The Indian government’s recent
decision to invalidate five-hundred- and one-thousand-rupee notes is a
reflection of growing concerns about the widespread circulation of counterfeit
currency notes in the predominantly cash-based Indian domestic economy. Data collected by the Indian Statistical Institute revealed
that as many as 250 out of every million notes in circulation were fake. This
may seem a small percentage, but in absolute terms it translates into
mind-boggling numbers. The Indian media’s clamor over the politically exciting
issue of black money is understandable, but it undermines the threat posed by
counterfeit currency—both to monetary stability and to the internal security of
the country. It was not surprising that the official notification by the ministry of finance, which
regulates the production and circulation of Indian legal tender, categorically underlined
that the decision to withdraw the notes was intended to curb the financing of
terrorism through the proceeds from these fake notes.
India has a large unorganized, cash-based
economic sector whose daily transactions number in billions of rupees. According
to Boston Consulting Group, in the year 2015, 78 percent of all consumer
transactions in India were cash-based. It is this large cash-based
sector that was inundated with the circulation of counterfeit currency notes.
The question is how big this circulation really is, and how such criminal
activity, traditionally undertaken for economic gain by private individuals,
organized gangs and crime syndicates, managed to erode common consumers’ faith
in Indian legal tender.
Between 2010 and 2013, Indian law-enforcement agencies seized $150 million in
counterfeit currency. The counterfeiting of high-denomination Indian
legal tender is not an ordinary criminal activity; it is a well-orchestrated,
state-sponsored enterprise, intended to adversely impact India’s economic
security. It amounts to terrorism by other means.
In India, counterfeiting is performed by a
large and well laid-out network
of intermediaries. These intermediaries are not only located within Indian
territory, but have woven an extensive web in neighboring countries like Nepal,
Bangladesh and Sri Lanka. They use these locations as staging posts for pumping counterfeit currency into
Indian territory through the porous border. Many Pakistani nationals have been
arrested with huge amounts of Indian counterfeit in these countries.
David Headley, who is currently serving a
sentence in the United States for his role in the Mumbai terror attacks,
confessed before a Chicago court that a major of Pakistan’s ISI had
provided him with counterfeit Indian currency to cover his various
reconnaissance trips to India. Headley admitted that because of the high
quality of the counterfeit, he never encountered any problem using the bills in
India. It did not surprise Headley that Pakistani state actors were
involved in the counterfeiting of Indian currency.
In the late 1990s and early 2000s, the
United States faced a similar problem, in the form of counterfeit
“superdollars,” which were illegally produced by North Korea and then pumped
into the United States through shadowy banks and individual smugglers. A 2009 Congressional Research Service report,
“North Korean Counterfeiting of U.S Currency,” admitted that high-quality
counterfeit hundred-dollar bills had the ability to erode public confidence in
U.S. legal tender. No wonder that many stores in the United States during that
period simply refused to accept
hundred-dollar bills.
The Indian government, for its part, has
been trying to address this problem through a combination of legal indictments
and diplomatic measures. India increased its diplomatic tempo after 2014, when
Indian investigating agencies received a judicial conviction in a crucial
transnational case of counterfeiting, where investigators armed with
scientific evidence were able to nail down the role of Pakistan’s state
agencies in the production of Indian counterfeit.
The sophistication of the
counterfeiting, and the use of genuine currency paper, clearly suggested the
involvement of state actors. Moreover, the counterfeit currency successfully
imitated certain high-quality, cost-intensive security features of genuine
Indian currency. Such features as a guilloché pattern in the background design,
asymmetric see-through registration and latent image effects can only be incorporated
using standard currency-making machines. These making machines are highly
capital-intensive, and are sold only to sovereign governments and their central
banks. There is only a handful of manufacturers for these currency-making
machines in the world.
The clinching evidence for Indian
investigators came when a Committee of Experts,
set up to look into counterfeit forensics, opined that “all the batches of
counterfeit currency notes which were seized by law enforcement agencies from
different parts of the country, not only had a common source but based on their
printing defects these were printed in the same currency printing press.” The
earliest batch of these counterfeits dated back to 2000, when counterfeits
five-hundred-rupee notes amounting to half a million Indian rupees
(approximately $9,000) were recovered from the bodies of two Pakistani
terrorists who were gunned down near the international border in Jammu and
Kashmir.
The findings of the investigation were also taken to the Financial Action Task Force,
an intergovernmental body set up to combat money laundering and terrorist
financing.
The decision to invalidate five-hundred-
and thousand-rupee denomination notes is a step in the right direction, as most
of the counterfeit currency seized till now has been in these two
denominations. This also makes sense, as five-hundred- and one-thousand-rupee
notes together constitute 86.4 percent of the total value of Indian currency in
circulation.
The Indian government needs to build upon
this move with a multipronged strategy against counterfeiting by changing the
cost/benefit calculus of decisionmakers in Islamabad. The strategy must involve
both increasing costs and reducing benefits, in order to make the entire
enterprise prohibitive. The present step of invalidating high-denomination
notes would render millions of counterfeit notes as paper scrap. A few years
ago, the Indian government amended its counterterror legislation
and brought the circulation of high-quality counterfeit currency under the
ambit of a “terrorist act.”
It is also imperative to ensure that the
new notes have high counterfeiting costs. The invalidated five-hundred- and
one-thousand-rupee notes had strong covert features, but it was the imitation
of their overt features that dented their credibility. The new legal
tender needs to have robust overt security features. Covert features are
important, but these come into play only at the bank level, when the currency
has already been circulated in the market. Effective counterfeit-resistant
overt security features would make it easier for lay consumers to differentiate
between genuine and counterfeit currency, thereby making counterfeiting a less
profitable venture.
Sajid Farid Shapoo is a highly decorated
Indian Police Service officer at the rank of Inspector General (two star
general equivalent) with 18 years of progressively senior experience in
sensitive and high profile assignments across India. He is currently pursuing a
Master’s in International Affairs from Columbia University, New York.
Image:
Indian 1000-rupee note. Pixabay/Public domain
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