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Product Counterfeiting The Economic Scourge of the 21 st Century Ralph V. Frasca, Jr. CEO Grand ISS January 21, 2009

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  • 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 cant 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 managements 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

    countrys 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 SummarizeWhat 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

    For more information regarding this presentation, please contact:

    Product Counterfeiting The Economic Scourge of the 21st CenturyRalph V. Frasca, Jr. CEO Grand ISSJanuary 21, 2009 On Focus: Corporate-initiated Anti-Counterfeiting Solutions for Abatement and SuppressionAcknowledgement Notes1. Snapshot of Counterfeiting a Big Business. Who pays?Counterfeiting SnapshotCounterfeiting Snapshot (continued)Counterfeiting Snapshot (continued)Updated estimates suggest counterfeit and pirated goods in international trade grew steadily between 2000-2007 According to Interpol, the map below shows, the extensive involvement of organized crime and terrorist groups in counterfeiting2. Business Consequences. Who is responsible?Business ConsequencesBusiness Consequences (continued) 3. Combating Counterfeiting and Piracy. What can be done?Analysis of 48 companies (grouped into 3 categories) surveyed over 27 industries. Results reflect their attitude for best methods to combat counterfeiting and piracy.Combating Counterfeiting - Basic StepsCombating Counterfeiting - Basic Steps (continued)4. Anti-Counterfeiting Remedies Who Should Manage the Risks?Anti-Counterfeiting RemediesAnti-Counterfeiting Remedies (continued)5. The Merits of Engaging Specialized Investigative Firms.Investigative Firms have developed effective trans-national enforcement solutions focused onMany 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) Country rankings continue to show China as the international capital of counterfeiting Investigative firms use traditional investigative resources combined with innovative techniques Sample Investigative Case Activity Chart - representing a 24-hr Internet postingActual Counterfeit Case Sample Forensic Investigation6. Three-Phase Strategy Approach Designed to Abate and Suppress Counterfeiting.Identification (Discovery Process) Phase 1Response Plan (Sampling of Activities) Phase 2Actionable Intelligence Closure Monitoring Phase 37. To Summarize What Can Industry Leaders Do?Industry Leaders canRalph V. Frasca, Jr.President / CEOGRAND ISSTel: 727 797 6545 Direct: 727 771 9174email: [email protected] web: www.grandiss.com