

In Norway, only 6 percent use cash on a daily basis, and its central bank is proposing to get rid of the 1,000 kroner note (NZ$178).

And, in discussing the outliers in the survey, the researchers allude to another factor in cash use.

In Sweden, they say, there is a cultural stigma against cash, with many Swedes associating the payment method with crime. This follows decades of government and banking initiatives encouraging digital bank transfers and the use of a local mobile payments app, Swish. Police reports are required for any large cash transactions.

So, if many of us aren't using cash on a daily basis, where is all the money that is in circulation in New Zealand?

Not necessarily criminals

"It does seem counter-intuitive for cash use to be increasing by such amounts, yet more evidence would be needed before necessarily attributing it to the criminal economy," says political scientist and money laundering expert Ron Pol.

For crimes producing cash the money is often never held for long - and many crimes never involve cash, Pol says.

"Criminals often don’t want to hold cash either. Even with crimes that generate large amounts of cash, such as retail drug sales, apart from paying some wages and expenses, cash isn’t very useful until it’s been laundered, and converted into assets like real estate and other investments, and bank accounts.

"Big piles of cash pose a risk, and serve little purpose for serious criminal enterprises."

"Many crimes also don’t generate much or any cash at all. The proceeds of crime from political corruption, tax evasion, fraud and countless other lucrative criminal activities may never involve cash. And that’s just the way criminals prefer."

Pol says companies, real estate and other assets and investments are criminal's real stock in trade for furthering criminal activities, not cash.

Is the cash economy thriving?

But some forms of tax evasion do involve cash and, while people may be using cash less and less for even small everyday transactions, "cash in hand" jobs can see larger amounts changing hands.

When IRD investigators went to his home they found $180,000 in cash

Inland Revenue cautions against assuming that an increase in cash in circulation means there has also been an increase in the cash - or "hidden"- economy. The hidden economy has been around as long as there has been taxation systems, and includes tradesmen doing jobs for cash and not declaring the income, or owners of small businesses such as cafes slipping some of the cash out of the till before doing the books.

Then their problem, as with other criminals, is what to do with the cash that hasn't been declared.

Hutt Valley cash stash

The sums involved are not always small. In April this year, Hutt Valley restauranteur Tao Li was sentenced to 10 months detention for evading tax amounting to $522,644. Li pocketed cash sales, falsified expenses and laundered money through the bank accounts of his father and his chef. When IRD investigators went to his home they found $180,000 in cash.

In August, Auckland restaurant owner Zai Jian Liang was sentenced to jail for evading $787,996 in tax. He and his wife, who ran the Tasty Zone Restaurant in East Tamaki, failed to declare over $1 million in cash sales. They used the cash to pay for everyday expenses as well as overseas trips, while at the same time claiming $30,000 in Working for Families tax credits.

South Auckland builder Rajesh Sami ended up in prison after he paid no tax between 2011 and 2015, while at the same time gambling more than $560,000 at SkyCity Casino.

An IRD spokesman said the department does not attempt to calculate the possible size of the hidden economy. But it has received more funding to address the problem.

Hunting the tradies doing 'cashies'

The IRD spent $6 million in the 2016-17 financial year on "hidden economy" investigations, up from $4.89m the previous year.

This included campaigns targeted at tradespeople throughout 2016 and 2017, which, along with radio and TV ads, involved letters and emails being sent to over 45,000 tradespeople.

The IRD's annual report says that, as a result, income and GST declared by tradespeople increased. After the September-November 2016 campaign, 26 percent of the tradespeople contacted increased their GST calculated by more than 3 percent.

And 77 percent of Auckland tradespeople surveyed earlier this year said that "most businesses like mine declare all their earnings" – up from 52 percent in 2012.

This year IRD inspectors also visited over 200 cafes, restaurants and bakeries in Gisborne (where only half of the businesses were meeting their cash recording obligations) and Rotorua (where 64 percent were properly recording cash sales). It says that, after the visits and follow up letters, all the businesses are now meeting their obligations. It says every new café, restaurant or bakery that starts up in the towns now gets a visit "to help them understand their obligations from the start".

The cash economy and worker exploitation

One of the largest tax evasions involving cash sales was over $1 million undeclared by Khalid Mehmood, the owner of three Auckland and Hamilton restaurants. Mehmood made $2.7 million more in sales than he declared, and also failed to disclose cash wages paid to staff. He was jailed for three years in 2014.

Workers being paid in case is one symptom of what researchers say is increasingly widespread migrant worker exploitation.

worker exploitation was widespread across the horticulture, hospitality and construction industries

Two managers of the Masala Indian restaurant convicted in 2015 had been paying staff (many of whom were Indian or Fijian nationals promised visas in exchange for working at the restaurant) as little as $3 per hour.

An AUT study last year found workers being paid $500 for up to 90-hour weeks, being paid for half the hours they worked, and paying their own salary to "buy" permanent residency.

The researchers said it appeared worker exploitation was widespread across the horticulture, hospitality and construction industries.

As well as being paid well under the minimum wage, migrant workers were receiving no holiday or sick pay. In the so-called "cash for residency" schemes, workers paid cash to their employers, which was then returned to them as their "wage". The researchers said this was so common it was "viewed as 'normal' in some circles".

When cash dies

The eventual death of cash in theory will make life harder for tax evaders and other criminals - but they now have the option of turning to so-called "crypto-currencies" such as Bitcoin, which promise anonymity.

Last week the Reserve Bank published an analytical note on "crypto-currencies" (warning of the money laundering and tax evasion concerns they raise) in which it also mentioned "work is currently under-way to assess the future demand for New Zealand fiat currency and to consider whether it would be feasible for the Reserve Bank to replace the physical currency that currently circulates with a digital alternative."

In the meantime, the value of banknotes in the hands of the public continues to grow, and certainly not just because more of us are heeding advice to keep a stash in hand in case of earthquake or other natural disasters.