oversight

U.S. Treasury: Observations on Plans to Study Genuine and Counterfeit U.S. Money Abroad

Published by the Government Accountability Office on 1997-07-10.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                          United States General Accounting Office

GAO                       Testimony
                          Before the Subcommittee on General Oversight and
                          Investigations, Committee on Banking and Financial
                          Services, House of Representatives


For Release on Delivery
Expected at
10 a.m., EDT
                          U.S. TREASURY
Thursday,
July 10, 1997

                          Observations on Plans to
                          Study Genuine and
                          Counterfeit U.S. Money
                          Abroad
                          Statement of JayEtta Z. Hecker, Associate Director,
                          International Relations and Trade issues, National Security
                          and International Affairs Division




GAO/T-NSIAD-97-201
          Mr. Chairman and Members of the Subcommittee:

          We are pleased to be here today to discuss our observations on the
          Department of the Treasury’s October 1996 audit plan and its April 1997
          addendum to study the uses, holding, and counterfeiting of U.S. currency
          in foreign countries. As we reported in February 1996, the Secret Service
          used its detection data to reflect the actual amount of counterfeit U.S.
          currency notes abroad, despite limitations in these data that raised doubts
          about their usefulness for measuring counterfeiting activity. Subsequently,
          Congress passed the Antiterrorism and Effective Death Penalty Act of 1996
          (P.L. 104-132, Apr. 24, 1996) which, among other things, requires that the
          Secretary of the Treasury develop a plan that is designed to enable the
          Secretary to (1) study the use and holding of genuine U.S. currency in
          foreign countries and develop useful estimates of the amount of
          counterfeit U.S. currency that circulates outside the United States each
          year, (2) conduct audits based on this methodology, and (3) report
          triennially on the results.

          My remarks today are based both on our report on the Treasury’s original
          plan entitled U.S. Currency: Treasury’s Plans to Study Genuine and
          Counterfeit U.S. Currency Abroad (GAO/NSIAD-97-104, Apr. 11, 1997), and our
          assessment of the Treasury’s subsequent addendum to the plan.


          Our review of the Treasury’s original plan submitted to Congress indicated
Summary   that it did not explain how it would enable the Treasury to meet the audit
          objectives required under the act. The plan’s audit objectives were not
          clearly stated. Although the Treasury’s plan identified some elements of a
          methodology that could be employed to collect information about the uses
          of genuine U.S. currency abroad, it did not specify how the Treasury
          intended to analyze the information that might be collected. The plan also
          did not define the methodologies that the Treasury expected to use to
          estimate the amount of genuine and counterfeit U.S. currency in
          circulation abroad.

          After we outlined our concerns to Treasury and Federal Reserve officials,
          the Treasury agreed to submit to Congress an addendum to the plan. The
          addendum’s purpose was to more fully explain the objectives and the
          methodologies the Treasury intended to use. On April 21, 1997, the
          Treasury sent its addendum to Congress.




          Page 1                                         GAO/T-NSIAD-97-201 U.S. Treasury
             The addendum adds some clarity to the Treasury’s audit plan, but some
             questions remain. The addendum describes the Treasury’s audit
             objectives, provides new information that makes it easier to understand
             the methodologies the Treasury intends to use to develop estimates of the
             amount of genuine and counterfeit U.S. currency abroad, and provides
             current Federal Reserve estimates based on those methodologies.
             However, the addendum does not clearly address a deficiency in the plan
             that we previously reported. Specifically, the addendum does not fully
             describe the methodology the Treasury will use to collect, summarize, and
             report information on the uses of genuine U.S. currency abroad.
             Furthermore, because much of the Treasury’s methodologies for
             developing estimates are based on existing data, it is not clear what
             additional fieldwork or information is needed. The addendum does not
             explain how the audit steps from the original plan, particularly those for
             the interviews planned for future trips abroad, are to be incorporated into
             any of the methodologies described in the addendum. For example,
             questions remain about what useful new information the overseas trips are
             expected to yield and how it will be integrated into the Treasury’s
             estimates of the amount of genuine and counterfeit U.S. currency abroad
             and information on the uses of genuine U.S. currency abroad.

             With that overview, let us now go back and provide some contextual
             background and discuss our observations on the Treasury’s original plan
             and the addendum in more detail.


             All currencies are susceptible to counterfeiting, but the stability and
Background   worldwide acceptance of U.S. currency, in particular, have made it a target
             for international counterfeiters. Although the extent of counterfeit U.S.
             currency produced and circulated in foreign countries is difficult to
             determine, an evaluation of the threat can be used to allocate scarce
             resources to its detection and to assess the effectiveness of measures to
             combat counterfeiting.1 In the past, the Secret Service used its detection
             data to reflect the actual amount of counterfeits abroad. However, as we




             1
              Other tools may include evaluating the quality or usage of the counterfeits, the type of equipment
             used, the type of perpetrator, and the connection with other crimes. See GAO/NSIAD-97-104.



             Page 2                                                          GAO/T-NSIAD-97-201 U.S. Treasury
                    reported in February 1996, the limitations associated with such data raised
                    doubts about their usefulness for gauging counterfeiting activity.2

                    Counterfeiting of U.S. currency, if it became widespread, could undermine
                    confidence in the currency and perhaps even reduce the international
                    holdings of U.S. currency and negatively affect the U.S. economy. When
                    U.S. currency remains in circulation abroad, it essentially represents an
                    interest-free loan to the U.S. government. The Federal Reserve has
                    estimated that the U.S. currency held abroad effectively reduces the need
                    for the government to borrow up to $250 billion a year and thus may lower
                    the government’s interest costs by over $10 billion a year. If confidence in
                    the dollar were undermined, individuals might switch to other currencies,
                    which would reduce this benefit to the United States. It was within this
                    context that the Treasury was called upon to develop better ways to, in
                    essence, monitor the extent of genuine and counterfeit U.S. currency
                    abroad.


                    The audit plan originally submitted to Congress by the Secretary of the
The Treasury’s      Treasury did not demonstrate how it would enable the Treasury to meet
Original Plan Was   the audit plan objectives required under the law. A written plan should
Unclear and         define the audit’s objectives and the scope and methodology to achieve
                    those objectives.3 The Treasury plan’s audit objectives were not clearly
Incomplete          stated. Concerning scope, the original plan provided a time line for
                    completing the audits, site selection criteria for regions of the world, and
                    information and data sources. Although the original plan provided some
                    information on data gathering, it did not adequately explain the analytical
                    methods the Treasury intended to use to achieve the objectives. For
                    example, the original plan identified data sources and provided questions

                    2
                     In 1996, we reported that the available data presented many limitations, and we questioned whether
                    the Secret Service had a sufficient basis to conclude either the approximate magnitude or the trend of
                    counterfeiting activity abroad. Some specific limitations of the data are that they (1) included only
                    those counterfeit detections that were reported to the Secret Service; (2) may have underreported the
                    occurrence of high-quality currency notes because those notes are difficult to detect; (3) may have
                    reflected factors other than increasing counterfeit activity, such as improvements in the ability to
                    detect counterfeits or to determine their source; and (4) may have shown fluctuations over time that
                    were skewed because of the occurrence of unusually large seizures. See Counterfeit U.S. Currency
                    Abroad: Observations on Counterfeiting and U.S. Deterrence Efforts (GAO/T-GGD-96-82, Feb. 27,
                    1996) and Counterfeit U.S. Currency Abroad: Issues and U.S. Deterrence Efforts (GAO/GGD-96-11,
                    Feb. 26, 1996).
                    3
                     The objectives are what an audit is to accomplish and can be thought of as questions that auditors
                    seek to answer. Objectives identify the audit subjects and performance aspects to be included, as well
                    as the potential finding and reporting elements that the auditors expect to develop. Scope is the
                    boundary of the audit. It addresses such things as the time period and number of locations to be
                    covered. The methodology comprises data-gathering and analytical methods auditors will use to
                    achieve the objectives. See Government Auditing Standards: 1994 Revision (Washington, D.C.,: U.S.
                    General Accounting Office, June 1994).



                    Page 3                                                         GAO/T-NSIAD-97-201 U.S. Treasury
that may be asked of foreign financial and law enforcement officials, but it
did not fully explain how this information would be analyzed and
synthesized to address each of the audit plan objectives set forth in the
act.

The original plan did not describe analytical methods for studying the
holding of genuine U.S. currency abroad and developing estimates of
counterfeit U.S. currency abroad. However, it did describe elements of a
methodology that might be used to study the use of genuine U.S. currency
abroad. According to the original plan, the Federal Reserve would attempt
to specify and test a model to support or refute an assumption about
currency movement outside the United States. The assumption was that
U.S. currency would move between and among individuals and business
firms in such a way that the portion of U.S. currency held abroad that was
received by the Federal Reserve each year through its foreign-origin
currency receipts (at least 13 percent in 1995) was representative of the
total amount of U.S. currency abroad. The Federal Reserve’s model was
expected to focus on the factors that cause certain amounts to (1) come
into the possession of financial institutions abroad, (2) be regarded as
surplus to the needs of those individual financial institutions, (3) be sold
subsequently to correspondent banks,4 and finally, (4) be deposited by a
correspondent bank at the Federal Reserve.5 However, the plan did not
fully explain how the Treasury intended to analyze the information
obtained to reach conclusions about the use of U.S. currency abroad.

After we outlined our concerns about the original audit plan to Treasury
and Federal Reserve officials, the Treasury official responsible for the plan
advised us that the Treasury planned to submit a written addendum to
Congress that would explain in more detail the Treasury’s proposed
methodologies, the assumptions the Treasury made, and the limitations
associated with the resulting estimates. As stated, the Secretary of the
Treasury submitted an addendum to Congress in April 1997, to more fully
explain the objectives and methods the Treasury intends to use to report
on the uses, holding, and counterfeiting of U.S. currency abroad. In the



4
 A correspondent bank is a financial institution that regularly performs services for another in a
market inaccessible to the other. In banking there is usually a depository relationship that
compensates for expenses and facilitates transactions.
5
 Information about how citizens and businesses, other than financial institutions, use U.S. currency
abroad is likely to be addressed as part of the information on how and why financial institutions obtain
U.S. currency. Financial institutions obtain U.S. currency for many reasons and from many sources; for
example, in countries with unstable currencies, traders may deposit proceeds from sales transacted in
U.S. currency.



Page 4                                                           GAO/T-NSIAD-97-201 U.S. Treasury
                      addendum, the Treasury stated that it had begun fieldwork and intended
                      to report to Congress sometime before the September 1999 deadline.


                      The Treasury’s addendum addresses some of the issues we previously
Treasury’s Addendum   raised, but questions remain. The addendum provides the Treasury’s
Adds Clarity, but     objectives, the methodologies that the Treasury intends to use to meet its
Some Questions        objectives for developing estimates of genuine and counterfeit U.S.
                      currency abroad, and estimates resulting from those methodologies.
Remain                However, the addendum does not fully address a concern we previously
                      reported about the Treasury’s limited explanation of how it intends to
                      analyze and report information on the uses of genuine U.S. currency
                      abroad. The Treasury has already collected information on the uses of U.S.
                      currency in 18 locations around the world, but the methodology for
                      analyzing and reporting such information is not explained. Further, given
                      that some of the data on currency usage has been collected and that much
                      of the Treasury’s methodologies for developing estimates use existing
                      data, it is not apparent what additional fieldwork and information the
                      Treasury needs to complete to meet its objectives.

                      The addendum addresses some of the deficiencies we identified in the
                      original plan. The addendum describes, in detail, the methodologies the
                      Treasury will use to develop estimates of the amount of genuine and
                      counterfeit U.S. currency abroad and provides estimates based on these
                      methodologies. The methodologies are based on data already maintained
                      by the Federal Reserve and assumptions that, according to the addendum,
                      are supported by evidence that has been gathered from overseas sources,
                      including overseas trips made by the Treasury, Secret Service, and Federal
                      Reserve.6

                      The addendum provides answers to the questions on the amount of
                      genuine and counterfeit U.S. currency circulating abroad by providing
                      Federal Reserve estimates. According to the addendum, the Federal
                      Reserve estimates that about $200 billion to $250 billion of U.S. currency,
                      or more than half the roughly $375 billion in circulation outside of banks in
                      1995, was abroad. The 1996 estimate had not yet been completed, but the
                      available information suggested that approximately $215 billion to
                      $265 billion out of about $400 billion of U.S. currency was held abroad at
                      the end of last year, according to the addendum. The addendum also cites

                      6
                       As of February 12, 1997, visits had been made to 18 countries or entities where U.S. currency was
                      used or distributed to a significant extent. These locations are Argentina, Bahrain, Belarus, Cambodia,
                      Egypt, England, Indonesia, Hong Kong, the Philippines, Russia, Saudi Arabia, Singapore, Switzerland,
                      Taiwan, Thailand, Turkey, the United Arab Emirates (Abu Dhabi and Dubai), and Vietnam.



                      Page 5                                                          GAO/T-NSIAD-97-201 U.S. Treasury
a Federal Reserve estimate of total counterfeit U.S. currency in circulation
of $40 million to $67 million worldwide. Of this amount, the Federal
Reserve estimates that $15 million to $25 million in counterfeit $100 notes
circulate outside of the United States.7 According to the Federal Reserve,
the estimates suggest that 1 in 10,000 U.S. currency notes is likely to be
counterfeit.

Although the addendum addresses our previous concern about how the
Treasury intends to develop estimates of genuine and counterfeit U.S.
currency circulating abroad, it does not clearly address our previous
concern about the analysis and reporting of information on the uses of
genuine U.S. currency abroad. To address this objective, the addendum
states the Treasury and the Federal Reserve will develop models for
currency usage in selected countries or regions where U.S. currency is
widely used, such as the former Soviet Union and Argentina. Each model
is expected to account for the relevant variables that dictate the usage and
flows of U.S. currency, such as economic conditions (for example,
inflation and trade), the level of development of the banking and financial
systems, political stability, currency and foreign exchange controls, laws
regarding the use of U.S. currency for certain transactions, the number of
expatriate workers, and the amount of tourism. The addendum also cites
the possibility of modeling how much domestic currency residents of a
country would hold in the absence of any foreign currency holdings.
Because the addendum does not identify additional information the
Treasury would need to develop such models, it is not clear what
additional work the Treasury needs to perform. Although, as of
February 1997, information had been collected in 18 countries or entities
where U.S. currency was used or distributed to a significant extent,
including the former Soviet Union and Argentina, the methodology for
analyzing and reporting information on U.S. currency usage abroad,
including how specific models are to be integrated into the process, had
not been defined.

Finally, the Treasury had already conducted a number of interviews
worldwide using similar questions on U.S. currency usage, holding, and
counterfeiting to those listed in the original plan, but the addendum only
makes a passing reference to overseas visits.8 What additional information

7
 Overall, according to the Federal Reserve, $100 notes accounted for approximately three-quarters of
the value of all counterfeit notes passed last year.
8
 The addendum refers to foreign currency audits and other information from foreign central banks in
its description of how the Treasury intends to produce estimates of genuine U.S. currency held in
various regions of the world. The Treasury has previously obtained such information during overseas
visits.



Page 6                                                        GAO/T-NSIAD-97-201 U.S. Treasury
           was to be derived from such visits and what additional fieldwork needed
           to be conducted in order to meet the Treasury’s objectives were not
           discussed. Although the Treasury may have other reasons for overseas
           trips, such as using them as a forum for discussions, exchanges of ideas,
           and counterfeit-detection training, it is not clear from the addendum how
           sending U.S. officials on additional trips abroad would provide useful
           information for reporting purposes under this act.


           Mr. Chairman and Members of the Subcommittee, that concludes our
           prepared statement. We will be pleased to answer any questions you may
           have.




(711269)   Page 7                                        GAO/T-NSIAD-97-201 U.S. Treasury
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