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. Last Updated: 07/27/2016

Fake $100 Bills Are Traced to S. Ossetia

TBILISI, Georgia -- The U.S. Secret Service and Georgian police are investigating an international counterfeiting operation that stretches from South Ossetia to the United States, where fake $100 bills have been seized, according to senior officials and investigators in Tbilisi. The allegations are supported by U.S. diplomats, U.S. court documents and a recent report to the U.S. Congress.

From a printing press in South Ossetia, a sliver of Georgian land with no formally recognized government, more than $20 million in fake bills has been transported to Israel and the United States, according to investigators. The counterfeit $100 notes have also surfaced in Georgia and Russia, officials said.

The fake notes have been passed at numerous businesses throughout the Baltimore area and have also surfaced in New York City; Newark, New Jersey; and Buffalo, New York, according to court papers, and the joint report to Congress by the U.S. Secret Service, Treasury Department and Federal Reserve. The report, issued in September, also said the number of counterfeit notes produced in this region and passed in the United States had "increased dramatically" in recent years.

The presence in South Ossetia of an international counterfeiting ring capable of producing thousands of bills, according to investigators, is a stark example of how organized crime has flourished, sometimes through the neglect or alleged involvement of officials, in areas of the former Soviet Union whose territorial status remains unresolved.

"Counterfeiting is not the only headache for us if you're talking about criminality in South Ossetia," said Ekaterine Zguladze, Georgia's deputy interior minister. "You also have drug trafficking, weapons trafficking, robbery, kidnapping. And our opportunity to fight criminals in there is very limited."

A U.S. Secret Service spokesman declined to discuss the case "due to the sensitivities of the ongoing investigations and political considerations." But the joint report to Congress says the Secret Service "is currently investigating a scheme with ties to suspects in Israel, Russia, and the Republic of Georgia to produce counterfeit U.S. currency. The U.S. Secret Service has reason to believe this family of counterfeit notes is being produced in the Caucasus region."

U.S. diplomats confirmed that the location was South Ossetia.

The cash from the Caucasus, as with other lines of counterfeit dollars believed to be from the same source, was given its own code by the Secret Service: c-21558, according to the joint report to Congress.

"Since the c-21558 family's first detection in March 1999 the total counterfeit activity (passed and seized notes) has exceeded $23 million," the report said. In 2005, the Secret Service detected $5.3 million from the Caucasus ring, up from $1.5 million in 2003, the report said.

That compares to the approximately $2.8 million in "supernotes" linked to North Korea that the agency says it confiscates, on average, each year. The production of supernotes, so called for their quality, has become a major diplomatic issue between the United States and the government of Kim Jong Il.

Georgian investigators said the fake bills from South Ossetia are made with special ink and paper and have watermarks, different serial numbers and other features that allow them to be easily passed off as real. "They are of very high quality," said Konstantin Kemularia, secretary of Georgia's National Security Council.

The counterfeiting operation in the region has become another irritant in U.S. relations with Russia, which acts, in effect, as a protector for South Ossetia. Russian peacekeeping troops patrol the breakaway enclave and most of its residents have been issued Russian passports.

"We have expressed our concerns on this subject to both the Russians and the South Ossetians," said a U.S. State Department official who did not have approval to speak on the record. "This problem is one of many that underscore the urgent need for resolution of the conflict in South Ossetia and the threat it poses to security and border control, among other consequences."

Russia's Interior Ministry, which is responsible for fighting counterfeiting, did not respond to requests for comment. Officials in South Ossetia, where rubles are used for currency, bitterly contested any allegation that a counterfeiting ring existed on their territory.

"Counterfeit dollars? Well, if you are going to listen to Georgians, soon you will say that we have a nuclear bomb here," said Mikhail Mindzayev, the interior minister in the separatist government. Mindzayev asserted that "we do not have any counterfeit dollars here, and we do not have any criminals."

On Oct. 27, 2004, its fingers reached Linthicum, Maryland. At the Hampton Inn near Baltimore/Washington International Airport, Hazki Hen, who had just flown to the United States from Israel, met with two men, one of whom was an undercover Secret Service agent. Hen expected to consummate a deal that had been negotiated over 19 tapped phone calls.

Hen agreed to exchange $230,000 in counterfeit $100 bills for $80,000 in genuine currency, according to a Secret Service affidavit filed in U.S. District Court in Baltimore. Hen also planned to accept $220,000 as a down payment on the delivery of another $1.5 million in fake bills.

Just before the Secret Service moved in and arrested Hen, the three men discussed deals involving between $25 million and $100 million in counterfeit U.S. currency, according to the affidavit. In November 2005, U.S. prosecutors dropped charges against Hen, then 65, after he became seriously ill and the court agreed to allow him to return to Israel to die.

Suspicions are growing, meanwhile, that some South Ossetian officials are not just ignoring counterfeiting, but are involving themselves in it directly.