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Conterfeiting

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Counterfeiting: a global spread, a global threat

The growth levels of counterfeiting are associated with the significant development of international commerce, the internationalization of the economy, the large-scale distribution of new technologies, the opening of new markets and the increasing profitability of exploiting intellectual property rights in multiple sectors. The growing importance of trademarks, patents and industrial designs in modern trade has led progressively to the increasing importance of the economic side of IPRs.

In addition, significant profit opportunities have emerged from new markets following the collapse of highly regulated economic regimes - such as ex-Soviet countries - or the partial introduction of market economies, such as China.

Counterfeiting is a rapidly expanding criminal activity which poses serious threats to consumers’ health and safety. It is extremely lucrative, even when compared with other profitable illicit activities like drug trafficking or arms smuggling. Criminal organizations which now control the actual production and trade of counterfeit goods are also attracted by the lack of deterrence. Legislation has often been constrained by a purely economic analysis of the phenomenon whose negative effects are believed to exclusively affect producers from a financial point of view. This perspective does not take into account the consequences caused by the involvement of organized crime in such activities nor the risks for the safety of citizens. This perspective also ignores the negative impact on government revenues resulting from the trade of untaxed goods. Counterfeiting is far from being a victimless crime and international and national responses to the problem should take this into due account.

While economic gain is the unifying factor for all counterfeiting activities, the replication of certain products such as medicines, toys, foods, beverages, and spare parts for the aircraft and the automotive sectors has an additional factor for consideration: safety. The idea that criminal organizations, focusing only on the exploitation of intellectual property rights, are unscrupulously replicating such products is a serious cause for concern, especially since they only consider profit, without any regard for safety.

Key figures

Providing precise data and information on the problem is extremely difficult. Counterfeiting is linked to illegal markets and it is therefore difficult to quantify, given the problems associated with collecting and comparing data. However some estimates are available.

According to the European Commission, counterfeiting is estimated as totaling between 5 and 7% of the legal market.

The Organization for Economic Cooperation and Development (OECD) affirms that up to 200 billion US dollars of international trade in 2005 could have been in counterfeit or pirated products. The OECD clarifies that this figure does not consider domestically produced and consumed counterfeit and pirated products and the significant volume of pirated digital products being distributed via the Internet. According to the OECD, if these items were to be considered, then the figure would be several hundred billion dollars higher.

Data from the World Customs Organization and the European Commission DG – TAXUD show an increase of 88% in the seizures of counterfeit goods in the European Union between 2000 and 2006, with almost 68 million goods seized in the year 2000 and more than 128 million in 2006.

The counterfeiting report of the European Commission states that one out of every five French industries with more than fifty employees reported at least one case of infringement of intellectual property rights, while the US Copyright Industry estimates that 12-15 billion US dollars are lost in this sector as a result of such violations.

The Report of the European Commission also states that the sectors which are most affected by the phenomenon in the EU include the data-processing sector - in which the trade of counterfeit products reaches an incidence of 35% of all commerce - as well as the audiovisual sector (25%), the toy sector (12%), the perfume sector (10%), the pharmaceutical sector (6%) and the clock sector (5%).

Italy is confirmed as one of the European Union member states most affected by counterfeiting, with more than 22 million items seized in 2004 by customs, and more than 18 million in 2006. Italy represents an important entry point for counterfeit products destined for other EU countries. The majority of these originate in China. Considering the years 2004, 2005 and 2006 the incidence of Chinese counterfeits with respect to the total number of items seized by the customs in Italy was of 82.5%, 91.5% and 93.4% respectively. Italy, because of its geographical position, represents a bridge for counterfeit products originating from – or transiting through – countries like Greece and Turkey, on their way to EU member states, like Spain and the United Kingdom.

According to the World Customs Organization, in 2006, Italian Customs intercepted the highest number of counterfeit spare parts for the automotive sector (121,229 items), followed by the customs agencies of the Philippines (49,328) Lithuania (30,517) and Germany (27,252). Italian Customs also registered the highest number of counterfeit toys seized in the years 2005 and 2006 (10,051,781 items intercepted in 2006), followed by Dutch (1,243,777) and German (468,062) Customs.

The Toy Industries of Europe states than one toy out of ten in Europe could be a counterfeit.

It is estimated that, in the European Union alone, more than 100,000 jobs are lost every year due to counterfeiting.

According to the World Intellectual Property Organization, WIPO, the losses sustained by EU member states due to the inability of governments to tax these products are estimated to be 3,731 million Euro in the toy and sports clothing sector and 1,554 million Euro in the pharmaceutical sector. Losses relative to other sectors are similar, totaling 7,581 million Euro in the clothing and footwear sector and 3,017 million Euro in the perfume and cosmetics sector.

By affecting the level of wealth that is created by the various “economic parties” within EU countries, counterfeiting causes a net reduction in Gross Domestic Product which—according to estimates supplied by the Center for Economics and Business Research—can be quantified as 8,042 million Euro across Europe.

The incidence of counterfeit spare parts in the automotive sector could be quantified as a loss of 12 billion dollars per year.

According to the World Customs Organization in 2006, the US witnessed an increase in seizures of counterfeit goods of 83% over the previous year. In South America more than 200,000,000 counterfeit items were seized at various borders in 2006.

In Asia in 2006, Customs’ agencies experienced an increase of 39% in seized items in comparison with the previous year, totaling over 15,000,000 intercepted units. China is the most interested and active country, with 676 seizures and more than 9 million items intercepted.

Regarding the Commonwealth of Independent States, the Russian Federation is still the Country most affected by the problem with a total of 15 seizures and more than 37,000 items intercepted in 2006.

The losses in terms of reduced tax revenues are estimated to be circa 3 billion dollars per year for the Chinese government and 2.4 billion dollars for the United Kingdom.

Risks for the health and safety of consumers

Furthermore, counterfeiting poses serious risks for civil society. The unauthorized replication of certain kinds of products like medicines, toys, foods, beverages, and spare parts for automobiles and aircrafts creates serious threats for public health and safety.

There are several cases that demonstrate how the use of counterfeit products could be extremely harmful, or even deadly, for consumers.

The use of counterfeit baby milk-powder formula containing no nutritional value caused the death of at least 13 babies in China in 2004.

In 2005, counterfeit raki – a typical Turkish alcoholic beverage – containing lethal levels of methyl alcohol caused the death of 23 people while dozens were hospitalized.

The use of diethylene glycol in counterfeit cough syrup, antihistamine tablets, calamine lotion and rash ointment killed more than 100 people in Panama in 2006. A counterfeit drug containing diethylene glycol caused the death of 11 people in China in the same year.

According to the World Health Organization, more than 50% of medicines purchased online from Internet sites concealing their URL addresses are counterfeit. Counterfeit medicines are a point of great concern today. They are usually sold to unwary customers, with an increasing role played by the Internet which is in widespread use among criminals.

The World Health Organization reports that between 7 and 10% of all pharmaceutical products in the world are possible counterfeits, reaching a total of 30-40% in some African countries and of 20% in the former Soviet republics.

In the European Community the seizure of counterfeit pharmaceuticals increased by 383% from 2005 - 2006. Seizures of such goods increased from almost 570,000 in 2005 to more than 2,700,000 in 2006. 2006 witnessed an increase in seizures of counterfeit pharmaceutical products over the year 2005 in several Member Countries of the World Customs Organization. The United Kingdom (710,083 items intercepted), France (328,144) and Belgium (161,040) registered the most incisive action of their respective Customs Agencies in this area, while India was confirmed as one of the most important sources of counterfeit pharmaceutical products followed by China, Hong Kong (China) and Thailand.

Fake medicines usually contain a lower level of active ingredients or no active ingredient at all, thus having little impact on the patient’s illness. Several cases have been registered in which the fake products contained poisonous substances, as in the case of diethylene glycol mentioned previously. These are therefore even more dangerous, and potentially fatal for patients’ health.

Counterfeiters are able to infiltrate their products into the legitimate commodities’ supply chains. As a result, counterfeit drugs have even been discovered in local pharmacies in European and North American countries.

Counterfeiting and organized crime

General considerations

Organized crime manages a significant portion of counterfeit trafficking today. This involvement has advanced production in the counterfeit sector, with complex chains of illicit production co-existing with legitimate and illegitimate forms of trade in the expanding global market. The structures which criminal organizations have developed for the mass-production of counterfeit goods often have the characteristics of legal entrepreneurial supply chains, with sophisticated technology for the seamless replication of a huge spectrum of goods and the use of existing illicit trade routes, such as those used in the trafficking of arms, narcotics and human beings.

The magnitude of the counterfeiting problem demonstrates the availability of large quantities of capital allocated for these activities. Without the availability of capital and strong organizational links between parties, this activity would not be able to operate on such a scale. Criminal organizations have transformed counterfeiting into a mass production industry capable of supplying conscious consumers and deceiving unconscious ones. The result is that counterfeiting is a highly organized, transnational criminal activity that can exploit all market opportunities on an international scale.

The involvement of criminal organizations is magnified by the internationalization of markets and economies. Globalization has provided global markets for illicit goods and global financial markets have resulted in a weakening of national borders along with trade regulations.

Why are criminals attracted?

The counterfeiting industry is highly profitable, with minimal risks and low regulation. The high level of profitability in counterfeiting is similar to - and sometimes higher than - that of the trade of narcotics, but the level of risk is significantly lower with less severe penalties and fewer resources devoted to this sector.

For example, the cost of production of a replicated computer program is estimated at 0,20 Euro while its sales price can reach 45 Euro - a profit margin that is much greater than that generated by a gram of cannabis whose cost of production is circa 1.52 Euro with an average sales price of 12 Euro.

Modus operandi of organized crime

Globalization has provided an opportunity for producers to reduce costs through outsourcing. Equally, outsourcing allows counterfeiters to produce their products at various locations. Outsourcing also enables counterfeiters to exploit factories and workers by producing “fakes” using the very same raw materials as the originals and with the same skills as the “legitimate” work force. According to the Union de Fabricants, the majority of counterfeit products which are marketed within the EU originate from sources outside the EU, specifically China, Thailand, Morocco or Turkey.

The EU itself is, however, a very active production centre for a range of replicated products. Countries such as Italy and Portugal, for example, are often associated with the counterfeiting of clothing items while Spain and Italy are the countries that are most highly associated with the production of fake spare parts for automobiles. These products are not only intended for domestic markets but are also exported; as a result, the EU is an important strategic area for the sale, production and transit of counterfeit goods.

Networks of connections are used by counterfeiters to distribute as well as conceal the origin of a counterfeit good. Counterfeiting networks do not have a fixed structure, but can change location and organization depending on regulatory factors and production capacities of certain countries. This flexibility makes it difficult to trace and interrupt the activities of such networks.

Trafficking is also facilitated by the advent of intermodal shipping. The volume of commercial exchanges between countries as well as the elevated number of containers which arrive in ports and commercial hubs each day allows counterfeiters to more easily conceal the trade route of a cargo of goods. By transferring the goods in question through various intermediary destinations, they can conceal their origin. By exploiting the fact that customs authorities cannot physically check all incoming and outgoing goods, counterfeiters manage to transfer large quantities of counterfeit goods with relative ease.

Some examples of the modus operandi of criminal networks are shown here.

The interception of a cargo of counterfeit batteries in 2002 on the part of customs authorities in Vancouver, Canada showed that the batteries had reported an origin in the United States despite the fact that the cargo had arrived from China. Several months earlier, US officials implemented a similar operation that involved the same type of counterfeit batteries, suggesting that the cargoes were diverted to Canada, chosen for its relatively low border controls. This problem is also a key factor within the European Union where differing legislations between member states are often exploited by counterfeiters.

In 2006, the Italian customs and the Guardia di Finanza intercepted several tons of counterfeit Louis Vuitton products, whose commercial value was estimated at circa 15 million Euro. The merchandise originated from China and was diverted through Italy, Greece, Croatia and Montenegro.

In 2005, the Italian Guardia di Finanza seized a container with 15 tons of counterfeit toys. The container originated in China and passed through Hungary before being intercepted at the Italian – Slovenian border, transported by a truck.

Another important issue is the level of commercial access offered by the Internet. This resource increases the flexibility of the organization and grants anonymity to both buyer and seller.

Tactics employed by criminal organizations to maintain this illegal trade are often violent and brutal, with widespread use of intimidation and corruption. There are numerous examples of instances of intimidation not only in the distribution sector, but also with respect to public authorities.

In Malaysia, the president of a municipal council was subject to death threats in 2001 after initiating actions against those selling counterfeit Video Compact Disks.

In Russia, the director of the Russian anti-piracy organization was subject to a murder attempt linked to an anti-counterfeiting operation

In Northern China, one of the leaders of the economic investigations unit was killed by a trader of counterfeit liquors following an anti-counterfeiting operation.

Another particular method which is primarily linked to the territorial presence of Mafia-style criminal organizations involves forcing the retailer to offer counterfeit products. In certain cases, this method has replaced the requirement of a “protection money fee” and is based on intimidation tactics. In particular and with regards to the latter point, the Italian National Antimafia Bureau notes that several years ago certain individuals associated with high-level members of the Camorra had moved to Liguria (in the Northern part of Italy) and were forcing local retailers to exclusively acquire fake designer trademarks.

These tactics have facilitated the expansion of trafficking in replicated products as well as the ability to sell them within licit sales channels, thereby also reaching unconscious consumers.

Counterfeiting serves a dual function for criminal organizations: a source of finance for other illegal activities and a tool for laundering proceeds derived from various crimes. The end result is a complex economic system which connects the illegal activities of the organization with various “businesses” and criminal groups.

The following are some examples of counterfeiting organizations linked with other criminal activities provided by the Union des Fabricants;

In 2005, French Authorities arrested members of a criminal organization involved in the trafficking of narcotics between France and Spain. Law enforcement officials also discovered and seized counterfeit goods, weapons and fake credit cards.

In 2004, a criminal organization involved in the illegal trafficking of narcotics was dismantled in Pont-Sainte-Maxence, France. Authorities discovered that the criminal group had been selling counterfeit and stolen goods along with drugs.

In 2000, 22,000 goods labeled with the trademark Head and Shoulders were seized in London from the same areas that the criminal group used as a centre for drug trafficking.

The most well-known criminal organizations involved in the counterfeiting market include the Chinese triads, the Japanese Yakuza, the Neapolitan Camorra and the Russian Mafia. The latter is particularly active in the counterfeiting of musical CDs, software and DVDs.

An investigation conducted in Great Britain in 2001 revealed the existence of a criminal network of Russian origin. The undercover operation revealed that the activities of this criminal group were not limited to the trafficking of counterfeit products but also included the trading of arms, pornographic materials and counterfeit credit cards.

There are numerous instances of high-level involvement of Asian organized crime networks both in Europe and the US. A considerable network of Asian origin in Madrid, Spain was dismantled several years ago.

Chinese Triads managed a significant amount of counterfeit DVDs in the UK in 2002. The network utilized Chinese illegal immigrants for retail distribution and planned their entry into the UK; the latter was also involved in the trafficking of human beings from China.

Numerous elements relating to the operational modalities of organized crime were discovered during an investigation conducted in 2005 by the District Antimafia Bureau of Rome. In particular, the following points were noted:

1) The use of forged transportation documents for the purposes of concealing the real origin of the goods. In the case in question, the real origin of the goods was Singapore but they appeared to originate in Dubai.

2) Significant transfers of capital to China by various interconnected parties following the filing of dubious tax returns. As a result, there was a link with counterfeiting activities in addition to operations involving the concealment and transfer of capital.

Finally, investigations relating to the operations of the Camorra in Naples are enlightening. The Italian National Antimafia Bureau highlights growing links between Chinese criminal organizations and the Neapolitan Camorra. Moreover, certain significant elements were discovered due to statements made by parties collaborating with law enforcement officials. The results of these interrogations confirmed that counterfeiting was managed in conjunction with other illegal activities, such as narcotics peddling, and that the proceeds deriving from counterfeiting were reinvested into various activities. These investigations also confirmed that the proceeds deriving from these illegal activities were significant – and often greater than those attainable from the trafficking of narcotics.

In the area surrounding Naples, there were numerous plants producing fake leather jackets which were controlled by the criminal group and which not only supplied their goods within Italy but also abroad. The criminal group managed global counterfeiting in countries such as Brazil, Germany, Russia, France, Belgium, Ireland, Switzerland, the United States, Great Britain and Spain. According to the collaborator statements, the Camorra retained a monopoly in Germany with respect to the counterfeiting of leather jackets as well as counterfeit Bosch drills – produced in Hong Kong. These collaborators also confirmed that the proceeds derived from these illegal activities were significant in amount – and often greater than those attainable from the trafficking of narcotics.

Consequences for consumers and human exploitation

This illegal trade has filled the global market with innumerable counterfeit goods, many of which are potentially harmful to the health and safety of consumers.

The pharmaceutical industry is also vulnerable to infiltration by criminal organizations. Products are easily modified, replicated and transported. Steady demand, the retention of value over time, the oligopolistic nature of this market and strong competition facilitate the infiltration of organized crime. The existence of an irregular market is also an aggravating factor. A large variety of pharmaceutical products ranging from antibiotics to so-called lifestyle drugs and anabolic products are available in this market. The irregular market does not require medical prescription and guarantees anonymity for purchasers. This has obvious implications for the health and safety of consumers, if drugs are not sufficiently vetted for efficacy or for safety standards.

The entry of organized crime into the counterfeiting market has additional consequences. Regardless of whether production activities occur within or outside the EU, worker exploitation is widespread and often involves minors. Counterfeiting is linked to illegal immigration and human trafficking. It is often the criminal organizations themselves which manage the trafficking of human beings for subsequent use as workers. As discovered during a 2002 investigation into pirated music CDs conducted by the Spanish Civil Guard, part of the organization was involved in collecting the workforce while other members of the criminal group acquired the CD burners and rented apartments and basements to use as production centers. The workers were exploited in a variety of ways, either as sales “personnel” on the streets or production workers.