Judging by recent reports, the incidence and quality of banknote counterfeiting is on the rise. This should come as little surprise as it has been widely predicted as an inevitable consequence of the economic downturn. What is surprising is the speed with which previous advances in bringing down levels of counterfeiting appear to have gone into reverse.

Or maybe not so surprising. As Bob Rankin of the Reserve Bank of Australia points out in his interview this month, when counterfeiting starts to increase, it can do so very rapidly.

There are several recent cases pointing to the reversal in the trend towards lower counterfeiting. Strenuous efforts have been made in Canada in recent years, for example, to tackle counterfeiting but this has now reached a 'dangerous' level, according to local reports. Counterfeit note seizures amounted to C$5m by the end of September, an increase of 50% on the value seized in 2007, which was C$3.3m.

How this figure relates to the counterfeiting ratio in terms of number of fakes per million notes is circulation is unknown. This ratio peaked at 470 in 2004, but has subsequently been brought down. It was 105 in 2007 and as recently as last October the Bank of Canada was claiming that, by the middle of 2008, the ratio was just 65, leading it to predict that it would easily beat its target of 100 by 2009.

Targeting Higher Values

This ratio aside (which is a useful indicator of counterfeit activity but by no means the only one), what is clear from the reports is that counterfeiters are now targeting higher value notes, with the Bank said to be particularly concerned about the effective reproduction of the Canadian Journey series high-denomination $100. This was the most counterfeited note in the third quarter of 2008, representing about 55% of all notes detected in circulation, compared with only 5% of all seizures in the whole of 2007.

The European Bank has reported, in a different trend, that the most commonly counterfeited note during the second half of 2008 was the EUR 20, compared with the EUR 50 that has, historically, been the most-targeted note.

Euro counterfeits rose by 18% in volume terms in this period to reach their highest level yet. The number of notes in circulation has also grown but, even so, the progressive reduction in the counterfeiting ratio in recent years, to around 49 per million in 2007, has stopped and the ratio has gone back up to 55.

The US Secret Service, meanwhile, has reported that counterfeiting arrests increased by 28% in 2008 to reach a five year high. The value of notes seized was $64.4m, a 5% increase over 2007. The majority of counterfeit notes are $20 bills, but there have also been a reported increase in counterfeit $100 bills as well.

The Secret Service describes the counterfeiters as 'not just the criminal element', but also students using counterfeit $20 bills to buy pizza or fuel for their cars. As economic concerns rise, more consumers are trying to pass fake bills to pay things like utilities or to buy groceries and other essentials.

Another example is the Bank of Thailand, which has advised of 'rampant forgery' of Baht 1,000 banknotes. This is despite the fact that punishment for counterfeiting in the country is severe (producers can face life imprisonment, and the deliberate passing of fake banknotes is punishable by jail sentences ranging from one to 15 years).

These counterfeits are reported to be of low quality, but small-scale vendors are nevertheless avoiding the highest denomination notes, requesting smaller denominations from their customers instead which is in turn increasing the overall demand for banknotes.

China, the world's engine room for producing and supplying fake goods, is now experiencing an innovative method of distributing fake currency - counterfeit renminbi banknotes are being offered openly on the internet. Although some traders have had their websites closed down, others remain active and are easily found by conducting a search 'fake banknotes for sale'. According to a Financial Times reporter, sellers contacted via their websites offered prices ranging from 10-33% of the face value.

To take the above examples and assume that they are the start of a new trend that applies to currency as a whole is somewhat simplistic. It is early days and one should apply the adage that 'one swallow does not a summer make' (in that the first arrival in an annual bird migration does not in itself denote the start of the season).

A Sign of What's in Store

Having said that, the arrival of the first swallow is nevertheless a very good indication of what is in store, and so it is with counterfeiting. We have pointed out before that counterfeiters need little excuse to ply their trade at the best times, although economic hardship is a sure recipe for increased criminality. We have also pointed out that, when compared with other targets, currency counterfeiting is actually very low in both volume and value terms.

But it is not so much the actual value or volume of counterfeiting that is a cause for concern, so much as trends and the impact these can have on public confidence. This, as we all know, is already at an all-time low. At the same time, the need for organisations - issuing authorities among them - to tighten their belts has seldom been higher (even if several governments are, at the moment, are doing the very opposite).

Currency needs the best of protection at the best of times, and even better protection when times are hard. It is to be hoped, if the above examples do point to a wider trend in counterfeiting activity, that investment in security is not only maintained but stepped up, and that such investment pays off. Otherwise confidence in currency could go the same way as confidence in just about every other aspect of the financial system.