Is That Real?

Identification and Assessment of the Counterfeiting Threat for U.S. Banknotes

Committee on Technologies to Deter Currency Counterfeiting

Board on Manufacturing and Engineering Design

Division on Engineering and Physical Sciences

NATIONAL RESEARCH COUNCIL OF THE NATIONAL ACADEMIES

THE NATIONAL ACADEMIES PRESS
Washington, D.C.
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Is That Real? Identification and Assessment of the Counterfeiting Threat for U.S. Banknotes Is That Real? Identification and Assessment of the Counterfeiting Threat for U.S. Banknotes Committee on Technologies to Deter Currency Counterfeiting Board on Manufacturing and Engineering Design Division on Engineering and Physical Sciences NATIONAL RESEARCH COUNCIL OF THE NATIONAL ACADEMIES THE NATIONAL ACADEMIES PRESS Washington, D.C. www.nap.edu

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Is That Real? Identification and Assessment of the Counterfeiting Threat for U.S. Banknotes THE NATIONAL ACADEMIES PRESS 500 Fifth Street, N.W. Washington, DC 20001 NOTICE: The project that is the subject of this report was approved by the Governing Board of the National Research Council, whose members are drawn from the councils of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The members of the committee responsible for the report were chosen for their special competences and with regard for appropriate balance. This study was supported by Contract No. TEP-05-0002 between the National Academy of Sciences and the U.S. Department of the Treasury, Bureau of Engraving and Printing. Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the authors and do not necessarily reflect the views of the organizations or agencies that provided support for the project. International Standard Book Number 0-309-10124-7 Available in limited quantities from: Board on Manufacturing and Engineering Design 500 Fifth Street, N.W. Washington, DC 20001 bmed@nas.edu http://www.nationalacademies.edu/bmed Additional copies of this report are available from the National Academies Press, 500 Fifth Street, N.W., Lockbox 285, Washington, DC 20055; (800) 624-6242 or (202) 334-3313 (in the Washington metropolitan area); Internet, http://www.nap.edu. Copyright 2006 by the National Academy of Sciences. All rights reserved. Printed in the United States of America

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Is That Real? Identification and Assessment of the Counterfeiting Threat for U.S. Banknotes THE NATIONAL ACADEMIES Advisers to the Nation on Science, Engineering, and Medicine The National Academy of Sciences is a private, nonprofit, self-perpetuating society of distinguished scholars engaged in scientific and engineering research, dedicated to the furtherance of science and technology and to their use for the general welfare. Upon the authority of the charter granted to it by the Congress in 1863, the Academy has a mandate that requires it to advise the federal government on scientific and technical matters. Dr. Ralph J. Cicerone is president of the National Academy of Sciences. The National Academy of Engineering was established in 1964, under the charter of the National Academy of Sciences, as a parallel organization of outstanding engineers. It is autonomous in its administration and in the selection of its members, sharing with the National Academy of Sciences the responsibility for advising the federal government. The National Academy of Engineering also sponsors engineering programs aimed at meeting national needs, encourages education and research, and recognizes the superior achievements of engineers. Dr. Wm. A. Wulf is president of the National Academy of Engineering. The Institute of Medicine was established in 1970 by the National Academy of Sciences to secure the services of eminent members of appropriate professions in the examination of policy matters pertaining to the health of the public. The Institute acts under the responsibility given to the National Academy of Sciences by its congressional charter to be an adviser to the federal government and, upon its own initiative, to identify issues of medical care, research, and education. Dr. Harvey V. Fineberg is president of the Institute of Medicine. The National Research Council was organized by the National Academy of Sciences in 1916 to associate the broad community of science and technology with the Academy’s purposes of furthering knowledge and advising the federal government. Functioning in accordance with general policies determined by the Academy, the Council has become the principal operating agency of both the National Academy of Sciences and the National Academy of Engineering in providing services to the government, the public, and the scientific and engineering communities. The Council is administered jointly by both Academies and the Institute of Medicine. Dr. Ralph J. Cicerone and Dr. Wm. A. Wulf are chair and vice chair, respectively, of the National Research Council. www.national-academies.org

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Is That Real? Identification and Assessment of the Counterfeiting Threat for U.S. Banknotes COMMITTEE ON TECHNOLOGIES TO DETER CURRENCY COUNTERFEITING ROBERT E. SCHAFRIK, Chair, GE Aviation MARTIN A. CRIMP, Michigan State University CHARLES B. DUKE, Xerox Innovation Group ALAN H. GOLDSTEIN, Alfred University ELIZABETH A. HOLM, Sandia National Laboratories PRADEEP K. KHOSLA, Carnegie Mellon University CAROLYN R. MERCER, NASA Glenn Research Center STEPHEN M. POLLOCK, University of Michigan ARTHUR J. RAGAUSKAS, Georgia Institute of Technology JOHN A. ROGERS, University of Illinois at Urbana-Champaign BARTON RUBENSTEIN, Rubenstein Studios MICHAEL A. SMITH, France Telecom GARY K. STARKWEATHER, Microsoft (retired) DENNIS J. TREVOR, OFS Laboratories Staff TONI MARECHAUX, Study Director (until February 2006) MICHAEL MOLONEY, Senior Program Officer (Study Director from February 2006) MARTA VORNBROCK, Research Associate TERI THOROWGOOD, Administrative Coordinator LAURA TOTH, Senior Project Assistant

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Is That Real? Identification and Assessment of the Counterfeiting Threat for U.S. Banknotes BOARD ON MANUFACTURING AND ENGINEERING DESIGN PAMELA A. DREW, Chair, The Boeing Company CAROL L.J. ADKINS, Sandia National Laboratories GREGORY AUNER, Wayne State University RON BLACKWELL, AFL-CIO THOMAS W. EAGAR, Massachusetts Institute of Technology ROBERT E. FONTANA, JR., Hitachi Global Storage Technologies PAUL B. GERMERAAD, Intellectual Assets, Inc. THOMAS HARTWICK, Adviser, Snohomish, Washington ROBERT M. HATHAWAY, Oshkosh Truck Corporation PRADEEP K. KHOSLA, Carnegie Mellon University JAY LEE, University of Wisconsin, Milwaukee DIANA L. LONG, Consultant, Charleston, West Virginia MANISH MEHTA, National Center for Manufacturing Sciences NABIL Z. NASR, Rochester Institute of Technology ANGELO M. NINIVAGGI, JR., Plexus Corporation JAMES B. O’DWYER, PPG Industries HERSCHEL H. REESE, Dow Corning Corporation H.M. REININGA, Rockwell Collins, Inc. LAWRENCE J. RHOADES, Ex One Corporation JAMES B. RICE, JR., Massachusetts Institute of Technology DENISE F. SWINK, Adviser, Germantown, Maryland ALFONSO VELOSA III, Gartner, Inc. BEVLEE A. WATFORD, Virginia Polytechnic University JACK WHITE, Altarum Staff GARY FISCHMAN, Director

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Is That Real? Identification and Assessment of the Counterfeiting Threat for U.S. Banknotes Preface The U.S. Department of the Treasury, through the Bureau of Engraving and Printing (BEP), manufactures security documents—including banknotes, Treasury securities, identification cards, naturalization certificates, and other special documents—for the United States. One of the key missions of the bureau is the design and printing of U.S. banknotes, also known as Federal Reserve notes (FRNs). The BEP has the fundamental responsibility for producing currency that is easily recognized as U.S. banknotes and is respected around the world. To that end, notes must contain a combination of elements that serve a variety of purposes. These features must allow users to distinguish the denomination of notes and also to authenticate them as real. Therefore, the features of notes must be difficult for counterfeiters to duplicate using the same processes the bureau employs, and also be difficult for counterfeiters to simulate through alternate processes. The features and their arrangement must allow the general public to distinguish counterfeit from genuine notes quickly and consistently. While resistance to counterfeiting is vital, another important aspect of banknotes is that they are a manufactured product used daily by millions of people around the world. Therefore, on each of the billions of notes produced each year, features must be reproduced reliably. Notes must also be durable during normal use and able to survive folding, crumpling, and occasional laundering. Their design should be aesthetically pleasing, and finally, as with any manufactured product, they should be cost-effective to produce. Historically, the BEP has been very attuned to the threat of counterfeiting. Indeed, the bureau was established during the Civil War as a key element in the national strategy to reduce the volume of counterfeit currency flooding the Union. In recent years, the bureau has recognized that modern information technology could lead to entirely new types of counterfeiting threats, and over the past two decades, it has asked the National Research Council (NRC) to carry out several studies to assess and characterize these evolving threats.1 The BEP has since initiated a series of currency design changes aimed at reducing the vulnerability of U.S. banknotes to counterfeiting. In response to a new request from the BEP, the NRC appointed the Committee on Technologies to Deter Currency Counterfeiting. Appendix A presents biosketches of the committee members. The committee is tasked to aid the BEP in identifying and evaluating significant emerging counterfeiting threats against Federal Reserve notes, as well as to assess technologically feasible counterfeit-deterrent 1   The following reports have been issued by the NRC in response to these requests: Advanced Reprographic Systems: Counterfeiting Threat Assessment and Deterrent Measures (1985); Counterfeit Threats and Deterrent Measures (1987); and Counterfeit Deterrent Features for the Next-Generation Currency Design (1993).

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Is That Real? Identification and Assessment of the Counterfeiting Threat for U.S. Banknotes features for potential use in future design changes. The specific objective of this effort is to provide the bureau with up-to-date information on the factors that will allow it to produce designs to enhance the security of notes to the greatest extent possible, taking into account identified current and emerging counterfeiting threats. Specifically the committee is undertaking the tasks specified in the following statement of task: Primary Tasks: Identify technologies, both existing and emerging, that pose the most significant counterfeiting threats to Federal Reserve notes (FRNs). Threats known today include digital methods of producing images, desktop scanners, digital cameras, color printers, digital imaging software, and digital pre-press and printing equipment. The evaluation should include existing emerging threats to FRN features used by the general public to authenticate currency, as well as features used in vending, ATM’s, retail sorters, the gaming industry and other automated currency processing. Identify features, materials, and technologies to deter counterfeiting of FRNs, and assess their relative effectiveness. The study should include the identification, analysis, evaluation, and ranking by effectiveness of technologies that may deter the counterfeiting of FRNs and that could be incorporated into U.S. banknotes in the longer term (more than 5 years). The evaluations of technologies should include the following criteria: Effectiveness in deterring the counterfeiting of FRNs (i.e., difficulty in duplicating or simulating FRNs using existing or emerging commercially available materials and processes); Promoting visual authentication (i.e., technologies that are visually distinctive and obvious to the untrained observer, as well as noticeable, understandable, and easily used by the general public as a method of visually authenticating FRNs in a variety of lighting conditions); Uniqueness and aesthetics (i.e., novel or strikingly different from existing features used to deter counterfeiting of high security documents, and aesthetically pleasing in the design of FRNs). Identify potential costs, including material costs, equipment costs, and the costs of processing banknotes for the Federal Reserve System and third-party users of FRNs, including transportation, storage/handling, and eventual disposal. Feature evaluation should evaluate the implications of implementing proposed materials, technologies, or features on the BEP’s FRN manufacturing operations, including the following: Evaluation of the merits of exploiting the three-dimensional character of a banknote. Development of a new class of deterrents based on compositional changes of the substrate [the surface or material on which printing is done], incorporating new materials in a variety of new innovative ways, or incorporating optical or auditory security elements into the substrate. Evaluation of alternative banknote substrates relative to each other, and the potential of blending various substrates with other substrates—including standard banknote paper to create a hybrid that expands value as a counterfeit deterrent or new security feature. Include substrates already used for banknotes world-wide, as well as potential materials not yet in use, but that may have significant potential benefits. Secondary Task (not required, but to be completed if time and funds allow) Identify, including analysis, evaluation and ranking of the effectiveness of technologies that could be incorporated into FRNs in the long term (more than 5 years) for denominating or authenticating by the blind, for forensic analysis, and for third-party machine denominating or authenticating (e.g., point of sale), including estimated costs of implementation.

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Is That Real? Identification and Assessment of the Counterfeiting Threat for U.S. Banknotes This first report of the study assesses the counterfeiting threats to FRNs resulting from new technology as specified in Task 1 of the committee’s charge. The committee’s second report will take into account these threats while evaluating new banknote features as requested in Tasks 2, 3, and 4. During the course of this study, the committee’s deliberations also highlighted the perhaps greater threat of counterfeiting that may be perpetrated through cybercrimes relating to electronic funds transfer and digital currency. Considering these threats is clearly beyond the scope of this study, but the committee strongly believes that this equally if not more important subject should be examined further in the future. The members of the committee appointed for this study have expertise encompassing a broad range of disciplines and fields, including systems engineering, materials science and engineering, analog and digital imaging and printing, optics, computer software and hardware engineering, decision analysis and operations research, paper science, biomaterials, optical materials, and art. The committee met a total of three times: on May 23-24, 2005, and July 21-22, 2005, in Washington, D.C., and on October 10-11, 2005, in Woods Hole, Massachusetts. The first two meetings included sessions open to the public; the third was devoted to the preparation of the report. The committee is grateful to the following individuals, who presented invited briefings on specific areas relevant to the management, design, and production of banknotes; security features; and machine verification of banknotes: Sara Church of the Bank of Canada, Peter Crean of the Xerox Corporation, John Haslop of De La Rue, Annette Jaffe of Jaffe Consulting, James Jonza of 3M Corporation, and Ely Sachs of the Massachusetts Institute of Technology. The committee is also particularly grateful to the following government personnel who took the time to share their perspectives with the committee: Lenore Clark, Lisa DiNunzio, Larry Felix, Tom Ferguson, Goutam Gupta, Kalyan Maitra, and Robert Stone of the Bureau of Engraving and Printing; Eugenie Foster from the Federal Reserve Board; and Lorelei Pagano of the U.S. Secret Service. Supplementing the committee meetings, a number of site visits were conducted in order for members to gain an appreciation of banknote production, counterfeit detection, and verification equipment. The committee thanks these organizations and companies for making their personnel, facilities, and time available: Bureau of Engraving and Printing, Washington, D.C.; U.S. Secret Service, Washington, D.C.; Crane and Company, Dalton, Massachusetts; and Cummins-Allison Corporation, Mount Prospect, Illinois. The framework used in this study to describe the counterfeiting threat considers four activities: the production, stockpiling, passing, and circulation of counterfeit notes. It also considers five classes of counterfeiters who carry out these activities, each of which employs the four activities differently. The counterfeiters are classified as primitive, hobbyist, petty criminal, professional counterfeiter, and state-sponsored counterfeiter. Both the effectiveness of new features and the implications for new production and security feature technology are highly specific to the counterfeiting activity, the class of counterfeiter, and likely detection mechanisms. This report has been reviewed in draft form by individuals chosen for their diverse perspectives and technical expertise, in accordance with procedures approved by the National Research Council’s Report Review Committee. The purpose of this independent review is to provide candid and critical comments that will assist the institution in making its published report as sound as possible and to ensure that the report meets institutional standards for objectivity, evidence, and responsiveness to the study charge. The review comments and draft manuscript remain confidential to protect the integrity of the deliberative process. We wish to thank the following individuals for their review of this report: Sara E. Church, Bank of Canada; David R. Clarke, University of California, Santa Barbara; Amy Crook, Not Dead Yet Studios;

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Is That Real? Identification and Assessment of the Counterfeiting Threat for U.S. Banknotes Jill Culler, U.S. Patent and Trademark Office; Martin A. Hubbe, North Carolina State University; Ronald S. Indeck, Washington University; Edward H. Kaplan, Yale School of Management; Shayla Key Parker, Lawyers’ Committee for Civil Rights Under Law; Johannes Schaede, KBA-GIORISA; and Mark Willner, 3DTL, Inc. Although the reviewers listed above have provided many constructive comments and suggestions, they were not asked to endorse the conclusions or recommendations, nor did they see the final draft of the report before its release. The review of this report was overseen by Anthony J. DeMaria, Coherent-DEOS, LLC. Appointed by the National Research Council, he was responsible for making certain that an independent examination of this report was carried out in accordance with institutional procedures and that all review comments were carefully considered. Responsibility for the final content of this report rests entirely with the authoring committee and the institution. Finally, the committee acknowledges the support from the staff members of the National Research Council, including Laura Toth, Marta Vornbrock, Teri Thorowgood, Michael Moloney, and Toni Marechaux. Robert E. Schafrik, Chair Committee on Technologies to Deter Currency Counterfeiting

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Is That Real? Identification and Assessment of the Counterfeiting Threat for U.S. Banknotes Contents     SUMMARY   1 1   BACKGROUND AND OVERVIEW   6      The Evolution of Money,   6      The Inevitability of Counterfeiting,   7      The Need for a Systems Approach,   9      The Effectiveness of Features on U.S. Banknotes,   10      Visual and Tactile Effectiveness,   10      Machine Counting and Authentication,   12      Conclusions,   13 2   COUNTERFEITING TECHNOLOGY TRENDS   15      Image Acquisition,   15      Scanners,   15      Artwork Software,   16      Image-Acquisition Implications,   17      Image Processing,   17      Image-Processing Capabilities,   18      Image-Processing Implications,   18      Image Printing,   19      Electrophotography,   20      Ink-Jet Printing,   21      Thermal Printing,   22      Chemical Printing,   23      Image-Printing Implications,   23      Substrates and Additional Elements,   24      Summary of Digital Imaging Trends,   25      Image-Acquisition Technology,   25      Image-Processing Technology,   25      Image-Printing Technology,   25      Emerging Technologies,   27      The Convergence of Printing, Manufacturing, and Biology,   27      Improvised Counterfeiting Devices,   28

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Is That Real? Identification and Assessment of the Counterfeiting Threat for U.S. Banknotes      Conclusions,   29 3   A SYSTEMS APPROACH TO THE COUNTERFEITING THREAT   30      Counterfeiting at Home and Abroad,   30      The Impact of Counterfeiting,   32      Portrait of a Counterfeiter,   33      Primitive,   35      Hobbyist,   36      Petty Criminal,   36      Professional Counterfeiter,   37      State-Sponsored Counterfeiter,   37      A Systems Model for Counterfeiting,   38      Deterring or Preventing Production,   39      Emptying the Stockpile,   41      Disrupting the Passing of Counterfeits,   42      Removing Counterfeits from Circulation,   43      Conclusions,   44     APPENDIXES         A  Biographical Sketches of Committee Members   49     B  Features of Current U.S. Banknotes   54

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Is That Real? Identification and Assessment of the Counterfeiting Threat for U.S. Banknotes Tables, Figures, and Box TABLES 1-1   Banknote Features Used in Commercial Machine Authentication,   13 2-1   Capabilities of Digital Image Capture Devices,   16 2-2   Some Printer Technologies and Capabilities,   20 2-3   Usefulness of Security Features in Deterring Digital Age Counterfeiting,   26 3-1   U.S. Banknote Counterfeiting in Fiscal Year 2005: Production Technology, Class of Counterfeiter, and Amount,   31 3-2   Some Classes of Counterfeiters, Their Methods and Technologies, and Deterrent Features on U.S. Banknotes,   33 3-3   Classes of Banknote Counterfeiters, Their Tools, Location, and Impact,   34 3-4   Methods and Extent of Dissemination of Counterfeit Banknotes, by Class of Counterfeiter,   34 3-5   Digital Technology Access, by Class of Counterfeiter,   34 3-6   Usefulness of Overt and Machine-Readable Security Features in Deterring Counterfeiting, Evaluated by Class of Counterfeiter,   41 B-1   Limitations on Information Age Technologies Employed by Counterfeiters,   58 FIGURES 3-1   Comparison of the percentages of counterfeit notes detected in 2004 and 2005,   35 3-2   A systems model for counterfeiting,   39 B-1   The structure of cellulose,   55 BOX B-1   Papermaking,   55

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