So what’s going to happen to the 1.4 billion Series 2009 $100 Federal Reserve notes that have been printed but not accepted by the Federal Reserve Board?

Three options are outlined in an audit report titled OIG-12-038 Bill Manufacturing: Improved Planning and Production Oversight over NexGen $100 Note is Critical from the Department of the Treasury Office of Inspector General. (See article on page 5.)

According to the audit, three options exist for the disposition of the printed but not accepted notes:

Option 1: Destroy and replace all the notes.

Option 2: Inspect the notes and destroy only those that are found to be flawed.

Option 3: Circulate the notes as is after higher quality new notes have circulated for a few years.

The audit report indicates, “BEP officials stated the severe creasing problem has made option 3 unfeasible and they plan to pursue option 2 because the cost to inspect and reclaim the good notes is less than option 1, destroy and replace all the notes.”

OIG inspectors indicate that after “repeated requests” for a cost-benefit analysis supporting the BEP’s preferred option, the BEP eventually “provided piecemeal information over a period of several months in support of its favored disposition decision.”

According to the documents the BEP supplied to the OIG, the cost to replace the notes, option 1, is between approximately $78 million and $92 million depending on spoilage levels during production.

The OIG audit indicates that figure “would be in addition to the cost to destroy the notes, which BEP estimates at approximately $800,000.”

The report states the information “is still incomplete as it does not identify all costs, benefits and risks associated with option 2.”

The notes that would be inspected are already in cut, single-note form and the BEP’s current technology and equipment cannot detect creasing in notes, according to the OIG report.

According to the report, BEP officials have said they are planning to acquire “new single-note inspection equipment capable of detecting creasing. ... BEP estimates total costs in excess of $15 million for the purchase and installation of the equipment.”

At the time of the audit, OIG inspectors say the Federal Reserve Board’s position remained that it would not accept any notes with creasing problems.

Also, the report states: “BEP officials stated that if the tolerance levels of the single-note inspection machines are set to detect all creasing, there could be a significant number of notes that would be falsely rejected by the machines (i.e., notes that meet quality standards are rejected). Accordingly, the cost involved with false rejects and the quality standards that are ultimately established must be factored into any cost-benefit analysis.”

Second printing flaw

Another flaw has been detected in the already printed Series 2009 $100 FRNs. BEP officials are calling the flaws “crow’s feet” — a defect that occurs in the paper surrounding the 3-D security ribbon. According to the OIG report the flaw appears “as small wrinkles or creases that initiate at the ribbon and grow outward at a small angle.”

BEP officials advised the OIG that the paper supplier, Crane & Co., “has implemented a process change that is anticipated to eliminate crow’s feet going forward.”

However, BEP officials told OIG inspectors that “it was unclear whether the existing single-note inspection technology can detect another flaw [crow’s feet] that had been observed. ... In fact, BEP officials stated it is unlikely that the single-note inspection equipment will detect crow’s feet.” ¦