Will a Cashless Society Be the End of Financial Crime?

The pandemic has accelerated the transition towards a cashless society as UK retailers have dramatically reduced the acceptance of cash. It is a widely held belief that a cashless society could decrease financial crime and reduce money laundering activity. In this article, we explore whether a cashless society could actually end financial crime or simply drive criminals to use more sophisticated digital methods.

Posted on May 27, 2020
Written by Matt Law

Pandemic accelerates transition towards a cashless society

Retailers have limited the use of cash and made clear their preference of contactless and card payments during the coronavirus pandemic. This follows the World Health Organisation statement in March recommending the move to cashless transactions to help fight the spread of Covid-19.

Contactless has become an increasingly popular payment technology with a 16% increase in 2019, from the previous year, to £80.5 bn. Covid-19 will surely see an even greater increase as the rise in the cap to £45 was implemented to reduce physical contact and queuing.

According to UK Finance, pre Covid-19 only 34% of payments were made in cash with debit cards listed as the most preferred method of payment. We await latest figures to see the impact of Covid-19 but fully anticipate a drive towards a cashless society.

What impact would a cashless society mean?

Not only are cashless transactions faster and more convenient, but there is a wide belief that they could foster lower crime rates. The reason being is there is no money to steal, launder or evade tax because there is a far greater audit trail for digital transactions. Corruption is also curbed with cashless transaction, as the generation of black money is hindered to a far greater extent.

For all the positives of a cashless society you cannot escape the inevitability of increased cyber-crime, privacy issues and data breaches. It would also rely on 100% uptime to ensure there are no technical issues like outages or downtime which would prevent transactions being processed.

Impact on financial crime

Cash is often blamed for illicit money movement, such as bribery, tax evasion, money laundering, counterfeiting, corruption, and the finance of terrorism. Governments around the world have been focused on reducing these crimes, as they pursue the ideal of a cashless society. In the UK it has been estimated that £8bn in tax revenue has been lost due to ‘cash in hand’ payments. A cashless society would make it far easier to prevent this tax evasion – which could be equivalent to 2% on the basic rate of income tax.

The question is, with the recent decrease of cash transactions during the pandemic, has this deterred financial crime?

To think that criminal activity has subsided during the lockdown would be naive. As the past economic crises have shown, money laundering and financial crime actually increase during a recession or periods of increased unemployment. 

In fact, during the 2008 financial crisis, $352bn was effectively laundered by financial institutions and it was this illicit money that actually kept the financial system afloat according to Antonio Maria Costa, head of the UN Office on Drugs and Crime (source).

Another suggestion is that criminals who use cash are likely to continue their operations as normal, but simply stockpile their earnings and wait until normality resumes before banking their gains. However, more sophisticated criminals will take the initiative to use digital payment systems and disguise their transactions as legitimate services, to avoid being caught by the financial institution’s CDD process. 

Increase of Cybercrime fraud in a cashless society

Cases of online fraud have reached staggering numbers in recent years. Fraud, mostly online, was at an all-time high of 3.4m thefts of a total of £193bn in 2017 and continues to rise year on year.

The even higher rise of cyber fraud during the COVID-19 pandemic stems from several factors. The first is the unprecedented volume of users digitally accessing banking services, instead of visiting branches. There will be many people accessing online services for the first time and are unlikely to be aware of security best practices to ensure their personal data isn’t compromised. This puts them at risk of schemes that involve submitting personal information to unauthorized sources. 

Secondly, phishing attacks are on the rise and one of the most common scams. Fraudsters impersonate banks and send emails prompting recipients to enter passwords or other authorization details into fraudulent websites that resemble bank portals. This information falls directly into bad actors’ hands and gives free rein over victims’ accounts.

According to research from credit reference agency TransUnion one in four people have been targeted by cyber criminals during the lockdown in the UK (source). Organisations recently targeted include; EasyJet, the Centre for Disease Control and Prevention (CDC) and World Health Organization (WHO).  

Law enforcement is helpless with only a small proportion of online fraud cases investigated. Behind the inability of law enforcement agencies to contain the problem, lie three factors: the distance between thief and victim which excludes witnesses, the often foreign-based nature of the crimes and the ability of fraudsters to conceal their identity within the network. Online fraud is therefore expected to continue rising dramatically as the prediction of a cashless society draws closer.

Collaborations by Banks to reduce fraud

The International Finance (IFF) trade body has called for greater data sharing between financial institutions and law enforcement, both on a domestic and international level. Banks in the UK have already been asked to share their cybercrime experiences with regulators – allowing greater information flow across the sector in response to new threats.

We can expect further coordination between law enforcement and the private sector in the coming months, as well as greater international cooperation in tackling multi-jurisdictional fraud. We anticipate an accelerated digital-first approach be taken to combat fraud and achieve compliance for the potential of a cashless society.

In summary

The pandemic has acted as an example into how societies will operate without cash. As the world grows increasingly connected, online markets are developing with new funds being made available and dedicated to the security of electronic transactions. However, currently there is no proof that digitally-formatted money would be any easier to track as the speed and complexity of money laundering activity is what currently makes it so difficult to trace.

Understanding the true effects of the pandemic on crime such as money laundering will only be apparent after an extended period of time and analysis. However, what is clear is there has been a dramatic rise in cybercrime and online fraud that businesses will need to be vigilant of since the outbreak of COVID-19.