In his article in CN December 2024 Antti Heinonen reported that the majority of central banks which publish data on counterfeiting use parts per million (ppm) as a metric. Due to its relative ubiquity (and the absence of anything better), ppm serves as a useful means of comparing trends both within and between countries. But as a metric it has its shortcomings.
This article examines some of those shortcomings and proposes an alternative method based on the number of banknotes used for cash transactions.
Ppm is calculated based on the total number of genuine notes in circulation (NIC), yet in recent years, the Bank of England, European Central Bank (ECB) and Reserve Bank of Australia (RBA) have all published reports showing that only about 20% of banknotes are used for transactional purposes. If fewer genuine notes are used for transactions then the probability of receiving a counterfeit is significantly higher than the ppm suggests. By their nature counterfeit banknotes are used in cash transactions, and measuring counterfeits in terms of transactional cash instead of NIC could identify counterfeiting issues that are less apparent from the ppm calculation.
The Bank of England estimates that, at any one time, only around 20-25% of banknotes are held within the domestic transactional cash cycle. Of the remaining 75%, some are held by individuals within the UK, some are held overseas by investors as a store of value, and some may be held in the shadow economy. Around £10-30 billion of Bank of England banknotes are held in reserve by households domestically, with a high degree of confidence that at least £10 billion is held by households 1.
In 2023 there were over 4.6 billion Bank of England banknotes in circulation and 116,000 counterfeit banknotes were taken out of circulation, giving a counterfeiting level of 25ppm. The NIC includes notes from old series that no longer hold legal tender status and therefore cannot be used for transactions (although they can still be exchanged at the central bank for new notes). In July 2024 there were 395 million paper banknotes in circulation with a value of £7.2 billion 2. Removing these notes from the NIC number increases the counterfeiting level by two points to 27ppm.
The situation is similar in Europe; in Figure 1 the ECB estimated that 20-22% of euros are used for local transactions. Between 28-50% of euros are held as a store of value within the euro area whilst an estimated 30-50% of euros are held abroad 3.
Source: ECB
The RBA used four different methods to approximate the size of transactional cash and concluded that of all the banknotes in circulation:
The estimated share of banknotes used for transactions in Australia has declined by 5% since the Covid-19 pandemic and is consistent with the decline in cash payments 4.
If the number of banknotes used for cash transactions is only about 20% of the NIC, and assuming the number of counterfeits in circulation remains the same, then the ppm figure is increased fivefold.
Table 1 shows the impact on ppm in 2023 when it is calculated from transactional cash instead of NIC. It moves all of the countries above the global average of 15ppm quoted as a benchmark by the Central Bank of Sri Lanka and takes Canada close to its own benchmark of 30ppm.
*Deducted 0.4 billion withdrawn paper banknotes from NIC
In the case of the euro the €20 and €50 notes are the most counterfeited, together accounting for more than 70% of the total. The risk of coming into contact with a counterfeit increases because the most counterfeited denominations are mostly used for day-to-day cash transactions. The risk is also high in the UK, where 57% of the NIC are £20 and counterfeit £20 notes are 91% of the total.
Retailers tend to keep the transactional denominations as change and they cycle through the cash processing centres less frequently than higher denominations that are more likely to be banked once they are spent. This increases the possibility of a counterfeit banknote being used in more than one transaction before it is withdrawn. Higher quality counterfeits will stay in circulation for longer and could be passed more than once before they are detected. Such counterfeits are only counted once in the statistics at the point of withdrawal from circulation.
The risk of receiving a counterfeit banknote is concentrated in a small demographic of 1.5 million consumers or 2.6% of adults in the UK who mainly used cash when doing their day-to-day shopping in 2023. Further, cash is only handled by 61% of UK adults, with the remainder of the population living largely cashless lives 5. When people handle cash infrequently the risk of accepting a counterfeit increases because they are less familiar or are complacent about checking that the banknotes are genuine.
Calculating the level of counterfeiting based on the amount of transactional cash instead of NIC has the potential to show counterfeiting issues that may not be apparent in the ppm calculation. A method of calculating transactional cash is needed and the IMF views the value of cash withdrawn from ATMs as a more accurate measure of cash use compared to currency in circulation. This is because ATMs are typically stocked with mid-value denominations that are used in cash transactions 6.
Bulk seizures are counterfeit banknotes that are intercepted by law enforcement operations, such as raids on counterfeiting print shops. Because the counterfeits are seized before they enter circulation they are not included in the ppm calculation. Some central banks - including the RBA, the Bank of England and Bank of Canada - publish the number of seized counterfeits separately (in Canada the statistics are published by the Royal Canadian Mounted Police).
In some years the number of bulk seizures exceeds the number of counterfeits removed from circulation. In 2019 there were 453,000 counterfeit Bank of England banknotes removed from circulation and 536,000 in bulk seizures. This was due to a police investigation that closed down an organised crime group (OCG) that was producing high quality counterfeits of the paper £20 banknote, using commercial offset printing with simulation of the holographic stripe and windowed security thread by hot foil stamping. The OCG was jailed for conspiring to supply more than £12 million of counterfeit banknotes, of which £1.8 million entered circulation.
In August 2024. Italy’s Carabinieri arrested a counterfeiter in Naples who they believed was responsible for 27% of counterfeit euro banknotes removed from circulation in 2023. On dismantling his sophisticated counterfeiting print shop they seized nearly €3 million in high quality counterfeit banknotes 7. Because these notes were a bulk seizure they were not included in the ppm calculation.
Some likenesses of banknotes are marketed as Movie, Prop or Training notes. These look like genuine banknotes but are often printed onto paper without any security features such as windowed threads or holograms and contain phrases such as Movie or Prop Money. Training notes often have Chinese characters printed on the front and back.
Such notes were originally intended to be used in film and television productions and for training bank cashiers. If they are copied the same size as the genuine notes then they are counterfeit and it is a criminal offence to possess, pass, sell, make or import these notes. The Bank of England states that reproductions of banknotes must be at least 25% smaller or larger than the genuine banknote and in the US Prop money must be 75% smaller or 150% larger than the genuine notes.
In April 2024 police in Germany seized a consignment of over one million US$100 Movie Money notes that originated in Turkey and was being shipped to the US.
In October 2024 law enforcement agencies from 18 countries seized over €14 million in counterfeit currency in a joint customs and police operation coordinated by Europol. 174 parcels were seized and the vast majority contained Movie Money copies of €20 and €50 notes. Copies of British pounds and US dollars were also seized 8.
Whilst these bulk seizures are not included in the ppm calculation they point to a growing trend of counterfeiters importing commercially printed Prop or Movie money from China or Turkey. For currencies that have holographic stripes or patches, the counterfeiters may import separate consignments of counterfeit hologram stickers that are applied to the Prop money before the counterfeits are sold on social media platforms. The benefit to the counterfeiters is they do not need to invest in printing equipment and if they are caught they are likely to face lesser charges of possession or passing counterfeit banknotes as opposed to making counterfeits.
The majority of central banks which publish data on counterfeiting use ppm as a metric. Although ppm gives an understanding of counterfeiting trends it has a number of shortcomings that can lead to a false sense of security about counterfeiting levels.
1)The calculation of ppm is based on the number of genuine banknotes in circulation. This masks the true level of counterfeiting because studies show that only about 20% of banknotes are used for cash transactions, which increases the probability of a counterfeit being passed.
2)Bulk seizures are excluded from the ppm calculation yet they physically represent the next counterfeiting threat to a currency.
3)Counterfeits can be passed in more than one transaction but are only counted once in the statistics at the point of withdrawal from circulation.
It is proposed that the level of counterfeiting is calculated from the number of banknotes used in cash transactions. A figure for transactional cash can be developed using data on cash withdrawn from ATMs.
1 - Caswell, Ellen: Knocked down during lockdown: the return of cash, Bank of England Quarterly Bulletin, 2022 Q3.
2 - BBC News (24/07/2024) https://www.bbc.co.uk/news/articles/cx924nklw4yo
3 - Zamora-Peréz, Alejandro: The Paradox of Banknotes: understanding the demand for cash beyond transactional use, ECB Economic Bulletin Issue 2/2021.
4 - Elkington, Patrick and Guttmann, Rochelle: Understanding the post-pandemic demand for Australia’s banknotes, Reserve Bank of Australia Bulletin, January 2024.
5 - UK Finance (July 2024) UK Payments Market Summary
6 - Khiaonarong, Tanai and Humphrey, David: Measurement and Use of Cash by Half the World’s Population, IMF (2023) Working Paper 23/62
7 - Europol (2024) Euro forger who produced EUR 11 million in fake bills arrested in Italy
8 - Europol (2024) Over EUR 14 million in counterfeit currency seized in operation targeting postal shipments
