Product Counterfeiting The Economic Scourge of the 21st Century
Ralph V. Frasca, Jr. CEO Grand ISS
January 21, 2009
On Focus: Corporate-initiated Anti-Counterfeiting Solutions
for Abatement and Suppression
Acknowledgement Notes
• Certain data presented in this document reflect findings from such reputable sources as…
– the U.S. Chamber of Commerce through its National Chamber Foundation – the International Chamber of Commerce (ICC) /
BASCAP - Business Action to Stop Counterfeiting and Piracy– the International Anti-Counterfeiting Coalition, Inc. (IACC)– the Organization for Economic Co-operation and Development (OECD)– KPMG LLP, in cooperation with the Alliance for Gray Market and Counterfeit
Abatement (AGMA)
1. Snapshot of Counterfeiting – a Big Business.Who pays?
“While governments and businesses around the world are dealing with very difficult economic issues, we can’t lose sight of the fact that counterfeiting and piracy is costing all of us billions of dollars, thousands of jobs and exposing consumers to real health and safety risks.”
- David BenjaminSr. Vice President for Anti-
PiracyUniversal Music
Counterfeiting Snapshot
• The value of counterfeit goods on the world market has grown over 10,000% over the past two decades
• Counterfeit goods account for an estimated 6% to 7% of world trade
• An estimated $650 billion was lost to counterfeit goods in 2006 worldwide; cost to the U.S. economy was approximately $250 billion
• Counterfeiting caused the loss of over 750,000 jobs in the U.S.
• Counterfeiting poses a threat to consumer health and safety, national security, legitimate business, national revenues, foreign investment, and brand integrity
Counterfeiting Snapshot (continued)
• 10 % of all high tech products sold globally are counterfeit – In specific product cases (e.g., network interface cards) the percentage
is higher.– The estimated amount of global IT industry revenue lost to
counterfeiters equates to about $100 billion (USD) annually. ―Source: Alliance for Gray Market and Counterfeit Abatement
• The pervasiveness of electronic component counterfeiting is increasing at alarming rates. “If you can make it, they can fake it.”
• Most counterfeit products come from China– However, they can originate anywhere, in both emerging and
established markets wherever counterfeiters can turn a profit
Counterfeiting Snapshot (continued)
• The global counterfeiting problem continues to grow due to:– criminals taking advantage of high tax-free profits– the low risk of being caught– lax regulations – minimal penalties if convicted
• Counterfeiting is increasingly the crime of choice for organized criminal groups… including terrorist organizations
• Among firms reporting total sales of greater than $50 million, 71% had been victims of counterfeiting; firms with sales under $10 million per year have a 26% victim rate
Updated estimates suggest counterfeit and pirated goods in international trade grew steadily between 2000-2007
• Evolution of trade in counterfeit and pirated products
Source: OECD (2008), The Economic Impact of Counterfeiting and Piracy, OECD, Paris
According to Interpol, the map below shows, “the extensive involvement of organized crime and terrorist groups” in counterfeiting
2. Business Consequences. Who is responsible? “If you choose to install a
product that is not genuine but counterfeit and causes harm, you can be held liable for personal damages and possibly face imprisonment.”
–Kevin Yates, Vice President of Siemens Energy and Automation,
Residential Products Division
Business Consequences
• Direct loss of sales / revenues
• Loss of buyer goodwill / consumer confidence
• Irreparable damage to corporate brand / reputation
• Harm to marketplace equity
• Diminished demand
• Rising product support costs
Business Consequences (continued)
• Trademark dilution
• Costs of protecting and enforcing intellectual property rights
• Linkage to terrorism and organized crime organizations
• Financial liability – (consumer/worker) health, safety, damages
• Costs associated with legal remedies
3. Combating Counterfeiting and Piracy.What can be done?
"Perhaps most troubling is the widespread threat counterfeiting poses to public health and safety. Few Americans truly appreciate the significance, scope or consequences for this crime."
- Senator Orin Hatch (R-Utah), 1995
Analysis of 48 companies (grouped into 3 categories) surveyed over 27 industries. Results reflect their attitude for best methods to combat counterfeiting and piracy.
Source: BASCAP, Global Survey on Counterfeiting and Piracy, 29 January 2007
On the whole, firms consider allocating resources to enforcement.
Combating Counterfeiting - Basic Steps
• Make greater use of “creative” enforcement tools – Designed to detect, deter and respond
• Heighten management’s awareness at the highest level of the corporate structure as to the scope of the escalating counterfeit market quandary
• Implement internal remedies – to track, authenticate, guard
• Engage experienced investigators (familiar with target markets) to identify and uncover counterfeiters
Combating Counterfeiting - Basic Steps (continued)
• Understand the counterfeiting supply chain and evaluate enforcement activities available
• Work cooperatively with local authorities/investigators to root out and prosecute offenders (within their home countries)
• Consider a combination of legal responses. Examples…– civil actions and settlements– criminal/administrative raids– customs seizures– cease and desist letters
• Suppress the growth of counterfeiting by applying monitoring tools that provide for early detection
4. Anti-Counterfeiting Remedies –Who Should Manage the Risks?
"Tackling the trade in counterfeit and pirated products requires a multi-pronged approach by all stakeholders.”
- Michael Schmitz, Director of Compliance and
Facilitation, World Customs Organization
(WCO)
Anti-Counterfeiting Remedies
• Work closely with government organizations (e.g. IACC) to assess the adequacy in laws and effectiveness in practice
• Pursue and prosecute counterfeiters
• Lobby for stronger anti-counterfeiting laws in the U.S. & especially abroad
• Encourage international cooperation in the drafting and enforcement of such laws
• Add unique identifiers to your product or package to assist channel members and buyers in recognizing genuine goods
Anti-Counterfeiting Remedies (continued)
• Employ scientific / engineering forensics as a preventative measure
• Use legal actions and other legal remedies to discourage selling counterfeits (domestic and international)
• Inform the public and the trade of the possibility and risks of counterfeiting
• Publicize a willingness to prosecute vigorously
• Know and closely monitor / investigate channels of distribution
• Reward distributors for detecting / refusing counterfeit goods
5. The Merits of Engaging Specialized Investigative Firms. …concerning actions taken by
manufacturers to combat product counterfeiting, the most commonly used are consultations with government and other industry manufacturers. Although commonly used, these actions were perceived as the least effective. More effective but less frequently undertaken were hiring investigators…
Source: Ronald F. Bush “Remedies for product counterfeiting.”
Business Horizons. FindArticles.com. Dec. 2009
Investigative Firms have developed effective trans-national enforcement solutions focused on…
Counterfeit Abatement
Intellectual Property
Protection
Trademark & Copyright Protection
Supply Chain Diversion
Intervention
Loss Prevention and/or Reduction
Material Analysis (forensics)
Counterfeit Products
Identification (forensics)
Reseller Contractual Compliance
Overproduction Identification
Many investigative firms have a proven track record working with competent in-country authorities resulting in successful enforcement –Case in point… China (the international capital of counterfeiting)
• Relationships strengthen cultural and political ‘know how’• Sample cooperative China connection (spanning in order of rank):
– AIC – Administration for Industry and Commerce– TSB - Technology Supervision Bureau– PSB - Public Security Bureau– Supreme People's Procuratorate of PRC– MORO - Market Order Rectification Office– Anti-Corruption Committee of the Communist Party of China
___________________Note: Ascending such agencies, firms can cooperatively cause the cessation of illicit activities - successfully and legally - without damaging existing relationships and/or spending funds and resources for staged and ineffectual raids and closures.
Country rankings continue to show China as the international capital of counterfeiting
Source: BASCAP, Global Survey on Counterfeiting and Piracy, 29 January 2007
“The U.S. Patent and Trademark Office says that 66 percent of the counterfeit goods seized at American borders now come from mainland China.” —Fortune Magazine
Investigative firms use traditional investigative resources combined with innovative techniques
• Proprietary software for identifying risk indicators– counterfeiting activities, transportation, location and destination
• Computer, industrial, scientific and engineering forensics– for enhanced evidence development-sustainable in legal proceedings
• Investigative techniques – including ‘front’ companies, internet diversion, aliases, and social
engineering
• Advanced technical surveillance / physical surveillance
• Global tracking technology
• 38 respondents identified• Countries… China . Taiwan . Bangladesh . Pakistan . India . USA
Sample Investigative Case Activity Chart - representing a 24-hr Internet posting
Actual Counterfeit Case Sample – Forensic Investigation
• Litigation Support (Metallurgical Analysis) - $85 MM Wrongful Death
6. Three-Phase Strategy Approach —Designed to Abate and Suppress Counterfeiting.
Identification (Discovery Process) – Phase 1
Identify the current perceived risk exposure
Ascertain method of operations including financial support/backing
Gather intelligence (type, number, and country of origin for all identified
counterfeiters)
Document estimates of financial damages inclusive of public relations
and reputational issues
Direct enforcement resources and assets on the highest risk transactions
and activities
Catalog the source of counterfeiters’ supplies and equipment
Identify potential internal company accomplices
List specific in-country location, size, scope, and production output of all
global counterfeiting operations
Response Plan (Sampling of Activities) – Phase 2
Use new risk management techniques that provide greater analytical targeting (predictive modeling)
Compile electronic evidence communication file
Investigate and conduct surveillance to trace sales and supply chain
Undertake counterfeit product acquisition as evidence procurement
Utilize tip lines Maintain “chain of custody” process
Activate pretext countermeasures Use forensic lab analysis of counterfeit products and components
Initiate direct communication with global counterfeiters
Link specific evidence to specific counterfeiters
Actionable Intelligence – Closure – Monitoring Phase 3
Confirm identification of all identified counterfeiters
Seize counterfeit products, equipment, inventory, computer hard drives and
other electronic communication/paper records (in cooperation with the host
country’s law enforcement)
Profile all participants involved in the suspect scheme
Proceed with legal sanctions against counterfeiters and accomplices (if
appropriate)
Commence activities to effect cessation of operations and closure of all counterfeiting facilities (timed and
coordinated)
Employ ongoing monitoring measures to detect and thwart any revived
counterfeiting activities as a preventative tactic
7. To Summarize…What Can Industry Leaders Do?
The FBI describes counterfeiting as the
“crime of the twenty-first century.”
Source: International Anti-Counterfeiting
Coalition
Industry Leaders can…
• Heighten corporate anti-counterfeiting efforts • Step up trade collaboration for shared intelligence• Develop strong risk mitigation strategies • Promote prevention and detection within their supply network• Actively advocate best practices • Execute focused plans that supports…
– Awareness– Early risk exposure– Supply chain scrutiny– Robust inspection protocols (visual and materials analysis)– Aggressive pursuit of offenders– Preventative monitoring and tracking
Ralph V. Frasca, Jr.President / CEOGRAND ISSTel: 727 797 6545 Direct: 727 771 9174email: [email protected] web: www.grandiss.com
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