It’s a fake! Countering the counterfeiters

2015

Counterfeiting has become a global epidemic, growing by about 20 per cent every year and expected to be worth some $1,000 billion annually within five years. But don’t make the mistake of thinking that it is only luxury brands that suffer. The overwhelming majority of counterfeiting involves common consumer products, directly threatening public health and personal security.

Few people have a better insight into the plague that is counterfeiting than Pierre Delval, a criminologist, forensic scientist and art historian and one of the world’s leading specialists in counterfeiting and counterfeit crime. Delval is the President of the Swiss WAITO Foundation, the first NGO to deal with the criminal aspect of counterfeiting, contraband and food fraud at an international level and heads up the medical counterfeiting commission at the World Bank and the OCDE.

Here he talks to Jean-Fran?ois Fiorina, Associate-Dean of Grenoble Ecole de Management, about the scale of the counterfeiting problem and the measures he believes must be taken to slow its growth.

How do you define counterfeiting?

Counterfeiting is the act of trickery by appearance. In other words, you give the end user the impression that a product, due to its shape or presentation, is one that meets a certain number of technical or security characteristics. Yet in this case the means of achieving this illusion are completely fraudulent.

But counterfeiting is no longer simply a question of intellectual property. The problem goes beyond civil issues and has become a real criminal problem. Almost all counterfeit objects are produced under the control of organized crime groups who, in particular, tend to manage distribution channels.

You use very strong words, such as "organized crime" and "products that kill," to condemn counterfeiting. Why?

First of all, it's important to realize that, despite what we usually think, less than 10% of counterfeit products are part of the luxury or sporting goods markets. The vast majority of counterfeit products are aimed at consumer goods: food products, health products, tobacco, construction equipment, materials for construction, cosmetics, toys, etc.

These are all products that can directly impact consumer health and security as well as a country's economic and political stability. Organized crime has become the main player in the counterfeit market and is pushing for the development of this counterfeiting industry. Criminal groups are even investing in industrial tools as a new means of laundering money. They distribute these products via sales channels that already exist and were previously used for other illegal commerce.

Today, we are forced to look at counterfeiting from a much larger perspective. Above all else, we have to see counterfeit objects as products that do not conform to required quality and security characteristics. This "non-conformity" is most often due to the fact that a product of this type aims to provide criminal networks with a maximal profit and therefore must be produced at the lowest possible price. As a result, they cut all security and quality controls for raw materials.

The end product can therefore be dangerous and even deadly for consumers, who are hoodwinked by an appearance that resembles a real product (e.g. fraudulent use of certificates and labels) and sales techniques designed to trick buyers. We also have to consider the fact that counterfeiting can be a direct or indirect means of funding terrorism, as is the case now in places such as North Africa (Tunisia or Libya) and the sub-Saharan regions.

How did you become interested in this issue?

As the field of criminal investigation is my passion, I took a dual degree in law (criminal law and criminology) and science. At first, in the scientific police, I was interested in falsified documents. Afterwards, once I left the Ministry of Interior, I went on to lead the economic interest group for bank cards as they were implementing chip card technology. We had to coordinate the actions that were required to secure micro-processors, payment terminals and data-processing centers.

Following this, I created the first private consulting firm to work with governments on intelligent documents equipped with micro-processors. I become the strategic consultant for the national printing president, who is in charge of technical evolutions related to document security. I then worked at Bercy as project manager in the field of industrial anti-counterfeiting.

For strategic reasons, I left France to create the WAITO foundation in Switzerland. This international organization aims to track illegal commerce in terms of security and public health. Then I transferred the organization to the United States and operational activities to Tunisia. So I've now been working in the field of anti-counterfeiting for the past 25 years.

Who are your clients?

I have two primary types of clients: professional organizations and governments. By uniting the capabilities of companies, we are able to provide greater efficiency in the fight against counterfeiting. It's important to understand that this phenomena has a worldwide impact and that countries which produce counterfeit good often end up faced with problems as well.

For example, in China, counterfeit production is enormous, yet the country’s leadership cannot afford to trigger a major social or political crisis by grappling with it, especially when it comes to public health.

In most cases, we implement actions to follow the evolution of the criminal phenomena. Customs agencies in many countries do not necessarily have a clear idea of what the latest counterfeiting trends are. To make matters worse, it’s often the case that interactions between the private and public sectors are either non-existent or do not function properly.

As a result we have two primary goals. First of all, we have to put the priority on preemptive detection in order to pick up on criminal evolutions and anticipate them by implementing measures to fight these new trends in "criminal-counterfeiting". Our second objective is to use our operational capacities to their fullest extent to act as an interface between the public and private sectors in order to achieve practical results.

In Tunisia for example, we carry out concrete actions on the border. One of the reasons for the country's economic, commercial and political crisis is this widespread illegal trade. To lock down borders, we have to offer local populations the opportunity to leave mafia networks by creating real economic zones that are organized and protected.

First we try to encourage change by incentive before using repressive means. This entails strategic planning, pedagogical efforts and a review of the legal system. We also have to set up traceability and authentication systems for products. Above all else, we have to restore trust so that investors will return to the country.

Is there a geopolitical aspect to counterfeiting? Is the widespread growth of counterfeiting tied to globalization?

Yes. Counterfeiting is an opportunistic action. A person who sells counterfeit goods is following market trends and reacting to changes. One day, the counterfeiter sells medicine, another day, electric equipment and yet another day, luxury goods. This predator aims to capitalize on niches where profits are high and immediate.

Of course globalization has played an important role in the development of counterfeiting. In particular, the outsourcing of European industries and the increase in air and sea transport. But globalization does not explain everything.

Counterfeiting has really taken advantage of economic growth in the southern hemisphere combined with a poorer middle class in the northern hemisphere and the international expansion of criminal networks.

Does the internet have a role to play?

Without a doubt. For example, the internet has already started to impact the luxury goods counterfeit market. Currently, demand for medicine and spare parts is also growing exponentially as these goods are easy to export. It's important to understand that populations faced with stagnate or lower revenue during a crisis constitute the ideal prey for criminals who provide low cost products.

Craftsmen and company leaders may also be tempted to obtain cheap materials illegally via the internet or other untrustworthy sources in order to maintain or increase profit margins. In the construction sector for example, we see large-scale deliveries of containers filled with materials ordered online. We are currently working with the French construction federation to combat the dangers of counterfeit materials and equipment that can cause serious accidents.

How widespread are counterfeit products? Can you share with us any key figures or examples?

Well for example, if we speak in terms of turnover for criminal organizations, we know that counterfeit cigarettes generate around $50 billion in revenue (even if there is debate over the exact numbers). We also know that illegal medicine generates almost $75 billion in revenue across 100 countries.

Overall, we estimate the counterfeit materials represent $300 billion in profits and the same goes for intangible goods. Growth is around 20% per year and could reach $1,000 billion within five years if we don't implement strong actions to curtail this growth. In other words, organized crime profits much more from counterfeit goods than from drugs, whose turnover is estimated to be around $350 billion.

How should we protect ourselves from these risks?

As I already mentioned, counterfeiting is no longer just a matter of intellectual property rights. Counterfeiters have understood the deficiencies of our legal systems, which in my opinion are too weak and inadequate. Counterfeit goods have spread to cover a wide range of illegal traffic. From counterfeit products to smuggled goods to goods that are not in compliance with regulations, public authorities are limited in their actions by this compartmentalization according to goods or markets.

In addition to compartmentalization, budgetary issues also limit the scope of regulatory actions and the responsible authorities cannot implement efficient actions to counteract this plague. This leaves us with the possibility of relying on the private sector. However, we have to avoid a disorganized approach as many industries have done in the past. The key is to carry out united actions in partnership with public authorities.

While some partnerships do exist, their actions are sporadic and I believe them to have more of a marketing value rather than a real ability to interfere with mafias. Steps must be taken to coordinate the various federations and carry out preventive and deterrent actions. We also have to raise awareness among the members of each industrial sector.

But perhaps the most important thing we need to do is to stop viewing counterfeiting as an intellectual property issue and start recognizing the real threat it poses to security and public health (which is true of 90% of counterfeit goods).

How do you keep track of evolutions that deal with the issue of counterfeiting?

As always, data collection and processing are crucial. I have built a network of 170 experts around the world who often work in public administration and who follow up on these questions for us.

This allows us to follow trends and implement an appropriate plan of action. We also stay up to date on regulatory changes. For example, when new regulations are implemented in the construction sector we noticed that criminal networks adapt very quickly to these changes in order to offer illegal merchandise that surfs on a new trend and provides important profits.

Do you believe it's important to raise awareness among future managers? What would you say to young business school students?

It's crucial that students realize the realities of counterfeiting and criminal activities. We already observe a lack of awareness among many working professionals. It's important we send the message that this is a major economic threat as well as being a social and criminal threat. And the risk continues to increase as the crises we face in countries around the world weaken states and open the door to criminal initiatives.

It's important to understand that this is a global phenomena that is in constant evolution. That’s why no industry or country can tackle it alone. The key is to encourage collaboration, the sharing of information and education to raise awareness. It's for this reason that professional federations are a key part of elaborating a real collaborative strategy in each sector.

One recent study results demonstrate that companies are victims of counterfeiting because they do not anticipate the threat and are quick to give in to unfair competition. Some companies are also seduced by the ‘easy’ solution and start to become less careful in their buying practices. In other words, ‘if my competitor is doing it, why shouldn't I?’

This is why it's important to make sure that all levels of the purchasing chain are confronted with their legal responsibilities and the risks they face should they cross the line. Without awareness, without stiff legal measures, the plague that is counterfeiting is bound to continue growing and organized crime will continue to profit from it.

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About The Author

Jean-Fran?ois Fiorina
Jean-Fran?ois Fiorina

Jean-Francois Fiorina is Associate-Dean of Grenoble Ecole de Management and director of the Grande Ecole (ESC Grenoble), one of the four entities of Grenoble Ecole de Management. A graduate of INSEEC Bordeaux and an MBA graduate of the University of America, San Francisco, he began his career as an international consultant before becoming a professor of international trade.