As if the Bank of Canada doesn't have enough to worry about, a new report says there has been a surge of counterfeit banknotes in circulation.

A flood of fake $20 and $100 bills pushed the value of successfully tendered counterfeit bills to at least $5 million by Sept. 30, says an internal document.

That's already 50 per cent higher than the $3.3 million worth of counterfeits passed through all of 2007.

The phoney $100s first appeared in the spring in the Toronto area, peaking in May, then "migrated to the Montreal area where volumes peaked in June," says the central bank report, obtained by the Canadian Press under the Access to Information Act.

In the autumn, the number of fake $20s also began rising — the first quarterly rise seen for this denomination since 2006.

The appearance of the $100 bills, with a metallic stripe, is unusual as counterfeit currency in Canada has long been concentrated in low-value notes, largely $20s.

The recent fakes mimic the so-called Striped Canadian Journey series of banknotes, the Bank of Canada's most recent and most modern edition, featuring numerous security features.

The $100 note was the most counterfeited by the third quarter of 2008, representing about 55 per cent of all bad notes detected in circulation. Throughout 2007, phoney $100s accounted for just five per cent of all fakes found circulating.

The central bank issued a warning to Toronto-area businesses about the bogus $100s in late April, a month before the problem peaked there, and another to Montreal businesses in September, three months after the problem had peaked in that city.

Counterfeiters lift metallic stripes from lower denomination bills

The RCMP also issued a national alert in August, noting that some phoney $100s were being created by stripping out the metallic stripe from lower denomination notes and pasting it onto higher-value counterfeit notes. The counterfeiters then tried to exchange the damaged lower-value bills at banks for new ones.

City of Ottawa police recently warned of three incidents in which an unidentified woman successfully passed phoney $100 bills between Dec. 22 and Dec. 29.

The recent surge of bad money comes just as the Bank of Canada, already preoccupied with managing the current economic meltdown, was reining in "dangerous" levels of counterfeiting.

Canada experienced a sharp, five-year rise in currency counterfeiting starting in 2002.

The problem peaked in 2004 when almost 500 of every million notes in circulation was phoney. That's five times higher than the bank's medium-term target of fewer than 100, the threshold above which counterfeiting is considered a serious threat to confidence in the economy.

The surge from 2002 to 2007 was attributed to the development of inexpensive, high-quality inkjet printers and other digital tools that gave criminals an edge. The bank has since introduced a series of more secure notes that have helped bring levels down again to below 100.

The recent arrival of phoney $100s may have only a modest impact on the bank's performance when measured by parts per million.

But the higher value of the notes has a bigger impact on retailers and others caught by the bad currency, compared to the successful tendering of bogus $20 notes.

A spokesperson for the Bank of Canada said the number of $100 counterfeits in Toronto and Montreal continues to fall, and that the central bank expects to remain below its 100-parts-per-million threshold for all of 2008.

"Owing to an increase in awareness about this $100 counterfeit, retailers have been successful in stopping counterfeit notes from being passed at the point of sale — which has led to numerous arrests," Manuel Parreira said in an email response to questions.