U.S. Currency: Treasury's Plans to Study Genuine and Counterfeit U.S.
Currency Abroad (Letter Report, 04/11/97, GAO/NSIAD-97-104).

Pursuant to a congressional request, GAO reviewed the Secretary of the
Treasury's audit plan on the uses and counterfeiting of U.S. currency in
foreign countries, focusing on whether the plan will enable the
Secretary of the Treasury to: (1) study the use of U.S. currency in
foreign countries; (2) study the holding of U.S. currency in foreign
countries; and (3) develop useful estimates of the amount of counterfeit
U.S. currency that circulates outside the United States each year.

GAO noted that: (1) the Secretary of the Treasury's submitted plan does
not demonstrate how it will enable the Treasury to meet the audit plan
objectives required under the Antiterrorism and Effective Death Penalty
Act of 1996; (2) the plan does not clearly state the audit's objectives
or the methodologies to achieve those objectives; (3) although the
Treasury's plan identifies some elements of a methodology that could be
employed to study the use of genuine U.S. currency abroad, it does not
explain how the Treasury intends to analyze the information that might
be collected; (4) the plan does not define the methodologies the
Treasury expects to use to study the holding of genuine U.S. currency
abroad and to develop estimates of counterfeit U.S. currency abroad; (5)
the Treasury official responsible for developing the plan stated that
the audit objectives of the plan are the same as those stated in the
act; (6) he acknowledged that the plan does not fully address the
methods for achieving the objectives; (7) this official and Federal
Reserve officials said that the information obtained on genuine currency
usage will be used to describe U.S. currency flows and will be reviewed
to determine whether any of the information conflicts with their
assumptions about the usage of genuine U.S. currency abroad; (8) the
Treasury official stated that the Treasury intends to use a recently
published Federal Reserve methodology to develop an estimate of the
total holdings of genuine U.S. currency abroad; (9) the official also
told GAO the Treasury would rely on an existing Federal Reserve
methodology to develop rough estimates or ranges of estimates of
counterfeit U.S. currency circulating outside the United States each
year; (10) after GAO outlined its concerns about the submitted audit
plan to Treasury and Federal Reserve officials, the Treasury official
responsible for the plan told GAO that the Treasury, with the assistance
of the Federal Reserve, planned to submit a written addendum to Congress
explaining the Treasury's proposed methodologies in more detail, with
the caveat that these methodologies may change based on information
obtained abroad during the course of the audits; and (11) the Treasury
official also indicated that the addendum would explain the assumptions
the Treasury made and discuss the limitations associated with these
estimates.

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

 REPORTNUM:  NSIAD-97-104
     TITLE:  U.S. Currency: Treasury's Plans to Study Genuine and 
             Counterfeit U.S. Currency Abroad
      DATE:  04/11/97
   SUBJECT:  Currency and coinage
             Audits
             International economic relations
             Evaluation methods
             Interagency relations
             Crimes or offenses
             Forgery
             Money supply
             Foreign governments
IDENTIFIER:  Treasury International Currency Awareness Program
             
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Cover
================================================================ COVER


Report to Congressional Requesters

April 1997

U.S.  CURRENCY - TREASURY'S PLANS
TO STUDY GENUINE AND COUNTERFEIT
U.S.  CURRENCY ABROAD

GAO/NSIAD-97-104

U.S.  Currency

(711198)


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


Letter
=============================================================== LETTER


B-276332

April 11, 1997

The Honorable Spencer Bachus
The Honorable John M.  Spratt, Jr.
House of Representatives

Currencies are susceptible to counterfeiting, but the stability and
worldwide acceptance of the U.S.  currency, in particular, have made
it a target for international counterfeiters.  Although
counterfeiters may engage in this activity for direct economic gain,
counterfeiting is sometimes linked with other more nefarious criminal
endeavors, such as drug trafficking, arms dealing, and alleged
terrorist activities.  Widespread counterfeiting of U.S.  currency
could undermine confidence in the currency.  Further, if done on a
large-enough scale, this activity could reduce international holdings
of U.S.  currency and have a negative effect on the U.S.  economy.\1

While 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 and
to assess the effectiveness of measures to combat counterfeiting.\2

In the past, the Secret Service (a Treasury Department bureau) used
its detection data\3

to reflect the actual amount of counterfeits abroad.  However, as we
reported in February 1996, these data have limitations that raised
questions about their usefulness for illustrating counterfeiting
activity.\4 In April 1996, Congress passed the Antiterrorism and
Effective Death Penalty Act of 1996 (P.L.  104-132) which, among
other things, requires that the Secretary of the Treasury develop an
audit plan that is designed to enable the Secretary to (1) study the
use and holding of 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. 

In October 1996, the Secretary responded to the first requirement by
submitting the Audit Plan of the Secretary of the Treasury on the
Uses and Counterfeiting of U.S.  Currency in Foreign Countries.  At
your request, we reviewed the plan, as submitted, to determine
whether it will enable the Secretary of the Treasury to (1) study the
use of U.S.  currency in foreign countries, (2) study the holding of
U.S.  currency in foreign countries, and (3) develop useful estimates
of the amount of counterfeit U.S.  currency that circulates outside
the United States each year.  You also asked us to review any other
information and materials that the Treasury intends to use to conduct
the audits. 


--------------------
\1 When U.S.  currency remains in circulation, 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 reduce the government's interest costs by
over $10 billion a year.  If the confidence of the dollar were
undermined, individuals might switch to other currencies, which would
result in losses in the amount of this benefit to the United States. 

\2 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. 

\3 Secret Service counterfeit-detection data include detections made
by its agents and the Federal Reserve as well as detections made and
reported by others, such as domestic and foreign law enforcement
agencies and banks. 

\4 In our prior work, you had asked us to assess the extent of the
counterfeiting problem overseas.  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
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:  Issues and U.S.  Deterrence
Efforts (GAO/GGD-96-11, Feb.  26, 1996) and Counterfeit U.S. 
Currency Abroad:  Observations on Counterfeiting and U.S.  Deterrence
Efforts (GAO/T-GGD-96-82, Feb.  27, 1996). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

The Secretary of the Treasury's submitted plan does not demonstrate
how it will enable the Treasury to meet the audit plan objectives
required under the act.  The plan does not clearly state the audit's
objectives or the methodologies to achieve those objectives. 
Although the Treasury's plan identifies some elements of a
methodology that could be employed to study the use of genuine U.S. 
currency abroad, it does not explain how the Treasury intends to
analyze the information that might be collected.  The plan does not
define the methodologies the Treasury expects to use to study the
holding of genuine U.S.  currency abroad and to develop estimates of
counterfeit U.S.  currency abroad. 

The Treasury official responsible for developing the plan stated that
the audit objectives of the plan are the same as those stated in the
act.  He acknowledged that the plan does not fully address the
methods for achieving the objectives.  This official and Federal
Reserve officials said that the information obtained on genuine
currency usage will be used to describe U.S.  currency flows and will
be reviewed to determine whether any of the information conflicts
with their assumptions about the usage of genuine U.S.  currency
abroad.  The Treasury official stated that the Treasury intends to
use a recently published Federal Reserve methodology to develop an
estimate of the total holdings of genuine U.S.  currency abroad.  The
official also told us the Treasury would rely on an existing Federal
Reserve methodology to develop rough estimates or ranges of estimates
of counterfeit U.S.  currency circulating outside the United States
each year. 

After we outlined our concerns about the submitted audit plan to
Treasury and Federal Reserve officials, the Treasury official
responsible for the plan told us that the Treasury, with the
assistance of the Federal Reserve, planned to submit a written
addendum to Congress explaining the Treasury's proposed methodologies
in more detail, with the caveat that these methodologies may change
based on information obtained abroad during the course of the audits. 
The Treasury official also indicated that the addendum would explain
the assumptions the Treasury made and discuss the limitations
associated with these estimates. 


   BACKGROUND
------------------------------------------------------------ Letter :2

U.S.  counterfeiting deterrence efforts are coordinated through the
Advanced Counterfeit Deterrence Steering Committee, comprised of
officials from the Department of the Treasury (including the Secret
Service and the Bureau of Engraving and Printing) and the Federal
Reserve.  The Secretary of the Treasury is responsible for
manufacturing and protecting U.S.  currency.  The Secret Service
investigates counterfeiting and maintains counterfeit-detection data,
and the Bureau of Engraving and Printing designs and prints U.S. 
currency.  The Federal Reserve issues U.S.  currency, pays U.S. 
currency to and receives U.S.  currency from authorized financial
institutions in the United States (some of which may have affiliates
and/or customers outside the United States), and is responsible for
substantiating the authenticity of all U.S.  currency received.  The
Federal Reserve also maintains data on the amount of U.S.  currency
that its customers report as shipped to and from the United States
and the amount that it detects as counterfeit. 


      CONTENTS OF THE TREASURY'S
      AUDIT PLAN
---------------------------------------------------------- Letter :2.1

Developed in conjunction with the Advanced Counterfeit Deterrence
Steering Committee, the Treasury's audit plan identifies data
sources, sets forth site selection criteria, lists questionnaires to
be used in interviews abroad, discusses what audit reports might
contain, sets time frames, and states that the Federal Reserve will
attempt to specify and test a model of currency usage abroad.  The
Treasury's plan draws heavily on information obtained from ongoing
International Currency Awareness Program study trips.  The purpose of
those trips was to meet with foreign financial institution,
government, and law enforcement officials to learn more about the
uses, distribution, and counterfeiting of U.S.  currency overseas and
to begin to inform those abroad about the U.S.  currency redesign.\5
In September/October 1996 and January 1997, first using the
Treasury's draft and then the formally submitted audit plan, the
Treasury and the Federal Reserve took two study trips similar to
those done under the International Currency Awareness Program.  As of
February 1997, study trips under the International Currency Awareness
Program and Treasury's audit plan had been made to 18 countries or
entities where U.S.  currency was used or distributed to a
significant extent.\6 Under the Treasury's audit plan, the first
audit was to begin no later than April 24, 1997, and to be completed
by September 1999.  At least one audit is to be performed during each
subsequent 3-year period through April 2006.  The act requires the
Secretary to submit a written report to certain congressional
committees on the results of each audit within 90 days after
completing the audit. 


--------------------
\5 In 1996, the Treasury Department began issuing a newly designed
U.S.  currency with more security features to deter counterfeiters
both domestically and abroad. 

\6 As of February 12, 1997, visits were made to 18 countries or
entities under the International Currency Awareness Program and the
Treasury's audit plan, including Argentina, Bahrain, Belarus,
Cambodia, Egypt, England, Indonesia, Hong Kong, the Philippines,
Russia, Saudi Arabia, Singapore, Switzerland, Taiwan, Thailand,
Turkey, United Arab Emirates (Abu Dhabi, Dubai), and Vietnam. 


   THE TREASURY'S SUBMITTED PLAN
   IS UNCLEAR AND INCOMPLETE
------------------------------------------------------------ Letter :3

The Secretary of the Treasury's submitted plan does not demonstrate
how it will enable the Treasury to meet the audit plan objectives
required under the act.  A written plan should define the audit's
objectives and the scope and methodology to achieve those
objectives.\7 The Treasury plan's audit objectives are not clearly
stated and do not include the findings and reporting elements that
the Treasury expects to develop.  Concerning scope, the plan provides
a time line for completing the audits, site selection criteria for
regions of the world, and information and data sources.  Although the
plan provides some information on data gathering, it does not fully
explain the analytical methods the Treasury intends to use to achieve
the objectives.  For example, the plan identifies data sources and
provides questions that may be asked of foreign financial and law
enforcement officials, but it does not fully explain how this
information will be analyzed and synthesized to address each of the
audit plan objectives under the act. 

The plan does 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 describes elements of
a methodology that might be used to study the use of genuine U.S. 
currency abroad.  The plan indicates that the Federal Reserve will
attempt to specify and test a model of how the U.S.  currency that is
held outside the United States is used to support or refute an
assumption about currency movement outside the United States.  The
assumption to be tested is that currency moves between and among
individuals and business firms in such a way that the portion of U.S. 
currency held abroad that is received by the Federal Reserve each
year (at least 13 percent in 1995) through its foreign-origin
currency receipts is representative of the total amount of U.S. 
currency abroad.  The Federal Reserve's model is expected to place a
special emphasis 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,\8

and, finally, (4) be deposited by a correspondent bank at the Federal
Reserve.\9

However, the plan does not fully explain how the Treasury intends to
analyze the information obtained to reach conclusions about the use
of U.S.  currency abroad. 


--------------------
\7 The objectives are what the 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 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). 

\8 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. 

\9 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. 


   THE TREASURY INTENDS TO SUBMIT
   AN ADDENDUM TO BETTER EXPLAIN
   HOW IT WILL MEET ITS AUDIT PLAN
   OBJECTIVES
------------------------------------------------------------ Letter :4

After we highlighted some of the plan's shortcomings, particularly
the absence of methodologies, Treasury and Federal Reserve officials
acknowledged that the plan could be improved.  The Treasury official
responsible for developing the plan stated that the audit
objectives--to study the use and holding of genuine U.S.  currency in
foreign countries and develop estimates of the amount of counterfeit
U.S.  currency circulating outside the United States each year--are
the same as those stated in the act.  Further, the official told us
that, with the assistance of the Federal Reserve, the Treasury
intends to submit a written addendum to Congress to better explain
its proposed methodologies, with the caveat that these methodologies
may change based on information obtained abroad during the course of
the audits.  The Treasury official also told us the Treasury intended
to include in the addendum a description of its assumptions and the
limitations associated with the use of the resulting information. 


      THE TREASURY INTENDS TO
      DESCRIBE THE USES OF GENUINE
      U.S.  CURRENCY ABROAD
---------------------------------------------------------- Letter :4.1

Treasury and Federal Reserve officials explained that rather than
develop and test a model of currency usage, as discussed in the
submitted plan, they will summarize information obtained from foreign
officials to describe the uses of U.S.  currency in the countries
visited.  They said that it is not possible to develop a single model
of how U.S.  currency is used abroad because of the numerous reasons
why U.S.  currency is used and the many channels through which U.S. 
currency is distributed.  However, by determining and describing the
process by which U.S.  currency is used in individual countries under
specific conditions, they said that they may be able to understand
U.S.  currency usage in other countries in similar situations.  They
said that they need to interview foreign officials to obtain
information on currency usage and flows because little written data
exist.  They told us that the information obtained on genuine
currency usage will also be reviewed to determine whether any of the
information conflicts with their assumptions about the usage of
genuine U.S.  currency abroad.  By determining how currency is used
and how it flows within and between particular regions and countries,
the Treasury and the Federal Reserve intend to support or refute the
assumption that the sample of U.S.  currency returned to and reviewed
by the Federal Reserve is representative of the amount that is not
returned to the Federal Reserve. 


      THE TREASURY INTENDS TO
      DEVELOP ESTIMATES OF GENUINE
      U.S.  CURRENCY HELD ABROAD
---------------------------------------------------------- Letter :4.2

According to the Treasury official responsible for developing the
plan, the Treasury plans to address holdings by establishing
estimates of the total amount of genuine U.S.  currency abroad.  To
do this, the Treasury intends to use the Federal Reserve methodology
outlined in its 1996 study.\10 Synthesizing several methods and data
sources, the Federal Reserve estimated that about $200 billion-$250
billion of U.S.  currency, or up to two-thirds of the roughly $375
billion in circulation outside of banks in 1995, was abroad.  As
described in the study, because of the inadequacy of measurement
tools, the Federal Reserve used a range of direct and indirect
methods that provided an estimate of foreign and domestic currency
holdings. 

The Federal Reserve study points out that because the data on
currency flows abroad are incomplete, cumulating them does not
provide a good estimate of the amount of currency held abroad.  Thus,
the authors combined flow data with estimates from other methods. 
The estimates of foreign holdings vary depending upon which method is
used.  The study concluded that between 55 percent and 70 percent of
U.S.  currency is held abroad.  We reviewed the study and found the
method to be reasonable, based on the given assumptions.  Treasury
and Federal Reserve officials told us they intend to support or
modify the estimate with information obtained during the studies
abroad and to update and publish estimates periodically. 


--------------------
\10 See Richard D.  Porter and Ruth A.  Judson, "The Location of U.S. 
Currency:  How Much Is Abroad?" Federal Reserve Bulletin, Board of
Governors of the Federal Reserve System (Washington, D.C.:  Federal
Reserve System, Oct.  1996), pp.  883-903. 


      THE TREASURY INTENDS TO
      ESTABLISH ESTIMATES OF
      COUNTERFEIT U.S.  CURRENCY
      ABROAD
---------------------------------------------------------- Letter :4.3

According to the Treasury, it intends to use an existing Federal
Reserve method to establish estimates of counterfeit U.S.  currency
circulating abroad.  The Treasury indicated that it is confident the
data it already collects are sufficient for developing these
estimates.  The method that has been in use over the past few years
is based on a number of assumptions that cannot be either fully
validated or disproved.  Treasury and Federal Reserve officials said
that information they have obtained to date validates the
assumptions, yet they may modify this method if the information
obtained through their trips abroad make them question their
assumptions.  Although they recognize that the estimates cannot be
definitive or statistically validated due to the nature of the
activity, they believe the method should provide a rough estimate or
range that the Treasury can use to assess the counterfeiting threat
when taken into consideration with other factors. 

According to the Treasury, the most significant and detailed measures
of counterfeit U.S.  currency circulating abroad are already
contained within the Federal Reserve's currency receipt data and the
Secret Service's counterfeit-detection statistics, upon which the
Treasury's estimate is based.  The Federal Reserve indicated that
through its foreign-origin currency receipts it is able to examine a
significant portion of the U.S.  currency estimated to be circulating
outside of the United States.  Such receipts amounted to at least 13
percent of the currency that was likely to be outside of the United
States in 1995 and may amount to 20 percent in 1996, according to the
Federal Reserve.  The Treasury official also stated that the Treasury
understands the limitations of the Secret Service's
counterfeit-detection statistics and realizes that these actual
detections do not capture all of the U.S.  currency
counterfeit-activity that occurs worldwide.  Nevertheless, the
Treasury believes that its data and supporting evidence on actual
detections suggest that the amount of counterfeit U.S.  currency in
circulation is not much larger than Federal Reserve statistics
indicate. 

With this in mind, the Federal Reserve, using its
counterfeit-detection data and taking into account the extent to
which counterfeits are detected and reported to the Secret Service by
financial institutions and others before deposits are received by the
Federal Reserve, formed a rough estimate of the value of counterfeits
that may have been in circulation abroad.  Some of the figures used
in this calculation are considered "restricted information" by the
Federal Reserve and thus are not provided in this report.  In
general, the method used for 1996 was as follows: 

  -- As discussed previously, the Federal Reserve estimated that
     two-thirds of genuine U.S.  currency circulates
     abroad--approximately $174 billion in 1996. 

  -- It determined the value of all $100 notes\11 processed through
     New York, Miami, and Los Angeles\12 Federal Reserve banks during
     the year from abroad as a percentage of the value of notes
     estimated to be in circulation abroad--approximately 18.6
     percent. 

  -- It established a Federal Reserve counterfeit-detection rate by
     determining the number of counterfeit $100 notes detected per
     million notes processed at Federal Reserve banks from abroad. 

  -- It determined the estimated value of counterfeits in circulation
     abroad based solely on the Federal Reserve detection rate for
     $100 notes from abroad. 

  -- The Federal Reserve assumed that the ratio of counterfeit $100
     notes in circulation detected by the Federal Reserve
     domestically compared to those detected by financial
     institutions, retailers, and others domestically (as reported to
     the Secret Service) is the same ratio as would be found for
     counterfeit $100 notes detected abroad. 

  -- It applied the resulting percentage to the number of
     counterfeits in circulation abroad based on its own detections
     to come up with its estimate of the total value of counterfeits
     in circulation abroad--roughly a range centering on $21.2
     million in 1996.\13

This method relied on some assumptions that can neither be fully
validated nor disproved, due to the nature of the activity.  For
example, it relied on (1) assumptions about presumed overseas
currency flows, (2) counterfeit-detection data derived from currency
shipments reported as originating overseas, and (3) assumptions about
detections and reporting made prior to shipments of currency back to
the Federal Reserve from overseas.  According to the Federal Reserve,
information obtained during the previous International Currency
Awareness Program trips abroad did not indicate a need to revise its
assumptions.  The Treasury official told us that the evidence
gathered during future trips abroad should help reduce the risk
factors associated with these assumptions and either support or
refute the Treasury's belief in the efficacy of its statistics. 
According to the Treasury, interviews with foreign officials will
provide insight, as will examination of record-keeping procedures and
local counterfeit-detection statistics.  The Treasury and Federal
Reserve said that, at the very least, they may modify these methods
should they find anything in their studies of use and holdings abroad
to make them question their assumptions. 

The Treasury and the Federal Reserve agree that this method, which
has been employed for the past few years, cannot be used to give the
definitive answer due to the complex nature of currency flows and the
criminal nature of counterfeiting.  Rather, the results of this
method may be used to provide a rough estimate or range that the
Treasury can use in its assessment of the counterfeiting threat. 
Both the Treasury and the Federal Reserve agree that this rough
estimate cannot be used in isolation.  They say it must be considered
with other pieces of the threat assessment such as seizures of
counterfeits and intelligence information including the quality of
the counterfeits, the types of equipment used to produce
counterfeits, the types of perpetrators, any connections with other
crimes, and other data. 


--------------------
\11 According to the Federal Reserve, the $100 note is the most
heavily used abroad and has been used in the past couple of years to
estimate the total value of counterfeit U.S.  currency circulating
abroad. 

\12 According to the Federal Reserve, the majority of notes from
overseas come through these three banks. 

\13 The Federal Reserve concluded that this amount was insignificant
from a macroeconomic perspective and has no discernible effect on
public confidence in U.S.  currency. 


   RECOMMENDATION
------------------------------------------------------------ Letter :5

Without a clear description of the audit plan objectives, the methods
to be used to achieve these objectives, and the associated
limitations, the Treasury's submitted plan does not have all the
requisite elements of an audit plan.  More complete documentation of
the audit plan would provide a greater opportunity to determine
whether the proposed plan is likely to result in a useful report.  To
help assure that the Treasury corrects the deficiencies in the
submitted audit plan, we recommend that the Secretary of the Treasury
develop and submit an addendum to more fully explain the objectives
and the methods the Treasury intends to use, including a discussion
of assumptions and limitations associated with the use of the
resulting information. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :6

The Department of the Treasury, with the input of the Federal Reserve
Board, provided oral comments on a draft of this report.  The
Treasury agreed with most of the information presented and supported
our recommendation that it develop an addendum to the plan to more
fully document the objectives and methods it intends to use,
including a discussion of the assumptions and limitations associated
with the use of the resulting information.  The Treasury acknowledged
that certain aspects of the submitted plan were left vague, but said
that this was done in order to leave options open for the further
development of the methodology.  According to the Treasury, it, with
the input of the Federal Reserve, was in the process of developing
the addendum and planned to submit the addendum to Congress by April
18, 1997. 

The Treasury indicated that the uses of genuine U.S.  currency abroad
are so diverse that it cannot develop one worldwide model, and
therefore it planned to develop descriptions of U.S.  currency usage
in the countries it visits.  The Treasury believes this methodology
is a straightforward exercise whereby it compares responses from
foreign officials.  The Treasury stated that it may use these
descriptions to better understand the usage of U.S.  currency in
other countries in similar situations.  The Treasury's planned
approach for studying the uses of genuine U.S.  currency abroad is
less quantitative in nature than the methodologies the Treasury plans
to use to develop estimates of genuine and counterfeit U.S.  currency
abroad.  It relies primarily on testimonial evidence provided by
foreign officials, and it is unclear how the Treasury will reconcile
any differences in data gathered.  Therefore, the methodology is
dependent upon the quality and reliability of that testimonial
evidence and the context in which it is presented. 

The Treasury noted that although the methodology to be used in
developing estimates of counterfeit U.S.  currency abroad may be
refined, it felt the methodology was based upon reasonable
assumptions that have been validated by all of the evidence it had
collected to date and it had no evidence to suggest that any of the
assumptions were not valid.  Our position on this methodology is that
the assumptions cannot be either fully validated or disproved, and
therefore caution needs to be exercised to ensure that information
and estimates resulting from this methodology are provided in the
proper context. 

The Treasury's comments also included technical changes and
clarifications that have been incorporated in this report where
appropriate. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :7

We reviewed the Antiterrorism and Effective Death Penalty Act of 1996
to determine its requirements for the Treasury's audit plan.  We then
assessed the Audit Plan of the Secretary of the Treasury on the Uses
and Counterfeiting of U.S.  Currency in Foreign Countries (Oct. 
1996) using criteria for an audit plan as set forth under generally
accepted government auditing standards.  In doing so, we determined
whether the plan would enable the Secretary of the Treasury to (1)
study the use and holding of U.S.  currency in foreign countries and
(2) develop useful estimates of the amount of counterfeit U.S. 
currency that circulates outside the United States each year.  We
collected and reviewed documents, such as currency shipment and
receipt data and counterfeiting statistics, from and interviewed
officials of the Federal Reserve, the Department of the Treasury, and
the Secret Service.  We submitted written questions to the Department
of the Treasury to clarify information in the audit plan and obtained
and reviewed the written responses.  We reviewed International
Currency Awareness Program summaries of trips abroad and interviewed
officials who participated in those trips and who prepared the
written summaries.  We also evaluated the reasonableness of the
Federal Reserve's paper detailing its method for estimating the total
amount of genuine U.S.  currency abroad.  In doing this, we reviewed
the relevant literature, the study's methods, applications of the
methods, and the study's assumptions; and interviewed the study's
authors. 

We conducted our review from October 1996 to February 1997 in
accordance with generally accepted government auditing standards. 


---------------------------------------------------------- Letter :7.1

As agreed, unless you publicly announce the contents earlier, we plan
no further distribution of this report until 30 days from its issue
date.  At that time, we will provide copies of the report to
interested congressional committees, to the Secretary of the
Treasury, and to the Chairman of the Board of Governors of the
Federal Reserve System.  We will also make copies available to others
on request. 

Please contact me at (202) 512-8984 if you or your staff have any
questions concerning this report.  The major contributors to this
report were John P.  Hutton; Kathleen M.  Monahan; Cheryl L. 
Goodman; Arthur L.  James, Jr.; and Geoffrey R.  Hamilton. 

JayEtta Z.  Hecker
Associate Director, International Relations
 and Trade Issues


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