Cash Payment Restrictions: Slovak Reality

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With the public discussion absent, Slovakia introduced strict cash payment limits. Only 7 member countries offer stricter limits. Yet, the problems of the “age of cash” have not disappeared – and new risks emerged.

March 2012 parliamentary elections, which came after the premature fall of the center-right wing government, gave Slovakia one-party government for the first time in its modern history. The populist center-left SMER party soon started crusade against the flat-tax regime and demolished many pro-business settings in the tax code, labor code and other regulations. The introduction of cash payment restrictions in late November 2012 was barely noticed by the general public in this atmosphere.

The Rules

The law 394/2012 (valid since 1/1/2013) was voted in by 93 MPs (of 142 present in the parliament that day, with 15 votes coming from the opposition parties) introduced rather harsh limits on cash payments, compared to other European countries. Two individuals cannot legally exchange sums larger than 15 000 euro. Typical transaction would be represented by a used vehicle purchase, real estate transfer, or a loan between two individuals. Cash transfers between any other entities are capped at 5 000 euro. This means all transfer business to customer, business to owner, or business to business (in any direction) are required to be performed electronically, if reaching over 5 000 euro.

The overall value of the subject of the transfer is decisive for the law – one cannot chop the transfer into more separate payments to avoid the requirement for electronical payment. This counts not only for the obvious cases (like the transfer of a vehicle), but also for cases like rent payment. If there are 12 monthly rent payments, each valued 1500 euro, it is considered as one 18 000 euro value transaction and these monthly payments have to be conducted electronically. Also cash transfers over the limit conducted abroad and with at least one person domiciled in Slovakia participating and relating to a subject of value located in Slovakia are illegal. The exceptions include physical operation involving cash (transport), currency exchange and also transaction to state (tax or duty payments).

The Reasoning

The law was submitted by the Ministry of Finance. The official reasoning was rather dry. Unlike in some other countries, Slovak government has not been using much of the anti-terrorist rhetoric in those times and the law was prepared as part of the wider governmental Action plan for fight against tax evasion 2012 -2016. The key Ministry arguments:

  • Cash payment restrictions should make tax optimization more difficult by restricting creation of fictional invoices not backed with real cash flows.

  • Better oversight of the tax authorities and easier identification of suspicious activities

  • Easier court ruling in cases of disputed loans

  • Fictional beefing up of the company’s financial statements via rising the cash assets using strawpersons’ cash deposits

Reasons like money laundering, criminal or terrorist activities were briefly mentioned as well, but the tax evasion topic has been dominant. It was a part of a larger array of anti-fraud regulations, including the cash register receipt lottery, or detailed electronic registration of any VAT-related transfer of a business.

Reality Check: The “Age of Cash” Scandal

Tax fraud has been identified as a serious issue in Slovak economy by number of local, but also international institutions. Especially the VAT tax gap has been calculated far over the EU average, with potential bringing around one billion of additional annual revenue to the state coffers (with the tax receipt totaling around 14 billion) if pushed down to the EU average.

Despite certain success in the small scale, the opposition and NGOs repeatedly warned, that without a crackdown on the VAT fraud in the top levels, repression on the bottom level will not bring much revenue and will place a huge burden also on the law-respecting entrepreneurs. This position was underlined in the summer of 2016 when a large potential tax-fraud case surfaced to media. A typical multi-million euro worth VAT carousel (a chain of fictive goods transfers among interconnected shell companies with aim to make VAT-repayment claims on the state) became spicy after it was revealed, that the main protagonist is the prime-minister’s landlord (and the very apartment the Prime Minister resides in was part of the potential carousel) and that the Ministry of Interior stopped the investigation of the potential fraud early on. The center point of this case was a 12 million euro cash transfer (made before the restrictions came into law). The Minister of the Interior, who himself has been accused by journalists of having a personal relation with the chief protagonist of the case, explained the peculiar transfer as “something normal in the age of cash.” Difficult to believe, considering that if paid in 500 euro banknotes (which are difficult to obtain), it would weight 24 kilograms.

With cash restricted, but investigation of such high-profile cases in the cul-de-sac, the overall effect on the alleged tax fraud crusade remains dubious. Cash payment restrictions have not only very limited effect when it comes to the positive claims of their proponents. They have also some openly negative features, which are rarely discussed.

Less Cash, More Risk

INESS has been an ongoing critic of cash payment restrictions and the idea of legally enforced cashless society. We have been arguing that the proposed benefits are not significant, especially when compared to inherent risks of abandoning cash.

The benefits:

Crime fight. Fewer cash transactions correlate with less specific crime indeed. However, as noted by Kalle Kappner and Alexander Fink from IREF this crime involves only specific types – robberies, pickpocketing and similar. Organized crime has often good access to the financial system. And when not, substitutes are quickly found – starting with gold, diamonds, drugs, or Bitcoin and ending up with Amazon vouchers, liquid detergents or ramen noodles.

Terrorist attacks. These are often very cheap, when compared to damage imposed and can be (financially) organized below the radar of authorities.

Fight against shadow economy. While restricting cash can diminish the scope of the shadow economy, this is a repressive step. Shadow economy has to be viewed not only as a way of evading taxes or labor regulations but also as a competitiveness health indicator. A “bigger” shadow economy is usually a symptom of large bureaucratic and regulatory burden. And treating the symptoms can only help to disguise the illness. Shadow economy helps certain excluded groups (the Roma minority in Slovakia, for example) to keep in touch with the economy and plays an important role in their inclusion.

The risks include:

Control over one’s financial life. A number of cases have been reported in Slovakia when an administrative mistake of a debt collector resulted in the locking of bank accounts of third parties, which lead to great financial difficulties for them. No matter your asset value and cash flow, you can be locked out of your normal life in a matter of seconds.

Privacy. Your privacy is controlled by somebody else. In Slovakia, the feeling does not get any better knowing that the “somebody” is the state. Yet, the state is far behind the private sector in IT security. The National Security Authority (NSA), the central government body for protection of classified information, cryptographic services, trust services, and cyber security was easily hacked in 2010 after the attacker randomly discovered the main password to the system was nsa123. Even more troubling is the fact that the Prime Minister was able to produce tax reports of one of the opposition leaders, despite the reports being confidential and the PM having no official authority to access them, not to say to publicly display them. Every electronic payment means showing your ID to the world. Information about your travels, hobbies, tastes can be easily accessed. You have the right not to shop online, or the shopping will be used against you!

Taxes. While cash can be used to avoid taxes, transformation to cashless society can be used to impose more taxes. In a democracy, it is fairly difficult for a politician to raise taxes. Any tax rise costs popularity. A transaction tax is probably the easiest one to sell – because it seems very low. Everybody understands VAT rate rising from 15% to 20%. Will the voters understand the rise from 0.093% transaction tax rate to 0.095% rate may have the same financial impact on their wallets? Some years ago, the complete move of Slovak tax system towards a transaction tax (transaction meaning also debit card payments or transfer between accounts) was proposed by one of the bigger parties.

Intermediary risk. Transactions hand to hand have a long tradition in Slovakia. In such a transaction, the trust has to be built only between the two parties and the change of ownership is immediate. Electronic payments (with the exception of cryptocurrencies) always involve a third party, which has to process the payments. There is always a small, but the existent risk of the intermediary failing in the middle of the transaction and disrupting the business. Or the intermediary can actively interfere with the transaction. A typical example is PayPal. Due to strong buyer protection, PP reverses the payment if a protest by a buyer is raised. Many times legitimate, however, this gave rise to a common scam, when the buyer makes a fraudulent claim and receives money back and keeps the goods.

Security against financial crises. Not only Greek entrepreneurs have learned that cash buffer is a matter of life and death. Slovakia experienced its own banking crisis back in 2001 when the collapse of the Devin bank left many entrepreneurs (not covered by the deposit insurance) penniless. Bank collapses and restrictions to electronic transfer happened too many times in the recent European past to be simply ignored.

Monetary experiments. Everybody heard about the cases of Venezuela, Zimbabwe, or Weimar Republic. Again, we do not have to go into a prophecy of the currency Armageddon. Negative nominal interest rates are reality also in the EU. Currently, these can be imposed only on banks, since these can turn the vast reserves into cash only with a great difficulty. Ordinary depositors and business can protect themselves against negative nominal interest rate by withdrawing the money from bank accounts. With more and more cash restrictions, such a defense will become more difficult. The opinions about the “correct” monetary policy differ significantly even between the ideological wings inside the ECB. How much trust can be put into the monetary policy makers when it comes to your savings?

Cultural traditions. Handling cash, giving it as a gift or offerings is an important part of many cultures. One of the most viral videos of 2016 in Slovakia was a wedding video of a couple from Roma nobility, with the bride covered in EUR 500 banknotes…

The Future

The current government promised to consider further lowering the limits in its 2016-2020 program, published in spring 2016. According to journalists (Pravda, 24.4.2016), the limit may drop to EUR 2,500. No further development on the issue appeared since then. The regulation was cautiously accepted also by the representatives of business associations who have not been lobbying actively against the regulation.

INESS has been one of the few opponents of the regulation. We included the abolition of the cash payment restrictions in our long-term competitiveness program Top20. Also, thanks to our advocacy, the (currently) biggest opposition party included a partial easing of the regulations (rising the EUR 5,000 limit to EUR 15,000) in its 2016 election program.

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