COUNTERFEITING

Report: Executive Summary

Counterfeiting is a rapidly expanding criminal activity which poses serious threats to consumers’ health and safety. An undeniable link today exists between counterfeiting and criminal organizations, as demonstrated by the results of various criminal investigations. Attracted by the profitability of this illicit activity, criminal organizations now control the actual production and trade of counterfeit goods.

The profitability of counterfeiting is not limited to the economic sphere. Given the fact that it is an illegal activity, the risk linked to the activity itself is of critical importance. This low risk level is potentially one of the most appealing elements for criminal organizations given the lack of adequate deterrents within the applicable legislations of various countries. This lack of deterrence is the result of a distorted perception on the part of legislators and competent authorities with respect to the effects of this phenomenon. Despite an increasing awareness of the scale of the problem, 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. First of all, this viewpoint does not take into account the significant consequences caused by the involvement of organized crime in the management of such activities nor the risks for the safety of citizens and public order. This perspective is also limited from another point of view: it not only neglects the elevated risk for the health and safety of consumers - as a result of certain counterfeit products - but it also ignores the damage caused to government revenues due to the existence of untaxed traded goods. Counterfeiting is far from being a victimless crime and international and national responses to the problem should take this into due account. Standards that only punish counterfeiting on the basis of economic damages or as a result of a violation of public faith are not sufficient.

The rapid diffusion of technology allows for a relatively easy replication of every kind of product on the market. Albeit the economic consequences deriving from counterfeiting constitute a trait d’union among the various types of the so-called “fakes”, the replication of certain kinds of products is cause for a greater concern. Counterfeit medicines, toys, foods and beverages as well as spare parts for cars and aircrafts pose a great risk for public health and safety. Unscrupulous criminals are solely concerned with the high profits that can be derived by Intellectual Property Rights (IPRs) infringements. .

Intellectual Property Rights have the peculiar function of protecting the author of a literary, scientific or artistic work; the manufacturer or inventor of a product; or the entrepreneur or company who trade their goods using a particular mark or sign as a badge of origin and quality, from any form of illicit reproduction of the results of their creative activity or of the good reputation acquired through the years. Different forms of IPRs are established, following the various forms through which human intellect can express its creative potential. For example: Copyright, Patents, Industrial Designs and Trademarks (there are many others but the details are not necessary here).

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. However, the opportunity to exploit another’s Name, Symbol or Product as well as the literary and artistic expression of another person’s intellect at the same time began to attract the attention of criminals and led to the beginning of counterfeiting activity, which subsequently grew immensely.

Providing precise data and information on the problem is extremely difficult. Counterfeiting is in fact linked to illegal markets and it is therefore difficult to quantify figures, given the problems associated with collecting and comparing data. However some estimates are available. The Organization for Economic Cooperation and Development states that at least 200 billion US dollars of international trade in 2005 could have been in counterfeit or pirated products, while the World Health Organization reports that between 7-10% of all pharmaceuticals products in the world are possible counterfeits, reaching a total of 30-40% in some African countries. Regarding the toy sector, the Toy Industries of Europe states than one toy out of ten would be a counterfeit in Europe; with regards to the automotive sector, the incidence of counterfeit spare parts could be quantified as a loss of 12 billion dollars per year. Following the data provided by the World Customs Organization and the European Commission DG – TAXUD, on the seizures made by customs officers in the respective Member Countries, it is possible to affirm that the global trade in counterfeit goods is indeed growing. Considering the years 2000-2006, an 88% increase in the seizures of counterfeit goods was registered in the European Union, with almost 68 million goods seized in the year 2000 and more than 128 million in 2006.

Different causes lie underneath this exceptional growth. Counterfeiting is a very lucrative illicit activity, even if compared with other profitable ones like drugs trafficking or arms smuggling. Weak penalties and enforcement as well as lack of awareness regarding the involvement of organized crime among the civil society and the competent authorities led to an underestimation of the consequences it creates for the society as a whole.

In this regard it is possible to affirm that the economic damage caused to authors and producers is only one of the several negative effects of this illicit activity. From a merely economic point of view, in fact, decreased profits for producers imply a lower level of investments for product improvement as well as decreased innovation and, possibly, job losses. It estimated that - in the European Union alone - , more than 100,000 jobs are lost every year due to counterfeiting. In the United States of America, a study performed by the National Customs Service estimated 750,000 job losses caused by counterfeiting.

The diffusion of fake products sold as original ones to unwary customers, due to their low quality and high defectiveness, could lead to a lack of trust with respect to original manufacturers, with negative effects on their market share. Moreover, counterfeit products are produced and traded within an unregulated market and this creates a lower level of taxes and revenues collected by States.

Counterfeiting poses more risks for all the civil society. The unauthorized replication of certain kinds of products like medicines, toys, foods and beverages, spare parts for automobiles and aircrafts creates serious threats for the public’s health and safety. There are several cases that testify to 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; counterfeit diet pills caused several deaths in China in 2002; the use of diethylene glycol in counterfeit cough syrup, anthistamine tablets, calamine lotion and rash ointment killed 38 people in Panama in 2006; and a counterfeit drug containing diethylene glycol caused the death of 11 people in China in the same year.

Counterfeit medicines are today a point of great concern. Their diffusion is constantly growing, especially because of the role played by the Internet in their dissemination. The Internet has been appropriated by criminals and utilized as a giant and anonymous market that allows counterfeit products to be easily offered and purchased. According to the World Health Organization, more than 50% of medicines purchased online from Internet sites concealing their URL addresses would be counterfeit. The US Food and Drug Administration states that almost 10 million of postal parcels containing medicines enter the United States of America each year.

The Asian and African regions seem to be the most affected by counterfeit medicines. According to the World Health Organization in Africa, more than 30% of medicines on sale could be counterfeits in parts of Asia and parts of Latin America while in the former Soviet republics counterfeit medicines could constitute more than 20% of market value.

Fake medicines will usually contain a lower level of active ingredients or no active ingredient at all, failing to cure the patient. Several cases have been registered in which the fake products contained poisonous substances, as the diethylene glycol previously mentioned – therefore even more dangerous for the patients’ health.

Counterfeit medicines are usually sold to unwary customers. Counterfeiters are able to infiltrate their products into the legitimate commodities’ supply chain exploiting the complexity of the production and distribution systems. The existence of a great number of outsourced producers as well as wholesalers, retailers and parallel traders - without correspondingly tight regulations regarding their roles and functions - creates serious impediments for controlling and securing the medicines’ trade and distribution. As a result, counterfeit drugs have been discovered in local pharmacies even in European and North American countries.

The extreme profitability of counterfeiting attracted the attention of organized crime. Due to its involvement, the production and distribution phases of counterfeit products were greatly improved. Criminal organizations operating in different countries have established close ties and synergies. The same routes and concealment methods utilized to traffic drugs or firearms, for example, can be exploited for trafficking counterfeit goods while the great potential for intimidation and corruption of organized crime is another facilitating factor.

Counterfeiting represents a huge source of money for criminals – liquid funds which are readily reinvested in other illicit activities. The possibility to infiltrate the licit supply chain and sell fake products as original ones, allows counterfeiters to also utilize this activity to launder the proceeds deriving from other crimes.

In order to improve the global response to counterfeiting and taking into consideration the complexity of the phenomenon, a series of proposals have been elaborated.

• More importance should be given to data collection and analysis. The availability of more information and data is of crucial importance for the identification of more incisive actions against counterfeiting, while data elaboration would allow for the verification of their results. Both the public and private sector should contribute more actively to this end;
• Criminal law on counterfeiting should contain more severe penalties and their application should be more effective;
• All the different phases, from production to sales, should be taken into consideration. In particular, criminal laws should not make any distinction between those products intended for import and those intended for export or transit;
• Awareness raising activities for law enforcement agencies involved in the fight against counterfeiting should be promoted and organized, highlighting the involvement of organized crime and the risks created by this illicit activity;
• Codes of conduct as well as investigative protocols should be elaborated, with the aim of improving the efficacy of the law enforcers’ actions. Training courses for police forces and prosecutors should be organized, presenting the most effective investigative techniques and providing a constant update on the relevant national and international legislative frameworks;
• Detection techniques of counterfeit goods and concealment methods utilized by counterfeiters constitute important topics upon which specific training activities for customs officers should be conducted;
• The adoption of integrated IT customs risk assessment systems should be promoted and supported. In these regards, technical assistance programmes could be planned and implemented as well as training courses for the systems’ operators. More attention should also be given to the usage of postal parcels and postal couriers as a mean to dispatch counterfeit goods purchased via the Internet; and transshipment through Free Trades Zones;
• The security of shipping documentation should be enhanced, possibly through legislative action indicating security requirements that should be present in shipping documentation in order to avoid simple falsification;
• Methods to secure the commodities production and supply chains should be discussed, with the aim of protecting the consumers’ health and safety without affecting free trade. In particular, producers and distributors should adopt specific codes of conduct aimed to secure the production (i.e. sources of raw materials or more controls with regards to outsourced production) and distribution (i.e. more controls regarding the different steps composing the commodities supply chain) of original products;
• The role of the Internet as a facilitating factor in the trade of counterfeit goods should be more deeply analyzed;
• The private sector should more actively contribute to the diffusion of information regarding the presence of counterfeit versions of their products on the market. This would support the activity of law enforcers while enhancing the safety of consumers;
• Awareness raising activities directed to producers and the public at large, explaining the severe consequences deriving from counterfeiting, should be planned and realized;
• National and international cooperation should be enhanced, with the aim of avoiding the duplication and waste of resources while improving the efficacy of the response to the problem. In particular, the private sector should be more involved.
• An International Permanent Observatory on Counterfeiting could provide services and facilitate a needed acceleration in the execution of the above mentioned proposals. Good practices that are now applied in some specific areas (i.e. medical products) might represent a good model of coordinated action for other sectors as well.