He got rid of the cash after a branch of the Royal Bank of Scotland on the Isle of Lewis refused to accept them.
Other banks took similar precautions and refused to accept notes after being warned of a suspected counterfeiting operation in the Western Isles.
Stornoway Police launched an investigation but analysis by the Serious Organised Crime Agency (Soca) confirmed that the money that was being refused on was in fact real.
The local businessman who took the drastic action of flushing away his money, said: "This is a right mess and it was caused by the RBS and Bank of Scotland.
"This is all about their failure to properly train their local staff on how to spot fake notes. I tore up the pounds20 notes returned to me by the bank as fakes and I put them down the toilet to stop them getting back into circulation.”
The islander, who asked not to be named, added: "I thought that was my public duty. How do I prove that and who is going to compensate me?"
The warning of a possible counterfeit scam, after a local pub and Indian restaurant were allegedly conned, prompted local shops to invest in ultraviolet scanners in a bid to identify the allegedly high quality forgeries.
Retailers have also criticised the banks since learning that there was no problem with the notes in circulation on the island. Ann Robinson, who runs a flower shop, bought a UV scanner after the Bank of Scotland returned some of her notes.
She said: "If they are not fakes, we have been holding customers back needlessly to check all their notes. We have spent money on scanners for no reason, because we were given the wrong advice."
Insp Robbie MacDonald, of Northern Constabulary, said that all the notes that had been set aside by banks and tested by Soca had turned out to be genuine.
A spokesman for Bank of Scotland said: "We found what we thought were inconsistencies with some banknotes and as a precaution we set these notes aside so they were no longer in circulation. We have robust procedures in place which are standard across the industry.”