FROM THE OFFICE OF PUBLIC AFFAIRS

I appreciate theopportunity to discuss the Treasury’s audit plan for studying the uses and counterfeiting of U.S. currency overseas. Ihave worked closely with the other members of the ACD SteeringCommittee to produce this plan, and we have already started toimplement it.

As Under SecretaryHawke mentioned, two of the primary reasons for the successfulintroduction of the Series 1996 $100 note were our comprehensiveworldwide public education campaign and the coordination with ourcounterparts overseas. An especially important element in each ofthese areas was our International Currency Awareness Program or"ICAP." This program organized joint Treasury, SecretService, and Federal Reserve teams to visit selected regionsthroughout the world to meet with U.S. embassy, foreigngovernment, financial institution, and law enforcement officialsto discuss the uses, flows, and counterfeiting of U.S. currency.Our teams made six trips over a two-year period to South America,Russia and the NIS, Southeast Asia, Western Europe, and theMiddle East.

These trips enabledus to gain valuable information about the nature of U.S. currencyusage and counterfeiting overseas. In addition, we were able tointroduce the currency redesign program, assess the needs for oureducation campaign, and insure that there exists an adequatedistribution network for the issuance of the new notes. Along theway, we established or augmented our working relationships withvarious entities involved in the overseas U.S. currency market.

The Antiterrorismand Effective Death Penalty Act requires us to audit theinternational

use andcounterfeiting of U.S. currency every three years. We have usedour experience from ICAP as well as the past work of the ACDSteering Committee as a foundation for our Audit Plan. Thisexperience is particularly relevant because the questions thatthe Act requires the audit to answer are some of the samequestions that the ACD Steering Committee has examined andcontinues to examine on a regular basis. These are:

• What are the uses and holdings of U.S. currency overseas? and
• What is the Treasury’s estimate of the amount of counterfeit U.S. currency that circulates outside of the United States each year?

We began toformulate our plan early on. In fact, as we worked with yourstaff, Mr. Chairman, to help draft the Act, we determined thatour ICAP experience would provide a good starting point. Theobjectives of the audit plan, however, are decidedly different.Rather than introducing the new currency and insuring adequatedistribution channels, we are now focusing more on the uses ofU.S. currency and the quantities of genuine and counterfeit U.S.currency that are in circulation around the world.

Before finalizingour plan, we sought comment from GAO to insure that our planprovided all necessary information and detail. Unfortunately,after providing a draft of the plan to GAO, we were informed thatthey would be unable to give us comments because of a potentialconflict of interest.

At your request, Mr.Chairman, GAO then commented formally on our plan, and weresponded to their comments in an addendum to the plan. I haveattached as an exhibit to my testimony a chronology of thedevelopment of our audit plan.

As we discussed inour plan and in the addendum, the Steering Committee is using avariety of information to try to answer the Act’s questions.

The best sources ofinformation to answer the first question are our surveys. Sincelast September, we have conducted two surveys in Southeast Asiaand one in South America. Furthermore, we have scheduled foursubsequent surveys on an approximately quarterly basis to includeTurkey and Central Asia, Eastern and Central Europe, theCaribbean and Latin America, and India and Pakistan before wesubmit our first audit report in the fall of 1999. These tripsgreatly augment our understanding of currency movements outsideof the wholesale banking sector.

The most importantand comprehensive information to answer the second question comesfrom the Federal Reserve’s currency shipment and receiptdata. From these data, the Fed is able to trace flows of U.S.currency throughout the world and identify the country of originfor deposits of both genuine and counterfeit U.S. currency.

In a statement tothis Subcommittee last year, Theodore Allison, Assistant to theBoard of Governors of the Federal Reserve System, described theFederal Reserve’s currency processing operations. I wish tohighlight today three points from that statement:

• First, the Federal Reserve receives a sufficient quantity of currency to have an up-to-date and reasonably accurate view of the notes in circulation. For example, during 1995 the Federal Reserve received from circulation, and therefore performed a note-by-note inspection of, a quantity of $100 notes equal to 116 percent of all of the $100s estimated to have been held within the United States and 13 percent of the $100s held outside the country.
• Second, the levels of counterfeit $100 notes detected during 1995 were very low -- less than one one-hundredth of one percent (.0075%) or 75 counterfeits in every one million $100 notes inspected. Deposits of $100s at the Federal Reserve that originated outside the United States had a lower proportion, about 55 counterfeits in every million notes processed.
• Third, the successful passing of counterfeits, within the United States and abroad, is so small as to be insignificant from a macroeconomic perspective, and has no discernable effect on public confidence in U.S. currency.

I can now update Mr.Allison’s numbers. In 1996, the percentages of domesticallyand internationally circulating $100 notes that the Fed inspectedincreased to about 117 percent and 17 percent, respectively. Ourwindow on counterfeiting therefore became even better last year,particularly in regard to counterfeits circulating outside theUnited States. That window showed, during 1996, a slight declinein counterfeit $100s in circulation, as the detection rate fellfrom about 75 counterfeits per million notes processed (.0075%)to about 62 counterfeits per million (.0062%).

We consider the datafrom Federal Reserve currency processing operations to bereliable indicators of counterfeiting activity for severalreasons:

• The data are broadly based. The Reserve Banks made cash payments during 1996 that were destined for, and received deposits originating from, more than 80 countries.
• The sample is very large. The Reserve Banks received and were thus able to inspect 17 percent (or one of every six) of all $100 notes in circulation outside the United States during 1996.
• Federal Reserve figures are similar to other available data. The incidence of counterfeits in notes received by Federal Reserve currency operations is very similar to that found by major wholesale commercial banks.

During 1996, theFederal Reserve improved its method of collecting data onbanknote shipments to and from locations outside the UnitedStates. For cash payments by the Reserve Banks to depositoryinstitutions that intend to forward the banknotes to branches orcustomers abroad, participating institutions are now asked toidentify each ultimate country of destination. Likewise, for cashdeposits at Reserve Banks, participating institutions are askedto identify, for each 100-note strap of banknotes, the countryfrom which the deposit originated. As a consequence, theusefulness of the Federal Reserve’s operating data in makingjudgments about the geographic distribution of U.S. currencyoutside the United States has been enhanced. Similarly, theFed’s ability to provide to the Secret Service informationon the country of origin of any counterfeits detected in depositsoriginating abroad improves the Service’s understanding ofthe nature and extent of counterfeit U.S. currency that has beenpassed in various parts of the world.

As a result, webelieve the Fed’s data allow us to derive reasonableestimates of the amount of genuine and counterfeit U.S. currencythat circulates outside of the country at any one time.

Of course, theseestimates assume that the sample of currency the Fed receiveseach year is representative of the entire stock of U.S. currencyin circulation. We have used the ICAP and subsequent overseasaudit surveys to assess the validity of that assumption. We havefocused particularly on this issue since our audit surveys beganlast fall. To date, without exception, the evidence has indicatedthat the sample is representative. We have seen nothing tosuggest nor have we been given any plausible explanation for aprocess by which a significant amount of U.S. currency,counterfeit or otherwise, can circulate for an extended period oftime without entering the banking system and eventually theFederal Reserve.

While it isimpossible to know at any one time the precise amount ofcounterfeit currency in circulation, we are confident that theinformation we review on a continuous basis allows us toascertain the magnitude of the counterfeiting problem. Thisinformation clearly shows that the counterfeiting of U.S.currency remains a de minimis economic problem, with the oddsbeing minuscule of any particular individual actually incurring aloss due to counterfeiting. Nevertheless, we take counterfeitingseriously, as evidenced by the Secret Service’szero-tolerance approach to this crime.

Before concluding, Iwould like to mention some additional things we have learned fromICAP and the overseas audit surveys.

First, what we havefound consistently, in addition to a wide variety of reasons forwhy people use U.S. currency, is that those individuals serve asan effective front line against counterfeiting. Foreign users ofour currency are keenly aware of its features, and cash handlingprofessionals are quite adept at detecting counterfeits. As thefigures presented above illustrate, the counterfeit detectionrates in foreign-origin currency deposits at the Fed haveconsistently been below the detection rates in domestic Feddeposits.

Second, one of themost important benefits of these programs is the opportunity tobuild and strengthen our relationships with our counterpartsoverseas. This has proven to be especially important for ourintroduction of newly designed currency and in countries whereofficial government relations are still developing. In thatregard, I can report that the Secret Service continues to workwith the State Department to meet its overseas staffing needs.Over the past four months, the Service has received approval forfive additional overseas positions.

Third, even thoughmost of the people with whom we meet are anxious to provide anyinformation they can, the vast majority do not track closely orfocus upon U.S. currency usage in their own countries.Furthermore, most are under no obligation to provide us withinformation. Nevertheless, we believe that the vast majority giveus the best information available.

In summary, the newsthat we have to report is good. The introduction of the $100 hasgone well; we are making preparations for the issuance of thenewly designed $50 this fall and the $20 next year; we are wellinto the overseas currency audit process; we continue to buildproductive relationships with our counterparts overseas; and theinformation we have gathered thus far has held up in support ofour estimates of worldwide counterfeiting levels. Nevertheless,we will continue to look critically at all of the availableinformation.

We will alsocontinue to look forward and take steps that will allow us toremain ahead of the counterfeiting threat -- a threat that willno doubt be with us for as long as our currency serves as thestandard for stability and acceptability throughout the world.

TREASURY AUDIT PLANCHRONOLOGY

April 24, 1996 Passage of Antiterrorism and Effective Death Penalty Act of 1996

September 1996 First Audit Survey -- Southeast Asia

November 5, 1996 Submission of Audit Plan to Congress

January 1997 Second Audit Survey -- Southeast Asia

April 11, 1997 GAO Report on the Treasury Audit Plan

April 15, 1997 Treasury and Federal Reserve meet with Chairman Bachus’s staff to discuss the Addendum

April 21, 1997 Submission of Treasury Audit Plan Addendum

May 1997 Third Audit Survey -- South America