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U.S. Treasury: Observations on Plans to Study Genuine and Counterfeit U.S. Money Abroad (Testimony, 07/10/97, GAO/T-NSIAD-97-201).




GAO discussed its observations on the Department of the Treasury's
October 1996 audit plan and its April 1997 addendum to study the uses,
holding, and counterfeiting of U.S. currency in foreign countries.

GAO noted that: (1) its review of the Treasury's original plan submitted
to Congress indicated that it did not explain how it would enable the
Treasury to meet the audit objectives required under the act; (2) the
plan's audit objectives were not clearly stated; (3) although the
Treasury's plan identified some elements of a methodology that could be
employed to collect information about the uses of genuine U.S. currency
abroad, it did not specify how the Treasury intended to analyze the
information that might be collected; (4) the plan also did not define
the methodologies that the Treasury expected to use to estimate the
amount of genuine and counterfeit U.S. currency in circulation abroad;
(5) after GAO outlined its concerns to Treasury and Federal Reserve
officials, the Treasury agreed to submit to the Congress an addendum to
the plan; (6) the addendum's purpose was to more fully explain the
objectives and the methodologies the Treasury intended to use; (7) on
April 21, 1997, the Treasury sent its addendum to the Congress; (8) the
addendum adds some clarity to the Treasury's audit plan, but some
questions remain; (9) the addendum describes the Treasury's audit plan
objectives, provides new information that makes it easier to understand
the methodologies the Treasury intends to use to develop estimates of
the amount of genuine and counterfeit U.S. currency abroad, and provides
current Federal Reserve estimates based on those methodologies; (10)
however, the addendum does not clearly address a deficiency in the plan
that GAO previously reported; (11) specifically, the addendum does not
fully describe the methodology the Treasury will use to collect,
summarize, and report information on the uses of genuine U.S. currency
abroad; (12) furthermore, because much of the Treasury's methodologies
for developing estimates are based on existing data, it is not clear
what additional field work or information is needed; (13) the addendum
does not explain how the audit steps from the original plan,
particularly those for the interviews planned for future trips abroad,
are to be incorporated into any of the methodologies described in the
addendum; and (14) for example, questions remain about what useful new
information the overseas trips are expected to yield and how it will be
integrated into the Treasury's estimates of the amount of genuine and
counterfeit U.S. currency abroad and information on the uses of genuine*

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-NSIAD-97-201
     TITLE:  U.S. Treasury: Observations on Plans to Study Genuine and 
             Counterfeit U.S. Money Abroad
      DATE:  07/10/97
   SUBJECT:  Data collection
             Currency and coinage
             Forgery
             Audits
             Money supply
             Evaluation methods
             International economic relations
             Foreign governments
             Crimes or offenses

             
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Cover
================================================================ COVER


Before the Subcommittee on General Oversight and Investigations,
Committee on Banking and Financial Services, House of Representatives

For Release on Delivery
Expected at
10 a.m., EDT
Thursday,
July 10, 1997

U.S.  TREASURY - OBSERVATIONS ON
PLANS TO STUDY GENUINE AND
COUNTERFEIT U.S.  MONEY ABROAD

Statement of JayEtta Z.  Hecker, Associate Director, International
Relations and Trade issues, National Security and International
Affairs Division

GAO/T-NSIAD-97-201

GAO/NSIAD-97-201t

U.S.  Treasury

(711269)


Abbreviations
=============================================================== ABBREV


============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

We are pleased to be here today to discuss our observations on the
Department of the Treasury's October 1996 audit plan and its April
1997 addendum to study the uses, holding, and counterfeiting of U.S. 
currency in foreign countries.  As we reported in February 1996, the
Secret Service used its detection data to reflect the actual amount
of counterfeit U.S.  currency notes abroad, despite limitations in
these data that raised doubts about their usefulness for measuring
counterfeiting activity.  Subsequently, Congress passed the
Antiterrorism and Effective Death Penalty Act of 1996 (P.L.  104-132,
Apr.  24, 1996) which, among other things, requires that the
Secretary of the Treasury develop a plan that is designed to enable
the Secretary to (1) study the use and holding of genuine U.S. 
currency in foreign countries and develop useful estimates of the
amount of counterfeit U.S.  currency that circulates outside the
United States each year, (2) conduct audits based on this
methodology, and (3) report triennially on the results. 

My remarks today are based both on our report on the Treasury's
original plan entitled U.S.  Currency:  Treasury's Plans to Study
Genuine and Counterfeit U.S.  Currency Abroad (GAO/NSIAD-97-104, Apr. 
11, 1997), and our assessment of the Treasury's subsequent addendum
to the plan. 


   SUMMARY
---------------------------------------------------------- Chapter 0:1

Our review of the Treasury's original plan submitted to Congress
indicated that it did not explain how it would enable the Treasury to
meet the audit objectives required under the act.  The plan's audit
objectives were not clearly stated.  Although the Treasury's plan
identified some elements of a methodology that could be employed to
collect information about the uses of genuine U.S.  currency abroad,
it did not specify how the Treasury intended to analyze the
information that might be collected.  The plan also did not define
the methodologies that the Treasury expected to use to estimate the
amount of genuine and counterfeit U.S.  currency in circulation
abroad. 

After we outlined our concerns to Treasury and Federal Reserve
officials, the Treasury agreed to submit to Congress an addendum to
the plan.  The addendum's purpose was to more fully explain the
objectives and the methodologies the Treasury intended to use.  On
April 21, 1997, the Treasury sent its addendum to Congress. 

The addendum adds some clarity to the Treasury's audit plan, but some
questions remain.  The addendum describes the Treasury's audit
objectives, provides new information that makes it easier to
understand the methodologies the Treasury intends to use to develop
estimates of the amount of genuine and counterfeit U.S.  currency
abroad, and provides current Federal Reserve estimates based on those
methodologies.  However, the addendum does not clearly address a
deficiency in the plan that we previously reported.  Specifically,
the addendum does not fully describe the methodology the Treasury
will use to collect, summarize, and report information on the uses of
genuine U.S.  currency abroad.  Furthermore, because much of the
Treasury's methodologies for developing estimates are based on
existing data, it is not clear what additional fieldwork or
information is needed.  The addendum does not explain how the audit
steps from the original plan, particularly those for the interviews
planned for future trips abroad, are to be incorporated into any of
the methodologies described in the addendum.  For example, questions
remain about what useful new information the overseas trips are
expected to yield and how it will be integrated into the Treasury's
estimates of the amount of genuine and counterfeit U.S.  currency
abroad and information on the uses of genuine U.S.  currency abroad. 

With that overview, let us now go back and provide some contextual
background and discuss our observations on the Treasury's original
plan and the addendum in more detail. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:2

All currencies are susceptible to counterfeiting, but the stability
and worldwide acceptance of U.S.  currency, in particular, have made
it a target for international counterfeiters.  Although the extent of
counterfeit U.S.  currency produced and circulated in foreign
countries is difficult to determine, an evaluation of the threat can
be used to allocate scarce resources to its detection and to assess
the effectiveness of measures to combat counterfeiting.\1 In the
past, the Secret Service used its detection data to reflect the
actual amount of counterfeits abroad.  However, as we reported in
February 1996, the limitations associated with such data raised
doubts about their usefulness for gauging counterfeiting activity.\2

Counterfeiting of U.S.  currency, if it became widespread, could
undermine confidence in the currency and perhaps even reduce the
international holdings of U.S.  currency and negatively affect the
U.S.  economy.  When U.S.  currency remains in circulation abroad, it
essentially represents an interest-free loan to the U.S.  government. 
The Federal Reserve has estimated that the U.S.  currency held abroad
effectively reduces the need for the government to borrow up to $250
billion a year and thus may lower the government's interest costs by
over $10 billion a year.  If confidence in the dollar were
undermined, individuals might switch to other currencies, which would
reduce this benefit to the United States.  It was within this context
that the Treasury was called upon to develop better ways to, in
essence, monitor the extent of genuine and counterfeit U.S.  currency
abroad. 


--------------------
\1 Other tools may include evaluating the quality or usage of the
counterfeits, the type of equipment used, the type of perpetrator,
and the connection with other crimes.  See GAO/NSIAD-97-104. 

\2 In 1996, we reported that the available data presented many
limitations, and we questioned whether the Secret Service had a
sufficient basis to conclude either the approximate magnitude or the
trend of counterfeiting activity abroad.  Some specific limitations
of the data are that they (1) included only those counterfeit
detections that were reported to the Secret Service; (2) may have
underreported the occurrence of high-quality currency notes because
those notes are difficult to detect; (3) may have reflected factors
other than increasing counterfeit activity, such as improvements in
the ability to detect counterfeits or to determine their source; and
(4) may have shown fluctuations over time that were skewed because of
the occurrence of unusually large seizures.  See Counterfeit U.S. 
Currency Abroad:  Observations on Counterfeiting and U.S.  Deterrence
Efforts (GAO/T-GGD-96-82, Feb.  27, 1996) and Counterfeit U.S. 
Currency Abroad:  Issues and U.S.  Deterrence Efforts (GAO/GGD-96-11,
Feb.  26, 1996). 


   THE TREASURY'S ORIGINAL PLAN
   WAS UNCLEAR AND INCOMPLETE
---------------------------------------------------------- Chapter 0:3

The audit plan originally submitted to Congress by the Secretary of
the Treasury did not demonstrate how it would enable the Treasury to
meet the audit plan objectives required under the law.  A written
plan should define the audit's objectives and the scope and
methodology to achieve those objectives.\3 The Treasury plan's audit
objectives were not clearly stated.  Concerning scope, the original
plan provided a time line for completing the audits, site selection
criteria for regions of the world, and information and data sources. 
Although the original plan provided some information on data
gathering, it did not adequately explain the analytical methods the
Treasury intended to use to achieve the objectives.  For example, the
original plan identified data sources and provided questions that may
be asked of foreign financial and law enforcement officials, but it
did not fully explain how this information would be analyzed and
synthesized to address each of the audit plan objectives set forth in
the act. 

The original plan did not describe analytical methods for studying
the holding of genuine U.S.  currency abroad and developing estimates
of counterfeit U.S.  currency abroad.  However, it did describe
elements of a methodology that might be used to study the use of
genuine U.S.  currency abroad.  According to the original plan, the
Federal Reserve would attempt to specify and test a model to support
or refute an assumption about currency movement outside the United
States.  The assumption was that U.S.  currency would move between
and among individuals and business firms in such a way that the
portion of U.S.  currency held abroad that was received by the
Federal Reserve each year through its foreign-origin currency
receipts (at least 13 percent in 1995) was representative of the
total amount of U.S.  currency abroad.  The Federal Reserve's model
was expected to focus on the factors that cause certain amounts to
(1) come into the possession of financial institutions abroad, (2) be
regarded as surplus to the needs of those individual financial
institutions, (3) be sold subsequently to correspondent banks,\4 and
finally, (4) be deposited by a correspondent bank at the Federal
Reserve.\5 However, the plan did not fully explain how the Treasury
intended to analyze the information obtained to reach conclusions
about the use of U.S.  currency abroad. 

After we outlined our concerns about the original audit plan to
Treasury and Federal Reserve officials, the Treasury official
responsible for the plan advised us that the Treasury planned to
submit a written addendum to Congress that would explain in more
detail the Treasury's proposed methodologies, the assumptions the
Treasury made, and the limitations associated with the resulting
estimates.  As stated, the Secretary of the Treasury submitted an
addendum to Congress in April 1997, to more fully explain the
objectives and methods the Treasury intends to use to report on the
uses, holding, and counterfeiting of U.S.  currency abroad.  In the
addendum, the Treasury stated that it had begun fieldwork and
intended to report to Congress sometime before the September 1999
deadline. 


--------------------
\3 The objectives are what an audit is to accomplish and can be
thought of as questions that auditors seek to answer.  Objectives
identify the audit subjects and performance aspects to be included,
as well as the potential finding and reporting elements that the
auditors expect to develop.  Scope is the boundary of the audit.  It
addresses such things as the time period and number of locations to
be covered.  The methodology comprises data-gathering and analytical
methods auditors will use to achieve the objectives.  See Government
Auditing Standards:  1994 Revision (Washington, D.C.,:  U.S.  General
Accounting Office, June 1994). 

\4 A correspondent bank is a financial institution that regularly
performs services for another in a market inaccessible to the other. 
In banking there is usually a depository relationship that
compensates for expenses and facilitates transactions. 

\5 Information about how citizens and businesses, other than
financial institutions, use U.S.  currency abroad is likely to be
addressed as part of the information on how and why financial
institutions obtain U.S.  currency.  Financial institutions obtain
U.S.  currency for many reasons and from many sources; for example,
in countries with unstable currencies, traders may deposit proceeds
from sales transacted in U.S.  currency. 


   TREASURY'S ADDENDUM ADDS
   CLARITY, BUT SOME QUESTIONS
   REMAIN
---------------------------------------------------------- Chapter 0:4

The Treasury's addendum addresses some of the issues we previously
raised, but questions remain.  The addendum provides the Treasury's
objectives, the methodologies that the Treasury intends to use to
meet its objectives for developing estimates of genuine and
counterfeit U.S.  currency abroad, and estimates resulting from those
methodologies.  However, the addendum does not fully address a
concern we previously reported about the Treasury's limited
explanation of how it intends to analyze and report information on
the uses of genuine U.S.  currency abroad.  The Treasury has already
collected information on the uses of U.S.  currency in 18 locations
around the world, but the methodology for analyzing and reporting
such information is not explained.  Further, given that some of the
data on currency usage has been collected and that much of the
Treasury's methodologies for developing estimates use existing data,
it is not apparent what additional fieldwork and information the
Treasury needs to complete to meet its objectives. 

The addendum addresses some of the deficiencies we identified in the
original plan.  The addendum describes, in detail, the methodologies
the Treasury will use to develop estimates of the amount of genuine
and counterfeit U.S.  currency abroad and provides estimates based on
these methodologies.  The methodologies are based on data already
maintained by the Federal Reserve and assumptions that, according to
the addendum, are supported by evidence that has been gathered from
overseas sources, including overseas trips made by the Treasury,
Secret Service, and Federal Reserve.\6

The addendum provides answers to the questions on the amount of
genuine and counterfeit U.S.  currency circulating abroad by
providing Federal Reserve estimates.  According to the addendum, the
Federal Reserve estimates that about $200 billion to $250 billion of
U.S.  currency, or more than half the roughly $375 billion in
circulation outside of banks in 1995, was abroad.  The 1996 estimate
had not yet been completed, but the available information suggested
that approximately $215 billion to
$265 billion out of about $400 billion of U.S.  currency was held
abroad at the end of last year, according to the addendum.  The
addendum also cites a Federal Reserve estimate of total counterfeit
U.S.  currency in circulation of $40 million to $67 million
worldwide.  Of this amount, the Federal Reserve estimates that $15
million to $25 million in counterfeit $100 notes circulate outside of
the United States.\7 According to the Federal Reserve, the estimates
suggest that 1 in 10,000 U.S.  currency notes is likely to be
counterfeit. 

Although the addendum addresses our previous concern about how the
Treasury intends to develop estimates of genuine and counterfeit U.S. 
currency circulating abroad, it does not clearly address our previous
concern about the analysis and reporting of information on the uses
of genuine U.S.  currency abroad.  To address this objective, the
addendum states the Treasury and the Federal Reserve will develop
models for currency usage in selected countries or regions where U.S. 
currency is widely used, such as the former Soviet Union and
Argentina.  Each model is expected to account for the relevant
variables that dictate the usage and flows of U.S.  currency, such as
economic conditions (for example, inflation and trade), the level of
development of the banking and financial systems, political
stability, currency and foreign exchange controls, laws regarding the
use of U.S.  currency for certain transactions, the number of
expatriate workers, and the amount of tourism.  The addendum also
cites the possibility of modeling how much domestic currency
residents of a country would hold in the absence of any foreign
currency holdings.  Because the addendum does not identify additional
information the Treasury would need to develop such models, it is not
clear what additional work the Treasury needs to perform.  Although,
as of February 1997, information had been collected in 18 countries
or entities where U.S.  currency was used or distributed to a
significant extent, including the former Soviet Union and Argentina,
the methodology for analyzing and reporting information on U.S. 
currency usage abroad, including how specific models are to be
integrated into the process, had not been defined. 

Finally, the Treasury had already conducted a number of interviews
worldwide using similar questions on U.S.  currency usage, holding,
and counterfeiting to those listed in the original plan, but the
addendum only makes a passing reference to overseas visits.\8 What
additional information was to be derived from such visits and what
additional fieldwork needed to be conducted in order to meet the
Treasury's objectives were not discussed.  Although the Treasury may
have other reasons for overseas trips, such as using them as a forum
for discussions, exchanges of ideas, and counterfeit-detection
training, it is not clear from the addendum how sending U.S. 
officials on additional trips abroad would provide useful information
for reporting purposes under this act. 


--------------------
\6 As of February 12, 1997, visits had been made to 18 countries or
entities where U.S.  currency was used or distributed to a
significant extent.  These locations are Argentina, Bahrain, Belarus,
Cambodia, Egypt, England, Indonesia, Hong Kong, the Philippines,
Russia, Saudi Arabia, Singapore, Switzerland, Taiwan, Thailand,
Turkey, the United Arab Emirates (Abu Dhabi and Dubai), and Vietnam. 

\7 Overall, according to the Federal Reserve, $100 notes accounted
for approximately three-quarters of the value of all counterfeit
notes passed last year. 

\8 The addendum refers to foreign currency audits and other
information from foreign central banks in its description of how the
Treasury intends to produce estimates of genuine U.S.  currency held
in various regions of the world.  The Treasury has previously
obtained such information during overseas visits. 


-------------------------------------------------------- Chapter 0:4.1

Mr.  Chairman and Members of the Subcommittee, that concludes our
prepared statement.  We will be pleased to answer any questions you
may have. 


*** End of document. ***