Will Mid-East counterfeits destabilize the Dollar?

Beautiful Sheikh Zayed Mosque in Abu Dhabi city, UAEIn what one former Treasury official has declared to be an act of economic terrorism against the United States, super-high quality counterfeit 100 dollar-bills called “Supernotes” have begun to flood both into the United States and into other nations where the US dollar circulates as the local currency. This influx of billions of dollars’ worth of high quality forgeries on the currency market could undermine confidence in the U.S. greenback, says University / Wisconsin economist Edgar Feige. “It’s the psychological perception of the quality of the dollar that’s crucial,” says Feige, who studies how underground economic factors such as crime affect the economy. “If people perceive bogus notes to be widespread, then the value of the currency could be threatened.” For law-enforcement officials, the presence of counterfeit bills that slip by bank tellers every day is a continuing source of concern. Only a forensic expert with special equipment can distinguish between Supernotes and real bills. Ever since 1944, when the Bretton Woods Conference established the primacy of American currency, the U.S. dollar has been the recognized monetary unit that international banks use to measure economic activity.

From the steppes of Central Asia to the mountains of Peru, it is the favored medium of exchange in countries with inefficient banking systems. Traveling executives carry U.S. notes because their unspent dollars retain value between business trips. Roughly 55 percent of the $500 billion presently in circulation is held by people outside the U.S. And demand is increasing as more developing nations embrace capitalism. Indeed, according to Richard Porter, deputy associate director for monetary affairs at the Federal Reserve Board in Washington, up to 70 percent of newly printed U.S. banknotes go directly overseas. Counterfeiting’s real victims, of course, are people in the retail, hospitality, and service industries who must instantly decide whether to accept a seemingly genuine banknote. With more than $20 billion worth of phony bills estimated to be in circulation, the likelihood of being stuck with worthless paper is greater than ever.

In the past, counterfeiting rarely affected the value of money because even excellent forgeries were quickly identified. However, the new “Supernotes” often fool even experienced Secret Service agents. Supernotes are the best counterfeits ever seen, since their intaglio printing, a process by which ink from incised lines etched into a metal plate leaves a raised impression on paper, makes them feel like the genuine article. A U.S. congressional task force says the bills are printed by Iranians using U.S. equipment and American-trained engravers and printers. The Iranian-printed cash is supposedly taken to Syria where it is divvied up and sent around the world, claims the House Republican Research Committee’s Task Force on Terrorism and Unconventional Warfare. Such notes are said to be used by North Korean diplomats and, on occasion, make their way into the hands of Chinese political operatives working outside the mainland. “We can speculate about China’s involvement, but we don’t know anything for sure,” says Albert Joaquin, the special agent in charge of the Secret Service in Asia. “Only onePrinter printing fake dollar bills isolated on white thing is certain: If we don’t curb this problem now, there could be extensive damage in the future.” Even more disturbing is a second series of notes from Montreal. The rate of production and distribution network used are such that these notes have the potential to devalue U.S. currency.

Purchased for about $25 each, the $100 notes normally change hands in Toronto, where they are resold for half their face value. From there the fakes are sent directly to Asia and South America or allowed to percolate south across the lightly guarded U.S. border. Masterminding the distribution are the Big Circle Boys (a.k.a. Dai Huen Jai), a loose association made up mostly of former Chinese Red Guards that police in North America grudgingly concede to be “criminally brilliant.” By last summer, briefcase-loads of forged $100 bills were popping up all across America. In late July, three Vietnamese high rollers checked into Harrah’s Casino and Hotel at Lake Tahoe, Nevada, and immediately began playing pai gow poker. On their second day at the tables, a casino pit boss noticed that the three were surprisingly sanguine about their losses and called the Secret Service in Reno. When an agent arrived later that day he found a duffel bag containing 250 bogus hundreds. “The Secret Service agent was quite concerned,” remembers John Babcock, Harrah’s director of security. “I believe he said the bills that turned up here were from Canada.” In August of 1995, the Secret Service sent a formal notice to casino cashiers across Nevada, warning them that 11 permutations of a near-perfect $100 bill were flooding the state.

By October the flow of funny money, estimated by Canadian Police to exceed $5 million a week, was inundating Secret Service agents like Dale Pupillo in Detroit. “The images are sharp and the ink is perfect on these bills, “These people know what they’re doing. No clerk in America could spot this stuff as counterfeit.” One result of counterfeiting is that a growing number of countries are imbedding security devices in their currency. In 1988, Australia began printing plastic banknotes. Japan’s 1,000 and 10,000 yen bills are printed with a special ink that commercially available copiers can’t reproduce. Singapore and others have woven plastic fibers into some of their large denomination bills. After decades of delay, the U.S. finally began issuing tamper-resistant bills in 1996, starting with the $100 note.Among the 14 features incorporated into the new design are an enlarged portrait of Benjamin Franklin, a polyester security thread running through the paper, iridescent windows, a translucent watermark and new inks that change color when viewed from different angles. Federal prosecutors applaud the changes but doubt they will eliminate counterfeiting. Because of lenient sentencing guidelines, a person caught with more than $120,000 rarely draws more than 12 to 18 months in jail. First-time offenders with $2,000 or less could be released after four months. “It’s easy to flip a drug courier (have him testify against co-conspirators) because if he’s caught with more than a kilogram of heroin he’s looking at a minimum of 10 years,” says Christopher Johnson, an assistant U.S. attorney with the Organized Crime Strike Force in Los Angeles. “There’s no impetus to cooperate if you’re looking at only 18 months.

These guys know that if they just keep their mouths shut they’ll be rewarded with greater responsibility when they get out.” Because the average life of a $100 note is nine years, counterfeiters in theory can continue copying the existing bills for at least another decade. Recalling the old bills upon release of the new ones would stop counterfeiters cold, but Washington insists this will not happen. “A recall would inconvenience people who use dollars legitimately and possibly threaten the savings of those who can’t exchange their currency easily,” explains Darcy Bradbury, the U.S. Treasury’s deputy assistant secretary for federal finance “Those who save dollars should know that those dollars will always be good. The U.S. has never recalled its currency and has no plans to do so.” Maintaining the dollar’s desirability makes fiscal sense. “If people no longer wanted dollars, Washington would have to borrow another currency to pay for its imports,” explains economist Feige. “The American taxpayer would pay the interest on that loan. The global acceptance of dollars means taxpayers each year save $15 billion in taxes because no loan is necessary.” U.S. prosperity depends on continued global demand for the dollar. “The nation that can establish its currency as the world standard has a great advantage when it comes to acquiring resources cheaply,” says Feige. The prospect of foreign entrepreneurs rejecting the dollar because of its suspect value is a nightmare that few Americans wish to contemplate.

To ensure the dollar’s primacy, the Secret Service soon will receive an additional $5 million to pursue counterfeiters. The U.S. Treasury also plans to elevate FinCEN (Financial Crimes Enforcement Network) to a full-fledged governmental agency with responsibility for curtailing financial crime outside the United States. “There’s a natural reluctance to create a new bureaucracy, but if something’s not done now, counterfeiting and other financial crimes will cripple our economy,” says Cordell Hart of FinCEN. How much damage could the current Mideastern counterfeiting operation create for the U.S. economy? In the worst-case scenario, no longer trustful of the dollar’s validity, foreign banks and investors could begin exchanging dollars in their accounts for other currencies, like the Yen or Deutschemark. This dumping of dollars could create a tidal wave of inflation here in America, decimating the value of existing dollar-denominated investments owned by Americans.

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