That crisp pounds 20 note is a fake. How can anyone tell?

Although there were 2,500 prosecutions for passing forged notes last year and some pounds 25m was seized, one banknote in a hundred in circulation is a forgery, and numbers are on the increase.

Although many shops and filling stations use a variety of devices, including marker pens and ultra-violet light screens, to detect the cruder fakes, the best forgeries, including pounds 10 and pounds 20 as well as pounds 50 notes, are now almost impossible to detect by eye, thanks to advances in sophisticated computer technology and colour printing. It is estimated that some pounds 100m worth of fake notes are now washing around in the system.

The Bank of England plays down the gravity of the situation. "It's not serious," said a spokesman. "Less than l per cent of the pounds 18bn of genuine money in circulation is fake."

But critics disagree. John Hall, head of security at the 1,700-strong Co-Operative Wholesale Society chain, reckons it is getting worse: "Over the last year, counterfeit money through our stores has jumped 20 per cent," he said.

"The quality of the forgeries has improved enormously and the counterfeiters have switched from photo-copying to computer-generated graphics, which give a cleaner image and are more difficult to detect."

A genuine note should feel crisp, have a metallic strip, a watermark and sharp clear printing. Forgers at the sharp end of technology can now reproduce all these qualities.

The consumer, and not the banks or building societies, takes the hit when a forged note is discovered. Under the Forgeries and Counterfeiting Act (1981), anyone passed a fake banknote must hand it to the police with no compensation. Passing on fake notes is a criminal offence.

Banks and building societies, however, are not legally obliged to reimburse you even if they issue you with forged notes through their cash machines. Also, counterfeit notes are now so sophisticated that even experienced cashiers at the counter - not to mention their security equipment - cannot always tell the difference between a real note and a fake.

The Building Society Ombudsman is about to to give a decision on a landmark case involving Bradford & Bingley and a Yorkshire housewife. Tracey Cullen took legal action after the society's Selby branch wrongly accused her of including 19 forged notes in a pounds 4,800 cash deposit.

Tracey explained: "It was a nightmare. I was shamed and humiliated by a member of the Bradford & Bingley staff in front of other customers. The woman cashier questioned 19 notes. I was detained in the branch with my eight-month old daughter for 50 minutes. The notes were taken into the manager's office and the police were called."

Mrs Cullen was then frog-marched out of the branch in front of other customers and taken to the police station. After her arrest, police called in experts from Yorkshire Bank to examine the suspected forgeries.

"The police attitude changed completely when the bank said the notes were genuine. I was released on bail pending the outcome of forensic tests by the Bank of England," she explained.

"Next morning, the police informed me the tests had proved conclusively the notes were genuine and the society had dropped the charges."

Counterfeit notes are also plaguing small businesses, according to Stephen Alambritis of the Federation of Small Businesses. "We have heard strong rumours that the banks are instructing their staff to feed fake money back into circulation. Quite often, hard-worked bank staff will sometimes hand the forged note back to the customer to avoid embarrassment."

While acknowledging the problem, the Bank of England argues vehemently against compensating those who lose out to the counterfeiters. The Bank is convinced counterfeiters would turn to making cash out of the compensation fund. "It would be like asking us to underwrite the crime," says a spokesman.

"Big high street concerns have invested heavily in anti-counterfeiting security," says a spokeswoman for the British Retail Consortium. "Staff are trained to spot dud notes, and the bigger stores will also get regular visits from the police warning them of the latest scams."

A British company has developed a new micro-processor system able to detect forged notes. In trials, it picked out 4,000 fakes provided by the Bank of England and the police, and the makers say it will detect counterfeits which defeat systems that use ultra-violet light or marker pens. Only 10 per cent of the test notes were caught by ultra-violet systems.

John Wilkinson of MEI Electronics in Wokingham, Berkshire, which has developed the new Cashguard, said: "Some of those systems can be fooled by coating a fake note with ordinary suntan oil products."

Cashguard costs pounds 250 and can fit on to a check-out desk or till. A note is inserted in a slot and light with a wide range of wavelengths is shone on to it. Sensors measure how much light is reflected back, and at what wavelengths.

The micro-processor analyses this combination and compares it against a stored profile of the characteristics of valid notes, sounding an alarm for fakes and suspect notes.