Europe Dumps Old Money Before Ringing In the New

[Adam L. Beberg]

Quite facinating really. Wonder if the governments have thought of recording
all these transactions for later prosecution. Think of the infrastructure
improvements or national debts that could be dented with all that dirty
money...

But then if things are 1/10th as bad at this article implies, the european
economies are in a preaty extreme state of messed up.

Now I see why people are so (sometimes violently) opposed to electronic
currency. If 22% of my GDP was in need of laundering, I'd be opposed to it
too. This is what they get for not having a great system of loopholes and
corporate welfare like in the USA, where the rich never pay taxes and do it
quite legally.

- Adam L. "Duncan" Beberg
  http://www.iit.edu/~beberg/
  beberg@mithral.com

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Europe Dumps Old Money Before Ringing In the New

Currency: Tax dodgers rush to spend stashed cash before euro switch.

By RICHARD BOUDREAUX, TIMES STAFF WRITER

MADRID -- Who wouldn't enjoy Alfonso Bermudez's predicament? With $22,000
worth of undeclared cash income this year, the 28-year-old Spanish insurance
broker is hurrying to dispose of it in ways the tax collector might not
notice.

Millions of pesetas must go. Starting with that $2,100 Bulgari watch--the
one his fiancee, Carmen, adores. For Mom, maybe this $1,050 gold necklace
with the onyx pendant. Unless she'd prefer the one with coral on one side
and lapis lazuli on the other, for $2,200.

And after leaving the mall, he'll drop another several thousand dollars as
advance payment for next year's remodeling of his apartment. "Jan. 1 is the
absolute deadline!" he says in mock panic. "The idea is to get to New Year's
with zero." Throughout Europe, tax dodgers like Bermudez are fueling a
spending boom before their long-hidden cash becomes worthless. On Tuesday,
the new common currency, the euro, will become legal tender in 12 countries,
replacing pesetas, marks, francs, lire, schillings, guilders, markkaa,
drachmas, punts and escudos.

People will have two months to trade in their expiring cash. But because
most banks will be required to tell the tax authorities about anyone showing
up with more than roughly $10,000, many of those burdened with wads of money
have opted to splurge on goodies they've always wanted or can easily sell
for euros later.

Real estate, luxury cars, yachts, light aircraft, jewelry, antiques,
paintings and racehorses are favored havens.

Buyers paid record amounts of cash this year at the Duesseldorf Boat Show in
Germany and Madrid's contemporary art fair, ARCO '01. Cash sales are driving
up prices for villas along the Mediterranean. The pharmacist in Cabeza del
Buey, a Spanish farming village of 6,000 people, recently bought a Jaguar.

Irish soccer fans are plunking down cash now for trips to Japan next summer
to cheer their national team in the World Cup.

Christmas and year-end holiday sales are up across the continent, boosting
economies that are otherwise slowing or in recession.

"I've never seen so many people doing home improvements, extra building on
their property," said Dermott Jewell, chief executive of the Consumers Assn.
of Ireland, noting that the building industry there, as elsewhere in Europe,
is "notorious for cash deals" that facilitate tax evasion.

Others who are emptying cash from safe boxes, sock drawers, mattresses,
picture frames, grandfather clocks, holes in the garden and other hide-outs
have chosen to sneak it across borders and into numbered bank accounts, or
to buy dollars or other currencies not being absorbed by the euro.

The sheer volume of cash moving around is a measure of Europe's shadow
economy--a reminder of how far the euro zone, which unites 302 million
consumers and includes four of the world's richest countries, has to go in
enforcing laws against tax fraud and criminal money laundering.

The European Commission has estimated the euro zone's underground
economy--the value of otherwise legal economic activity that is unreported
for tax purposes--to be 7% to 16% of total production. Some economists
tracking the pre-euro spending spree believe that range might be too low.

Since the euro's introduction became a certainty, cash worth $100 billion in
national currencies--18% of the euro zone's money supply--has surfaced from
private stashes at home or returned from circulation abroad, according to
Hans-Werner Sinn, president of the Ifo Institute for Economic Research in
Munich, Germany.

Such cash makes up one-fourth of the money supply in Germany and Spain,
banking officials say. In France, it has been spent at the rate of $400
million a week since September.

Outlaws Are Also Dumping Their Cash

Large-denomination bills that passed from circulation years ago but remain
legal tender--Ireland's red-bordered 50-punt note, Spain's oversized
10,000-peseta bill--are reappearing.

Martin Vaquero, a construction boss, said he was astonished to get a
briefcase full of the old pesetas, "so crisp they looked ironed," for
remodeling the home of a senior government official.

Much of the cash being dumped throughout Europe includes huge sums amassed
by outlaws.

The equivalent of nearly $1 million turned up with a submachine gun in an
abandoned Citroen sedan recently after the driver, believed to be laundering
extortion proceeds for the armed Basque separatist group ETA, or Basque
Homeland and Freedom, fled into the woods from a Spanish Civil Guard
checkpoint.

Police in Limerick, Ireland, report that a local gang of cocaine traffickers
has been offering interest-free loans of up to $2,300 in punts to any
credit-worthy citizen, provided that the money is repaid in euros within
three years.

Some merchants are openly wooing illicit cash in year-end sales that have
ranged from soaring in Ireland to modestly successful in Germany.

"Black money? We'll look after it!" says a tongue-in-cheek come-on posted in
the Saturn chain of electronics goods shops throughout Germany. A Spanish
jeweler's ad observes: "The peseta is disappearing after 187 years, but a
diamond is forever."

The pre-euro splurge is not as beneficial to Europe's economies as it might
appear.

Consumers laying out cash in the waning days of this year will probably
spend less in 2002. That, some economists say, could offset the stimulating
effects of a common currency and weigh on the continent's continuing
slowdown.

Fernando Moraleda, general secretary of Spain's Small Farmers Union, warns
of long-term harm as cash-heavy tax dodgers bid up agricultural land prices,
slowing a trend toward larger, more productive holdings.

More than $5 billion in undeclared cash, he estimates, has flowed into rural
Spain. (One recent sale had to be delayed while a wad of bills that had been
stored in the buyer's freezer thawed out.) Recretativos Franco, a leading
operator of slot machines, has acquired 50,000 head of cattle and the
biggest ranch in Castile-La Mancha province. A scrap metal dealer now owns
the largest beet farm near Valladolid.

"The problem is, their vocation is not food production," Moraleda said.

The Swiss franc, which is not being absorbed by the euro, and the American
dollar may be benefiting more from all the tax dodging than the euro zone's
economies are.

Partly because of anxieties about the euro, billions of German marks have
been changed into dollars, much of it by local mafias in Central Europe and
the Balkans. Hidden cash savings in marks, Austrian schillings and Italian
lire have been filtering across borders into secret Swiss accounts.

Though the effect is disputed, some economists believe that these
transactions have helped weaken the euro.

Italian and German customs inspectors have intensified spot checks at
borders, seizing cash hidden in first-aid kits, spare tires, baby bottles,
sandwiches and hunters' ammunition belts. A woman was caught trying to leave
Germany with 136,000 marks, about $62,000, in her bra.

Travelers leaving Germany are asked to declare any amount of currency
exceeding $13,800; those leaving Italy, anything over $9,200. Undeclared
cash can be confiscated for punitive taxation, and the average seizure in
Italy jumped sixfold this year to $56,000.

German inspectors, whose $375,000 haul in October was triple that of October
2000, dub the Munich-to-Zurich train "the black money express" for all the
Swiss-bound cash found aboard. But they suspect that they're seeing just a
tiny fraction of what gets through.

"If you take the train to Switzerland, make reservations for the family
compartment," the Berlin daily Tageszeitung said in a column offering
"useful hints on how to whitewash your money." Customs inspectors "don't
check this compartment. . . . And take tons of baggage. The more, the
better."

If you'd rather not travel, "get a Swiss life insurance policy in Germany
and pay the whole premium with cash," the column advised. "You need a
minimum of 100,000 marks [about $45,000]. The insurance company will pay
back in euros."

Moving illicit money within the euro zone is easier. There are no customs
controls, and banking secrecy in Austria and Luxembourg blocks cross-border
tax inspection.

Besides, tougher measures against money laundering by terrorists, drug
dealers and other criminals, adopted by European leaders after the Sept. 11
attacks on America, do not take full effect until 2003.

Within national borders, European governments appear more eager to make the
biggest currency change in history go smoothly than to use it as a trap for
the large number of citizens who cheat on taxes.

The Netherlands is an exception. Foreseeing extraordinary movements of
illicit cash, the Finance Ministry last year set up hotlines to field
reports of "suspicious" transactions at banks, exchange houses and casinos,
and to dispatch rapid-reaction teams before the big spenders vanish.

Dutch Tax Collectors Nab 36 Big Spenders

As a result, 36 people have been hauled before Dutch courts to answer
awkward questions about the origins of more than $6 million.

But tax collectors elsewhere are believed to be so lax or so overwhelmed
that economists throughout the continent speak of an undeclared amnesty for
tax evaders--and a secure future for hidden euros.

Greece's tax system is so creaky that most savers confidently put undeclared
drachmas into banks, which will convert them automatically to the new
currency this week.

Italy, trying to draw back billions stashed overseas, is offering a token
levy of 2.5% on savings repatriated by Feb. 28.

"It might be appealing, the idea that you can catch a lot of tax cheats at
once," said Manuel Balmaseda, chief economist for Spain and southern Europe
at the Banco Bilbao Vizcaya Argentaria. "But the percentage of 'black money'
is so big here that if you strangle it, you strangle the whole economy."

Spaniards have more than 30 synonyms for the "underground" portion of their
economy--including submerged, informal, residual and twilight. It is
calculated as 22% of total production, one of the highest in the euro zone.
The figure for the United States is estimated at 10% to 15%.

Many Europeans Have Incentive to Cheat

High taxes and an expensive social welfare system give bosses and workers
here, as in the rest of Europe, incentive to cheat. An estimated 3 million
of Spain's 16 million workers are paid "off the books"--with no paper trail
for tax inspectors but no social security or medical benefits either.

Bermudez, the free-spending broker, says he earns his $31,000 annual salary
in what Spaniards call A-money, which is declared to the tax authorities,
and performance bonuses worth $22,000 in B-money, which is not. Any
entrepreneur who can get away with it uses double accounting--one book for
the tax inspector, one locked up with the B-money.

For Spaniards who work hard for their earnings and even harder to conceal
them, the most anxious query to the Economy Ministry's euro information
hotline is how to convert B-money to euros. Worried callers usually preface
the question: "I have a friend with millions under the mattress . . ."

"People have woken up to the fact that the currency is going to be changed
in a few days, so they're coming in with cash they should not have," said
Melanie Burth, purchasing manager at Madrid's Abaka home decorations shop,
where December sales are better than ever.

"They're recycling B-money, and here it becomes A-money," she said,
emphasizing that her store collects and pays sales tax. "I don't care where
their money comes from. It all goes round on the same big wheel."

*

Times staff writers Marjorie Miller in London and Alissa J. Rubin in Vienna,
and researchers Maria De Cristofaro in Rome, Reane Oppl in Bonn, Petra
Falkenberg and Christian Retzlaff in Berlin, and Achrene Sicakyuz in Paris
contributed to this report.