Sahil got a shock when the bank employee told him that one of the 20 notes of Rs 500 he had brought to deposit was a counterfeit. He was also embarrassed – at being fooled as well as being possibly taken for a criminal. He first argued that he did not know, a common man like him could not be expected to cross-check all the security parameters (there are 14 of them, to be precise), and the bank should accept the note. The Safdarjung Enclave branch of Central Bank of India refused.

Sahil was lucky, though. His father, who runs a small confectionery shop in Arjun Nagar of south Delhi, managed to catch the customer who had passed the dubious note on to him. Now was the customer’s turn to be shocked and embarrassed, but he changed the note.

In the process, however, the dubious currency note won another life.

Detection of counterfeit notes: what RBI has asked banks to do

1. Detection of counterfeit notes should be at the back office or currency chest only. Banknotes when tendered over the counters may be checked for arithmetical accuracy and other deficiencies like whether there are mutilated notes, and appropriate credit passed on to the account or value in exchange given.

2. Thereafter the notes should be passed over to the back office or currency chest, as the case may be, for detailed verification and authentication through machines.

3. The banknotes categorised as suspect during machine processing should be subjected to manual verification for checking their authenticity.

4. In no case, the counterfeit notes should be returned to the tenderer or destroyed by the bank branches or treasuries.

5. Failure of the banks to impound counterfeit notes detected at their end will be construed as willful involvement of the bank concerned, in circulating counterfeit notes and penalty will be imposed.

It had started its journey, most likely from a sophisticated printing press in a neighbouring country. It had crossed the border possibly near Malda in West Bengal – as part of a bunch of fake notes with a total face value of Rs10-15 lakh in a gunny sack thrown in a nullah from one side of the border and picked up on the other side. Now it would continue to circulate, changing hands as a genuine one and harming the economy. Travelling alone, it cannot be captured by any law enforcement agency. The only way to catch it and put it out of business is when it comes to a bank counter.

That is why the Reserve Bank of India (RBI) has asked banks to net fake notes, not reject them. It wants banks to accept all cash, without bothering about veracity, and give due credit to the customer. Counterfeits are to be filtered out at the back office. The RBI directive says, “In no case, the counterfeit notes should be returned to the tenderer.”

The central bank wants to be helpful to the hapless common man. A master circular dated July 1, 2014, reminded all banks of the monetary policy statement for 2012-13 (announced on April 17, 2012), “wherein it was indicated that banks may streamline their system in a manner which will make them bear the risk of counterfeit banknotes rather than the common man who unknowingly comes in possession of such notes”. It also refers to a circular dated November 16, 2012, “advising that failure on the part of the banks to impound counterfeit notes detected at their end will be construed as wilful involvement of the bank concerned in circulating counterfeit notes, and appropriate penalty will be imposed”.

In practice, however, the central bank advice is routinely flouted. Most banks assert they follow all RBI guidelines strictly, but customer experience contradicts the claim.

What usually happens is that the bank employee at the cash counter checks the authenticity of the notes and takes out the fake ones. Then one of the three things happens: the note is returned to the customer straight away, or it is stamped ‘forged’ and returned to the customer, or it is stamped “forged” and impounded. None of the scenarios follows the RBI guideline. The returned note is back in circulation – even with the ‘forged’ stamp.

Why do banks unwittingly abet the crime of keeping fake notes in circulation? Accepting a counterfeit note means bearing its cost. For every impounded fake note, RBI gives 25 percent of the face value to the bank in compensation, that is, the bank stands to lose 75 percent of the face value.

A junior official of State Bank of India, talking on condition of anonymity, admitted that bank officers prefer to return fake currency to customers. “You have to understand why we do so. People come expecting us to exchange their fake currency notes with genuine ones. When we impound the currency, they argue with us. Sometimes they make a scene. What can we do about it? So, to avoid unnecessary arguments we sometimes stamp it and return it.”

Vipin Malik, former director on the central board of RBI, explains, “Frankly speaking, an FIR [first information report] has to be registered by the bank when it gets a counterfeit currency note. Once you file an FIR, there is a lot of legal hassle which people and bankers try to avoid. What is required is that the government along with RBI should devise a mechanism to put in place a proper system to deal with counterfeit currency.”

That mechanism is, of course, lacking. In other words, the banking sector should be doing much more than what it does now on battling the menace of what is officially called fake Indian currency notes (FICN).

RBI directives about impoundd counterfeit notes

1. The notes identified as counterfeit should be kept separately with proper impounding stamp as per the format

2. Details of each impounded note should be recorded under authentication in a separate register

3. For such notes, there will not be any requirement to issue acknowledgement to the tenderer.

Reporting to police and other bodies

1. For cases of detection of counterfeit notes up to 4 pieces in a single transaction, a consolidated report should be sent by the nodal bank officer to the police authorities or the nodal police station, along with the suspect counterfeit notes, at the end of the month

2. For cases of detection of counterfeit notes of 5 or more pieces in a single transaction, the counterfeit notes should be forwarded by the nodal bank officer to the local police authorities or the nodal police station for investigation by filing an FIR

Directions in case of counterfeit notes dispensed from ATM

1. Banks should realign their cash management in such a manner so as to ensure that cash receipts in the denominations of '100 and above are not put into re-circulation without the notes being machine processed for authenticity

2. Non-compliance will be construed as violation of RBI directive. RBI instructs banks to ensure that in order to obviate complaints regarding receipt of counterfeit notes through ATMs, and to curb circulation of counterfeits, it is imperative to put in place adequate safeguards/checks before loading ATMs with notes

3. Dispensation of counterfeit notes through the ATMs would be construed as an attempt to circulate the counterfeit notes by the bank concerned

A top CBI official who has probed several cases of FICN says that a part of the problem is RBI’s reluctance to highlight the issue. “RBI is not in favour of highlighting this issue. It feels that the proportion of FICN in the economy is very small and in no way can it cause much harm to it. RBI feels that if it gives prominence to the matter, the counterfeiter’s purpose – of eroding the legitimacy of the Indian currency and thus subverting the economy – will be served,” says the official.

Malik insists that the proportion of counterfeit currency to that of legal tender is indeed “negligible”. Still, “why should even a single fake note be there in circulation? Any amount of counterfeit is bad. The RBI has taken a lot of initiatives to check the circulation of counterfeits.”

An RBI official admitted that they often receive complaints about banks flouting the guidelines, “but in such cases due action is taken”. Doing anything more than that, the official argued, would be beyond a civil body’s mandate and it would be up to the law-enforcement agencies to take further action.

An apex bank spokesperson said, “Like all central banks, the RBI also keeps researching new security features available the world over for currency notes. It introduces new security features to the currency notes from time to time. It also conducts training programmes for institutions about security features of genuine currency notes.”

Illegal tender

Evidence of Pakistani government's hand in printing conterfiet notes

On May 14, 2009, police nabbed four ruffians near Star cinema, Mazgaon in south Mumbai and seized high-quality fake Indian currency notes (FICN) of Rs 1,000, totaling a face value of Rs3,45,000. After interrogating them, the anti-terrorism squad (ATS) of Mumbai police arrested two more, recovering FICN of face value of Rs18,500.

The investigation in this matter was later transferred to the national investigation agency (NIA), which soon realised that the catch was not isolated and the amount involved was far bigger. The fake notes of '1,000 seized in this case had the series number 2AQ – the same as the fake notes recovered at the Kochi currency chest of the RBI. The quality of the notes was also the same, prompting the agency to join the dots.

There was obviously a wider network at work behind circulation of FICN, and the source of the fake notes found from Mumbai and Kochi was the same.

When NIA sent some of the notes to the RBI, the central bank’s experts were aghast. In their close scrutiny, they found in fake notes many covert features of Indian currency, and the imitation was so good it did not look like an amateur job from a shabby printing press. “It could have been achieved only through highly sophisticated machinery only available with sovereign governments,” the NIA noted in a release, quoting the RBI experts’ report. It added, “[A] similar opinion was given by experts of bank note press (BNP), Mysore.”

As the NIA dug deeper, the canvass soon expanded, and several cases of counterfeit currency recovery under investigation all over the country seemed to be interconnected.

So, NIA collected samples of FICN seized in Sector 31 of Chandigarh, Chitradurga town of Karnataka, Kashmir, Thane district of Maharashtra, Badwani in Madhya Pradesh, Vasco of Goa and Bhopal, and sent them all to Security Printing and Minting Corporation of India Limited (SPMCIL), New Delhi, for expert opinion.

This is what the SPMCIL found: “After thoroughly examining the FICN it can be concluded that the notes have been printed on highly sophisticated machines which a common man cannot acquire since such machines involve huge capital investment. The pulp found to be 100% rag in the FICN which is normally used in making currency papers. The perfection of window and watermarks formation indicates the manufacture of FICN paper on regular currency making machines which can only be owned by a country/state.”

NIA scaled up the matter further, and sent more FICN samples along with a detailed questionnaire to SPMCIL. The second expert report of SPMCIL compared fake notes seized from across India with the legal tender of a “neighbouring country” and found tell-tale similarities.
 

• The PH value of the paper used in legal tender of that country and one used in FICN samples was the same: 5.0 to 5.5.
• The gram per square metre (GSM) of the two bunches was similar. Their ‘caliper’ value was also in the similar range.

On the basis of the SPMCIL reports, the chairman of the committee of experts concluded:

• “During the examination of the samples of the FICN as well as the legal tender of the neighbouring country, most of the pivotal parameters of the paper like GSM of the paper, wax pick quotient, polyvinyl alcohol, PH value etc. were found matching ...
• GSM is an important indicator about the density of paper. Various currency papers have different GSMs. The GSM of FICN samples was the same as that of the legal tender of the neighbouring country.
• The wax pick quotient of the both bundles was the same: 18A.
• The similarity in the furnish used (100% rag content), PH of the paper and surface sizing (presence of polyvinyl alcohol) clearly indicated that a similar manufacturing process was used for the two.
• Moreover, “the presence of see-through registration features, quality of the printing of the FICN which is almost same to the genuine Indian currency note and cannot be detected with the naked eye, presence of security thread which appears to the inserted at the time of manufacturing of the paper, use of numbering box in printing the numbering panel of the FICN etc. point towards the neighbouring country as a source of FICN.”

This was the first case of fake currency notes investigated by NIA under the provisions of the Unlawful Activities (Prevention) Act, 1967, and the agency was successful in taking it to its logical conclusion. On January 29 this year, an NIA special court in Mumbai convicted the seven accused.

Apart from specific details, none of the above should surprise law-enforcement agencies. They have always assumed the Pakistani hand behind fake currency rackets in India. Officials said fake currency in India is not the output of some individual counterfeiters trying to make a quick buck. It is part of ISI’s strategy to destabilise the Indian economy.

This kind of warfare is not the original idea of the ISI. It was first deployed by Nazi Germany during World War II to destabilise the British economy. The then Indian government had to brace up to insulate themselves from the counterfeit currency pumped into India by the Japanese. The thread in the currency note was introduced as a countermeasure at that time.

The fake currency also makes it cheaper for the ISI to fund its terror activities in India. Fake notes used to be routed into India through several neighbouring countries such as Nepal and Sri Lanka. Nepal in particular was a major channel, and the scene came to such a pass that traders there started refusing to accept the '500 note. However, police and intelligence agencies made serious efforts, created awareness among people, and eventually eliminated the business of fake currency there.

Once Nepal was ticked off the list, racketeers turned to use other neighbouring countries like Sri Lanka and Myanmar, but they were not much successful. The most active route these days, officials say, is through Bangladesh.

On March 21, the Border Security Force (BSF) seized a consignment of fake notes with a face value of Rs13,99,500 from Malda in West Bengal, near the border with Bangladesh. As many as 1,100 counterfeit notes of Rs1,000 and 599 notes of Rs500 were recovered from three people. A BSF official said these notes were “placed by Bangladeshi FICN smugglers for circulation in India.”

This catch was, of course, nothing unusual, as the border district has emerged as a major hub for routing fake notes into India. A BSF spokesperson told Governance Now on phone, “I have been posted here for the last one year and have witnessed numerous seizures of the FICN. I cannot give the exact numbers of seizures but a substantial amount of fake currency is recovered from this area every month.”

A top CBI official also said Malda is the biggest centre from where the FICN is circulated throughout the country.

Officials of various law-enforcement agencies said large quantities of high-quality fake Indian currency notes in the denominations of '1,000, '500 and '100, printed in Pakistan are sent to Bangladesh via air route, and from Bangladesh into India.

Bundles of FICN are thrown into the Indian villages bordering Bangladesh. Local contacts of the smugglers collect the packages and distribute the notes to their agents across the country. Those lower down the chain pay up – in genuine currency – 60 percent of the face value of FICN to their masters within India. They deposit these genuine notes into the bank accounts of key operators – in tranches of maximum of '49,000 at a time to avoid suspicion. 

Despite the best efforts of the Indian law enforcement and intelligence agencies, the flow of FICN is unabated. That is why it makes all the more sense to use the banks to take out as many fake notes as possible.