Bankers Caught in Currency Scheme

The disposal of old or damaged bank notes can be an attractive opportunity for fraudsters.

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A routine audit last year uncovered a US$40 million currency fraud scheme in Nigeria, according to The Guardian. Nigeria's Economic and Financial Crimes Commissi​on has charged six central bank officials and 16 commercial bank employees with stealing Nigerian naira notes intended for destruction. According to the report, Nigeria's central bank withdraws old or torn notes from circulation regularly and replaces them with new notes. The audit last September discovered irregularities with this process at a bank branch in Ibadan, a city in the southwest of Nigeria. Further investigation revealed that mutilated notes of higher denominations were swapped with lower denomination currencies, with box labels indicating they contained a higher value than their true content.

Lessons Learned

Many banks around the world carry out the function of currency management, including the disposal of old or worn-out currencies, typically through a network of offices and some form of secure storage. A huge amount of money is involved: In 2012, the U.S. Federal Reserve ordered nearly 8.4 billion individual notes with a face value of more than US$358 billion to replace old currencies on a one-to-one basis. Typically this disposal work takes place under a statutory framework and a tight security regime. Bank notes and coins that are unfit, cannot be issued for further circulation, or are not needed immediately by the branches are deposited into a designated secure storage area. When sufficient quantities of these currencies have accumulated, they are remitted to a central bank office for inventory, scanning for counterfeits, and disposal. The local–central secure storage system combination is intended to remove the necessity for frequent physical movement of currency and enable banks and treasuries to work with a minimum cash balance of their own.

At least that is how it is supposed to work. Bearing in mind the potentially limited resources available in many countries, what can be done to enhance the controls and protect the security of these funds?

  • Continually work to improve the efficiency of currency management and closely monitor the printing capacity of bank note presses with a view to closing the demand–supply gap in currency and lessening the risk materiality.
  • Automate the currency-processing operations in the local offices as much as possible. Many countries have installed currency verification and processing (CVP) systems for bank notes received for examination. These systems are capable of sorting the notes on the basis of denomination, design, and condition. Generally, the system sorts the notes into Fit, Unfit, Reject, and Suspect categories. Notes in the Suspect category are received in separate stacks and must be inspected manually for the presence of counterfeit notes. CVP systems also have security measures that enable the bank to provide graduated access rights, capture and store data, and produce security reports.
  • Enhance physical security measures in areas where these currencies are being held. For example, install closed-circuit television (CCTV) cameras at all such facilities and retain recordings up to 90 days for appropriate monitoring by security staff. This can be enhanced by networking CCTVs from local to central offices. While there would be upfront investment costs, installing suitable biometric access systems at all currency storage locations can ensure only authorized staff members are able to enter. Banks also should consider requiring officials to present a pre-validated photograph to enter the storage area. Electronic locking of all storage bins/vaults also should be explored, along with linking them to a central server to ensure easy monitoring of transactions.
  • Use tamper-proof shrink-wrapping — or similar materials — of bank notes to be disposed of, with the details of the source branch bar-coded on the bundles. This can facilitate easy identification of the branch from which the notes were received so that accountability for shortages, defects, counterfeits, theft, and fraud can be attributed precisely, which can reduce the possibility of such incidents.
  • Conduct periodic security audits of secure storage areas at bank branches on a risk-based frequency, at least more often than annually. Comprehensive guidelines for such audits should be developed and well-communicated to branches. A system of surprise inspections also would be useful.

Human resource measures should include rotation of staff employed at currency disposal locations and heightened background checks before hiring staff.

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