Putting a cap on cash

What is a cash-transaction ceiling or cap?

A CASH-transaction ceiling (cap) is the maximum amount of raw cash (coins or bank notes) that persons can use to make a transaction (make a purchase or pay for anything) in a country.

For example, in the European Union (EU), the maximum amount of cash a person can use to make a transaction is €1,500 or roughly J$217,000. In the United States, the maximum amount is US$10,000 and in Switzerland it's approximately US$107,000.

In all these scenarios, any transaction where the maximum amount in exchanges is greater than the above figures, it is illegal and perpetrators are punishable by law. Here in Jamaica, it has been proposed to implement a cash transaction ceiling (cap) of J$1 million, a little under US$10,000.

How does it work?

Any person wishing to carry out transactions with bank notes and/or coins amounting to more than the ceiling, will first have to hand over the cash to a financial institution (bank, credit union or otherwise) in exchange for a cheque or some other non-cash means of payment, and use this to carry out the transaction instead of cash.

It is also illegal to make part payments in cash if the total amount for the final product/service is greater than the cash ceiling. For example, if a product/service costs US$20,000, an individual cannot pay $10,000 this month and $10,000 next month, it is illegal. A person can, however, pay $10,000 in cheque/debit or credit card and the remaining $10,000 in cash.

Why is a cash-transaction ceiling necessary?

Different countries have different reasons to implement cash-transaction ceilings, depending on the nature of their economies and the goal that the government wants to achieve.

For example, in the US and the EU, several transfer payments - wages, salaries, social security payments, pension and other transfer outflows - are non-cash. Some economists in more developed countries also believe that is easier to monitor non-cash transactions rather than cash transactions.

These economies are gradually moving from large cash-based transactions to debit/credit cards or cheques, a situation formally referred to as 'cashlessness'. In these economies, the governments can set a cash ceiling very low since people rarely receive raw cash in the formal economy, unless they directly withdraw it from the bank.

The government in Greece, for example, has proposed to reduce its cash ceiling to €500 in an attempt to reduce tax evasion. The tax ceiling of $10,000 in the US was established to help reduce money laundering and fraud. The cash ceiling in Switzerland is more than 10 times that of the US - US$107,000 - and this too was established to reduce fraud and money laundering.

What is the situation in Jamaica?

A significant portion of our transactions and transfer payments are in cash as our economy is not as developed as First-World countries to facilitate certain level of cashlessness.

In the music industry, for example, payments musicians and artistes receive for dub plates and stage shows are cash-based and these sometimes are more than proposed the ceiling. If a person is supposed to pay bail bond in court, it must be done by cash. Therefore, if this bond is greater than J$1 million, it cannot be done.

Many Jamaicans are also suspicious about the banking system and, in some cases, are reluctant to save with a financial institution, especially after the banking crisis in the 1990s, where some banks failed and closed down with people's hard-earned savings.

Does Jamaica need a cash ceiling?

Yes, every country needs a cash ceiling to prevent money laundering and fraud and to help the government achieve certain objectives. As to the value of the ceiling, whether $1 million is appropriate or not, is open for debate.

One can argue that it is sufficient for a small-island developing state such as Jamaica, or one can argue that because the economy is small and underdeveloped, the Government should not add one more business transaction to our already difficult business climate.

A cash ceiling will mandate everyone to take their money to a financial institution (credit union, banks) which will give these institutions more control over economic activities. With bank fees and charges ever increasing, the imposition of the cash ceiling will definitely increase the cost and time of doing business in a country where it is already extremely difficult to transact business. Don't forget, Jamaica is already performing badly on the world Ease Of Doing Business Index.

Dr André Haughton is a lecturer in the Department of Economics on the Mona campus of the University of the West Indies. Follow him on Twitter @DrAndreHaughton; or email editorial@gleanerjm.com.