Global trade in fakes approaching half a trillion – what can be done?

In April, the Organization for Economic Cooperation and Development (OECD) released an updated report that puts the value of imported fake goods worldwide in 2013 at $461 billion. This marks a significant increase compared to OECD’s 2008 study, which estimated the illicit trade in fake goods at approximately USD $250 billion. Fake goods now make up 2.5% of the $17.9 trillion world trade.

Article originally published in R econnaissance's June 2016 Aut hentication News™.

The OECD is a non-partisan non-governmental organization, which provides a forum for 34 members and more than 70 non-member economies to promote economic growth, prosperity, and sustainable development. OECD provides a setting where governments can compare policy experiences, seek answers, identify best practices and coordinate policies. OECD started to study the economic impact of the importation of counterfeit and pirated goods in 2008 to help provide a measure of the activity and provide data for policy and solution developments for governments. In this article we will examine the key findings of the latest OECD report, which estimated this illegal activity at nearly half a trillion dollars now. This number is truly staggering and the equivalent of the GDP of Austria, or the combined GDP of Ireland and the Czech Republic.

In this article, we will examine key changes, trends and the drivers behind the increase and finally provide our perspective on what this means to the Authentication Industry.

Key findings

The report analyses nearly half a million customs seizures around the world from 2011 to 2013, which allowed the OECD to build a robust quantitative estimate of the scale of counterfeit trade. The report covers all physical counterfeit goods, which infringe trademarks, design rights or patents, and tangible pirated products, which breach copyright. It does not cover online piracy, which further negatively impacts businesses and world economies. The United States, Italy, France, Switzerland, Japan and Germany are the hardest hit countries with the majority (83%) of fake goods, not surprisingly, originating from China and Hong Kong. European Brands are among the hardest hit with fake goods being estimated to amount to 5% of all goods imported into the European Union (EU) in 2013, or as much as USD $118 billion.

During the study, OECD found that fake products permeated a wide range of product categories from luxury goods, like watches, leather goods and perfume, to industrials such as machines, spare-parts and chemicals. The OECD also identified fake goods among common consumer products, including Consumer Packaged Goods (CPGs), toys, pharmaceuticals, cosmetics and even the trademark infringement of strawberries and bananas producers.

Even more concerning, many counterfeit products classified as consumer safety and critical technology products, such as pharmaceuticals, spare automotive parts and toys are often of low quality and pose a significant health and safety risks. And these are real risks, counterfeit automotive parts can cost lives, fake pharmaceuticals make people sick, instead of healing them, counterfeit toys can harm children and baby formula without nutritional value or nourishment.

The five most counterfeited items continue to be footwear, followed by apparel, leather goods (which includes handbags), electronics and watches. The proceeds from counterfeit goods continue fuel other illegal activities of criminal organizations, organized crime and even terror organizations.

Key trends and drivers

The bitter irony of the OECD report is that the report is based on seizures as percentage of legal exports. The OECD report uses seizures as a proxy to “see” into the hidden and clandestine world of illicit trade. And increased seizures point to increased counterfeit. But increased seizures also point to increased enforcement or at least constant enforcement against a growing issue. Some might ask, if there is simply not enough being done to address counterfeit goods? But the better question is, are the right things being done? The OECD report highlights some key aspects that are fueling this increase:

Increased counterfeit sales in primary and secondary markets
An expansion of counterfeit goods beyond big name brands across virtually all industrial sectors shipped across complex global networks
The shift of counterfeit distribution to small parcels

Several new trends are being identified in this report that highlight these issues. As OECD Deputy Secretary-General Doug Frantz stated “this new report contradict(s) the image that counterfeiters only hurt big companies and luxury goods manufacturers,” but counterfeit goods rather affect manufacturers big or small. Advances in cheap manufacturing, excess manufacturing capacity in countries such as China have led to almost unlimited potential to counterfeit any item or product. If the product has consumer demand, it will be counterfeited.

The OECD report also points out that counterfeit goods have penetrated primary and secondary markets. In secondary markets, also known as aftermarkets, which can include flea markets, online platforms and street sales, sellers expect and sometimes even willingly search out counterfeit goods. In primary markets consumers are normally deceived and defrauded to believe the goods are genuine.

The expansion of counterfeit goods to secondary markets is troubling and hard to combat. If consumers are seeking out and willingly buy counterfeit, enforcement becomes infinitely more complex. While the OECD report does not identify how much of the counterfeit trade flows through primary versus secondary markets, this has significant impact on how the security and authentication industry and the brands it serves attack this issue.

The illegal trade in counterfeit goods has become an intricate global network and menace of historic proportions. While most fakes originate from China or Hong Kong, they use complex shipping and trading routes, which trans-ship freight through the Middle East, Eastern Europe, Africa or free trade zones in the United Arab Emirates to disguise the origin of merchandise and minimize the suspicions. Even more concerning, transit points now include countries with weak governance and a strong presence of organized crime or even terrorist networks, such as Afghanistan or Syria. The criminals trafficking in counterfeit goods change their shipping routes often to avoid detection and swiftly exploit new weak spots in global distribution chains.

The most important change and development however, has been the migration of shipments to small parcel shipments. Small shipments, which include Express consignments, postal parcels and international mail, are now the primary method for shipping fake goods. During the 2011 – 2013 study, 62% of all seizures were small parcel shipments, reflecting the growing importance of online commerce in international trade and reflect the shrinking costs of shipping counterfeit goods globally as small parcels. This trend decreases the risk of detection, detention and seizure for the criminal distributors of counterfeit goods, while simultaneously frustrating the enforcement efforts of brand owners, law enforcement and authentication solution providers.

Implications for the Authentication Industry The Authentication and Security Marking industry has a great opportunity to capitalize on these trends by more standardized solutions to brand owners, law enforcement and investigative firms to better combat the changed illicit trade in counterfeit goods. The expansion of counterfeit goods into primary and secondary markets in correlation with the increase in direct to consumer small parcel shipments has created two distinct counterfeit threat scenarios. When counterfeit goods enter the primary market, anti-counterfeit and authentication tools are needed that enable consumers to simply, easily and reliably verify the authenticity of the good.

Today’s approach for such authentications has two major faults. It relies to heavily on overt security features and technology approaches are so divergent that it is hard for a consumer, law enforcement and investigative firms to be educated and proficient on all these technologies. All overt technologies can be imitated to be made to look like the real thing, even if it is only for a short time. But that is all the counterfeit authentication device needs to do – survive a cursory inspection by unsuspecting consumers. Seized overt counterfeit authentication technologies run the range across all overt features. Counterfeiters will imitate holograms, cut-lines, color shift inks and intricate print patterns and others. If it can be seen as an overt featured it will be imitated or counterfeited.

While industry experts will recognize the imitated features as a counterfeit, they are good enough to pass the “inspection” of consumers. Online sales of counterfeit goods make these anti-counterfeit authentication features completely ineffective, since the consumer will not be able to inspect until the shipment is received. Some overt anti-counterfeit authentication features are replicated so well that even law enforcement has a hard time authenticating.

What additionally is complicating authentication by consumers and law enforcement is the plethora, breath and unfortunately inconsistency of authentication features. Because there are so many potential features, how are law enforcement, investigators and consumers supposed to know which feature to look for? Overt or Covert? Is it a hologram or color shift ink? Is the ink supposed to shift from Green to Red or Blue? What is the correct placement of the security cutlines? What covert feature do I scan for? Which scanner do I use and where on the item is it?

There is a great opportunity to provide simple consumer centric authentication features, which allow consumers through broadly available non-custom technology to verify the authenticity of items, such as the verification or encrypted product serial numbers via text message or phone calls. Texting and calling are universal technologies and the consumer learning curve is very short. While not perfect, it is one example of a simple consumer focused authentication method.

For law enforcement and investigators consistent standards for covert features are needed. During my many tours of U.S. ports, enforcement officers often reported having a hard time to stay on top of the various covert technologies and the proprietary scanners, readers and sensors required. As a result law enforcement is not utilizing many covert features, but rather rely on other determination factors, such as packaging or shipment methods. For example, during at a recent visit to the JFK international mail port, officials highlighted the seizure of dozens of high-quality counterfeit luxury hand watches, which were identified by the fact that 10 of them were shipped in one simple cardboard box. Considering these watches retail for over $20,000 each, the Customs officer rightfully concluded that genuine watches of that worth are probably not shipped that way and seized the shipment as counterfeit.

Many overt security features had been replicated and the customs officer was unsure of the covert features. The industry has an opportunity to rally around a select, consistent and uniform number of covert features, which allow simple authentication for law enforcement. Taggants and IR inks are two examples of covert features, which are rarely imitated. If a common standard could be reached on covert features, law enforcement and investigators could authenticate a variety of technologies with ideally one reader, scanner, sensor or wand.

All these issues are even worse for counterfeit sales in the secondary market. In those markets consumers are either seeking out or accepting counterfeit goods. Overt features are a waste of money and effort here. Living in a college town, I have seen first hand the many counterfeit jerseys worn by college students, who trade information on the best websites to by the best counterfeit. Well-replicated overt features are used as a sign of high-quality counterfeit goods and even sometimes advertised on the online sites themselves. The key to make progress against secondary counterfeit markets are standardized covert features, to help aid law enforcement and investigators.

In summary, there are too many different authentication technologies in use today. Law enforcement, customs officers and even investigators are unlikely to be familiar with (and possess all the necessary tools to validate) every type of authentication device that comes their way. In addition, much effort is spent on “flashy”, exciting or complicated overt features. However, all features, if visible can be, and most have been counterfeited or imitated.

While many authentication technologies try to out-compete each other with complexity and newness, I wonder, if the key to better anti-counterfeit enforcement isn’t the standardization on a few key covert features and to focus our efforts on making those as good as possible with universal readers, smart phone apps and other verification tools. The future of anti-counterfeit technology or authentication technology, in this author’s mind, is simplicity, focus and standardization to help rapid and quick enforcement against increasingly small shipments. This can be achieved through voluntary industry standards, or could be achieved through mandatory technology requirements by governments or the World Customs Organization.

Sven Bergmann is a Managing Partner at Venture Global Consulting and advises brand owners, technology providers and governments on anti-counterfeit strategies, programmes and technologies.

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