Bullion Bullion

Volume 41 Number 1 Article 6

3-2017

Counterfeiting the naira notes: issues, trends and measurements. Counterfeiting the naira notes: issues, trends and measurements.

Kingsley Imandojemu Central Bank of Nigeria, kimandojemu@cbn.gov.ng

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Recommended Citation Recommended Citation Imandojemu, K., (2017). Counterfeiting the naira notes: issues, trends and measurements. CBN Bullion, 41(1), 67-80.

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Volume 4l No.l Jonuory - Morch, 2017

KINGSTEY IMANDOJEMUABEOKUTA BRANCH

CENTRAL BANK OF NIGERIA,

INTRODUCTION

The emergence of alternativemeans of payment andinnovations such as debit,credit, prepaid cards, mobilebanking, ATMs and internetbanking has transformed thepayment system landscape inNigeria profoundly.Nevertheless, despite theefforts of the monetaryauthority geared towardsencouraging the advancementof technological innovations inthe payment system in Nigeria,'cash is the most acceptablemeans of payment for all. lt isheld as the most reliable andfastest means of makingpayment' (EinFA, 2016)f his

explains the recent upsurge in

the currency in circulation (ClC)

.Available statistics from theCentral Bank of Nigeriastatistical bulletin shows thatthe currency in circulationincreased astronomically froma meager 62.6 bitlion in 1993 to

COUNTERFEITING THE NAIRA NOTES:ISSUES, TRENDS AND MEASUREMENT

744.8 billion in 1997representing 131.3 percentincrement .This increasedfurther to L,857.9 billion in2015 (Seegraph).

ABSTRACT

Currency counterfeiting is o worldwide phenomenon of greotimportonce to currency monogement ond monetory policy execution.This has resulted in tonsotlontic corporotion and synergy incomboting the moloise in addition to the effons of the monetoryouthorities towards ensuring that banknotes ore not susceptible toco u nte rfe iti n g. N otwith sto n d i n g th e ze ro cu r re n cy co u nte rfe it sto n ce

of the Centrol Bank of Nigerio the menace remoin unaboted. The poperthrough the lens of ovoiloble literoture, identified issues ond trendsthot undermine the effort of the Central Bonk of Nigerio gearedtowards ensuring thot bonknotes are not susceptible to counterfeitingand olso developed methodological fromework for the exactmeosurement of counterfeited currency. Availoble dota on Currencycounterfeit in Nigerio is envisoged with some deanh and hence thepoper relied on dialectical methodology in juxtaposition withtheoretical exposition to further give o detoiled analysis. Finolly,

recommendotions were provided to the Central Bonk of Nigeria, policy

mokers, low enforcement ogencies and government to serve os o

f ramework for reducing or possibly erodicoting currencycou nte rfeiti n g octiviti es i n Nig eri a.

The preponderant dominanceof cash in the Nigerian paymentsystem is traceable to thedeeply rooted mistrust offinancial institutions,significant perceived risk ofbank fraud, low bank accountpenetration, a large informalsector and high rate of financialilliteracy, High an.d non-transparent bank charges. This

is further compounded by theunequal distribution offi nancia I i nfrastructure, skewed

nature of bank products thatare favourable to the upperechelons in the society,complex processes ofalternative payment system,unavailability of neededservices and an inchoateregu latory envi ron ment.

Pursuant to Central Bank ofNigeria Act No 7 of 2007 an Actto repeal the Central Bank ofNigeria Act 1991 and to re-enact the Central Bank ofNigeria AcU and for relatedmatters the Central Bank ofNigeria (CBN) is the sole issuerof legal tender currency in

Nigeria. lt regulates the volumeof money supply in the

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economy in order to maintainmonetary and price stability."The bank shall have sole rightof issuing currency notes andcoins throughout Nigeria, andneither the federal governmentnor any state government norany local government nor any

other person or authority shallissue currency notes, banknotes or coins, or anydocuments or tokens payable

to bearers on demand beingdocuments or tokens which arelikely to pass as legal tender".The apex bank is also saddledwith the responsibility ofensuring confidence in thecurrency notes in circulationand that the integrity of theNaira is maintained.

Nevertheless, this germaneresponsibility is increasinglybecoming threatened as a

result of the seismic increase in

the scale of currencycounterfeiting of the Nairanotes resulting from theactivities of cou nterfeiterspropelled by technologicaladvancement. Muchcontroversy exists regardingthe exactness and authenticityof currency counterfeitestimates in Nigeria. Accordingto Mailafia (20161, there is

anecdotal evidence thatcounterfeiting is becoming a

major problem. An estimated25 percent of the naira incirculation is probablycounterfeited currency. Thisclaim remains unsubstantiatedand at best a guesstimate sinceavailable records from theCentral Bank of Nigeria Bankclearly indicate that the

prevalence of counterfeit notesin Nigeria from January toDecember 2016 was less thanone percent (O.OOL4%| or !4counterfeit pieces out of onemillion banknotes. However,the fact that closer scrutiny ofbanknotes is now reoccurringdecimal coupled with public

complaint of ATM's dispensingcounterfeited notes givecredence to the public'sperception of a worseningmalady.

Currency counterfeitingundermines the sovereignty ofa cou ntry; debase thegenuineness and authenticityof currency in circulation; lawenforcement agencies expendresources to detect andprosecute counterfeitingactivities; economic agentswho erroneously acceptcounterfeits as means ofpayment bear untold brunt;and the public perception ofthe functionality of currencyadversely affected. Currencycounterfeiting is also capable ofci rcu mventi ng monetary policymanagement with attendanteconomic distortion.

The Central Bank of Nigeria inrecogn ition of macro-economicdistortion resultant fromcurrency counterfeitingoperations put in placecounter- measures. The anti-counterfeit measures adoptedby the Central bank of Nigeriaincludes improved securityfeatures for the Naira notes,introduction of new Nairanote series(polymer) ,collaborative efforts with DMBs

Jonuory - Morch, 2017

and other stakeholders in thefinancial sector, distribution ofcounterfeit detection machinesto identified prone segment ofcounterfeiting operations,panel discussion and interviewson counterfeiting byrepresentatives of the apexbank, constant monitoring ofcounterfeit activity and trends,conducting consistentawareness programme for thegeneral public and lawenforcement on counterfeitedcurrency identification and theemployment of high standardtechnology in the detection ofcounterfeited currency in thecurrency processi ng activities

The efforts of the Central Bankof Nigeria towards ensuring a

counterfeit-free Naira notes isconstrained by measurementproblematique with the exactestimation of counterfeitednotes which is a sin-qua-non foreradicating the menacebecoming intractable,inexplicable and imprecise. Themagnitude and exact nature ofthe phenomena remainunknown due to inherentmeasurement problems giventhat a large proportion of theNaira notes reside outside thetraditional banking system,detected currency notes inDMBs processing activitiesdestroyed withoutdocumentation, officialstatistics on counterfeitedNaira notes clumsy and fraughtwith paucity of data and thehigh incidence of unreportedcases of detected/seizecurrency notes rernainsunabated.

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U nderstanding the n umismatic,

issues, trends andmeasurement in currencycounterfeiting operations is

critical because actionspremised on faulty knowledge

and inaccurate measurementwould further exacerbaterather than mitigate themalfeasances. Thus, the focalemphasis of the paper is in two-folds. Firstly, the paperexamines the issues, trends andchallenges that undermineefforts towards combating thescourge. Secondly, the paper

examines the measurementmethodology of cou nterfeiti ng

the naira notes in Nigeria toserve as litmus for exposing andidentifying opportunities foreradicatingthe malaise.

2.1 TITERATURE REVIEWln recent decades, there has

been appreciable globalattention on the fight againstcurrency counterfeitingactivities, which has broughtappreciable progress in theeradication of the phenomena.

This progress includesincreased awarenessprogrammes on the detectionof counterfeit notes,development of detectionmachines, transnationalsynergy and corporation in

eradicating the menace,renewed Law enforcementactivities and technologicalbreakthrough in developingcounterfeit proof-freecurrencies. However, thisadvancement in eradicatingcounterfeiting operations is not

evenly enjoyed by economiesthe world over. Apart from thecountries of Europe, NorthAmerica, Sweden, Russia,Philippines, Hong Kong, Canadaand the Oceania increasedcounterfeiting activities is thehallmark of developingcountries (Nigeria inclusive).According to Phillips (2005)

Counterfeiting is a majoreconomic problem, called "theworld's fastest growing crimewave. Counterfeiting is a

problem that has plaguedeconomic agents for centuries.The work of numismatists hasshown that counterfeiting has

existed since the first coinswere produced in Lydia in the7th century BCE. The popularmethods included clipping,shaving off, or melting thecoins, and each offense waspunishable by death(Tcherneva 2076).A "fourr6e" is

an ancient type of counterfeitcoin, in which a base metalcorewas plated with a precious

metalto look like its solid metalcounterpart. Advancement in

counterfeiting operationsmetamorphoses with theevolution of money. Despitethe commonality and time-honoured nomenclature of themalaise, counterfeitedcurrency remains a black box toeconomists. Literature on themenace of counterfeited banknotes in Nigeria is scanty;nevertheless, there is commonknowledge that there areenormous counterfeit banknotes, either in form of Nairanotes or foreign currencies.Essentially, Bosworth and Yang

(2002) note that the definition

of counterfeiting is crucial notonly for understanding thesubject, but also in terms ofmeasuring the extent andnature of the problem.According to the CounterfeitCurrency (Special Provisions)ACT CAP. C35 L.F.N. 2004"counterfeit" in relation to a

bank note or current coin of akind which is legal tender inNigeria, means a bank note orcurrent coin made or issued

other than by or by theauthority of the Central Bank ofNigeria, and in relation to a

bank note or current coin of a

kind which is not legaltender inNigeria means a bank note orcurrent coin made or issued

other than by or by theauthority of the body which,under the laws of the country inwhich the bank note or currentcoin is legal tender, isauthorised to make or issue

such bank note or current coin.The term "counterfeiting" canalso be defined as producingimitations of coins andbanknotes in particular, ormaking alterations to genuine

currencies for the purpose ofraising their denominationalvalues. Counterfeit means any

coin, paper notes or polymernotes other than the currencyissued by the monetaryauthority, resembling orapparently intended toresemble or pass for currencyissued by the apex bank, andincludes currencies prepared oraltered so as to resemble orpass for currency of a higherdenomination. Counterfeitingis referred to as the act ofmanufacturing fake currency or

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altering genuine currency.Counterfeit implies producing a

resemblance, imitation orprototype of originals. ln otherwords, the motives are to make

a copy of currency notes withthe intent to defraud or forge"by mastering known securityfeatures. A currency note is

counterfeit if it "bears such a

likeness or resemblance to any

of the genuine currency notesissued under the authority ofthe Central Bank of Nigeria as is

calculated to deceive anhonest, sensible andunsuspecting person ofordinary observation and carewhen dealing with a person

supposed to be upright andhonest". The basic goal ofcounterfeiters is to profit fromthe reputation of the monetaryauthority given that economicagents are usually unsuspiciousof banknotes issued by theCentral Bank of Nigeria. Theeffect of currencycounterfeiting can bedichotomized into two namely;Micro effect and Micro effectsof currency counterfeiting. The

effects of counterfeit currencyare mostly felt on the microlevel when it is circulated fromperson to person. customersare the unsuspecting guineapigs who not on ly have to bea r a

loss when they have beentendered a fake currency note,but also have to face cases thatsome banks are lodging for"handling" fake currency.Counterfeits fa lsely excha ngedfor goods and services result inthe transfer of wealth fromprivate agents, eitherhouseholds or businesses, to

counterfeiters. lf a counterfeitis passed more than once incirculation, the loss is borne by

the last holder of thecounterfeit. Counterfeiting ca n

affect the demand for currencythrough a loss of confidence inthe use of currency. Forexample, counterfeiting can

affect a currency's functions as

a store of value and a mediumof exchange. lt isthe perceptionof risk that affects confidence.Confidence weakens if thepublic perceives that there is agreater risk that they couldunknowingly accept a

counterfeit as payment. Nosal

and Wallace (2007) similarlyargue that the threat ofcounterfeiting alone can have a

significant negative impact ontrade, as people may not acceptmoney as a mean of exchange

due to a lack of confidence inthe currency due tocounterfeiting. On the macrolevel, flooding an economy withfake currency can causeinflation and devalue thecurrency being counterfeited.Rocheteau (2011) find that thethreat of counterfeiting canaffect the value and velocity ofmoney, as well as output andwelfare, even whencounterfeits do not actuallycirculate. Moreover, Monnet(2005) suBgests thatcounterfeiting can beinflationary if the productioncosts of counterfeiting are lowenough. Counterfeiting hasa lso been employed asweaponry of war against othercountries. Therefore, a lax anti-counterfeiting policy istherefore inconsistent with

price stability and the goal ofsocial welfare which isinconsistent with the mandateof the Central Bank of Nigeria. Li

and Rocheteau (2011) arguethat, while counterfeiting doesnot pose a threat to the accept-ance of money as a medium ofexchange, it lowers the volumeof economic transactions, sincesellers are concerned aboutreceiving counterfeits. This, inturn, will reduce productionand further decrease economictransactions. A striking findingin search-theory models has

been that the threat ofcounterfeiting can, in theextreme, eliminate the use ofcurrency altogether (Nosal and

Wa I lace 2007 ; Li a nd Rochetea u

2011; Shao 2013). Gresham'sLaw states that "bad money"drives out "good money", or inother words, if a new moneyenters circulation (bad money,i.e. counterfeit), and there is anold money that is still incirculation (good money, orhigher metallic content in thiscontext), people will hoard thegood money, and in doing so

leave the bad money incirculation until there is nomore good money left incirculation. The monetaryauthority incurs deadweightcost as resources are expendedto detect counterfeitedcurrency notes. Counterfeitingalso imparts costs onto societythrough the costs associatedwith producing more securenotes, providing proper lawenforcement, and the loss ofconfidence in bank notes (Fung

and Shao 2077:341. Accordingto FATF report (2013)

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Counterfeiting has evolvedfrom a mere criminal activitygenerating proceeds that arethen also used to fundterrorism, into an activityintended to replace realcurrency. ln certain instances,particularly during wartime,the infiltration of high-qualitycounterfeit notes has beenused to attack the economy of acou ntry in an effort to erode thefaith in its currency. Burger(2009) posited that throughouthistory opponent societieshave used counterfeit currencyproduction of their enemies'currency as a weapon. lt hasbeen used as a weapon bythose seeking to createeconomic instability: Whencounterfeit money isintroduced into a market, boththe currency and people's faithin the government becomedevalued. Fundamentally,counterfeiting hinders longterm economic developmentand, like other criminalenterprises, empowers theforces profiting from stateweakness. This is a newdimension to the phenomenonof criminal activity related tocurrency counterfeiting withserious consequences given thespate of terrorism, insurgencyand left wing extremism in

Nigeria. The Central Bank ofNigeria must be proactiverather than reactive to thisscourge given her anti-terrorism finance stance.Prognosis of currencycounterfeiting argue that, inplaces like China,cou nterfeiti ng employs people,

improves the purchasing

power of certain segment ofthe society especially thevulnerable, expos6 theingenuity of populace(crimeentrepreneurs) and benefitsthe economy. This position is ashort-sighted fixation oncounterfeited operations sincethe benef its come at thesubstantial cost to economicagents both locally andi nternationally. Counterfeitingbenefits mainly those criminalelements, mortgage the statestability and social well-beingfor personal gains. Moreove4for any developing country,counterfeiting is anunsustainable and potentiallydangerous enterprise.Therefore, academics,monetary policy expert andpolicy analyst are concernedwith the analysis of theeffectiveness ofcountermeasures (e.g., Green

and Smith 2002; Grossman and

Shapiro 1988a, 1988b; Olsen

and Granzin 7992, 1993). lnorder to develop appropriatecountermeasures it becomespertinent to develop a

methodological framework forthe exact measurement of thephenomena as well as a firmunderstanding of theunderlying issues and trendsinfluencing counterfeitingoperations. The availableliterature on the subject matterhas exposed the enormity and

inherent dialectics ofcounterfeiting operations.Howeve1 previous research is

seldom based on accurateestimation of currency

counterfeiting and is stronglytheoretical reasoning driven.Therefore, the study is primal in

addressing the gap identifiedand espousing thecountermeasures in the fightagainst currency cou nterfeiti ng

activities premised on accurateestimate methodology despite

scanty literature on the subjectmatter in the country.

2.2 ISSUES AND TRENDS IN

CURRENCY COUNTERFEITOPERATIONS !N NIGERIAThis review takes an in-depthlook at recent trends incounterfeiting activities inNigeria. Empirical analysis ofthe issues such as that are

capable exposing /identifyingopportunities for growth andchallenges to overcomingmyriad barriers to theeradication of this malady is

equally undertaken.

TECHNOLOGICALLYPROPETLED

The advent of low-costtechnology has alsocontributed to the increasedprevalence of Counterfeiting(Hopkins, 2003). Counterfeitersnow have access to inexpensivetools which allowcou nterf eiters to easilyreplicate bogus bills.Counterfeiting rates was at thelowest ebb in the 1980s. At thattime, equipping a

counterfeiting operation was

an expensive and riskyproposition. Since the early1990s with advancement in

technology with easier access

to improved photographic,

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computer and printingtechnologies, along with theavailability of low-costequipment that is relativelyaffordable counterfeitingactivity has risen geometrically,

both in Nigeria and globally.Therefore, counterfeitingactivities is no longer within theambit of experts. Evenamateurs can produce largernumbers of bogus bills sincecu rrency cou nterfeiti ng requi reminimal initial investment ortechnical prowess. Currencycounterfeiters improvise andtake advantage ofadvancement in technology tokeep pace with countermeasures and regularperiodical changes in currencydesign and security features.Technological lnnovation has

intensified the inherentconflicting interest betweenincreasingly sophisticatedbanknote counterfeiters andgenuine banknote designers. lnbusiness entity, the improvedperformance and decreasingcost of information technologyhave reduced "barriers toentry". Unfortunately, this is atruism in currencycounterfeiting. The technologyrevolutions ease thecounterfeiting operations. Astechnology continues toevolve, so must the monetaryauthority be proactive inintroducing new bank notes,series with distinctive featuresthat makes currencycounterfeiting operations a

futile activity. The challengesposed by advancement intechnology can be addressed

by exploring a wide range ofdistinctive features andsu bstrates.

HIGH DENOMINATION BIILS

ARE PRONE TOCOUNTEFEITING

Currency demand is dependenton income levels, social status,prices, availability ofalternative payment methodsand the opportunity cost ofholding currency instead ofinvesting in interest-bearingasset. ln Nigeria, demand forlower denominations (N5, N10,

N20 and N50) exceeds demandfor higher denominations(N500 and N1000). Economicagents employ smaller-denomination notes for smalland frequent transactionswhich is the bulk of economictransaction especially theinformal sector of the economyand alternative paymentmethods (for example, ATMand credit cards) for largetransaction. ln contrast,counterfeited currencies arelargely influenced by the needto exchange higherdenomination of counterfeitedcurrency for goods and service(Va lue) propelled by the urge toget balances in lowerdenomination with attendantgains. Available evidence fromdata showed that higher billsare prone to counterfeiting thisis largely attributable to themultipliers gains of collectingbalance after exchangingcou nterfeited notes f orproducts /services.

QUATITY OF BANK NOTES

AFFECTS THE DETECTION OF

COUNTERFEITED NOTES

The currency processingactivities of the Central Bank ofNigeria is tailored towardsensuring quality control incurrency management in a bidto combat counterfeitingoperations. Currency is issuedto deposit money banksthrough the branches of theCBN, and old notes retrievedthrough the same channel.Currency deposited in the CBN

bythe banks are processed andsorted to fit and unfit notes inline with the clean note policy.

The clean notes are re-issuedwhile the dirty notes aredestroyed (CBN, 2016). ln orderto assure the high quality ofbanknotes in circulation, thecentral bank of Nigeriamaintains a minimum standardfor sorting currency duringcurrency processing activities.The clean note policy of theBank also serves as a deterrentto counterfeiting activities.However, clean notes producefalse alarm and unnecessaryscrutiny and delay in economictransaction. This result is inconsonance with the findings ofKlein et al. (20O4l. whoobserved that counterfeits arebest detected when theirquality is high, while genuinebanknotes of medium qualityproduce the lowest number offalse alarms. The note quality inthe test sets has no impact oncounterfeit detection, but cleansets produce more false alarms.

SECURITY FEATURES TO CURB

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protected by a number ofsecurity features to enable therecognition of genuine notes.The distinguishing featureswhich can immediately berecognized by touch andvisibility are raised print, thesecurity thread and thewatermark. Other areas such as

the portrait, lettering and thedenominational numerals onthe front and the back areembossed. The raised printprovides the facility, while thesecurity thread, whichordinarily, looks broken but isnot when held against the light,has "CBN" in small letteringprinted on both sides of thenotes. The Naira notes are alsoprotected againstphotocopying. There arefeatures, which are visibleunder ultraviolet light; forexample, the serial number oneach note is black, but turnsgreen under ultraviolet light.The currency notes issued in

Nigeria are in: l{5, N10, N20,f+50, N100, N200, N500 andN1000 denominations and theyare all of the same size, 151 x 78

mm. The paper used is a specialpaper with specificconstituents which are uniqueto bank notes.

The manufacturing process andthe materials which are usedprovide the currency with theunique qualities, necessary togive the notes a long span ofcirculation. At the same time,these special features give a

distinctive appearance and feelwhich is meant to protect itfrom imitation. The CentralBank of Nigeria also introduced

COUNTERFEITINGOPERATIONSIN NIGERIA

The upsurge in counterfeitedcurrency operations withattendant implication on theeconomy has resulted in thedevelopment of securityfeature the World over. Themajor security features of banknotes (paper or polymer) are (i)WM (Watermark) (ii)ST(Security Thread) (iii) lP(lntaglio Printing) (iv)PMD(Perfect MatchingDrawing) (v) HOL (Holograms)/Kinegrams (vi) Hl (Hiddenlmages) (vii) UV (UltravioletRays--Observation under ultraViolet Rays) (viii) lR (lnfra-Red)glowing used by Russian Rubbleand Euro (ix) Ml (Micro-lnscriptions) (x) CCI (ColorChanging ln k) (xi) Clea rWindow (xii) Non-TransparentWindow (xiii) Shadow lmage(xiv) Micro-Printing (xv) See

Through Element (xvi) Raised

Printing (xvii) WatermarkPortrait (xviii) Security Thread(xix) Security Fiber (xx) Lateral

lmages (xxi) Braille feature (xxii)

STRAP (xxiii) Crisp Sound (xxiv)

Background Decoration (xxv)

Gradient Coloring (xxvi) Kipp

Effect or Latent lmages (xxvii)Signatures (xxviii)Metallographic (xxix) Hair (xxx)

Protection Ornaments, (xxxi)

Marks for the blind (xxxii) Novelnumbering (Jorge and Miguel(2007)). However, The CentralBank of Nigeria in particular hasput in place countermeasureswith special reference to thepeculiarity of counterfeitingoperations to address themenace. The Naira notes are

the polymer series of Nairanotes to counterfeitingoperations. The polymersubstrate has proven anextremely effective deterrentagainst counterfeiting due to itsability to incorporatesophisticated and effectivesecurity features at maximumcost and operational savings inboth note issue and notehandling and provide clean andsecured bank notes to thepublic .lt has also reduced thecost of replacing dirty notes andthereby free resources thatcou ld be used for othercommitments. Nigeria issued

her first polymer bank note in2007, starting with the N20.00note and in 2009 introducedthe N5, N10 and N50 notes.

LEGAL PROVISIONS AGAINSTCU RRENCY COUNTERFEITI NG

COUNTERFEIT CURRENCY(sPECrAr PROVTSTONSI ACT

CAP. C35 l.l.n, 2004 amendedby tribunals (certainconsequential amendments,etc.) decree no.621999 an Actto repeal and re-enact theCounterfeit Currency (Special

Provisions) Act 7974 and toprovide for the penalties ofcounterfeiting in currency andother ancillary matters is thefoundation of the legalframework for counterfeitingoperations in Nigeria.According to S. 1(1) Any person

who falsely makes orcounterfeits any bank noteresembling any bank noteissued by the Central Bank ofNigeria and which is legaltender in Nigeria shall be guiltyofan offence underthisAct and

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shall on conviction thereof be

sentenced to lifeimprisonment. S. (2) provides

that Any person who, withoutlawful authority or excuse (theproof whereof shall lie on theperson accused), knowinglymakes or mends or begins orproceeds to make or mend, orbuys or sells, or has in hispossession any puncheon,counter- puncheon, matrix,stamp, dye, pattern or mould in

or upon which there is made orimpressed, or which will makeor impress, or which is adaptedor intended to make or impress,the figure, stamp or patternresembling both or either ofthe sides of any bank note orcurrent coin, or any part of bothor either of those sides, or anymachinery, implement, utensilor material used or intended tobe used for the forgery of a

bank note or for falsely makinga current coin, whether or notthe bank note or current coinbe legaltender in Nigeria, shallbe guilty of an offence underthis Act and on convictionthereof shall, whether the banknote or coin is legal tender inNigeria or in any other country,be sentenced to lifeimprisonment. There are alsoprovisions in the Criminal andPenal Codes prohibiting themaking or counterfeiting ofNigerian currency. lndeed, thewhole of chapter 15 of theCriminal Code is devoted tosuch offences. Thus, S. 147 (1)provides: Any person whomakes or begins to make anycounterfeit current gold orsilver coin is guilty of a felonyand is liable to imprisonment

for life. Moreover, any person

who utters any counterfeitcurrency gold or silver coin,knowing it to be counterfeit, isguilty of a misdemeanor and is

liable to imprisonment for twoyears. This position is equallyreplicated in the Penal Code. ltcan thus be seen that there aresufficient provisions under therobust Nigerian legalframework. The severity ofpunishment attached tocounterfeiting activityunderscores the importanceattached to a counterfeit- freeNaira notes and the seriousnessof government in combatingthe malaise headlong.However, the will to prosecute

offenders remains an openquestion.

2.3 MEASUREMENT OFCOUNTERFEITED BAN K NOTES

The development ofmethodologica I fra mework fortracking the volumes ofcounterfeited currency notes incirculation is a sin-qua-non foreffective monitoring/controland subsequent eradication ofcounterfeiting operations. Themethodologica I fra mework forthe estimation of counterfeitedcurrency notes in Nigeria is

based on the Part-Found ln-Processing activitiesphilosophy.

ln the primordial PFP form theestimation of counterfeitedcurrency notes is premised onthe number of counterfeitedcurrency notes detected viathe currency processingactivities of the central bankof Nigeria.

The P.F.P approach can be

depicted algebraically as Cof=

ccPDU,. BK",_(l)

Where

Cof = Counterfeited currencynotes estimate of a

predetermineddenomination D

CCPDU, = The volume ofcounterfeited notes detectedin the currency processingactivities of the central bankof Nigeria.

BK", = The outstanding stockof notesof denomination D.

The P.F.P approach ispremised on the plausibleassumption that the entirespectrum of counterfeitednotes resides within theambits of the monetaryauthority with Zero-counterfeited notes outsidethe Centra! Bank of Nigeriaprocessing activities system.The assumption is thatcounterfeits are detected bythe authorities at worst duringthe sorting operations.Howeveq this assumption is

an exception rather than a

rule in reality.

The employment of the totalnumber of seized counterfeitnotes by the Central bank ofNigeria as a yardstick for themeasurement ofCounterfeited notes in thecountry is in itself a vague andimproper indicator ofmeasuring the total extent of

74

Cof = Counterfeited currencynotes estimate of a

predetermined denominationD

CCPDUT = The volume ofcounterfeited notes detectedin the currency processingactivities of the central bankof Nigeria.

BK,u,- The outstanding stockof notes of denomination D.

rF= The proportion ofcounterfeits detected by theeconomic agents

More precisely, the ratio rF =TD*/BD,=CP (3)

More precisely, the ratio rF =TDN/BDN = (PDN+BDN) /BDN_(4)

Where TDN represent totaldetections of counterfeitnotes of denomination D;

PDN, detection ofDenomination D made by theeconomic agents; and BDN,detection of denomination D

made by the central bank inprocessing. TD, PD, and BD areall measured as number ofdetections peryear.

The PFP approach connotes alower bound estimatebecause it fails to takecognizance of counterfeitdetected outside the centralbank while the modified (PFP)

approach represent a Upper-bound estimate due to thecounterfeited bank notesdetected by economic agents.Therefore, the modified

fake currency in an economy.The P.F.P as a methodologicalframework is thus aninadequate framework for theestimation of counterfeitedcurrency Notes in developingcountries (Nigeria lnclusive)where a large chunk ofcounterfeited currency Notesresides outside the domain ofthe monetary authorities. Thiscan result in theunderestimation of thecou nterfeited cu rrency notes.

The weakness observed in theP.F.P approach resulted in thefinal breakdown of the P.F.P

premises with resultantmodification anddevelopment of alternativemethodology. Despite, theparadigm shift in themeasurement ofcounterfeited bank notesCentral Banks has adopted theP.F.P due to the inherent easeof collating data using thisapproach.

The modified version of P.F.P

(PFP) takes cognizance of thecounterfeited notes detectedby economic agents outsidethe domain of CBN. Theassumption of the modifiedPFP is premised on the beliefthat counterfeits are seized,i.e. detected prior to havingbeen put in circulation, orpassed, i.e. identified as fakeafter having enteredcirculation.

The modified version of PFP

is denoted algebraically as

CrF = CCPDU,.rF.BK", _(2)Where

version of PFP is morerepresentative of the estimateof counterfeited notesdetected.

LIFE-OF.COUNTERFIETAPPROACH

A much more encompassingand elaborate approach in theestimation of counterfeitednotes detected is the life ofcounterfeit approach whichtakes cognizance of the life ofcounterfeited notes andinvariably the velocity oftransaction of counterfeitnotes prior to detection.

This can be representedalgebraically as

Cof =LOC". TD,, _ (5)

WhereLOC*= Life of counterfeitTD"= f6a annual recovery ofcounterfeited currency notesof denomination D.

However, historical records ofthe life-of-counterfeitapproach are fraught withpaucity of data on the life ofcounterfeits in practicalterms. This drawback can bemitigated by implanting theyear of printing and issuing ongenuine notes to estimateaverage life of currency notes,which could proxy for similarlycounterfeited notes.However, the life ofcounterfeited notes issomewhat different from thatof genuine notes since the lifeof counterfeited notes reflectss the life span of counterfeitednotes prior to being detectedunlike the life of genuine

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currency which is largelydependent on the wear andtear of currency.

THE COMPOSITE METHOD

The composite method is an

amalgam of elements of PFP

and LOC in estimating thestock of circulatingcounterfeits with precision: ltdraws inferences from thedrawback of both method ofestimating counterfeitedcurrency notes. Data arecollected from the processing

activities of the MonetaryAuthorities, Detection ofcounterfeited notes outsidethe preview of the monetaryauthorities and the life ofcounterfeit. , The compositemethod employs data on thelife of a particulardenomination say N100 toprovide a f ra mework ofdetermining the life span ofcounterfeit N100 notes. This is

combined with data fromcounterfeits detected by themonetary authorities andeconomic agents. Thecomposite method estimatesthe stock of outstandingcounterfeits using threecriterions. (a) The currencynotes classified a clean duringthe processing activities of theCentral Bank of Nigeria and inturn circulated to economicagents, where 'e' of thecounterfeits is'detectedbefore it is passed to thecentral bank, or where theremaining counterfeit notes

are detected. lf PPM (parts Per

Million) is the originalproportion of counterfeits in

circulating currency, thenPPM is described as PPM =RBIPPM/ (1-e) (0<e<1). Here

RBIPPM is the proportion ofcounterfeits detected by theApex Bank. The first criteriasignifies the relation betweenthe stock of outstandingcounterfeits, C, of anydenomination (D) anddetections of counterfeits ofthat denomination, premised

on the efficiency of public

screening, e, and theproportion of counterfeitingdetected by central bank(RBIPPM), C (e)D = PPM x NICD

= RBIPPM x NICD/(1-e). ltbuilds on the PFP method byallowing for differentefficiencies of publicdetection. (b) The secondelement deals with theturnover of currency neededto account for the actual levelof public detection ofcounterfeits during a year,given the efficiency of public

screening. The estimatedturnover, T of counterfeits ofany denomination D is'givenbyT(e) D=PDD/(exPPMxNICD). Here, PDD is thedetection of denomination D

made by public per year. Herethe denominator measurespublic detections per tu rnoverof the circulating Stock ofdenomination D. (c) The thirdelement is estimated life ofcounterfeit notes, which isgiven by LOCD = C (e)D/TDD.

Data are readily available forRBIPPM, the proportion ofcounterfeiting detected by

central bank and NICD. Each

equation, however, requiresinformation on unknowns in

order to estimate C(dD. fheunknowns ate e, LOCD and f(e) D.Yaluesfor TD and LOCD

could be derived usingknowledge about theturnover rate of the currencyor the life of counterfeits(Sanjoy Bose and AbhimanDas,2013).

3.0 RECOMMENDATION

The modification of thecurrent methodologicalframework for themeasurement ofcounterfeited notes in Nigeriais important in solving theproblems of cu rrencycounterfeiting in Nigeria. Themeasurement of currencycounterfeiting must becomprehensive enough toencompass the entirespectru m of detectedcounterfeited notes in thecountry whether or not theyare within the ambits of theCentral Bank of Nigeria. Thiscan be made possible with theencouragement of properrecording and documentationof detected currency notesincidence in Nigeria. The act ofPerforating and destroyingcounterfeited bank notesdetected in DMBs withoutproper documentation shouldbe discou raged henceforth.

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Volume 41 No.1 Jonuory - Morch, 2017

There is also an undeniableneed to strengthen theenforcement mechanismsenshrined in the existing lawsto achieve optimum outcome.The bane of the fight againstcurrency counterfeiting hasbeen the inadequacies ofenforcement measures andcontinued sustenance ofdrives towards ensuring a

cou nterfeit proof-f ree society.Severe punishment tocurrency counterfeiters isgermane to serve as a

deterrent factor .The commonpractice is to make lawswithout concomitant zeal toenforce same which defeatsthe dictates of the laws abintio. lt is germane torecommend renewed focuson the enforcement ofexisting substantia! laws oncounterfeiting operationsrather than frequent changesof existing legislation whichhas become thenomenclature in legaldevelopment in Nigeria. Theestabl.ishment ofcounterfeited bank notesvigilance cells in banks as wellas formation of securitycommittees in each stateincluding representatives ofpolice, banks, etc., to dealwith all counterfeit cases inaccordance with thestipulated law is alsoimportant.

Counterfeiting of currency is

an unprofitable venture priorto the exchange of fake notesfor other value and thecirculation in the economy;blocking all access/loopholes

to get counterfeited currencypassed; implies the blockageof incentive to counterfeit.Efforts to combatcounterfeiting must includestrategies to disrupt thepassing process. These effortstypically focus on educatingthe human cash handler andemploying reliable machineauthentication. The CentralBank of Nigeria must sustainand reinvigorate awarenessprogrammes to educate thepopulace on the detectionand recognition of genuineand counterfeited currencynotes and the procedures forhandling incidence ofcounterfeited notes.

The Central Bank of Nigeriamust be proactive rather thanbeing reactive to changingparadigm in Technologicaladvances. Technologicaladvancement exposes theNaira notes to counterfeitingvulnerabilities as well asimproves the detection ofcounterfeited notes.Therefore, the continualintroduction of new banknotes designs with distinctivefeatures by the Centra! Bankof Nigeria is a pre-requisite toremain ahead of sophisticatedcounterfeiters.

4.0 coNclusroN

ln practical terms, there aremany pitfalls in the fightagainst currencycounterfeiting operations inNigeria. The efforts of theCentral Bank of Nigeria geared

towards maintaining a zero-

counterfeit Naira notes has

rarely worked ideally becauseof measurementproblematique and lack ofunderstanding ofcontemporary trends andissues in counterfeitingoperations. Therefore, thispaper exposed this germanecontradictions, inherentdialectics as well as strategicoptions that are likely to shapethe combat of the menace inNigeria. Nevertheless, foracceptability every proposedsolution capable of addressingthe malaise must beundertaken with specialreferences to the peculiarityof currency counterfeitingoperations in the Nigeriancontext. This creates anopportunity for rethinkingand reassessing solutionsbased on nativistic models.Rega rd less of the ma nydifficulties, facing themonetary authority inensuring a counterfeit proof-free Naira notes in Nigeriatwo basic requirementsunderpin their resolution. Thefirst is the need to continuallymonitor new trends incounterfeiting operations a ndthe second relates to thecapacity of the monetaryauthority to develop a robustmeasurement of the volumeof counterfeited currencybank notes within the scopeand context of the peculiarrealities in counterfeitingoperations in Nigeria. Themethodology enunciated inthis paper would serve as areference sou rce for themonetary authority for policy

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Volume 4l No.l Jonuory - Morch, 2017

consideration in view of thescientific and practica!

solution in obtaining crediblestatistica! estimates of

counterfeits availed

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REFERENCES

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Bender,K.(2006)" Money Makers. Belin; John Wiley and sons.

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Bosworth, D. and Yang, D. (20O2l, "The Economics and Management of Global Counterfeiting". Papersubmitted to the Sixth World Congress in lntellectual Capital and lnnovation (Current Draft;September, 2002).Retrieved 16th May, 2005 f romhttp://www.ulb.ac.be/cours/solvay/vanpottelsberghe /resources/rsaem 39.pdf

Cavalcanti, R. and E. Nosal (2OO7) "Counterfeiting as Private Money in Mechanism Design." FederalReserve Bank of Cleveland Working Paper No. 07-16.

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Fung, B., Shao, E. (2011). Modelling the Counterfeiting of Bank Notes: A Literature Review. Bank ofCanada Review.

Green, Robert T. and Tasman Smith (20021"Countering Brand Counterfeiters." Journal of lnternationalMarketing 10 ( ) : 89-106.

Grossman, Gene M. and CarlShapiro (1988). "Counterfeit-Product Trade." American Economic Review78 (March): 59-75.

Hopkins, David M., et al. (2003) "Counterfeiting Exposed: Protecting Your Brand and Customers"Hoboken : John Wiley & Sons.

Jorge Eduardo Galan Camacho and Miguel Sarmiento Paipilla l2OO7l, "Banknote Printing at ModernCentral banking; Trends, Costs, and Efficiency", htto://www.banreo.gov.coldocum/ftp/borra476.odfLi Y and G Rocheteau (2011), 'On the Threat of Counterfeiting', Macroeconomic Dynamics,15(Supplement 51), pp 10-41.

Mailafia, O (2016), "How to save the Naira' 'article published on Business Day on the December 5'h,

2016. ( HTTPS://www. busi nessdavon li ne.com/how-to-save-the-nai ral)Monnet C (2005), "Counterfeitingand lnflation', European Central BankWorking PaperSeries No 512

Nosal, E., Wallace, N. (2007). "A Modelof (the threat of)Counterfeiting". Journalof MonetaryEconomics, sa@l: 994-1001.

Nathan Viles, Alexandra Rush and Thomas Rohling (2015) "The Social Costs of CurrencyCounterfeiting" Research Discussion Paper* Economic Research Department ** Note lssue

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Olsen, Janeen E. and Kent L. Granzin (L992) "Gaining Retailers' Assistance in Fighting Counterfeiting:Conceptualization and EmpiricalTest of a Helping Model." Journalof Retailing63 (1):90-109.

Phillips, T. (2005): Knockoff: The DeadlyTrade in Counterfeit Goods. Kogan Page Limited, London.

Sanjoy Bose and Abhiman Das(2013) "Estimation of Counterfeit Currency Notes in lndia -AlternativeMethodologies" RBIWORKING PAPERSERIESW PS (DEPR): 03l2OL3 .

Shao E (2013),'TheThreat of Counterfeiting in Competitive Search Equilibrium',Bank of Canada Working Paper 2OL3-22.

Tcherneva, P. (2005). Chartalism and the Tax-Driven Approach to Money. ln P. Arestis and M.

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Tcherneva, P (2016). Money, Power, and Monetary Regimes (Working Paper No.861). Levy Economicslnstitute: pg8.

The Financial Action Task Force (FATF) (2013) Money laundering and terrorist financing related tocou nterfeiti ng of cu rrency.

Vanguard (2017)"Fake Naira notes in circulation less than one percent' 'Read more athttp://www.vanguardngr.com/2Ot7lO2lfake-naira-notes-circulation-less-one-percent-cbn/

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