Wednesday 11 January 2017

Fake Currency and Security Features in the New Currency

Our Prime Minister on 8/11/2016 when he announced the demonetisation of high value denominations, told to the nation that:

“Terrorism is a frightening threat. So many have lost their lives because of it. But have you ever thought about how these terrorists get their money? Enemies from across the border run their operations using fake currency notes. This has been going on for years. Many times, those using fake five hundred and thousand rupee notes have been caught and many such notes have been seized.”

Demonetisation announced by the Government is welcomed by many Indians since they viewed it as a panacea for all the ills like black money, terrorism abetted by the fake currency, etc. There were a lot of Indians believed that there are lakhs of crores of black money and fake currency in the system. In the initial weeks of demonetisation, a narrative sold by the evangelists of demonetisation was that black moeny and fake currency (Fake Indian Currency Note – FICN) are so rife and argued that it is almost 30-40% of the total currency in circulation. RBI data shows that as on 4/11/2016, the currency in circulation was ₹17.975 Lakh crores. We have later informed in the Parliament that out of this 86%, ie, ₹15.44 Lakh crores are of high denomination notes of ₹500 and ₹1000. So many believed that the quantity of fake currency is anywhere between 4-6 lakh crores!

FICN Estimates

Now let’s examine the quantity of FICN in the currency in circulation from Government's own database. Minster of State for Finance disclosed in the Parliament (Lok Sabha, Unstarred Question No.3285 05.08.2016) that:

“A study on Fake Indian Currency Notes (FICN) issues, including estimation of FICN in circulation, has been undertaken by Statistical Institute (ISI), Kolkata under the overall supervision of National Investigation Agency (NIA). As per the study, the face value of FICN in circulation was found to be about Rs. 400 crores. It was found the value remained constant for the last 4 years.”

Yes..the Government's own agencies estimated the quantity of FICN as just 400 crores, not even the amount run in to thousand of crores, forget the lakh crores propagated. This ₹400 crores is only 0.02% of the currency in circulation.Though it is a small quantity, FICN is being used for various subversive activities such as espionage, smuggling of arms, drugs and other contraband in India. As per the NIA probe, which has a Terror Funding and Fake Currency Cell, Pakistan is the major supplier of FICN in India. 

Further the Finance Minister disclosed in the Parliament on 18/11/2016 the details of FICN detected by police and law enforcement agencies during 2013-2016 (up to 30.09.2016), as per records of the National Crime Records Bureau. The answer is attached here.

Meanwhile, the Annual Report 2015-16, of the RBI reported that 632,926 notes of various denominations were detected by the banking system from a total of 90.266 billion notes, which are in circulation, ie, 0.0007% of the volume. Value wise this amount of FICN is ₹29.642 crores out of the total ₹16.42 lakh crores currency in circulation, ie, 0.0018% of the value. If we consider this ₹29.642 crores of FICN is denomination wise, that comprises of ₹14.310 crores of ₹1000 notes (143099 nos.), ₹13.085 crores of ₹500 notes (261695 nos.) and ₹2.215 crores of ₹100 notes (221447 nos.), which are 0.0023%, 0.0017% and 0.0014% respectively of the total value of the above denominations in circulation. The RBI made it clear that the above data does not include counterfeit notes seized by the police and other enforcement agencies.

We can see that the banking system detected around ₹30 crores of FICN annually and law enforcement agencies seized around ₹40 crores of FICN annually for the last couple of years  Hence a total of around ₹70 crores of FICN detected during last couple of years by the checks and balances in the system without any major disruptive measures. So if we consider the ISI, Kolkota study as a yard stick, only ₹70 crores of FICN of the estimated quantity of ₹400 crores, i.e., 17.5% of the FICN is seized by our systems. Kindly note that ISI study, is a statistical study using certain parameters, the real quantity of the FICN may be more or less than the above figure. 

Meanwhile, ISI, Kolkota who done the study of FICN, however, concluded that "the existing systems of seizure and detection are enough to flush out the quantum of FICN being infused". The institute says that if detection can be improved, the value of FICN in circulation can be reduced by at least 20% annually. I don't know whether our Government & RBI have considered these facts and pointers before taking the drastic decision on the demonetisation of the high value denominations or not. I am still not able to digest the logic of going ahead with demonetise the 86% of the currency amounting to 15.44 lakh crores to trap just a meagre ₹400 crores, ie, 0.02%! RBI's attempt is looks like to shoot out cannon into sparrows.

RBI instructed banks to report daily the details of the FICN detected in the system during the 50 days window period during the post-demonetisation. It is quite perplexing that RBI so far not disclosed the quantity of the FICN detected in the system to the public. There was a news item on the Malayala Manorama daily about the quantity of FICN detected by the State Bank of Travancore (SBT). The news item reported that 8.78 lakh FICN was detected from a total deposits of ₹12,872 crores, that means 0.007% of value of the total deposits. We should recall that around 0.0018% of the FICN of the total currency (value) is detected in last financial year by the banking system without doing any disruption. Till RBI officially disclose the FICN figures, we cant reach any conclusions. But if the figures reported by Manorma daily on SBT deposits is true and indicative, then there is no chance that the total FICN detection due to demonetisation will touch even ₹100 crores!

Detailed analysis of FICN detection in the banking system (2000-2016)

I have analysed the RBI Annual Reports from 2000-2001 to 2015-16 to gather pointers about the FICN detection in the banking system (Except the FY 2009-10, the FICN data denomination wise is available  for all the other years). The following table is prepared from the above data gives you a clear picture of the FICN detected in the system by its volume (denomination wise). From the above table it can be seen that majority of FICN is in the high denominations of ₹1000, ₹500 & ₹100. This is  quite natural while considering the printing and hoarding parameters. The volume and value of the lower denominations FICN are very insignificant compared with the above high denomination notes of ₹1000, ₹500 & ₹100, which constitute 96% of the total currency in circulation. 

RBI reintroduced ₹1000 notes in October 2000, which was demonetised in the year 1978 along with ₹5000 & ₹10000 notes. From the above table it is evident that it took almost 8 years to counterfeit these ₹1000 notes to a substantial quantity of above 10,000 numbers. This fact shall be compared with the news now pouring in with counterfeit notes of new ₹2000 denominations amounting lakhs of rupees within a couple of months after its introduction ( We should cogitate whether this demonetisation exercise resulted in  throttling the fake currency especially when it replaced old high denomination ₹1000 notes with ₹2000 notes which are more prone to fake and hoard.

The above graph shows the FICN as percentage of the total currency in circulation detected in the banking system from FY 2000-2001 to FY 2015-16 (except 2009-10). The trend of the FICN detected by the system is quite interesting. The percentage of FICN in 2000-2001 was 0.0015% which is seen steadily declined to 0.0004% up to 2005-06 which then steeply increased to 0.0023% in 2008-09 and reached to 0.0018% in the year 2015-16. There are many reasons for this complex trend, which will be discussed in the following paragraphs. 

Now let's look at the graph above, which shows the FICN as percentage of each of high denomination notes of ₹1000, ₹500 & ₹100. The yearly variation of FICN detected in each denomination is interesting. 

The FICN detected in each denomination in the banking system over the years is warranted a closer examination. 
  • ₹1000 notes (shown in red line in the graph), which introduced in the circulation in 2000-2001 took 8 years to cross the 0.001% of the value of the total ₹1000 notes in circulation. During the year 2011-12 it reach 0.0024% and more or less remain around that value till 2015-16 (0.0023%)
  • FICN ₹500 notes (shown in violet line in the graph), which were around 0.0054% in the year 2000-01 dropping to 0.0003% in FY 2005-06 steadily rising to 0.0036% in the year 2008-09 and seen further showing a decreasing trend and reached 0.0017% during the year 2015-16 though it is almost 50% of the currency in circulation by value basis.
  • FICN ₹100 notes (shown in green line in the graph), which were 0.0004% in 2000-01 increased to 0.0015% in 2002-03 and then declined to 0.0005% in 2006-07 and then shown an increasing trend and reached 0.0014% in the year 2015-16

Many reasons can be attributed to these variances viz. better detection mechanisms put in place by RBI & Banks to detect FICN at their ends, introduction of new security features at regular intervals in the currency notes, systematic withdrawal of old currency notes, improved vigilance and law enforcement, citizen awareness programs, FICN pumped along with genuine currency during elections etc. 

But interesting to observe that during 2008-09, FICN component of all high denominations jumped substantially over the previous year value. My surmise is that 10 State Assembly Elections conducted during the above period is one of the major contributor of this substantial jump.

I am at a loss why Government decided to demonetise ₹500 notes which are showing a consistent decreasing trend since 2008-09? Also the high value ₹1000 notes shown an increasing trend and became steady at a substantial high level. This is definitely due to its high denominational value and ease of hoarding. When this data and trends are at Government disposal, why Government introduced ₹2000 notes which is quite vulnerable to get forged due to its high denominational value and less space to hoard.

Systematic improvements for better detection of FICN

For handling the increasing quantum of notes received for examination, the Reserve Bank had commissioned very sophisticated Currency Verification and Processing Systems (CVPS) at the Bhopal and Chandigarh Issue offices as a pilot project during the FY 2000-01. These systems can sort the notes into issuable and non-issuable categories, detect counterfeit notes and destroy the non-issuable notes in an eco-friendly manner through shredding and briquetting systems. In the year 2002-03, RBI commissioned 22 CVPS at its issue offices, which can process 50,000-60,000 notes per hour. By the end of FY 2003-04, RBI had installed a total of 48 CVPS at 18 offices. They procured 6 more CVPS in 2004-05 & another 5 CVPS in  2009-10. The Annual Report of 2011-12 says that there are 59 CVPS are already under RBI. After that the annual reports not mentioning any additional procurement of the same.

During the year 2000-01, Banks are instructed by RBI to equip their branches with ultraviolet detectors and the staff from banks, Government departments, the police and other enforcing agencies are being regularly trained on security features in bank notes to facilitate the detection of forgeries. During the year 2002-03, RBI advised all banks to establish Forged Notes Vigilance Cells at their Head Quarters for dissemination, monitoring and implementation of the Reserve Bank's instructions on forged notes to their branches and compiling of data on detection of forged notes and follow-up of cases filed with police etc. 

During 2004-05, Banks were advised by RBI to install Note Sorting Machines (NSM) capable of detecting counterfeit banknotes at currency chests. Banks with less than 100 currency chests were given time up to the end of May, 2005 for installing such sorting machines in each of the currency chests. Banks with 100 or more currency chests were given time up to November, 2005. Bank branches with average daily cash receipts of ₹50 lakhs were advised by RBI to use such NSM by end-March 2011.

The increased use of NSMs, facilitated detecting FICN at bank branch level itself before reaching the same at RBI. The share of the counterfeit notes detected at the Reserve Bank’s offices declined from 96.1 per cent in 2005-06 to 56.4% in 2006-07 and further to 10.4% in 2010-11 indicating increased effective use of NSMs at currency chest branches. As of 2015-16, only 5% counterfeit currency was detected at RBI level and the rest 95% are detected at other banks. 

A High Level Group on Systems and Procedures for Currency Management (Chairperson: Smt. Usha Thorat, Deputy Governor, RBI) constituted by the Bank, submitted its Report in August 2009, to enhance the integrity and efficiency of the systems and procedures for stocking and distribution of currency notes. The Group suggested different measures for detecting counterfeit notes and maintaining good quality notes in circulation, and strengthening security systems. As per the recommendations, to ensure issuance of only clean and genuine notes to public, banks should use note sorting machines. The Reserve Bank, in turn, should set parameters and standards for such machines. To instil confidence of the public in the banknotes in circulation banks have been advised to re-align their cash management in such a manner so as to ensure that cash receipts in denominations of 100 and above are not put into re-circulation without the banknotes being machine processed for authenticity.  The Reserve Bank also introduced an incentive-penalty system relating to detection and reporting of counterfeit notes by banks.

Security Features in Currency Notes

Ashoka Pillar Banknotes

The first banknote issued by independent India was the one rupee note issued in 1949. While retaining the same designs the new banknotes were issued with the symbol of Lion Capital of Ashoka Pillar at Sarnath in the watermark window in place of the portrait of King George.

The name of the issuer, the denomination and the guarantee clause were printed in Hindi on the new banknotes from the year 1951. The banknotes in the denomination of ₹ 1000, ₹ 5000 and ₹ 10000 were issued in the year 1954. Banknotes in Ashoka Pillar watermark Series, in ₹10 denomination were issued between 1967 and 1992, ₹20 denomination in 1972 and 1975, ₹50 in 1975 and 1981, and ₹100 between 1967-1979. The banknotes issued during the above period, contained the symbols representing science and technology, progress, orientation to Indian Art forms. In the year 1980, the legend "Satyameva Jayate" was incorporated under the national emblem for the first time. In October 1987, ₹500, banknote was introduced in October 1987 with the portrait of Mahatma Gandhi and the Ashoka Pillar watermark.

Mahatma Gandhi (MG) Series 1996

The banknotes in MG Series – 1996 were issued in the denominations of ₹5, (introduced in November 2001) ₹10 (June 1996), ₹20 (August 2001), ₹50 (March 1997), ₹100 (June 1996), ₹500 (October 1997) and ₹1000 (November 2000). All the banknotes of this series bear the portrait of Mahatma Gandhi on the obverse (front) side, in place of symbol of Lion Capital of Ashoka Pillar, which has also been retained and shifted to the left side next to the watermark window. This means that these banknotes contain Mahatma Gandhi watermark as well as Mahatma Gandhi's portrait.

MG Series - 2005 notes

MG series 2005 banknotes are issued in the denomination of ₹10, ₹20, ₹50, ₹100, ₹500 and ₹1000 and contain some additional / new security features as compared to the 1996 MG series. The ₹50 and ₹100 banknotes were issued in August 2005, followed by ₹500 and ₹1000 denominations in October 2005 and ₹10 and ₹20 in April 2006 and August 2006, respectively.

The security features in MG Series 2005 banknotes are as under:

i. Security Thread: The silver coloured machine-readable security thread in ₹10, ₹20 and ₹50 denomination banknotes is windowed on front side and fully embedded on reverse side. The thread fluoresces in yellow on both sides under ultraviolet light. The thread appears as a continuous line from behind when held up against light. ₹100, ₹500 and ₹1000 denomination banknotes have machine-readable windowed security thread with colour shift from green to blue when viewed from different angles. It fluoresces in yellow on the reverse and the text will fluoresce on the obverse under ultraviolet light. Other than on ₹ 1000 banknotes, the security thread contains the words 'Bharat' in the Devanagari script and 'RBI' appearing alternately. The security thread of the ₹1000 banknote contains the inscription 'Bharat' in the Devanagari script, '1000' and 'RBI'.

ii. Intaglio Printing: The portrait of Mahatma Gandhi, Reserve Bank seal, Guarantee and promise clause, Ashoka Pillar emblem, RBI’s Governor's signature and the identification mark for the visually impaired persons are printed in improved intaglio.

iii. See through register: On the left side of the note next to the watermark window, half the numeral of each denomination (10, 20, 50, 100, 500 and 1000) is printed on the obverse (front) and half on the reverse. The accurate back to back registration makes the numeral appear as one when viewed against light.

iv. Water Mark and electrotype watermark: The banknotes contain the portrait of Mahatma Gandhi in the watermark window with a light and shade effect and multi-directional lines. An electrotype mark showing the denominational numeral 10, 20, 50, 100, 500 and 1000 respectively in each denomination banknote also appear in the watermark widow and these can be viewed better when the banknote is held against light.

v. Optically Variable Ink (OVI): The numeral 500 & 1000 on the ₹500 and ₹1000 banknotes are printed in Optically Variable Ink viz., a colour-shifting ink. The colour of these numerals appears green when the banknotes are held flat but would change to blue when the banknotes are held at an angle.

vi. Fluorescence: The number panels of the banknotes are printed in fluorescent ink. The banknotes also have dual coloured optical fibres. Both can be seen when the banknotes are exposed to ultra-violet lamp.

v. Latent Image: In the banknotes of ₹20 and above, the vertical band next to the (right side) Mahatma Gandhi’s portrait contains a latent image, showing the denominational value 20, 50, 100, 500 or 1000 as the case may be. The value can be seen only when the banknote is held horizontally and light allowed to fall on it at 45°; otherwise this feature appears only as a vertical band.

viii. Micro letterings: This feature appears between the vertical band and Mahatma Gandhi portrait. It contains the word ‘RBI’ in ₹10. Notes of ₹20 and above also contain the denominational value of the banknotes. This feature can be seen better under a magnifying glass.

Security features of bank notes need to be reviewed and upgraded from time to time in order to take advantage of research and technology in the field to combat counterfeiting. The notes issued in any series/design by the Reserve Bank continue to be legal tender for all time, although over a period, notes in a particular series/design may not be seen any more because of discontinuance of  printing issues in that series/design. In some countries, where the volume of notes in circulation is small, a new design replaces an old design every 5-6 years and the old design is discontinued as legal tender. In such a situation, prevention of counterfeiting is strengthened. In India, while it is difficult to remove an old design by way of withdrawing its legal tender, the Reserve Bank is attempting to phase out the old design by not re-issuing it once it comes to the currency chests or the Reserve Bank's offices. Although the predominant reason for new security features is to make counterfeiting difficult, they also assume importance in the context of the mechanised cash processing activities by high-speed currency verification and processing systems (CVPS). The success of these systems in achieving the authenticity and rated capacity depends greatly on the notes having machine-readable security features. MG- 2005 series notes are having machine-readable compatibility while Pre- MG -2005 series are not.

During 2011-12, banks were instructed to stop re-issue of banknotes of ₹1,000 denomination of the Mahatma Gandhi Series 2000 and ₹100 denomination of the Mahatma Gandhi Series 1996 in a prompt, smooth and non-disruptive manner without any inconvenience to the public. Such banknotes, however, continued to be legal tender and acceptable for all transactions and no member of the public was denied exchange facility. Further, in order to ensure that all cases of detection of counterfeit notes at the bank branches/treasuries were promptly reported to the police authorities, it was decided to revise the procedure to be followed on detection of counterfeit banknotes at bank branches, treasuries and sub-treasuries. 

During the FY 2013-14, as a move towards mitigation of risk arising out of multiple series of banknotes in circulation, at the request of the Government of India, from 31-03-2014 the Reserve Bank has set in process  the withdrawal from circulation all banknotes issued prior to 2005 as they have fewer security features as compared to banknotes printed after 2005. The withdrawal exercise is in conformity with the standard international practice of not having multiple series of banknotes in circulation at the same time. The Reserve Bank has been withdrawing these banknotes in a routine manner through banks. These banknotes can be freely exchanged at any bank branch till January 1, 2015. 
This exchange facility was later extended up to 30.06.2016. From July 01, 2016 onwards, the facility for exchange of pre-2005 banknotes was offered only at Issue Offices of the Reserve Bank. 

Additional Features Introduced to MG-Series 2005 notes in 2015-16

Central banks worldwide adopt a standardised practice of periodic up-gradation of security features of banknotes to stay ahead of counterfeiters. While in India, the last such up-gradation was done in 2005 with a new 2005 series of banknotes, certain new features such as bleed lines and exploding numbers were introduced during 2015-16. Exploding numbers is hailed as great security feature which gives forgers a run for their money. "Printing the numerals in ascending size is a visible security feature in the banknotes so that the general public can easily distinguish a counterfeit note from a genuine one," a release from the RBI said during its release.
Read this article from Hindu Business Line which details the new security features along with the old one in a comprehensive manner

New High Denomination Notes issued from November 2016

The new currency notes of 2000 & 500 introduced post demonetisation were fashionably shrunk in size. The ₹2,000 note is 66mm x 166mm, smaller than the current ₹1,000 and even ₹500 notes. And the new 500 note is just 66mm x 150mm. While the ₹2,000 paper dons a bright magenta, the ₹500 is cast in stone gray.

Meanwhile rumour mills spread a propaganda that ₹2,000 note have is an embedded nano chip that beams signals to the powers-that-be and will give nightmares to hoarders, which was floated like hot cakes on Whatsapp forwards. Another uplifting forward had Gandhiji’s portrait giving you a tight slap if you tried to offer a bribe with the new note. Anyway, the new notes do not have such features from straight out a sci-fi movie and have a prolonged wait for such happy happenings!

Let's examine the features of new notes one by one to see that what are the additional security features in place in the new notes, which are not there in the notes prior to demonetisation.

1. See through register with denomination numeral 2000 -  Existing feature in MG- Series 2005

2. Latent image with denominational numeral 2000 - Existing feature in MG- Series 2005

3. Denominational numeral 2000 in Devanagiri - not a security feature, but a controversy

4.  Portrait of Mahatma Gandhi - Existing feature in MG- Series 2005

5. Micro letters RBI & 2000 - Existing feature in MG- Series 2005

6. Color shift window security thread - Existing feature in MG- Series 2005 

7. Guarantee clause, Governors Signature, Promise clause & RBI emblem towards right - not a security feature

8. Mahatma Gandhi Portrait &Electrotype (2000) water marks - Existing feature in MG- Series 2005

9. Number Panel - numbers growing from small to big - Feature introduced in 2015

10. Denominational numeral with color changing ink - Existing feature in MG- Series 2005

11. Asokha pillar emblem on right - not a security feature

12. Horizontal Rectangle with 2000 in raised print on right for visually impaired - Symbols were there in MG-Series 2005, the this denominational numeral is introduced this time, not at all a security feature

13. Bleed lines for visually impaired - Feature introduced in 2015

14. Year of Printing on the back  - Feature introduced in 2015

15. Swatch Bharat with logo - not a security feature

16. Language Panel towards the centre - not a security feature

17. Motif of Mangalayan - not a security feature

Now we seen that no additional security feature is added to the new notes than what is existing. So make your own judgements based on facts before you, when tall claims are made that the new notes are going to make counterfeiting a hell of a job. If those high security notes introduced in 2015 were kept in the system, the pain due to demonetisation can be ameliorated to a certain extent. But unfortunately such thought process have no place in the hasty demonetisation decision. 

Some Questions to RBI

When I finished my research of fake currency, some questions perplexed me and let me share them with you. Hope either our House Panel or Supreme Court may ask these questions to RBI.

  1. While taking the recommending the demonetisation whether the Central Board of RBI considered their own data and Indian Statistical Institute study and apprised the Cabinet about the above study and vital inputs?
  2. Whether RBI, being the premier financial institution, done any cost-benefit analysis of the impacts of the demonetisation in short term and long term on the economy before taking this drastic decision?
  3. When the ₹500 notes showing a decreasing trend in FICN for last several years, what was the logical reasoning behind RBI's decision to demonetise this particular denomination, which constitutes 50% total currency in circulation?
  4. Why did RBI not took a decision to exempt the ₹1000 & ₹500 notes with added security features introduced in 2015 from the demonetisation?
  5. Especially the new currency notes have no additional security features than the ones already existing in the 2015 notes?
  6. Why RBI printed and circulated the above denomination notes with high security features dated from 2015, only to demonetise them at a later date by wasting exchequer's money?

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