January 2000 Contents Preface ...................................................................................................... vii Executive Summary .................................................................................. ix Findings Regarding Currency Abroad ....................................................................... ix The Introduction of the 1996-Series New Currency Design (NCD).............................x Findings Regarding Counterfeiting..............................................................................x Innovations to Combat Counterfeiting...................................................................... xii Conclusions and Recommendations.......................................................................... xii 1 Introduction........................................................................................... 1 1.1 Design of the Audit Plan ...................................................................................1 1.2 International Demand for the U.S. Dollar..........................................................3 1.3 The Difficulty of Measuring the Extent of International Counterfeiting............5 1.4 Organization of the Remainder of the Report ....................................................5 2 The New Currency Design: Introduction, Distribution, and Results. 6 2.1 Overview: Goals, Programs, and Results...........................................................6 2.2 Introducing the New Currency Design ..............................................................7 2.2.1 Potential Problems....................................................................................8 2.2.2 Objectives.................................................................................................8 2.2.3 Communications Media............................................................................9 2.2.4 Target Audiences....................................................................................10 2.2.4.1 Domestic Audiences..................................................................10 2.2.4.2 International Audiences.............................................................10 2.2.5 Campaign Effectiveness........................................................................12 2.3 Perception of the New Currency Design..........................................................13 3 Country Surveys of Currency Usage: The ICAP Trips .................... 14 3.1 Background for the Currency Surveys.............................................................14 3.2 Criteria for Country Selection..........................................................................15 3.3 Use of U.S. Dollars Abroad: Patterns ..............................................................16 3.3.1 Argentina ..............................................................................................19 3.3.2 The Former Soviet Union......................................................................21 3.3.3 Other Areas ...........................................................................................22 3.3.4 Remaining Geographic Uncertainties Regarding Currency Location....24 3.4 Judging the Plausibility of Overseas Dollar Holdings from Country Surveys..25 3.5 Changing Conditions in Countries Surveyed ...................................................27 3.5.1 Transaction Technologies......................................................................27 3.5.2 Euro Banknote Introduction ..................................................................28 4 Models of Overseas Currency Demand and Usage ........................... 29 4.1 Data Sources....................................................................................................29 4.1.1 Major Wholesale Dealers of Banknotes ................................................29 4.1.2 Federal Reserve Cash Processing Data..................................................30 4.1.3 Currency and Monetary Instrument Reports (CMIRs)...........................30 iii 4.1.4 ICAP Trips and Other Institutional Information....................................32 4.2 Methods for Measuring Flows and Stocks of U.S. Currency Abroad ..............33 4.2.1 The Seasonal Method............................................................................33 4.2.2 The Biometric Method ..........................................................................34 4.2.3 Wholesale Demand for Currency ..........................................................36 4.2.4 Summary: Reconciling the Estimates from the Various Methods .........41 5 The International Distribution of U.S. Banknotes ............................ 42 5.1 International U.S. Banknote Market Structure.................................................42 5.2 The Extended Custodial Inventory (ECI) Program..........................................44 5.2.1 The ECI Pilot Program..........................................................................44 5.2.2 The Current ECI Program .....................................................................46 5.2.3 ECI Accomplishments...........................................................................47 6 Global Counterfeiting ......................................................................... 49 6.1 General Considerations....................................................................................49 6.2 Counterfeit Production Methods......................................................................51 6.3 Recent Experience with Counterfeiting ...........................................................52 6.3.1 Rates of Counterfeiting in Federal Reserve Statistics............................52 6.3.2 Counterfeiting Outside the United States ..............................................53 6.4 Counterfeiting in Key Countries and Regions .................................................58 6.4.1 Colombia...............................................................................................58 6.4.2 South Africa ..........................................................................................60 6.4.3 Italy.......................................................................................................60 6.4.4 Germany................................................................................................61 6.4.5 Russia....................................................................................................61 6.4.6 Vietnam.................................................................................................61 6.4.7 Middle East ...........................................................................................62 6.5 The Changing Nature of the Counterfeiting Threat .........................................62 7 Global Estimates of Counterfeiting.................................................... 65 7.1 Theoretical Work.............................................................................................66 7.2 Data Sources....................................................................................................67 7.2.1 Secret Service Data ...............................................................................67 7.2.2 Federal Reserve Data ............................................................................68 7.3 Estimating the Total Quantity of Counterfeits in Circulation Worldwide........69 7.3.1 Estimating the Minimum Stock of $100 Counterfeits in Circulation.....70 7.3.2 Using Federal Reserve and Secret Service Data to Estimate the Total Stock of $100 Counterfeits in Circulation .............................................72 7.3.3 Extrapolating from $100 Counterfeits to All Counterfeits.....................73 7.4 The Next Step: How Unrepresentative Are Our Data? ....................................73 7.4.1 Hoarding: Some Empirical Evidence from the Team’s Travels.............73 7.4.2 Pools of Undetected Counterfeits..........................................................74 7.4.3 Comparing the Country Distribution of Counterfeit Notes....................75 7.4.3.1Comparing the Counterfeiting Data............................................75 7.4.3.2Testing the Location of Counterfeits with Dollar Estimates in Various Parts of the World....................................................78 iv 7.5 Conclusion.......................................................................................................79 8 Summary and Conclusions................................................................. 80 8.1 Overseas Currency Holdings ...........................................................................80 8.2 Overseas Counterfeiting ..................................................................................81 8.3 Currency Distribution and Education Campaign .............................................82 8.4 Conclusions and Recommendations ................................................................83 Appendix A................................................................................................ 85 Methods for Estimating the Stock of U.S. Currency Held Abroad....... 85 A.1.1 The Seasonal Method ......................................................................................85 A.1.1.1 Seasonality in Currency Holdings and in Banking Shipments ............86 A.1.1.2 Canada as the Benchmark for U.S. Domestic Behavior ......................86 A.1.1.3 The Seasonal Variation Technique......................................................88 A.1.2 The Biometric Method .....................................................................................90