Opinion of the European Central Bank of 25 September 2007 at the request of the President of Narodowy Bank Polski on a draft ordinance on the method and procedure for counting, sorting, packaging and labelling packaging units of banknotes and coins, and in conducting activities related to the supply of banknotes and coins to banks (CON/2007/28)

OPINION OF THE EUROPEAN CENTRAL BANK of 25 September 2007 at the request of the President of Narodowy Bank Polski on a draft ordinance on the method and procedure for counting, sorting, packaging and labelling packaging units of banknotes and coins, and in conducting activities related to the supply of banknotes and coins to banks (CON/2007/28) Introduction and legal basis

On 24 July 2007 the European Central Bank (ECB) received a request from the President of Narodowy Bank Polski (NBP) for an opinion on a draft ordinance of the NBP’s President on the method and procedure for counting, sorting, packaging and labelling packaging units of banknotes and coins, and in conducting activities related to the supply of banknotes and coins to banks (hereinafter the ‘draft ordinance’). The ECB’s competence to deliver an opinion is based on Article 105(4) of the Treaty establishing the European Community and the first, second and third indents of Article 2(1) of Council Decision 98/415/EC of 29 June 1998 on the consultation of the European Central Bank by national authorities regarding draft legislative provisions , as the draft ordinance relates to currency matters, means of payment and to the NBP. In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion.

1. Purpose of the draft ordinance

The draft ordinance is intended to replace the current NBP rules concerning commercial banks’ obligations with respect to counting, sorting and packaging of banknotes and coins . Particularly in view of the need to adjust the existing legal requirements to the increased automation of cash handling procedures , the draft ordinance introduces the following key modifications: (i) streamlining regulatory

obligations as regards the manual counting and sorting of banknotes ; (ii) modifying relevant technical standards, such as those related to packaging banknotes in packets (100 pieces), half-bundles (500 pieces) and bundles (1000 pieces) ; and (iii) facilitating a decrease in stocks of banknotes held by commercial banks, inter alia by allowing packaged banknotes of certain denominations to be lodged with NBP’s regional branches in half-bundles .

2. General observations

2.1 While Poland is a Member State with a derogation and the ECB requirements regarding the organisation of national cash cycles in Member States that have adopted the euro currently do not apply to NBP, these requirements will become applicable to NBP once Poland adopts the euro and NBP becomes a fully integrated part of the Eurosystem. As a general comment, the ECB notes that the NBP’s provisions on the handling of banknotes differ to some extent from Eurosystem practices and that these provisions will have to be aligned with the Eurosystem standards before Poland adopts the euro. The ECB understands that the main intention of the draft ordinance is to adapt the NBP’s legislation to the growing automisation of the cash handling operations. The ECB assumes that the draft ordinance may be an adequate legislative instrument to achieve this specific purpose. However, the ECB would have welcomed at the same time a more consistent approach to achieve a high level of harmonisation with the Eurosystem standards. The ECB also considers that the explanatory memorandum to the draft NBP ordinance could include an appropriate reference to the necessary further evolution of NBP’s regulatory framework in view of the future adoption of euro. 2.2 The ECB furthermore notes that the draft ordinance forms part of a wider body of the regulatory framework containing also NBP’s legislative instruments covering: (i) rules on withdrawal from circulation of worn or damaged banknotes and coins ; and (ii) rules on seizure of suspected counterfeits . Legal certainty and clarity could be enhanced by consolidating all such Polish cash handling rules, in a single administrative instrument. The ECB notes that this is currently difficult to achieve due to the existence of separate statutory bases for the regulation of the various elements of NBP’s cash handling regulation. While greater legal coherence may currently be achieved by way of introducing clear cross-references between the various existing provisions, a uniform cash

handling regulation should be introduced in view of the future adoption of euro, on the basis of a single statutory delegation. Moreover, as regards the euro banknotes and coins such framework needs to comply with the directly applicable provisions of Council Regulation (EC) No 1339/2001 of 28 June 2001 extending the effects of Regulation (EC) No 1338/2001 laying down measures necessary for the protection of the euro against counterfeiting to those Member States which have not adopted the euro as their single currency (this ECB opinion does not assess such compliance) . 2.3 Under Article 106 of the EC Treaty, the ECB has the exclusive right to authorise the issue of banknotes within the Community, whereas the coins are issued by the Member States subject to approval by the ECB of the volume of the issue. Consequently, as a general principle, the Eurosystem’s regulatory competence concerns only banknotes. Hence, in view of the accession of national central banks (NCBs) to the Eurosystem, the ECB supports a clear and consistent separation between national rules relating to banknotes and rules relating to coins. Also the draft ordinance, and more generally the NBP’s overall cash handling framework, would benefit from introducing such consistent internal separation between rules concerning banknotes and coins, respectively . This would in time facilitate the legal convergence of the Polish legislative framework, necessary to become a full participant in economic and monetary union.

3. Alignment with the Eurosystem’s Banknote Recycling Framework

3.1 The draft ordinance regulates, among others, the detection of counterfeits and fitness sorting of banknotes ensuring that worn or defective banknotes that are unfit for circulation, and banknotes where there is sufficient reason to believe that they are counterfeit, are duly withdrawn from circulation . In the view of Poland’s future adoption of euro and the related general obligation to align Polish law with the law of the Eurosystem , the ECB would welcome already establishing in the draft ordinance a legal framework at the national level that is consistent with the ECB’s ‘Framework for the detection of counterfeits and fitness sorting by credit institutions and other professional cash handlers’ (hereinafter the ‘Banknote Recycling Framework’ or the ‘Framework’) . 3.2 The Banknote Recycling Framework aims to implement a common policy for the recycling of banknotes by credit institutions and other professional cash handlers, so as to contribute to

maintaining the quality and authenticity of euro banknotes in circulation. As issuing authorities, the ECB and the NCBs of the Member States that have adopted the euro consider it to be of utmost importance for euro banknotes in circulation to be in good physical condition so that the general public, as well as professional cash handlers, can check their authenticity in a reliable and proper manner and separate authentic banknotes from counterfeits or suspected counterfeits. 3.3 Under the Banknote Recycling Framework , credit institutions and other professional cash handlers may re-issue euro banknotes to customers only if these banknotes are duly checked for authenticity and fitness. As a general rule, the authenticity and fitness checks of the banknotes to be recycled can be performed either by banknote handling machines successfully tested by NCBs, or by trained staff members. However, the banknotes may only be returned to circulation via automated teller machines (ATM) or other customer-operated devices if they have been checked for both authenticity and fitness by banknote handling machines successfully tested by an NCB. Banknotes which have been checked for authenticity by trained staff members of a cash handler without the use of successfully tested banknote handling equipment, e.g. manually, may not be returned to circulation via ATMs or other customer-operated devices, but may only be re-issued over the counter after being checked for fitness. 3.4 Under the draft ordinance the definition of ‘counting of banknotes’ includes verification of their authenticity, and ‘sorting of banknotes’ consists in separating banknotes fit for circulation from those unfit for circulation due to wear or tear damage . Both counting and sorting of banknotes can be effected manually or with the use of sorting machines . The draft ordinance does not, however, include any provisions corresponding to the Framework’s requirements that would provide that only the banknotes checked by banknote handling machines for both authenticity and fitness may be returned to circulation via ATMs or other customer-operated devices. 3.5 Moreover, the ECB notes that the draft ordinance contains a definition of ‘banknotes unfit for circulation’, which covers, among others, banknotes which are tattered, torn partially or entirely, backed with an adhesive, excessively soiled, stained or damaged in any other way . The above description does not correspond with the Eurosystem’s minimum standards for manual and automated fitness sorting of euro banknotes by credit institutions and other professional cash handlers that are contained in the Annex to the Banknote Recycling Framework . Further, the ECB notes that the draft ordinance’s criteria for qualifying banknotes as unfit for circulation are without prejudice to the separate NBP’s provisions relating to the exchange of worn or damaged banknotes . In view of preparations for the future adoption of the euro by Poland, the ECB invites

the NBP to already consider the overall alignment of such NBP’s standards for fitness sorting with the Banknote Recycling Framework and its Annex. 3.6 The ECB notes that the draft ordinance applies only to domestic banks, branches of European 20 21 Union credit institutions and branches of foreign (i.e. non-EU) banks as well as to NBP itself , whereas the Banknote Recycling Framework applies to all professional cash handlers, i.e. both credit institutions and other professional cash handlers. The ECB understands that under Polish law the NBP has no powers to regulate non-bank entities , such as non-bank cash handlers. Taking into account the potentially increasing role of non-bank cash handlers in the Polish cash cycle, the ECB therefore recommends taking appropriate steps to ensure uniform application of Eurosystem standards contained in the Banknote Recycling Framework to all relevant categories of cash handling entities. Hence, in addition to fully aligning with the Framework of the NBP’s own legislative instruments directed to banks, which would be an important first step, other appropriate legislative or contractual instruments may need to be introduced for the remaining categories of cash handlers.

This opinion will be published on the ECB’s website.

Done at Frankfurt am Main, 25 September 2007.

[signed]

The President of the ECB

Jean-Claude TRICHET