Summary

The deterrence of currency counterfeiting is an important element of U.S. public policy because of the need to maintain confidence in the nation’s currency in the United States and around the world. During the past 20 years, a counterfeiting threat has emerged with the evolution of new reprographic technology and the related emergence of a new class of counterfeiters: nonprofessional, independent individuals with limited, if any, traditional counterfeiting skills. These “casual counterfeiters” took advantage of the increased availability of advanced color copiers and color scanner-computer-printer systems during the mid-1980s. To deter counterfeiting, the Bureau of Engraving and Printing (BEP) of the U.S. Department of the Treasury began adding new features to banknotes and implemented changes in U.S. banknote design to stay a step or two ahead of this threat.

A proactive counterfeit-deterrence strategy, which includes not only continual updating of banknote features but also public education and vigorous law enforcement, has had clear results: U.S. banknotes have one of the lowest counterfeiting rates of any major currency.1 Currently, approximately $720 billion in U.S. banknotes is in worldwide circulation. This amount is increasing by about 6.5 percent per year.2 The rate of counterfeiting of U.S. banknotes is estimated at 5 counterfeits per million notes circulating in 2002. The number of counterfeit $100 notes is estimated at 30 counterfeits per million.3

In response to a request from the BEP to the National Research Council (NRC), this report identifies technologies, both existing and emerging, that pose the most significant counterfeiting threats to U.S. banknotes, also known as Federal Reserve notes (FRNs). A second report from the NRC’s Committee on Technologies to Deter Currency Counterfeiting will identify future possible banknote features, materials, and technologies that could be employed to deter counterfeiting in future versions of FRNs while remaining cognizant of the threats described in this first report.

CURRENT CURRENCY FEATURES

Security features that maintain the “look and feel” of historical U.S. banknotes are key elements of today’s Federal Reserve notes. These features are described in Appendix B of the report. New features—

1  

R. Judson and R. Porter. 2003. Estimating the Worldwide Volume of Counterfeit U.S. Currency: Data and Extrapolation. Report by the Federal Division of Monetary Affairs. Washington, D.C.: Board of Governors of the Federal Reserve System. The paper has two main conclusions: first, the stock of counterfeits in the world as a whole is likely on the order of 1 or fewer per 10,000 in both piece and value terms; second, losses to the U.S. public from the most commonly used note, the $20 note, are relatively small, and are minuscule when only counterfeit notes of reasonable quality are considered.

2  

E. Foster, Federal Reserve Board. 2005. Presentation to this committee, May 24.

3  

J. Haslop, De La Rue. 2005. Presentation to this committee, July 21.



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Is That Real? Identification and Assessment of the Counterfeiting Threat for U.S. Banknotes Summary The deterrence of currency counterfeiting is an important element of U.S. public policy because of the need to maintain confidence in the nation’s currency in the United States and around the world. During the past 20 years, a counterfeiting threat has emerged with the evolution of new reprographic technology and the related emergence of a new class of counterfeiters: nonprofessional, independent individuals with limited, if any, traditional counterfeiting skills. These “casual counterfeiters” took advantage of the increased availability of advanced color copiers and color scanner-computer-printer systems during the mid-1980s. To deter counterfeiting, the Bureau of Engraving and Printing (BEP) of the U.S. Department of the Treasury began adding new features to banknotes and implemented changes in U.S. banknote design to stay a step or two ahead of this threat. A proactive counterfeit-deterrence strategy, which includes not only continual updating of banknote features but also public education and vigorous law enforcement, has had clear results: U.S. banknotes have one of the lowest counterfeiting rates of any major currency.1 Currently, approximately $720 billion in U.S. banknotes is in worldwide circulation. This amount is increasing by about 6.5 percent per year.2 The rate of counterfeiting of U.S. banknotes is estimated at 5 counterfeits per million notes circulating in 2002. The number of counterfeit $100 notes is estimated at 30 counterfeits per million.3 In response to a request from the BEP to the National Research Council (NRC), this report identifies technologies, both existing and emerging, that pose the most significant counterfeiting threats to U.S. banknotes, also known as Federal Reserve notes (FRNs). A second report from the NRC’s Committee on Technologies to Deter Currency Counterfeiting will identify future possible banknote features, materials, and technologies that could be employed to deter counterfeiting in future versions of FRNs while remaining cognizant of the threats described in this first report. CURRENT CURRENCY FEATURES Security features that maintain the “look and feel” of historical U.S. banknotes are key elements of today’s Federal Reserve notes. These features are described in Appendix B of the report. New features— 1   R. Judson and R. Porter. 2003. Estimating the Worldwide Volume of Counterfeit U.S. Currency: Data and Extrapolation. Report by the Federal Division of Monetary Affairs. Washington, D.C.: Board of Governors of the Federal Reserve System. The paper has two main conclusions: first, the stock of counterfeits in the world as a whole is likely on the order of 1 or fewer per 10,000 in both piece and value terms; second, losses to the U.S. public from the most commonly used note, the $20 note, are relatively small, and are minuscule when only counterfeit notes of reasonable quality are considered. 2   E. Foster, Federal Reserve Board. 2005. Presentation to this committee, May 24. 3   J. Haslop, De La Rue. 2005. Presentation to this committee, July 21.

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Is That Real? Identification and Assessment of the Counterfeiting Threat for U.S. Banknotes including security strips, watermarks, embedded fibers, color-shifting ink, and microprinting, fine-line printing, and color printing—provide means for counterfeit deterrence and authentication as well as presenting difficulties for nonauthorized sources attempting to replicate the notes. The security features in current use are highly durable, low cost, odorless, and environmentally sound. Many of the features are detectable by the unaided eye. The unique look and feel of the substrate itself is an important part of the FRN’s recognizability. Machine readers for currency mostly make use of FRN features that are different from those used by human cash handlers. The use of machine readers is increasing worldwide, and because the machine-readable features of currency sometimes change as currency design evolves, the design of these machines must be changed with each currency design change. It is possible that this kind of evolutionary cycle might provide a window of opportunity for astute counterfeiters. Additionally, the orientation of features may not necessarily work optimally with high-speed machine feeders, which can limit the machine’s functionality, or in accommodating the visually impaired. CLASSIFICATION OF COUNTERFEITERS AND A SYSTEMS APPROACH TO THE COUNTERFEITING THREAT While carrying out this study the committee found it helpful to classify counterfeiters into five categories: Primitive counterfeiters—who do not use digital technology, but create counterfeits using little more than manual artistry to modify a piece of currency in order to increase its value and obtain financial gain; Hobbyists—who counterfeit occasionally and use typical desktop computer equipment and available crafting supplies, sometimes in creative ways; Petty criminals—who counterfeit in a dedicated manner and actively invest in specialized computer equipment and materials; Professional counterfeiters—who focus the efforts of a large group of people on the sophisticated production and distribution of counterfeits; and State-sponsored counterfeiters—who may use the very same high-precision equipment that the government uses to manufacture notes. Looking at the counterfeiting threat as a system may reveal approaches or combinations of approaches that may be more effective than focusing only on one step in the process. For example, while much attention may be given to preventing the production of a counterfeit note, attention can also be paid to preventing its casual circulation. Although U.S. currency has a low rate of counterfeiting, it is in the national interest to remain vigilant about preserving the actual and perceived security of U.S. currency. Today, domestic counterfeiting—dominated by the first four classes of counterfeiters—focuses on the $20 note and is primarily a for-profit enterprise. Foreign counterfeiting—primarily primitive, professional, and state-sponsored—currently centers on the $100 note and may be engaged in to generate revenue as well as to support other illegal activities. It is possible, however, that several trends, including the following, will affect this balance: Lower-cost, higher-performance image-printing equipment; Improved global purchasing access—which could allow counterfeiters to find and purchase specialized materials or surplus printing machinery more easily; and Improved communication that facilitates information sharing among counterfeiters—which may include access to expertly processed image files, leads on sources for specialty raw

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Is That Real? Identification and Assessment of the Counterfeiting Threat for U.S. Banknotes materials, ideas for ways to simulate features, and connections to a distribution network for counterfeit products. These trends enable a professional counterfeiter to expand operations dramatically with minimal cost; they may also allow a petty criminal to enter the realm of the professional without previous connections to the underworld. For example, wide distribution of counterfeit notes may be possible through communication within an Internet-based community. The counterfeiting threat may be described by a systems model with four components. Counterfeit notes flow down the system from production through stockpiling to passing and circulation. Counterfeit deterrence focuses on disrupting or preventing each of these components. Thus, a comprehensive response to counterfeiting must include ways to do the following: Prevent or deter production, through the use of technology blockers and note features that are difficult to simulate; Empty counterfeit stockpiles, through law enforcement programs; Disrupt passing of counterfeit currency, by means of public education and machine authentication of currency; and Remove counterfeits from continued circulation, through the identification of counterfeit currency by individuals and by special methods within the banking system. Banknote features are important elements of counterfeiting deterrence at each stage of this system. Because each class of counterfeiter engages in the four components differently, the impact of different deterrence efforts will vary among the counterfeiting classes; however, each effort fulfills an important role in preserving the security of U.S. currency. COUNTERFEITING TECHNOLOGY TRENDS A number of features for digital imaging tools expected to be introduced in the next 5 years would allow the casual counterfeiter to achieve what only a specialist can do today. Image-Acquisition Technology Digital images that appear on FRNs can be acquired using art software, digital cameras (including cell phone cameras), and a variety of digital scanning equipment. Current technology encompasses a variety of devices offering very cost-effective capture of images with adequate quality. In the future, improvements in consumer-grade scanners are possible, but they will not overcome the limitations on counterfeiting presented by substrate quality and the printing processes used to produce FRNs. Expected significant improvements in digital photography will enable the ordinary user to obtain results of the quality that professional counterfeiters can produce today. Image-Processing Technology Digital image processing of FRN images can be done using a wide variety of software tools, ranging in cost from free to inexpensive to very expensive. Current capabilities with such software are highly dependent on the skill of the user. In the future, substantial improvements in automation are expected to help the ordinary user process images like an expert. These improvements may include automatic contrast and brightness enhancement, optimal unsharp masking, and color balancing, and they could extend to many other areas. Significant increases in processing speed and automation capabilities may enable a user with little or no training to optimize images with high bit depth. Automated capabilities such as line-width

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Is That Real? Identification and Assessment of the Counterfeiting Threat for U.S. Banknotes control, uniform image appearance, and color balance would enable an ordinary user to easily obtain an optical image that is very faithful to the original. Image-Printing Technology The capability needed to print captured and processed images is the limiting step in the counterfeiting process at the present time. Current printers for home use, primarily thermal ink-jet printers, offer very-low-cost image printing. Other types of ink-jet printers and electrophotographic printer technologies produce counterfeits that can be passed, even though no counterfeits produced with such equipment are currently able to withstand minimal scrutiny by a trained money handler. Thermal printing and digital photography are available but are not specifically useful for printing counterfeit notes; however, they are useful for simulating specific features. In the future, the capabilities of electrophotographic printers will continue to advance in terms of image quality, image maintenance, and color quality. While fine lines and small details may be possible to reproduce through the use of smaller toner particles than are available today, the introduction of particles smaller than 4 to 5 micrometers is unlikely because of environmental and performance factors. A more useful improvement in electrographic printers for counterfeiters would be an improvement in gray-scale printing. Having even four levels of gray compared with the option for on-or-off imaging of most current products could provide significant advantages in image appearance. Ink-jet printers will continue to improve, but it is unlikely that droplet volumes will fall appreciably below 1 picoliter. Improvement in the number and design of ink nozzles is also expected to increase the print speed, but more importantly, would also allow for the use of inks with the same color but differing density, thus improving both color and gray-scale image printing. Variable droplet size and placement, combined with new ink formulations and innovative curing cycles, may also help impart texture to the note or could enable printing of optically variable features. An important class of printers consists of copiers, or devices that only scan and print an image. This class includes commercial copiers, but also stand-alone multifunction devices that may act as printers, scanners, and fax machines on the home desktop. When these are used only to scan and copy, they may bypass the image-acquisition and processing steps. IMPLICATIONS OF DIGITAL IMAGING TRENDS A range of excellent, reliable, and cost-effective digital printers for consumer use are available today at very affordable prices. Innovation and skilled engineering have resulted in this progress, and while innovation will continue, some physical limits may dominate the possible improvements in image quality. Image-capture, processing, and reproduction technologies, both current and predicted, pose a significant threat to the security of Federal Reserve notes—particularly because the security of FRNs depends on the casual viewing of two-dimensional printed features in reflected light. Emerging technologies are targeted at dramatic improvements in desktop capabilities. These improvements will continue to limit the ability of any two-dimensional printed image to deter widespread counterfeiting successfully. The committee concludes that images involving other classes of features—images viewed in transmitted light, light-reflecting features, or other complex optical features—offer a substantial challenge to primitive and hobbyist counterfeiters and a costly barrier to petty and professional criminal counterfeiters. An obvious consideration for the future is the goal of incorporating in image-processing software the ability to disable in all digital tools the processing of image patterns that are unique to currency. Because digital printing devices depend on software, the potential to disable the devices to keep them from reproducing these identified patterns is also a pertinent issue. Whereas simple copy protection may deter an opportunistic counterfeiter, the growing availability of online “hacks” means that a criminal with intent will not be deterred. A more sophisticated approach would be to add features to banknotes that

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Is That Real? Identification and Assessment of the Counterfeiting Threat for U.S. Banknotes intentionally frustrate image-capture capabilities or that generate unwanted patterns when scanned and processed images are printed. Some successful features on currency today are optical features that cannot be directly captured by present-day input scanners but can be seen by the human eye. CONCLUSIONS The advent of new materials and fabrication technologies and image-analysis tools, and especially the existence of the Internet—which allows communication of the results of the use of these technologies and tools—have changed the world of secure documents. To keep ahead of counterfeiters, continuous assessment is needed of the development of technologies and of the viability of various deterrents in practice. The greatest threat from counterfeiting in the future will arise from the growth in low-cost, high-performance image-printing equipment. This equipment is used today primarily by hobbyists, the most casual of counterfeiters. As the cost of imaging equipment goes down and print quality goes up, the use of this type of equipment by hobbyists will expand. The same equipment will enable expanded operations by petty criminals, and it may make counterfeiting more lucrative for professionals as well. The trend means that the protection against counterfeiting afforded by a two-dimensional printed image casually viewed in reflected light is highly diminished. The second most pressing threat related to counterfeiting in the future—and the more insidious one—involves what can be done as a result of improved communication available via the Internet. Counterfeiters today can easily search online for raw materials and surplus high-quality printing equipment. This search capability, coupled with the ability to purchase these materials and equipment from global sources via the Internet, accounts for an important and growing threat. Information itself is also a precious commodity for the counterfeiter. The information shared across the globe today may include ideas for simulating currency features, novel concepts for combining processes to create a better counterfeit, or expertly processed image files. Successful information sharing may also create new distribution networks for counterfeits. Such network-coordinated distribution would require law enforcement to be at least equally well networked in order to discover and stop it. The committee concludes that reliance on the current printed image used on U.S. banknotes is not sufficient. New digital technologies combine to create the opportunity for rapid growth in counterfeiting. However, the underlying reasons why people choose to counterfeit are more difficult to understand.4 Economic drivers, the effectiveness of laws and their enforcement, and ethical motives all play a role. All of these threats—technological, legal, and cultural—will provide an ongoing challenge to the entire monetary system. 4   M. Naim. 2005. Illicit. New York: Doubleday. The author expressed his opinion this way: “Most of all, I was baffled by how an inherently economic phenomenon was customarily treated with moral denunciations and law enforcement remedies.” P. 10.