Oh my.
The goings on at the world’s banknote printer of choice, De La Rue, are beginning to take on mystery thriller dimensions.
In July, CEO James Hussey stepped down due to a problem with the firm’s paper production specifications — now resolved.
On Tuesday, though, came the following filing from the company (our emphasis):
De La Rue plc (the “Company”) announces further developments in its investigation of the irregularities identified at one of its paper production facilities. The Board continues to carry out its investigations of the irregularities, assisted by its external legal advisers.
However, it has now been established that some of the Company’s employees have deliberately falsified certain paper specification test certificates for a limited number of customers. Banknote paper specifications have a large number of detailed parameters and the investigation has found in certain cases that a small number of them have fallen marginally short of specification.
The Board stopped shipment of any affected banknote paper as soon as it became aware of the irregularities. All production is now within specification and the Company is ready, subject to customer agreement, to resume supply of fully compliant paper.
The Company remains confident that neither the physical security nor the security features in the paper have been compromised. Furthermore, the Company can now report that these matters have already resulted in increased operating costs and lower volumes.
The Board believes that, for the first half of the current financial year, the adverse impact on the group’s profit before tax is likely to be at least £35m. This includes some one-off costs such as stock write-offs, professional fees, rectification and production trial costs as well as some slippage of Currency volumes into the second half.
The Company has reported its findings to the relevant law enforcement agencies. Quantification of the financial impact on the group for the full year and subsequent years is not possible at this stage pending the outcome of discussions with customers and the relevant law enforcement bodies.Nicholas Brookes, Executive Chairman of De La Rue, said: “The behaviour of some of our employees in this matter was totally unacceptable and contravened De La Rue’s rigorous standards. We do not tolerate such behaviour and appropriate disciplinary action is being taken. The Board has put an immediate end to the irregularities that have been identified and has appointed a new Managing Director for the Currency Division. “We are carrying out a very thorough investigation and are keeping our customers and the legal authorities fully informed.
The Company reiterates that it has not found anything to suggest that either the physical security or the security features in the paper have been compromised and that the matters uncovered relate only to the certification of paper specifications at the relevant facility.”
Which reads a little like doublespeak.
On one hand, the ‘paper specification issues’ relate only to the certification of paper specifications at the relevant facility and it was only a small number of ‘detailed paramaters’ that fell marginally short of specification. De la Rue emphasizes that security features have not been compromised.
On the other hand, the issue has been serious enough for the CEO to step down, and for the company to experience increased operating costs and lower volumes. The issues will be dealt with by ‘relevant law enforcement agencies’ rather than on an internal compliance basis.
And, more worrying still: “Quantification of the financial impact on the group for the full year and subsequent years is not possible at this stage pending the outcome of discussions with customers and the relevant law enforcement bodies.”
As yet we have no indication of which customers, or which banknotes, may have been affected. De La Rue, of course, sells high-security paper and printing technology for over 150 national currencies, including the Bank of England, the European Central Bank and even the Central Bank of Iraq.
But there is some reason to suspect a major breakdown in quality control at the plant. The Basingstoke Gazette, where De La Rue’s printing facility is based, reported back in August that:
De La Rue said investigations into the quality of the paper were still being conducted. However, a well-informed source in the village claimed the faults had occurred because cutbacks were made in the quality control department. The source, who did not want to be named, said staff at the mill had been threatened with the sack if they spoke to anyone outside the company about what had happened.
The source, who did not want to be named, said staff at the mill had been threatened with the sack if they spoke to anyone outside the company about what had happened. He added: “The paper has to be absolutely pristine clean and the flow that runs through the machine has to be immaculate. That’s why they make banknotes for 150 countries around the world. It’s extremely difficult to make it that perfect. “There was a team of people who check that quality and the word is that the line of quality control was removed by orders from above.”
And of course in this day and age ‘quality control’ at a banknote printing facility means more than just ensuring watermarks are effectively applied.
The industry incorporates some of the most advanced technological processes to covertly mark its banknotes in ways that are not visible to the human eye, including the use of nanotechnology particles.
Banknotes also have to be created with current retail banking and vendor infrastructure in mind. And not just from a security perspective, but wear and tear too.
Any slippage here, and the differentiation of good banknotes and bad, may become compromised.
Hence falsifying paper specifications certificates — suggesting banknotes have been created to a certain spec when they have not — could, without actually compromising security features designed to fend off forgery, be an extremely expensive affair for all involved.
Not least an embarrassing and reputation-tarnishing one for De La Rue.
[Update: Worth pointing out that the Daily Mail reported on August 22 that one of the main customers affected by the quality control issues was the Central Reserve Bank of India.]
Related link:
Funny money profit warning – FT Alphaville