https://www.manilatimes.net/2025/12/31/business/top-business/bsp-backs-tougher-aml-enforcement-bank-secrecy-reform-to-curb-corruption/2251132

EFFORTS to curb corruption and financial crimes in the Philippines should focus on tougher enforcement of anti-money laundering rules and reforms to the country’s strict bank secrecy law, rather than on withdrawing high-denomination banknotes, according to a new discussion paper by the Bangko Sentral ng Pilipinas (BSP).

In its December 2025 discussion paper, the central bank argued that demonetization is a “blunt instrument” that imposes high economic and social costs while delivering little benefit in curbing corruption and money laundering.

“Demonetization of high-value denomination currency is not the appropriate policy tool to root out financial crimes and systemic corruption,” it said. “Instead, it is a blunt instrument that inflicts severe collateral damage to legitimate, cash-dependent populations.”

It argued that systemic corruption persists not because of the existence of P1,000 and P500 bills, but due to weak compliance, limited financial intelligence and insufficient penalties for institutions and individuals engaged in rent-seeking and illicit financial activities.

The central bank stressed that corrupt actors are rarely constrained by the form of money they use.

According to the paper, when institutions are weak and the risks of detection and punishment are low, “the rewards for corruption rise,” allowing illicit activity to persist regardless of the availability of high-denomination banknotes.

It added that corrupt officials can easily adapt to demonetization by shifting to other stores of value and laundering channels, including real estate, shell companies, precious metals, gold and cryptocurrencies.

As a result, demonetization may temporarily inconvenience illegal actors but does not stop the flow of illicit funds.

“Corrupt actors can ingeniously adapt by shifting to more sophisticated stores of value such as precious metals, shell companies, real estate, gold and cryptocurrencies,” the paper said.

High costs, heavy disruption

The BSP warned that demonetizing the P1,000 and P500 bills would be extremely costly and disruptive. Withdrawing these denominations would remove more than half of all banknotes in circulation by volume and almost all by value.

The paper estimated that the existing P1,000 and P500 bills represent sunk production costs of about P11.6 billion. Replacing them with smaller denominations could require producing nearly P27 billion of banknotes, with indicative replacement costs reaching roughly P81.0 billion, excluding logistics, distribution and disposal expenses.

Beyond cost, the BSP said demonetization would increase cash-handling burdens for businesses and households, and could create artificial shortages of smaller bills, raising transaction costs across the economy.

Instead of demonetization, the BSP called for a comprehensive reform agenda centered on enforcement and institutional strengthening.

“Addressing systemic corruption in the Philippines requires stronger enforcement of existing anti-money laundering and counterterrorism financing (AML/CTF) safeguards through rigorous compliance, enhanced financial intelligence and strict sanctions against noncompliant institutions,” the paper said.

The BSP also pushed for amendments to Republic Act 1405, or the Bank Secrecy Law, saying that carefully designed reforms — with proper safeguards and technology — would allow authorities to more quickly build prosecutable cases against financial crimes.

In addition, the paper emphasized stricter enforcement of cash transaction regulations, continued upgrades to banknote security features and accelerated adoption of secure digital payments — without forcing cash-dependent sectors out of the system.

“Reducing high-denomination currency alone does not curtail large-value transactions,” the paper said, warning that without credible penalties and strong institutions, demonetization risks becoming symbolic policy rather than an effective reform.

Lessons from global experience

The BSP drew heavily from international experience, pointing out that countries that pursued demonetization as an anti-corruption tool often failed to achieve their objectives.

India’s surprise demonetization in 2016, which withdrew 86 percent of banknotes by value overnight, disrupted economic activity but did not meaningfully reduce black money or corruption, the paper said.

Almost all demonetized currency eventually returned to the banking system, indicating that illicit funds had been successfully laundered or converted.

Similarly, crisis-driven demonetization efforts in Venezuela, Zimbabwe and North Korea worsened economic instability and eroded public trust, while doing little to strengthen governance.

By contrast, successful cases such as Australia, Canada and the European Union involved gradual, well-communicated currency reforms focused on security, efficiency and modernization — not corruption crackdowns.

Using Philippine data, the BSP said there is no evidence that the P1,000 and P500 bills are drivers of corruption or financial crime.

As of end-August 2025, the P1,000 bill accounted for 83 percent of the total value of banknotes in circulation and 41 percent in volume. Together with the P500 bill, the two denominations make up 93 percent of total value and 51 percent of total volume of banknotes in circulation.

Despite this, counterfeiting incidence remains very low. In the first semester of 2025, counterfeit banknotes fell to 5.8 parts per million, down from 8.1 parts per million a year earlier, underscoring the peso’s continued integrity as a payment instrument.

The BSP also pointed out that the purchasing power of the P1,000 bill has significantly eroded over time and is now equivalent to just 63 percent of its 2010 value. Compared with other Southeast Asian economies, the Philippines has one of the lowest real values for its highest denomination banknote.

“There is also no observed correlation between the highest denomination and public perception of effectiveness in combating corruption,” the paper said, citing regional data showing that countries with very high-value banknotes, such as Singapore, rank among the least corrupt globally.