As an increasing number of banknotes are now being sorted outside the central banks, locally or in industrial sorting centres, efficient detection of forged banknotes by private operators has become very important. Today, over 95% of forged Euro banknotes are being detected by these professional cash handlers. In this article, Yves Timmermans describes the risks of the shift towards banknote sorting by private operators, as well as the possible responses to these risks. It is a summary of Timmermans’ contribution to the Intergraf Security Printers Conference, held in Vienna, Austria, in December 2013.
Every central bank’s ultimate dream is for the intrinsic quality of its banknotes, combined with communication and training actions, to enable all those who receive payment in cash to detect forged banknotes and to prevent them from being used. Despite new banknote series, communication campaigns and training modules, there is still a long way to go in order to attain this ideal situation. This is why efficient detection of forged banknotes by professional cash handlers is so important; it prevents the notes from getting back into circulation via ATMs, vending machines or through withdrawals at bank counters.
The Eurosystem has made a lot of progress in this direction: since the single currency was launched a growing proportion of forged banknotes (over 95% today) are being detected by private operators, either by industrial sorting centres, or – even better – by locally installed cash recycling machines. Detecting counterfeit banknotes locally and thus immediately after they have been spent makes it possible to track precisely and very quickly how and where they have been issued, which in turn can improve police response and prevention.
ECB rules
The detection of counterfeit banknotes by private operators is the result of increasing recourse to banknote handling machines (local customer‑operated machines, staff‑operated authentication machines or high‑volume banknote processing machines). It has also been aided by new rules adopted by the European Central Bank on 16 September 2010 to govern the authentication and qualitative sorting of banknotes by these operators.1 The rules cover such aspects as annual tests on equipment proposed by the industry itself (the Banknote Equipment Manufacturers), the obligation to only use equipment that has successfully passed testing procedures, staff training and on‑site inspection by the various national central banks.
The main risks
This positive shift towards banknote sorting by private operators, albeit to varying extents in different countries but nonetheless still significant, gives rise to new risks that must be tackled and kept to an absolute minimum. Below are listed a number of them.
Undetected counterfeiting
During their own sorting operations, the central banks authenticate the banknotes by reading several security features, some of which are exclusively reserved for them and known to them alone. Thanks to these level‑three security features, banknote issuers can guarantee that their banknote authentication process is perfectly robust. Private operators have the level‑two security features at their disposal, which are designed to be machine readable. Such features include ultraviolet, infrared and magnetic signals.
Even though it is not yet the case for the euro, counterfeiters could produce forged banknotes that are specifically intended to slip through private operators’ sorting equipment or banknote acceptors, by attempting to simulate not just the image on the note but also its level‑two security features. If they used a false identity to open a bank account, counterfeiters could even anonymously test whether their forgery is accepted by the customer‑operated machines. The risk of forgeries going undetected and thus getting reissued could be even higher if the equipment has not been properly maintained, serviced and regularly calibrated, or has not had software updates installed.
Taking into account the evolution of techniques available to counterfeiters and their creativity, one cannot completely rule out the production of this type of forged banknotes which, should it ever happen, would lead to the suspension of any banknote sorting and recycling activity with the affected machines. As a result these volumes that cannot be processed anymore would have to be transferred to other operators and the central banks. The subsequent impact on the cash cycle would be proportional to the share of banknotes handled by the inoperative machinery and would last for as long as it takes to develop and install the technical solution at local level. The introduction of the new EUR 5 note in May 2013 has shown that it takes several months for the necessary adaptations to be rolled out to the whole stock of existing machines.
Business continuity issues
If one or more private operators sorting high volumes of banknotes are unable to carry out their tasks for a few weeks due to, for example, non‑detection of forged notes, a strike, bankruptcy or a disaster, this will create a problem if the remaining handling and storage capacities – including those of the central bank – prove to be inadequate to deal with such an unexpected event. Therefore, crisis scenarios and plans to ensure the continuity of the cash cycle have to be in place. Furthermore, one has to keep in mind that there is a general tendency to reduce the central bank’s role in the cash cycle and to slim down its branch network, which can of course affect their banknote handling and storage capacities.
Wider dissemination of technical information
In order to ensure the reliability of sorting using private operators’ equipment, nowadays the central banks are obliged to release many more technical specifications of its current and future banknotes than they used to. Inevitably, the risk increases that information will be leaked regarding the security features and the authentication method used by the different manufacturers (detectors and algorithms). Any forger familiar with these two areas could be tempted to produce counterfeits specifically targeted at banknote acceptors and other sorting machines.
Possible responses
To this day, the equipment tested and used has been carrying out its tasks correctly, thus preventing any reissue of counterfeits at bank counters or via automatic machines. A few avenues to explore are suggested here to continue down this path, despite the risks of counterfeiting developing further.
Central bank in‑depth knowledge
Knowing both how the equipment works and the way in which counterfeiters can imitate the security features that these machines use will contribute to a permanent risk assessment. In fact, it is only by confronting machine‑based banknote authentication methods (i.e. what the machine reads, what degree of accuracy is required and what tolerance levels are accepted) with the simulation or imitation techniques now accessible to counterfeiters that we can start to understand the risks. This know‑how will of course
be useful for the effective management of possible crisis situations but, above all, it will enable future generations of banknotes to be equipped with level‑two security features that are not just resistant
to forgery attempts but can be read by the sorting machines as well.
Cooperation between industry and designers
Beyond their intrinsic qualities, such as resistance to counterfeiting and durability, the banknote security features that can be read by sorting machines and ATMs will only live up to their full potential if their features are fully detected. This shows the need for close cooperation between the industry and banknote designers even before the banknote feature selection stage, in order to ensure that the detectors corresponding to the new security features are available in good time and at a reasonable cost, and then actually installed on site. Reading a sophisticated security feature with a detector from the old generation does not guarantee the best possible authentication of newer banknotes and consequently, does not make the agreed investment in launching a new series worthwhile.
Detection and analysis of early warning signs
All central banks have instruments at their disposal for taking inventories of forged banknotes and describing their technical features. In the Eurosystem’s case, the database is called the Counterfeit Monitoring System. The early warning signals may come from the analysis of the characteristics of new classes of forged banknotes (including simulation of the level‑two security features); from gauging an increase in the share of counterfeits detected by the central banks or from any difficulties that professional cash handlers might report. Permanent monitoring of such information can help to detect any trend and assess the risks. If a problem were to be found, an immediate test (i.e. without waiting for the regular procedures) on the potentially problematic equipment with that counterfeit should enable the analysis to be confirmed. If necessary, the manufacturers in question may be asked to develop and install the required changes to the software and, if need be, the hardware too.
Maintenance and calibration of equipment
In close consultation with banknote equipment manufacturers, work needs to be done to improve regular maintenance and calibration of the machinery. Furthermore, the time needed for the effective installation of upgrades in order to keep up with developments in counterfeiting and ensure optimal adaptation to new generations of banknotes, should be reduced. Practical experience has shown that progress can still be made in this area, at least among certain stakeholders.
Improving test procedures
By using a more challenging test set of counterfeit notes, the central banks can encourage more checks on the features as well as ensure the best possible use of new level‑two features introduced in a new series of banknotes. Apart from the latest version, these regular tests must cover all software versions still used by professional cash handlers.
Summary
An increasing number of banknotes are now being sorted outside the central banks, locally or in industrial sorting centres. The Eurosystem has set out rules governing banknote processing by professional cash handlers, which have so far enabled a good detection of forgeries. However, we cannot rule out the possibility that one day these machines are purposely targeted by a forgery without the professional cash handlers detecting it. Banknote authentication based on level‑two security features is naturally less robust than based on the covert security features read by the sorting machines of central banks.
If this were to happen, forged banknotes would be distributed to the public until the authorisation for recycling notes with the affected equipment is suspended. The time required to adapt the machines to the new EUR 5 note suggests that, even if a technical solution were to be developed quickly, it could still take several weeks or even months to deploy the upgrade on site. Any such suspension could subsequently lead to a business continuity problem, because other operators and the central bank would suddenly be confronted with the extra volume of banknotes to process and transport.
Therefore, this risk needs to be integrated into the central banks’ and professional cash handlers’ plans, while doing everything possible to prevent its occurrence. Designing new generations of banknotes with improved features, making sure that the machinery is equipped with ad‑hoc detectors enabling optimal reading, ensuring maintenance and regular calibration of detectors and prompt installation of the latest available software version should all contribute to reducing the probability of seeing the cash cycle affected by a poor detection of forgeries.
Reference
1 Decision of the European Central Bank of 16 September 2010 on the authenticity and fitness checking and recirculation of euro banknotes. https://www.ecb.europa.eu/ecb/legal/pdf/l_26720101009en00010020.pdf.
Accessed on 17 December 2014.
Yves Timmermans has a degree in Business Administration from Liège University. He joined the National Bank of Belgium in 1984 where he has had various responsibilities in connection with banknote manufacture and issuance. As a member of the Eurosystem’s Banknote Committee, a member of the European task forces dealing with counterfeiting problems, and the Belgian representative in the Central Bank Counterfeit Deterrence Group, he has gained broad experience in the field of counterfeit prevention and risk analysis. Yves is also member of the Intergraf Committee of Experts.
