The Cash Compensation Model

Cash remains an important but controversial payment method. On one hand, the government advises keeping enough cash at home for emergencies; on the other, it points out that cash use can indicate criminal activity. Banks are particularly cautious about cash withdrawals and deposits, especially involving large bills and amounts exceeding €20,000 per year.

About a year ago, a collaboration between banks and the government uncovered the so-called “Cash Compensation Model.” The first conviction related to this model was handed down on November 12, 2024.

How does it work?
Someone has a large amount of cash and wants to keep it off the authorities’ radar. They make cash payments on behalf of a business owner—for example, paying employees in cash. The business owner then receives an invoice for these payments and pays it via bank transfer. This way, the cash (‘cash’) is accounted for as a legitimate business expense (‘compensated’) and converted into bank money.

If the cash is not properly reported for tax purposes or originates from other criminal activities, this is a money laundering method. It’s important for entrepreneurs to be vigilant about this practice.

Banks collaborate with the Dutch Government to combat money laundering

Since at least August 6, 2019, banks have been sharing information with the Public Prosecutor’s Office, police, Financial Intelligence Unit (FIU), and FIOD to protect the integrity of the financial sector. This began as a pilot project called the “Serious Crime Taskforce” with four banks. Since July 21, 2023, six banks (ABN, ING, Rabobank, Volksbank, Aegon, and Triodos) participate under the “Convenant Serious Crime Taskforce.”

Before this Taskforce was established, banks had already been exchanging information with the FIU since 2018 via the “Fintell Alliance,” aiming for more efficient cooperation between the FIU and financial institutions subject to the Anti-Money Laundering Act (Wwft).

The legal basis for these collaborations was long debated. Until March 1, 2025, no formal law regulated this data exchange. After that date, the “Wet gegevensverwerking door samenwerkingsverbanden” (Law on Data Processing by Collaborations) came into force. An earlier proposal to centrally analyze bank transactions was removed from legislation following criticism from the Dutch Data Protection Authority.

Despite the initial legal uncertainties, these public-private partnerships helped identify and describe the Cash Compensation Model. While questions remain about the legal purity of how this money laundering method was uncovered and described, the fact remains that both banks and law enforcement are alert to the use of this model as a red flag for possible money laundering.

Suspicion of money laundering

When a possible method for laundering cash is publicly announced and described with much fanfare, it quickly leads to a “suspicion of money laundering.” This suspicion assumes that the money being laundered has a criminal origin, and it then becomes the suspect’s responsibility to provide an explanation for the legal origin of the funds. This is known as the “six-step plan,” which sometimes effectively reverses the criminal burden of proof that normally lies with the Public Prosecutor’s Office (OM) and places it partly on the suspect. If the suspect fails to provide a credible explanation that the OM can verify, a conviction can follow if the suspicion of money laundering is strong enough.

The Cash Compensation Model fits into a broader growing mistrust of the use of cash. Banks are increasingly scrutinizing cash withdrawals and deposits. In Europe, cash payments over €10,000 will be banned starting in 2027. Many EU countries already have legal limits on cash payments. In the Netherlands, cash payments of €3,000 or more will soon be prohibited. The attention to the Cash Compensation Model is therefore not surprising.

Still, there are sectors where paying with cash is common practice, both in the Netherlands, across the EU, and beyond. Holders of cash will often go to great lengths to use this money. However, as a business owner, engaging with someone using the Cash Compensation Model is strongly discouraged, as it is clearly flagged as suspicious for money laundering. It is practically impossible for a business to prove that the cash is not criminally sourced. Even if you can, it will not help if employees are paid cash knowingly without payroll tax withholding. Paying employees in cash without tax deductions is itself a criminal offense.

Science of involvement in the cash compensation model

In the situations described by the AMLC and the FIU, it is clear that payments are made without withholding payroll taxes (‘off the books’ or ‘under the table’). These situations typically occur in labor-intensive sectors such as construction and parcel delivery, where subcontracting or temporary work is common. A contractor or hirer (such as a parcel delivery company) hires a subcontractor or intermediary who pays their employees in cash, off the books, while being paid via bank transfer based on an invoice—thus being ‘compensated’—by the contractor or hirer.

The question, however, is whether the (main) contractor or the hirer actually knows that payments are being made in cash and off the books. And if they don’t know: should they have known or could they have known?

In domestic situations, a contractor will generally want to avoid such a setup due to the chain liability for payroll tax. For example, if you’re a contractor and you hire a subcontractor, you are also liable for the proper withholding and remittance of Dutch payroll taxes by that subcontractor. If you work with a subcontractor who pays his Dutch tax-liable employees in cash, then in addition to the money laundering risk, you’re also exposed to significant tax risks. You can mitigate this fiscal risk through the use of a so-called G-account, but it is unlikely that an intermediary operating under a ‘Cash Compensation Model’ would be willing to cooperate with such a system. Such intermediaries are more likely to work with foreign workers who are temporarily employed in the Netherlands, as the tax risk is sometimes lower in that case.

The Cash Compensation Model can, of course, be applied more broadly—for example, for the purchase of goods. In those cases, it’s even harder to determine how your supplier paid for their products. After all, in many EU countries, there are already such strict limitations on cash payments that it’s practically impossible to purchase inventory with cash. This means that, in principle, you need to be less concerned about whether your supplier used cash—partially or entirely—to procure their goods.

Ask the right questions

Given the Current Focus on the Cash Compensation Model, Providers Are Likely to Adapt Their Practices

In other words, they will be even less inclined than they are now to reveal whether they pay their employees or business partners partially or fully in cash. For foreign providers, this is already difficult to determine as it is.

The first question any entrepreneur should always ask—even if they are unaware of whether cash payments are involved—is whether a transaction that seems attractive to them can realistically be viable for the counterparty without violating laws or regulations. After all, a counterparty must also be able to pay at least minimum wage to its employees or offer its suppliers a fair price. If that does not seem reasonably possible based on the offer made to you, that in itself is a cause for concern.

In any case, it is always wise to also ask yourself the following questions:

• How well do you know your counterparty and their representatives?
• How long has the company been in existence, and how reputable is it?
• From your business’s perspective, is it logical to engage with this party—and what is the (economic) rationale behind that decision?

It is also important to properly document your answers to these questions if you decide to enter into a business relationship with the party. After all, if you are asked these questions again in six months, a year, or three years, you may no longer remember the reasoning behind your decision at the time. Moreover, from an evidentiary standpoint, it strengthens your position if you can demonstrate that you made a deliberate and well-considered decision at the time.

In conclusion

It is to be expected that both banks and government authorities (the Tax and Customs Administration, Public Prosecution Service, police, and FIOD) will take a critical view of the Cash Compensation Model. After all, their systems can reveal whether a subcontractor, labor provider, or supplier is making electronic payments that match their reported revenue. If that is not the case, they will likely suspect that cash payments are being made.

Buyers doing business with such parties will also come under scrutiny: Did you know about it? Or should you or could you have known?

If you cannot provide an adequate answer to those questions, you risk getting into trouble with your bank, the tax authorities, or even the Public Prosecution Service. Our cases clearly show that the burden of proof placed on you should not be underestimated.

In short: if you receive difficult questions from your bank, the tax authorities, or the police/FIOD—suggesting they suspect you of being involved in or cooperating with a Cash Compensation Model—contact one of our specialists as soon as possible.

This article is translated from Dutch to English with ChatGTP and may not be 100% accurate. Although we try to reproduce the original Dutch text as accurately as possible, no rights can be derived from the content of machine-translated texts.