ANTI-COUNTERFEITING
Stephen Keith, Member of the ECTA Anti-Counterfeiting Committee,
Probe International, GB
Counterfeiting is a global issue linked to organised crime syndicates which operate trans
nationally. It is an insidious and pervasive trade that plays on the greed and gullibility of
consumers.
Counterfeit Goods are a profitable enterprise and one that is considered low risk by the
perpetrators, ie organised crime.
Invariably government agencies have a much wider focus, in particular to the
counterfeiters’ other operations:
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Drugs - Narcotics
People-smuggling - Slavery
Arms - Illegal weaponry
Money laundering
Often it is seen that mixed shipments of both genuine and counterfeit goods are being
sent across borders. The criminals use the persons they are transiting to load the
counterfeit goods, in turn the immigrants are then put into the trucks and, if and when
intercepted, they are either blamed and/or associated with the trafficking of such goods.
REGIONAL
Some countries are more prominent in the type of counterfeit goods they produce.
Whilst the following is a generalisation there is a certain familiarity to the IP rights holder.
India - China – Turkey
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Pharma & Chemical
Clothing
Auto parts
Chemicals
Luxury goods
FMCG
METHOD OF SHIPMENT
Counterfeiters do not concern themselves with border or jurisdictional issues.
In most cases the manufacturers work with middle men to facilitate export, usually via a
number of routes and access points.
Invariably the delivery methods differ according to the various influences; the fact that
one border/port is more effective than another is known and avoided.
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It is known that there are “spot inspections” or random examinations being made of
cargo; the counterfeiters are aware of these actions and will hold shipments for
deployment at a later time.
Often the receivers of counterfeit goods are legitimate businessmen who may have
debts, ie loans, to these groups and/or have arranged for relatives to be “delivered” and
therefore they are compromised and are at the mercy of the counterfeiters.
Alternatively they are criminal representatives of the counterfeiters strategically
positioned within local migrant populations.
METHODOLOGY
There are two types of counterfeiter - organised, sophisticated criminal gangs and the
“small trader” who has a tenuous contact with the originator of the goods.
The one thing the counterfeiters have in common is the extremes to which they are
prepared to go to achieve their desired goals.
Threats, harassment, intimidation, beatings and businesses being vandalised are all part
of the arsenal deployed to protect the counterfeiters’ operations and to ensure that their
orders are carried out. Inevitably they cloak their actions behind holding companies and
other third party entities to avoid identification.
LAUNDERING
The proceeds of crime are one of the key issues for counterfeiters - they need to wash
their income and to this end they often display great flair and entrepreneurship.
OEM AND LAUNDERING
For example, part of the laundering process is to use the proceeds of counterfeiting to
buy OEM goods in the destination market - car parts, electronics, etc as there is a
demand for these goods in their own home market.
They use a genuine front company to legitimately export these goods which they will sell
at a discount price in the home market to wash the money and legitimise their
operations; thus returning the funds to their home territory.
TRANSPORTATION METHODS
MAIL
The small operators, ie family and friends will and do rely on postal services - the
amount of seizures via the mail service increases year on year.
For example, the entry point at the UK East Midlands Airport (the main UK point of entry
for airmail) has reported a huge upturn in seizures during the past year, in particular to
counterfeit clothing, counterfeit electrical and counterfeit duty free goods being
intercepted. This is true in nearly all countries and, to their credit, the mail services have
been and are extremely proactive and dedicated; they are highly beneficial to any IP
Rights holder.
Anti-Counterfeiting
© ECTA, November 2010
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PARCEL SERVICES
We have seen an increase in the use of various parcel services, such as FedEx and
DHL, where the consignee purports to be trading in OEM products. Invariably these
entities are using websites, ie e-commerce, to promote and sell counterfeit.
An example of this sophisticated method is shown as follows:
A Pakistani leather manufacturer making motorcycle jackets, represented that the
jackets had protective endoskeleton, and transhipped them in bulk to Canada
where an e-commerce site was hosted.
A test purchase was made and the goods were despatched to us in the UK, with a
taxable invoice.
The jacket, received with branding, was found not to have the protective
endoskeleton but instead foam padding and metal straighteners.
It was found that they were selling 3,000 jackets per year in North America and
Europe.
The costing and price was the first indicator - one-third of the OEM price - and of
course the counterfeit goods were of substandard quality.
It is our experience that the management teams of the parcel service companies are
invariably highly professional and have assisted with the identification and origin of the
persons behind the shipment and, in some cases, linking multiple shipping accounts
held by the same entities by cross referencing account holder information.
ROAD FREIGHT
One of the key points of entry into the EU is via Turkey; relevant crime investigating
bodies together with the EU body cite this as being the main “land” entry point of
counterfeit goods to the EU.
A key to the success of overland freighting from Turkey to the EU is the mixing of
shipments of genuine OEM goods with counterfeit. Sometimes as little as 10% of the
container will be counterfeit goods, but, considering over 1,000 to 2,000 containers a
day are transported via Turkey through the Balkans, this poses and establishes a
considerable capacity, one that is very difficult to interdict.
There are holding and storage facilities in the Balkans to where these part shipments
are delivered for consolidation and onward shipment; in nearly all cases this supply
chain is difficult to interrupt as it is managed by trans-national crime gangs to whom
counterfeit goods are considered a “low risk” enterprise.
SEA FREIGHT
To our mind there are two main ports that are used by counterfeit operations to facilitate
goods entry to Europe, both of which enjoy “transhipment - Duty Free Zones” status as
well as having tenuous agreements in place with each other.
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The first is Jebel Ali Free Zone, Dubai UAE. Counterfeit goods are transhipped via this
port for destinations globally, but in particular to Europe.
At Middle East IP conferences the existence and practices of this port have been cited
as one of the main conduits for counterfeit goods to Europe, Africa and the Middle East.
As the goods are in transit, even if the IP rights holder has evidence that a container
holds counterfeit goods, it is not possible to seize the goods, let alone inspect the
container.
This scenario is the perfect counterfoil for counterfeit operators.
There has been much debate with regard to the existence of the Free Zone port system
but despite programmes to change the regulations, due to the issues above, there has
been no firm timetable set to amend the laws to allow inspection, let alone interception.
The other Free Zone port is Mersin in Turkey; not surprisingly there is a great deal of
trade between Jebel Ali and Mersin. Over the past decade we have investigated goods
emanating from Mersin as being one, if not the leading, point of entry for foreign made
counterfeit goods entering the EU.
Once goods arrive in bond in Mersin, they are cleared for delivery to their final export
destination, often to other European territories which are not members of the EU;
because they are not subject to internal inspection, they are in sealed export containers
and are simply sent on by road freight.
We have good local relationships and, whilst we are extended every courtesy, there is a
feeling of apathy that little, if anything, can be done to counter these shipments.
TERRITORIES
PRC
As it is known by ECTA Anti-Counterfeiting Committee Members, the EU July 2010
Report “Report on EU Customs Enforcement of Intellectual Property Rights, Results at
the
EU
Border
2009”
(“the
EU
report”)
(http://ec.europa.eu/taxation_customs/resources/documents/customs/customs_controls/
counterfeit_piracy/statistics/statistics_2009.pdf)
reported
by
BBC
News
(http://www.bbc.co.uk/news/world-europe-10726125) relating to the origin of counterfeit
goods stated that 64% of pirated goods originated from China; the writer’s first thought
was “is that all?”.
Many IP rights holders have ceased all IP interdiction programmes in the PRC as the
results to date do not justify the costs. Instead they prefer to rely on detection inside the
EU, then trace the goods back through the chain. Whilst this position is understood,
there are key factors which should be considered in the making of these commercial
decisions.
Firstly, the PRC is changing; IP rights are becoming more recognised and enforceable
as it is important to the country’s future global trading position.
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There is the cultural issue; the PRC only “opened up” twenty years ago and it is the
education and maturity of the consumer that will lead the way.
A strong-arm ethic is probably not the way to go - negotiation is; whilst this may seem a
protracted and non-conclusive process, having dialogue is the first vital step.
In our e-mail broadcast dated 30 June 2010 we reported the Shanghai Ruling (Shanghai
Shenda Sound Electronics Co Limited v Jiulide Electronics (Shanghai) Limited,
Shanghai Higher People’s Court, November 2009) that counterfeit is legal as long as it
is exported”. This is, however, in our experience merely a localised incident and one that
is in the process of being retracted.
Many officials from various other PRC government agencies do want to see change and
do not support this Shanghai Ruling.
The EU Report firmly states that the Chinese pirated goods seized in the EU originate
from Turkey; we would add that the shipment route also includes Jebel Ali, Dubai.
Whilst clothing is a leading counterfeit product it is the life-threatening products that are
the most dangerous, ie pharma, critical car parts and electrical appliances.
There have been a number of incidents of fatalities in the EU from consumers buying, in
good faith, electrical goods which have electrocuted people.
These are extreme cases and it is the ignorance of persons who knowingly buy a cheap
“designer-label” article of clothing which fuels the counterfeit industry.
The “who does it hurt” or the “it’s the same shirt but at 50% of the RRP” is symptomatic
of the mindset of the consumer who knowingly buys counterfeit goods, this attitude is
the life blood of the counterfeit industry.
In relation to the PRC a unique set of rules apply, most of which are unwritten, but in
relation to our work in this country we have found in many instances that the IP rights
holder has contributed to their own problems. Namely, they are using contract
manufacturers, from whom they order, say, 10,000 garments; the factories are not
monitored and the goods are not securely tagged or hologrammed (main reason - cost);
the factories then produce 20,000 pieces. The additional cost of the over-run is
minuscule as they have the designs, the sizes, etc. and labour costs are, in the main,
insignificant.
In the case of designer clothing, the “overproduced” goods are sold via Western ecommerce sites; a new and emerging point of retail sale is via duty free operators.
Often there are no factory visits, ie snap inspections, by the IP owner, the supply
contracts do not have this provision and, even when they do, regular inspections are not
made.
The factories’ opinion is “well it is their fault, we are here to do business.”
On this point an IP rights holder should treat the factories well, engage with them, meet
with them, create a rapport; this can be a key source of local information.
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For example, a client’s contract manufacturer was bemoaning rising costs in raw
materials, labour, transportation, electricity, etc, adding that the forward supply contract
did not have enough flexibility to adjust pricing.
The client had a very good relationship and said they would be flexible and the unit cost
was adjusted.
In turn the client was informed by the contract manufacturer of two factories producing
counterfeit goods, of a good quality and lower prices; this led to the identification of a
counterfeit chain of supply and export.
The OEM contract manufacturer had knowledge of these operations for some time and
could not compete; therefore as the client was price flexible they decided to inform them
of these events and in turn they were then able to combat the main counterfeit operators
of their brand.
We cannot stress the importance of having close relationships with your factory(ies).
They are local; they know!!
One example is where we were with a group of local PRC manufacturers at a social
event. The night grew longer and much socialising was done.
One contract manufacturer offered us some forty-foot containers of clothing that they
had finished two months’ earlier and for which they had not been paid.
We like to think that the offer was made in jest, but it was suggested to us that if we paid
US$250,000 we could buy US$2 million worth of clothing and drive the containers away
with the real export certificates which would allow legitimate export to the EU.
The manufacturer had produced the goods on time and on price and the client simply
did not need the goods according to their nominated delivery date, due to a fall in
European sales, so they ignored their responsibilities at their peril when all they had to
do was explain the position and come to an agreement, ie part payment, instead they
threatened their entire supply of the next season’s range.
Most IP rights owners, whilst many do not have direct representation from their offices in
the PRC, rely on agents; therefore the control and direct input can be altered and
misrepresented.
Thus we underscore the importance of direct local relationships in the PRC.
Clearly documented orders with the option of snap inspections is indicative of a
company’s intent and it is not an unreasonable request. When placing first orders, it
would be advisable to send a member of staff to liaise with the factory and identify key
people with whom to build a relationship.
If anything, the manufacturer will respect your attention to detail and the importance you
place on the relationship and the fact you are monitoring them.
This is one of the key areas where IP rights holders lose control; poor relationships, no
local contacts, no factory liaison, except via third party agents.
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An example of lack of clarity and communication is thus described:
A pan-European women’s brand was the subject of a merger and acquisition, due
diligence in relation to IP was factored into the final sale.
However, the company had established a unique way of doing business in the
PRC: their agency agreement permitted the main contractor to sub-contract, as the
main product line is clothing, featuring bags and accessories, the main factories
sub-contracted to many smaller factories for many years.
There is no record of who the sub-contractors are, what they produce, ie bags,
shoes, zippers, belts, clasps, buttons, contract sewing and assembly, etc. for the
main contractor.
As a result there is a large proliferation of small factories producing goods in all
categories using the IP Rights holder’s brand/label.
These smaller factories, realising there were no local trade marks registered, have
even registered the marks in different classes and sub-classes.
The problem is that there is rampant proliferation of the use of this brand, at the
time of writing this article, that there are in excess of 4,000 branded articles offered
for sale in the PRC.
It is the new owner’s intent to open retail outlets, but the brand is already severely
damaged and it cannot be seen how they can establish their brand as it is probably
regarded locally as a low cost, low quality article that can be bought from street
market vendors and upwards.
All because no effort was made to facilitate a relationship with the factories and keep a
track of all aspects of the supply chain.
PROACTIVE OR REACTIVE
As outlined earlier, many IP Rights holders do not have a response until the counterfeit
goods are in the marketplace – this raises the issue of Proactive or Reactive.
REACTIVE
It is understood why a reactive stance is adopted – “out of sight, out of mind” – until it is
not and then the response is “How did that happen? Who is doing this?...”
Often we are engaged to combat the presence of the counterfeit goods in the local
markets.
We attend to test purchases and trace the origin of the goods through the supply chain;
both costly and time consuming and not necessarily constructive as in combating the
issue at hand – it simply disappears for a while and then returns.
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PROACTIVE
Having the relationship with the contract manufacturers is important: they are often
aware of the identity of the competitors who are producing counterfeit.
Training is a key area and one that is often overlooked; the staff and representatives are
one of the best sources of market feedback and information. Representatives know the
markets, the key persons, the products, and, if they see or hear of anything untoward
it is important that they know that there is a point of contact within the company to whom
they can report “issues”.
IN T E R N E T
Constantly searching and reviewing the products as offered on the internet is a key
indicator of any copying/counterfeiting occurring. Just because it is in a region in which
the company does not trade is not immaterial; it is a warning. This is a truly insidious
practice but the counterfeiters are, in the main, aware of an IP rights holder’s operations
and in turn they exploit any advantage. For example, if an IP rights holder is not
operating in Malaysia, the counterfeiters then plan and tranship counterfeit to this
territory and try to seize the market and establish their “brand”.
REPORTING SYSTEM
IP rights holders may not want to post notices that there may be fake goods in the
marketplace; however, this attitude is changing. Some of our proactive clients post
information with contact details so customers can report if they have encountered a
counterfeit product which they bought in good faith. On this point a great deal of market
information and feedback can be obtained at no cost.
The counter argument is often stated by marketing departments – they don’t want to
acknowledge the existence of such goods, and consider that it is not commercially
viable to do so because they think it is an admission of brand damage; we do not think
so. It is about educating the consumer and promoting communication and feedback
and, if managed properly, it can be a great source of “free” market intelligence
information.
E-COMMERCE
So many websites - main corporate URLs - do not have SSL Certificates; it is amazing,
yet for their e-commerce solutions they do. This simple act of negligence does
incentivise clone websites, often with e-commerce solutions built within.
How do you know that you are dealing with the right person or rather the right web site?
An SSL certificate contains information about the owner of the certificate, such as e-mail
address, owner's name, certificate usage, duration of validity, resource location or
Distinguished Name (DN) which includes the Common Name (CN) (web site address or
e-mail address depending on the usage) and the certificate ID of the person who
certifies (signs) this information. It contains also the public key and finally a hash to
ensure that the certificate has not been tampered with.
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In essence this identifies to any member of the public that this is a 'genuine' and
legitimate website as owned and supported by the trade mark owner.
It is a minor precaution to stop phishing and/or spam (clone) websites, reassuring the
public.
Promote the fact that all company sites are SSL verified - it is a simple measure.
THE FUTURE
The work of the ECTA Anti-Counterfeiting Committee in making representations to
national, local and EU government agencies is a key stratagem for the future towards
combating counterfeit products.
Without these efforts and representations, there exists the possibility that key issues
may not be addressed in their rightful manner and legislation not enacted.
The saying “think local, act global” has never been more apt than in the case of
combating counterfeiting.
The rights acquired through ownership of intellectual property, whether it be trade
marks, patents, design rights or copyrights, should be jealously guarded. It is a sad fact
that IP rights are often subject to unauthorised use through piracy and infringement.
Stephen Keith
Probe International IP & Corporate
Investigation Limited
United Kingdom
Anti-Counterfeiting
© ECTA, November 2010
Tel: + 44 (0) 20 7713 7136
Fax: + 44 (0) 20 7713 7137
E-mail: [email protected]
Internet: www.probeip.com
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