International Chamber of Commerce
If there’s one thing that we know about the trade of counterfeit and pirated goods, it is that it continues to increase alarmingly. The Organisation for Economic Cooperation and Development (OECD) and the EUIPO jointly published a 2019 report, “Illicit trade: trends in trade in counterfeit and pirated goods”, based on 2016 world seizure data of counterfeit and pirated goods that attempts to measure the scale of the problem. Based on their findings, the international trade in counterfeit and pirated products could have amounted to as much as $509 billion in 2016, estimated to be 3.3% of world trade – up from $461 billion in 2013, representing 2.5% of world trade. What is so significant about the growth in these numbers is that it occurred during a relative slowdown in overall world trade – the numbers are based only on global customs seizures and do not include counterfeit goods that were not seized. In addition, these amounts do not include domestically produced and consumed counterfeit goods, or pirated digital products distributed online.
Counterfeit components and parts continue to create health and safety risks that affect a wide range of industries. In the pharmaceutical industry, using counterfeit medicine has the potential to be devastating. Within the pharmaceutical supply chain, from the initial raw materials to manufacturing and distribution, plenty of opportunities exist for providing fake or mislabelled materials and ingredients, leading to possibilities for creating counterfeit products. In the automobile industry, the amount of counterfeit vehicle parts available is on the rise, as reported by the EUIPO in its 2018 report “The economic cost of IPR infringement in the tyres and batteries sectors”. The report estimates that more than €2 billion is lost every year due to counterfeit tyres and batteries alone. The most common counterfeited vehicle parts worldwide include filters, brake pads, lights, wheel rims and air bags. Other safety risks include counterfeit circuit breakers, extension cords and surge protectors, often made with inferior materials without regard for meeting even minimal performance specifications. The trusted marks of independent certifications have also been counterfeited. Using counterfeit electrical products can result in malfunctions causing overheating or short circuits leading to fires, shocks or explosions that can cost lives and produce considerable property damage.
Transnational criminal organisations continue to take advantage of the low risk, high reward of counterfeiting crimes. These organisations use their counterfeiting profits to expand their business into other related crimes, such as the smuggling of other contraband, money laundering, tax evasion and corruption of government officials. In addition, e-commerce and social media sites have allowed a number of small retail counterfeiters without links to larger organisations to proliferate. Northumbria University’s Dr Anqui Shen’s publication “Counterfeit goods fraud: an account of its financial management”, found that counterfeiting is a fragmented business that does not require a great degree of sophistication and management of finance and resources. Counterfeiting is an attractive business because counterfeiters can get involved with only a small investment. There is a low entry barrier and counterfeiters can expand as they wish after entry.
As noted in the International Chamber of Commerce’s (ICC) “Intellectual property roadmap 2020”, the covid-19 pandemic has overwhelmed global business and, to date, has created the most substantial negative supply chain security effect in history. The pandemic has also provided opportunities for criminal organisations that seek to take advantage of the rise in demand and subsequent shortages of parts and products. Reduced volume of genuine materials allow criminals to offer counterfeit raw materials that contaminate supply chains. These threats lie with certain counterfeiters who exploit weaknesses in legitimate supply chains by offering lower than normal prices for source and raw materials. Such threats taint legitimate supply chains and can be continuous within sectors. In addition, as a result of covid-19, there are major shortages of specific products produced around the world, specifically in China. According to the OECD-EUIPO study, China (along with its global trading partner and transit point Hong Kong) is the top producer and distributor of counterfeit goods, therefore providing a seamless environment for counterfeiters.
In April 2020, the World Trade Organistion published a report entitled “The treatment of medical products in regional trade agreements” advising G20 countries to ensure open trade for the need to expedite movement of pandemic-related supplies and other essential goods across borders, keeping open trade lines and the removal of unnecessary trade barriers in key supply chains. This included the reverse of and ban on all tariffs, quotas and other non-tariff measures that affect the deployment of medical equipment, medicines and other essential goods and services. Given the cross-border nature of supply chains, these recommendations and safeguard measures have increased the opportunity for the infiltration of the supply chain by substandard or counterfeit goods. Open trade allows criminals to take advantage of the relaxed oversight, as has the rise in demand of many products by exploiting weaknesses in legitimate supply chains, while seeking to offer substandard, adulterated and counterfeit branded goods.
Continued counterfeit risks and best practice solutions
Raw materials and component suppliers form a complex network of typically first-stage intermediaries that provide opportunities for counterfeit ingredients, parts and components to enter the supply chain that can make up a company’s larger final product. However, a network of numerous intermediary suppliers creates multiple opportunities for counterfeiters to integrate fakes into the supply chain or mask the true origin of a production input of a final product.
Within the counterfeit industry, poor quality chemicals are used in the manufacturing of pharmaceuticals, agrochemicals and consumer goods. Poor quality counterfeit electrical components, software and metals can find their way into cars, aircraft, appliances and computers. These inferior or adulterated components and parts may contain the classic counterfeits bearing trademark violations, logos, markings and sometimes legitimate serial numbers lifted from the products of a respected manufacturer. But some of these products will bear no brand names and are shipped with documentation falsely certifying that the product is of a certain quality, has met the required standard material testing or possesses important properties. The intended or non-intended purchase and use of low-grade, inferior raw materials and products cuts costs tremendously, boosts profits and allows the counterfeit manufacturer to undercut authentic competition. These products can enter the supply chains of legitimate businesses and brands, especially during times of high demand and shortages. They can come not only directly from the manufacturer, but also through trusted suppliers and distributors.
The following are established best practices for companies cited in the ICC’s 2015 document “Roles and responsibilities of intermediaries: fighting counterfeiting and piracy in the supply chain”:
- Use ‘know your supplier’ and ‘know your customer’ programmes by component and raw material intermediaries to incorporate specific provisions covering the risk of counterfeit infiltration into the supply chain. Such programmes should include ongoing customer/client monitoring and in-depth background checks for partners operating in problem markets and monitoring for unusual transactions. These should be implemented in clear contractual terms, alongside operational controls such as audits of documents, data and facilities, and regular inspection, testing and evaluation of sample raw materials, ingredients and components.
- Carefully monitor suspicious customer orders by suppliers of active ingredients and other essential components that have a limited number of suppliers.
- Develop standards and guidelines for third-party accreditation mechanisms (eg, the US Federal Aviation Administration uses a voluntary industry distributor accreditation programme). Trusted supplier networks can then be built using suppliers that adopt these higher standards. Centralised reporting mechanisms, operated by third-party rating agencies or governments, should collect information on component supplier counterfeiting, including information on involved individuals as well as companies, with redress mechanisms to correct mistakes.
- Deploy technologies, such as tracking and tracing, to complement monitoring and compliance efforts, basing them on open standards ensuring interoperability between systems and avoiding fragmentation across companies, sectors and countries.
Transport operators continue to be intermediaries that provide critical services subject to abuse as part of counterfeiting supply chains. Sea and land transport remain the favoured means for transporting large volumes of counterfeits. Although import and export shipments have decreased during the pandemic, online purchasing and small parcel shipments delivered directly to consumers increased dramatically even before the pandemic. E-commerce, including transactions involving small parcels purchased online from retail websites or third-party marketplaces and shipped via express or international postal services, has been intensely misused by traffickers in illicit trade. Goods transported by large sea container, overland transport and small-parcel shipments delivered via couriers or postal services continue to present challenging vulnerabilities. The volume of container cargo and the actions by counterfeiters mask the true nature of shipments with false paperwork, making goods transport hard to monitor.
The OECD estimated in its 2017 publication “Mapping the real routes of trade in fake goods” that 63% of seized fakes were shipped by postal and express services, constituting a growing challenge for law enforcement agencies. The OECD found that the transport modes by modes of seizures were:
- sea – 51%;
- postal and express service – 23%;
- air – 19%; and
- road – 8%.
According to a 2018 report from the European Commission entitled “A Europe that protects: EU Customs seized over 31 million fake goods at EU borders in 2017”, 65% of all detained articles entered the European Union via the maritime route, usually in large consignments, while air traffic accounted for 14% of fake articles. Courier and postal traffic together accounted for 11% and mainly carried consumer goods ordered online (eg, shoes, clothing, bags and watches).
Historically, the system has relied greatly on Customs to identify suspicious behaviour. In a vastly expanded global marketplace, enforcers, intermediaries and rights holders must develop new solutions, as seen within other sectors. Best practices for all include:
- Developing and adopting appropriate voluntary practices to stop counterfeiters’ abuse of transport and distribution systems, starting with adequate due diligence and ‘know your customer’ processes, including quality system reviews for shipping clients and customers – these systems should ensure accurate shipment paperwork, including in-depth background checks for partners operating in problem markets, ongoing customer monitoring, and accurate recording of customer names and identities. Ongoing training of local staff – particularly in high-risk export countries – regarding current risks from counterfeiting and piracy should become standard due diligence.
- Establishing contractual terms between transport operators and their clients that specifically call for the (infringing) client to bear the costs incurred from the detention of counterfeit shipments – effective due diligence will help identify when counterfeiting is a risk and assure that insurance is in place in the event of a claim.
- Putting monitoring systems in place to flag shipments of counterfeit and pirated products. For instance, such systems as DHL’s IP rights control system include notices from rights holders and enforcement authorities (eg, through track and trace systems). These systems notify rights holders and enforcement agencies at shipment and delivery points when counterfeits are identified.
- Establishing a provision that requires transport operators to supply electronic shipment information to customs administrations in advance of shipment arrivals – this provision would enable customs to perform risk assessment and target shipments for further examination. Such policies can also track counterfeit transport operators, including individuals and entities that initiate shipment and actual transport operators, to identify repeat offenders.
- Expanding the authorised economic operator programme and other accreditation schemes to include an IP rights element – adopting higher standards would enable trusted shipper programmes and allow rights holders to ship their genuine goods through intermediaries that follow these recommendations.
Free trade zones
Another favoured means for counterfeiting and other illicit trade organisations continues to be the use of free trade zones. In 2020, ICC updated its 2013 comprehensive report on the current status of free trade zones and the vulnerabilities created by them. The updated publication, “Controlling the zone: balancing facilitation and control to combat illicit trade in the world’s free trade zones – a 2020 update” finds that while free trade zones continue to contribute to the economic growth of the host countries and businesses operating within them, insufficient oversight remains a major enabler of illicit activities. Since the publication of the previous report, there have been no vast improvements in limiting criminal activities in free trade zones. The very reason that free trade zones are so popular – the relaxation of regulations and oversight of operations – continues to make them attractive to criminal networks. Counterfeiters use transit or transhipment of goods through multiple, geographically diverse free trade zones for no other purpose than to disguise the illicit nature of the products. Once introduced into a free trade zone, counterfeit goods may undergo a series of economic operations, including assembly, manufacturing, processing, warehousing, re-packaging and re-labelling. Once completed, the goods can be imported directly to the national territory of the hosting state or re-exported to another country for distribution or to another free trade zone, where the process is repeated.
Balancing trade facilitation and controls in free trade zones starts with an understanding that free trade zones are part of the national territory and are physical locations for goods in a particular status or regime for customs purposes. Suggested recommended best practices for governments include:
- empowering Customs and strengthening relationships between Customs and free trade zones;
- enhancing data sharing between Customs and the private sector;
- strengthening national government adherence to international conventions and implementation of existing international standards such as the Revised Kyoto Convention, which covers:
- simplified, predictable, transparent customs procedures;
- optimum use of information technology;
- risk management;
- partnership with the trade and other stakeholders; and
- a system of appeals.
Best practices for free trade zone operators include:
- ensuring and encouraging customs authorities to evaluate the zone via physical observation of operations and verification of compliance with tariff and non-tariff requirements;
- ensuring that managers provide training regarding techniques and methods of smuggling by illicit traffickers, including how lack of proactive action can affect the reputation of the free trade zone, as well as facilitate the movement of illicit goods;
- providing unconditional access to the competent authorities, in accordance with domestic laws, to carry out unobstructed, ex officio enforcement checks of operators in support of investigations of violations of applicable laws and regulations;
- prohibiting legal or natural persons convicted of illegal economic or financial activities from operating within free trade zones; and
- ensuring that economic operators active in the free trade zone maintain detailed digital records of all shipments of goods entering and leaving the zone, as well as all goods and services produced within it, sufficient to know what is inside the zone at any given time.
ICC encourages the adoption of responsible practices among all intermediaries, rights holders and authorities. Sharing dialogue among stakeholders with regard to counterfeiting and piracy ensures that best practices for deterring illegal activity in one area can be applied in others. As stakeholders align themselves with voluntary efforts for keeping counterfeiting and piracy out of genuine commerce, those complicit or wilfully negligent become more visible to enforcers where needed. The development of new initiatives built on the lessons learned will deliver a more prosperous future for businesses that deliver the world’s products and services.