Flaws in Printing New U.S. $100 Bill Were Avoidable, Audit Says

Defects in the U.S. government’s printing of the new $100 bill, which have delayed its release for a year, were the result of poor planning and oversight by the Bureau of Engraving and Printing, the Treasury Department’s inspector general said.

The bureau, part of the Treasury, presided over “a production failure that potentially could have been avoided and has already resulted in increased costs,” the watchdog wrote in a report released yesterday. Some notes were creased during printing, making them unusable.

The $100 bill, known as NexGen, is designed to thwart counterfeiting. Its design has additional colors and a three- dimensional security ribbon woven into the paper. The flaws led the bureau to halt printing of the bills and the Federal Reserve to delay their release, which was scheduled for February 2011.

The inspector general’s report follows two audits by the office last year that criticized the bureau for its lax security, including one that took it to task for keeping some 54 million $100 bills in a production area instead of a vault.

According to the report released yesterday, focusing on difficulties in the printing process, the bureau didn’t perform “necessary and required testing to resolve technical problems before starting full production” of the bill, the inspector general said.

The bureau also didn’t “adequately complete” a cost- benefit study for disposing of about 1.4 billion notes that were printed but not accepted by the Federal Reserve, according to the inspector general’s report.

Production Validation

Bureau Deputy Director Pamela Gardiner, in a response included with the report, said the bureau had agreed on a “production validation strategy” with the Fed and said it will implement a new “design control process.”

Louise Roseman, director of the Fed’s division of reserve bank operations and payment systems, said in a separate letter that “although the more robust production validation process should substantially reduce unforeseen production problems, it will likely not eliminate them completely.”

The inspector general’s report also said the bureau is still trying to decide how to handle the 1.4 billion new bills that the Fed won’t accept.

While the bureau wants to inspect the notes and destroy only those that are flawed, it doesn’t have technology to detect the problems because the bills have already been cut. It would cost more than $15 million to purchase and install equipment to do that, the report said.

‘Crow’s Feet’

That inspection system probably won’t be able to find another flaw known as “crow’s feet,” or small wrinkles surrounding the notes’ security ribbon, that has cropped up with the bills, the inspector general said.

The inspector general recommended that the bureau put its purchase of the equipment on hold and further study the costs and benefits of destroying and replacing the bills. That option would cost about $800,000 for the destruction and between $78 million and $92 million to replace the notes, the report said.

In 2010, the Treasury was forced to delay the debut of the $100 bill due to printing errors. The new design has several security features, including the “3-D Security Ribbon” and an image of a bell on the front that, when tilted, changes in color from copper to green.

In a September report, the inspector general found that the bureau, or BEP, didn’t have adequate protection for its computer network and systems. The inspector general’s staff persuaded 23 bureau users -- everyone it approached -- to give access to their computers.

In May, the inspector general said millions of $100 bills were inadequately protected at a bureau printing plant with windows that lacked security features.

To contact the reporters on this story: Ian Katz in Washington at ikatz2@bloomberg.net; Robert Schmidt in Washington at rschmidt5@bloomberg.net.

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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