This election a lot of the black money that changed hands may have been fake. But then counterfeits may not matter to the central bank in the larger scheme of things
Elections and money have an uneasy relationship. We fear money’s influence in elections, and how it might undermine trust in the democratic process. Yet, it is seen as essential, especially when campaigns are as protracted as this current one. Money pays for the logistics, the ads and even the food and drink that, in large parts of the country, is seen as a necessary inducement to voting.
But money might be a source for further unease with this election. Several media reports have quoted sources in organisations like the Directorate of Revenue Intelligence (DRI) on the large amounts of fake currency notes flooding the country. They are usually alleged to have been printed in Pakistan, both to finance terrorism and destabilize the Indian economy by destroying trust in our currency, and smuggled into India from other neighbouring countries.
ET recently reported a DRI alert for all international airports, ports and land transit roots to watch out for smuggled counterfeit notes. Law enforcement agencies know that in all counterfeiting operations the challenge is not just producing convincing notes, but also finding easy ways to distribute them — and that is what elections provide. With so much money thrown around and no accounts asked for, it’s easy to pass out large amounts of fake notes. One report suggests that four out of every 1,000 currency notes might be fake and that the total value in circulation is well over 3,200 crore.
This is wildly in variance with what the Reserve Bank of India (RBI) claims. The RBI’s annual report says that 4,98,252 fake notes were detected in 2012-13. This would be around 0.00067% of total Indian rupees in circulation, adding up to a value of around 25 crore. Central banks typically don’t like talking about counterfeits, but in a detailed report in the Toronto Globe & Mail on how Canada tackled its burgeoning counterfeiting problem it’s indicated that alarm bells went off when the number reached 0.47% of notes, which was 10 times what was acceptable in G20 countries.
The Real Problem of Fakes
By that norm India is still far from facing problems. The RBI’s currency department, through the bank’s spokesperson, says firmly: “The security features in genuine Indian banknotes have not been breached.” A directive to withdraw by March 2014 (later extended to January 2015) all pre-2005 notes stirred rumours it was meant to tackle counterfeiting, but the RBI says it was simply a regular process: “Earlier we withdrew older series banknotes in a passive manner where the banks were instructed not to re-issue such notes and send back those notes to RBI for disposal,” says the spokesperson. In the past few years banks were told to do this for all notes of 100 and above printed prior to 2005. “In the current withdrawal plan we have involved the public also,” says the spokesperson.
One response to this divergence in news might be that the RBI is understating the problem either because it is not convinced about the extent of counterfeiting or because it wants to dampen fears of its extent. After all, stories about Pakistan-printed notes are widespread. In January this year a National Investigative Agency (NIA) judge awarded life sentences to six people caught in 2009 distributing fake notes and explicitly stated, “It is certainly a terrorist act in which neighbouring sovereign country i.e. Pakistan is involved with the sole purpose and intention to damage and threaten the unity, integrity, economic security and sovereignty of this country…”
That would seem to state the matter plainly, yet there is room for some ambiguity in the issue and it is linked to the nature of money. Money, particularly paper currency, is in its essence just a matter of trust and this is why counterfeiting has always been seen as such a threat. Fake currency undermines trust and threatens the whole system of money, as can be seen from the NIA judge’s strong words. A state’s power is reflected in the trust its money commands, so counterfeiting is an attack on the state.
For this reason counterfeiting has always been punished very severely. The Romans varied the penalty depending on the value of currency — faking silver coins meant exile, but faking gold got you thrown to the lions. The British decreed hanging, drawing and quartering, which involved disemboweling the criminal before he was dead. The US also made it a capital crime, with a lesser penalty of being branded and having ones ears cropped. This no longer applies, but fighting counterfeiting is still the job of the US Secret Service, along with protecting the president.
Yet counterfeiting currency has always flourished. The gains seem too large and immediate — all you need to do is pass on the fake, and then it is literally out of your hands. Counterfeiting also appeals to an anarchic dislike for the state that many people harbour. Many counterfeiters in the US were acquitted by juries who felt it was a minor, ‘clean’ crime. When the state is the victim then all are, but few feel it that way. And once currency was delinked from bullion reserves and governments printed money easily to cover their needs, people were cynical and wondered why they couldn’t create value the same way.
When States Join ’em
Adding to this cynicism is the fact that states have done their share of faking. Rulers have devalued their own currency to cover their reckless spending, but printing an enemy state’s currency is also an established tactic. The most famous case is Operation Bernhard when the Nazis took Jewish artists into concentration camps and made them forge British pounds and US dollars which they planned to air drop to cause chaos in these countries. The Counterfeiters, an Austrian film based on this story, won an Oscar for Best Foreign Film in 2007.
But Jason Goodwin, in Greenback, a history of the US dollar, points out that the idea originated with the British during the American Revolution. The rebelling colonies printed their own currency, but the British felt this was illegal to start with, so it wasn’t wrong to fake these notes. They were open about it: “The more public their operations, the more successfully they cast doubt on the currency,” writes Goodwin, citing newspaper ads through which they offered the fakes to those travelling to the rebels.
Such brazenness was matched by Rajaram Waman Mudras who, The Times of India reported on April 12, 1960, was arrested when the police found a currency printing press in his office in Fort, Bombay. Mudras had an ingenious defence — he was forging the Portuguese currency of Goa, still not part of India then. Mudras said he was fighting for Goa’s freedom and “that one of the acts of hostility in this war was to print counterfeit notes and thereby inflate the value of the currency in the Portuguese settlement.” The judge didn’t buy this admirably anti-colonial argument and sentenced him to jail.
Superpower of the Superdollar
And then there is the Superdollar. This is a very high-quality fake dollar that is said to be printed by an enemy state to the US — perhaps Iran or Syria. The first Superdollars may have surfaced in the 1980s, with more details emerging after the capture of two Lebanese born drug traffickers in 1992 who revealed the operation. The Superdollar story made much news at that time but then, this is the interesting part, it neither entirely went away nor developed much beyond that.
Superdollar stories still emerge occasionally, focussing on North Korea now, and always suggesting economic danger and imminent collapse of the dollar — and then the story dies again. The US treasury department stonewalls, much as the RBI might be doing now. At most there is tinkering with security features, like new microprinting, panels or threads. The RBI is talking about polymer currency, the so-called plastic notes pioneered by Australia that are the most secure form of currency because the formula for the polymer substrate is closely guarded and does not, as yet, seem to have been copied.
Polymer notes are how Canadians solved their counterfeit problems and they are now widely used, including by our neighbours in Bangladesh, Sri Lanka, Singapore and Nepal. The RBI has plans to try them in five cities, Shimla, Kochi, Jaipur, Bhubaneswar and Mysore, but this has been the case for a while now. The RBI’s plans for polymer highlights its durability and environmental benefits as much as its security. India may get polymer notes one day, but the RBI doesn’t want to sound like counterfeiting is the compulsion.
Apart from the pre-2005 withdrawal proposal, quickly modified, the RBI has also not gone in for the wholesale withdrawal of bank note series. Countries like the UK which do this make it easier by doing a complete redesign of their notes each time. When new notes are introduced, with the latest security features, there are windows in which the old notes can be withdrawn, but after a point this closes. It is not a good idea to keep old UK pounds in your cupboard between trips.
Playing it Safe
As of now, India is like the US where every note printed in the independent country is legal tender (barring the high value rupee notes demonetized in 1978). Both countries also rarely change the basic designs of the notes, though the reasons probably differ — the US Treasury feels it adds to the stability of the currency, whereas the RBI probably knows that any design change is likely to cause objections from politicians, so it’s easiest just to keep things the same.
Yet such a static position is curious, given the frequency and urgency of allegations in both countries of fake currency printed by enemy states (claims of forged Indian notes in Pakistan go back to 1957). And perhaps there is a clue in Goodwin’s statement of how the British felt that even claims of counterfeiting could undermine trust. When you are in a situation where even a claim of an attack might work as well as an actual attack, perhaps the best solution is not to even bother repulsing the attack, but pretending the attack never happened. It is a mind game, but then that is what money is.
In any case, cash is becoming ever less important to central banks. This may not be the case with the RBI, given the extant of the cash economy in India, but the US treasury is clearly more concerned about digital dollars that trade invisibly and continuously across the world than their green and black real life counterparts. As for the Superdollars, perhaps they are a threat, perhaps just another sign, however backhanded the compliment, of the US’s power. Certainly, the US treasury doesn’t seem to want us to worry about them, and the RBI may feel the same way about fakes. And in the strange world of currencies, counterfeits and confidence, perhaps they may be right.
