HowSerious Is the Problem?

The volume and the variety ofproducts that are counterfeited have grown during the recent years. Theincrease in the number of “fakes” and their penetration in legal marketsreflect at least two factors: (1) an increase in the types of counterfeitproducts and (2) an increase in the number of actors involved incounterfeiting. In addition, an improvement of the external quality of replicatedproducts makes it difficult to distinguish them from the originals.

We have seen the evolution from arelatively small scale and craftsman's activity to a veritably well-organizedenterprise that relies on an international market and a transnational productionand distribution structure. Some estimates on the volume of the counterfeitmarkets exist, however, it has been noted that the statistics mightoverproblematize the counterfeiting matter because many of them are developedby different interest groups.

The Organization for EconomicCooperation and Development (OECD) conducted a survey together with the WorldCustoms Organization (WCO) on interceptions of IPRs infringements, recordedduring the period 1999 to 2005. The survey measured the relative intensity withwhich a given economy exports counterfeit and pirated products and the relativelikelihood for products in one category to be counterfeit relative to another.The findings show that the trade in counterfeit and pirated products grewsteadily over the period 2000 to 2007, while an updated study showed that, inparticular, between 2005 and 2007 it grew by more than 25%. The OECD alsoestimates that the total value of counterfeit and pirated goods ininternational trade have amounted for up USD 250 billion in 2007. In addition,the share of counterfeit and pirated goods in the world trade has grown between2000 and 2007 from 1.85% in 2000 to 1.95% in 2007. The numerically smalldifference is significant given that world trade more than doubled over thatperiod.

Counterfeit Products

The list of counterfeited goodspresented in Table 1 showsthat almost everything can be counterfeited. The rapid distribution of newtechnologies has significantly expanded the variety of products that arecounterfeited. It is relatively simple and accurate to replicate most productsin current markets, avoiding compliance with the elevated qualitative standardsof original goods. Some counterfeit goods impose a serious threat to consumersas demonstrated later in this article.

Table 1 Overview of the FortyRecommendations

SOURCE: Elaboration from FATF (Financial ActionTask Force)

Counterfeit Medicines

According to the WHO, a counterfeitdrug is a pharmaceutical product “which is deliberately and fraudulentlymislabeled with respect to identity and/or source.” This definition applies toboth branded and unbranded medicines, the so-called generics, and it includesproducts with the correct ingredients or wrong ingredients, without active ingredients,with insufficient active ingredients, or with fake packaging.

The definition falls within thebroader concept of substandard medicines; however, the two categories shouldnot be confused. Substandard drugs include medicines that may present anunintentionally incorrect package or that may have an incorrect quantity orratio of ingredients. Counterfeit medicines are always substandard because theyare outside regulatory control and their composition is unpredictable. Thedifference with counterfeit medicines is that substandard medicines are notalways distributed to intentionally deceive the consumer but are the result ofinaccurate production processes or transport and storage conditions. This maybe a problem particularly in those countries where adequate resources andcontrol structures are not available.

There are some global estimates onthe scale of the counterfeit and substandard medicine market; however, there isno clear indication how these estimates were developed. WHO estimates that theamount of counterfeit medicines in developed countries could reach 1% of themarket, whereas in developing countries this figure would raise to 10%, hitting30% in certain African countries.

In 2011, a joint law enforcementoperation called Pangea IV involving 81 countries took place targeting the saleon the Internet of counterfeit and illegal medicines. During the week-long operation,45,500 packages were inspected of which almost 8,000 were seized; 2.4 millionpotentially harmful medicines worth USD 6.3 million were confiscated and almost13,500 websites engaged in illegal activity were shut down. The counterfeitmedicines originating from 48 countries included antibiotics, steroids,anticancer, anti-depression, and anti-epileptic pills, as well as slimming orfood supplement pills. Some 55 individuals were investigated or arrested duringthe operation.

Series of regional joint lawenforcement operations targeting the manufacture and distribution ofcounterfeit medicines have been organized in East Africa, West Africa, andSoutheast Asia. Operation, Mamba III, was carried out in Burundi, Kenya,Rwanda, Tanzania, Uganda, and Zanzibar in 2010. Over 300 premises were checkedor raided, resulting in the seizure of 200,000 counterfeit essential medicinessuch as vaccines, antimalaria drugs, and antibiotics. The operation led to 120investigations, and more than 30 perpetrators were convicted. In West-Africa,the operation Cobra was carried out in Burkina Faso, Cameroon, Ghana, Guinea,Nigeria, Senegal, and Togo in 2011. At least 10 tons of illicit and fakemedicines were seized, and more than 100 people were arrested. Operation StormII was organized in 2009 in Cambodia, China, Indonesia, Laos, Myanmar,Singapore, Thailand, and Vietnam. More than 100 pharmacies and illegal drugoutlets were closed; over 12 million pills of counterfeit medicines and medicalproducts such as pills, bottles, and sachets were seized; and over 30 peoplewere arrested.

Counterfeit Toys

The toy industry possesses severalappealing characteristics for counterfeiters. It is a very extensive sectorwith a significant economic incidence, and the particular market composition isquite attractive because it is dominated by a few large producing companiesthat also operate as distributors. The incidence of counterfeiting for thissector would cause losses for producers totaling one and a half billion Europer year, according to estimates made by Toy Industries of Europe.

The countries of origin of these products aremostly in Asia, particularly China and Thailand, but there are also numerousother products from other countries such as Poland and Turkey where it is believedthat the volume of production of counterfeit toys is actually higher than thatof original toys. However, the noticeable presence of counterfeit toys inPoland and Turkey should also be linked to their role as transit countriesfor counterfeit products coming from Asia and intended for the European Unionmarket.

These data become particularlyalarming if we consider that the end users are children. Original toys aresubject to very severe regulations and quality controls as well as specifictests that precede their introduction in the market so as to ensure that theiruse does not involve any type of risk for children. An object placed in thehands of a child must be designed and produced considering child behavior. Atoy must not have parts that are easily detachable and can be potentiallyswallowed. The materials themselves, as well as the colors used, must notcontain any toxic agent. Following controls and on the basis of the toy'scomposition, its size, or the size of its parts and its structure, the productis classified as suitable or not suitable for a certain age group; particularcare is given to toys classified for children under the age of 36 months. Thesecontrols are obviously not implemented by counterfeiters whose only interest isto market the products at a good price and with the lowest possible cost ofproduction. The range of replicated products for children is unfortunately verybroad, and several parts of such products may be dangerous.

A concrete example of this trade isa 2009 case, when the Italian police seized counterfeit merchandise from Chinaworth more than EUR 20 million during raids on 17 warehouses in Rome. Italy'sfinancial police affirmed that 18 Chinese citizens were being investigated forallegedly importing counterfeit goods, including clothes, electronics, and some150,000 children's toys.

Counterfeit Spare Parts

From an economic perspective, themarket for aircraft and motor vehicle spare parts is a thriving sector forcounterfeiters. In the case of aircrafts, this is essentially ensured by theelevated market price of the products while, in the case of motor vehicles,profitability is guaranteed by their massive distribution and therefore by thewidespread commerce of spare parts.

Aircraft

Spare parts for aircraft aregenerally produced by a variety of small firms and are subject to severeregulations in order to guarantee compliance with strict safety standards. Thisis due to the specific characteristics that these products must have in orderto fulfill their functions. Any form of structural failure or malfunctioningcan result in catastrophic consequences. Even the production of screws, bolts,and supporting must comply with specific requirements and ensure elevatedresistance and durability. Production and distribution of counterfeit aviationspare parts are the direct consequence of the high level of profitability ofthese products. Given the requested characteristics of resistance and duration,a simple component such as a nut may cost circa USD 400. Counterfeiters do notcomply with safety specifications for the spare part and may therefore producethe product at very low cost and resell it on the market at a very high price,attaining significant profit margins.

Although it is difficult to unequivocally linkthe cause of an aircraft disaster to the use of a counterfeit spare part,because of the problems inherent in verifying the causes of such accidents, itis, in any case, possible to illustrate a few examples where it was suspectedthat the accident was caused by the installation of a noncompliant spare part.These examples also dramatically illustrate the phenomenon and highlight thenumber of human lives sacrificed for the economic interests of unscrupulouscriminals. One example is the case of the Norwegian aircraft Convair 580 thatcrashed due to a counterfeit bolt in the tail structure of the airplane in 1989when flying from Norway to Germany, resulting in the deaths of 55 people. Arecent report on counterfeiting published by the Union des Fabricants (UNIFAB)affirms that a tragic incident in the year 2000 involving a Concorde whose fueltanks exploded, would have been caused by a counterfeit spare part lost by anaircraft during the take off phase departing before the Concorde and subsequentlyhit by the Concorde itself.

Also in this sector, the Internet has become ahuge marketplace for these products. An article printed in the weeklymagazine L'Espresso reported on the recent spread of Internet sitesdedicated to the sale of counterfeit spare parts for aircraft whose origin isquite obscure. Acquiring these spare parts is as easy as carrying out a normalsession of online shopping. There are no specific procedures designed to verifythe identity of the buyer or seller, and the only thing that matters isimplementing the transaction. The parts on offer include components used indevices for tire pressurization, vanes for turbines, propeller brakes, andentire engines.

MotorVehicles

Similar to the case of spare partsfor aircraft, the market of spare parts for motor vehicles is very appealing tocounterfeiters because of its size and the relative ease with which replicatedproducts can be marketed and sold on legal markets. This market, particularlyin recent years, has grown significantly in conjunction with the increase inmotor vehicles across the world. Like other markets of counterfeit products, itis again difficult to provide accurate and reliable data on the scale of theproblem. However, it is possible to provide estimates that highlight anextended market that should be cause for concern. Of the USD 12 billion thatare globally lost by the automotive industry as a result of sales ofunauthorized spare parts, the Motor and Equipment Manufacturers Associationestimates that USD 3 billion are to be attributed to the incidence ofcounterfeiting in the US market only. General Motors estimates that USD 1.2billion was lost by its company and its distributors. In the United Kingdom,the market for such spare parts is estimated to be equal to 10% of the nationalmarket.

A greater degree of uncertaintyrelative to the incidence of counterfeiting within the legal market is reportedin Europe: The EC estimates an incidence of 5% to 10% of the European market incontrast to the estimate of the International Federation of AutomotiveAftermarket Distributors that is less than 1%. Aside from this significantdiscrepancy of the two estimates—perhaps because of sector interests—there isno doubt that the motor vehicle spare parts sector is a thriving market forcounterfeiters, as illustrated by the results of some seizures andinvestigations. According to these investigations, there are 57 companiesmanufacturing counterfeit spare parts in France alone supported by a network of44 distributors.

There are several possibilitiesthrough which counterfeit spare parts may enter the supply chain, many of whichhave to do with unauthorized distributors and brokers that operate as entrypoints also for legitimate or grey-market products. Furthermore, the Internetis indicated as an important source for distributors to acquire counterfeitauto parts. The spare parts most frequently counterfeited are those that arebroadly used. Counterfeiters concentrate on a handful of easily replicableproducts with low cost and effortless marketing. The most replicated productsinclude fenders and bumpers, brake pads, shock absorbers, hoods, steeringwheels, oil filters, windshields, and fuel pipes. Counterfeiters are veryattentive to giving the product an external resemblance that is as close aspossible to the original one. Auto parts installers may consequently bedeceived and in good faith install a counterfeit part because of the difficultyof distinguishing a counterfeit from the original.

Also with regard to counterfeit autoparts, counterfeiters benefit from certain competitive advantages, allowingthem to market products at extremely low prices. These advantages areessentially derived from an absence of quality controls on the final productthat is, on the contrary, tested multiple times by manufacturing companies inorder to guarantee the required duration and safety levels. The lack of qualityin spare parts may result in significant risks for users. When a counterfeit orlow-quality product is installed on a vehicle, the risk is that its overallfunctionality becomes compromised. Consider, for example, a steering wheel orits components built from low-quality materials that could easily break;an engine hood that does not crumple on impact but penetrates the vehicle; fuelpipes that break and create a fire hazard; brake pads that are ineffective dueto the materials of which they are built (compressed mud or wood) and increasethe pull-up distance and are set on fire during intense usage; or a windshieldthat is not sufficiently resistant and disintegrates. These examples areunfortunately not hypothetical cases but are based on documented incidents inwhich counterfeit spare parts caused serious accidents.

Counterfeit Food and Beverages

The presence of counterfeit food andbeverages on the market highlights, once again, the unscrupulousness ofcounterfeiters. As in the sectors previously analyzed, counterfeiters' abilityof exploiting loopholes in the legitimate supply chain to infiltrate theirproducts, creating high risks for citizens, is evident. The impact on societiesis significant. Before presenting the characteristics of this sector, we haveto specify that the expression “counterfeit food” normally refers to thosecases in which a counterfeit trademark or appellation of origin is affixed to aproduct without the authorization of the IPRs owner. However, as the purpose ofthis article is to discuss the global phenomenon and the dangers that consumersrun because of unscrupulous practices put in place by criminals for profit, thebroader expression “unauthorized food” will be used.

A report prepared by the GroceryManufacturers Association (GMA) shows the importance of consideringadulterations in general when referring to the consequences that unauthorizedfood and beverages may have on consumers' health. In particular, the reportdistinguishes between the following:

Counterfeiting: the unauthorized replication ofa registered trademark in view of deceiving consumers regarding theorigin/authenticity of the product.

Contamination: the unintended presence ofpotentially harmful substances in food. It also includes pathogenic substancessuch as salmonella and E. coli.

Economic adulteration (alsoindicated as economically motivated adulteration): the intentional fraudulentmodification of a finished product or ingredient for economic gain. It includespractices aimed at substituting ingredients or introducing substances toincrease the apparent value of the product or reduce its production costs.

Food fraud: the deliberate insertionin the market of food with the intention of deceiving consumers and obtainfinancial gains. Two main types of food fraud have been identified by the UKFood Standards Agency: (1) the sale of food that is unfit and potentially harmfuland (2) the deliberate miscategorization of food that deceives consumers.

As in the case of medicines, it isundoubtedly interesting to indicate some of the reasons for the spread ofcounterfeit food and beverages. The most important reason could be identifiedin the presence of a huge market with a rigid demand curve that could provideimmense profits to unscrupulous criminals. In the case of food and beverages,controls in the production and supply chain are often not as stringent as formedicines. Furthermore, the global economic crisis and the food crisisexperienced by less developed countries open immense possibilities forcriminals to insert low-cost products into the supply chain.

A concrete example is the case ofthe melamine-contaminated milk that happened in China in 2008. Melamine iscommonly found in plastics and adhesives but is also used for the production ofpesticides. Melamine has a very interesting characteristic for counterfeiters,as it may allow low-protein food to fool proteins quality tests. In the case ofmilk, these tests usually check the protein level by measuring the nitrogencontent, and melamine is rich in nitrogen. Adding melamine to low-protein milkwill result in increased levels of nitrogen, fooling the tests measuringnitrogen levels. Adding melamine to food is forbidden by the FAO/WHO CodexAlimentarius or by any national authorities, because it can lead to kidneyfailure. Because dairy companies were refusing milk without a certain amount ofproteins, milk producers and suppliers started to add melamine. The result wasthat a huge amount of contaminated baby milk powder was put into the market,leading to almost 300,000 babies affected, almost 54,000 hospitalized, and 11deaths probably caused by its use. The reaction of the Chinese authorities wasstrong, and 22 companies were put under investigation. The contaminated milkcrisis also caused the bankruptcy of one of the biggest dairy suppliers inChina.

A well organized counterfeiting ringwas dismantled in 2007 by law enforcers from Togo, Benin, and Senegal.Counterfeiters produced fake beverages, introducing them into the market underthe name of local famous brands. These organized criminals obtained fake labelsand colorants from Nigeria and subsequently produced the fake beverages inunauthorized distilleries. When the National Authorities of Togo seized samplesof the products on the market and tested their composition, they found anextremely dangerous pathogen agent that causes botulism.

Industrialized countries are also inthe eye of the storm, as demonstrated by a series of cases. In Germany, forinstance, frozen mushrooms with high radioactivity levels were seized in 2008on their way from the Russian Federation.

WhatIs the Harm?

There is no clear pattern ofvictimization even though it must be emphasized that counterfeiting is not avictimless crime. Wall and Large identify three victim groups:

1. Consumers who can be exposed to health andsafety risks from counterfeiting goods

2. Owners of the goods or brands beingcounterfeited who feel that their business is threatened

3. Victims indirectly affected by effects of thecounterfeiting industry upon the environment and taxation systems

The use of counterfeit goods canseriously damage consumers' health and safety. This is particularly evident inthe case of counterfeit medicines that can lead to drug resistance, healthcomplications, or even death. In 2009, BBC News reported that at least 20infants aged between 11 months and 3years of age had died of kidney failure inBangladesh because of contaminated painkillers, paracetamol containingdiethylene glycol that is widely used as an antifreezing additive in the paintand coating industry, in the textile industry, in agriculture, and in explosivemanufacture. Diethylene glycol also caused the death of 84 children between theages of 3 months to 7 years of age in Nigeria in 2008 when a counterfeitteething medicine for babies contained this poisonous ingredient. Thecounterfeit medicine was used to treat teething pain, causing damages to theliver, the kidneys, and the central nervous system.

Risks to consumers are not limitedto the pharmaceutical field, as we have seen when discussing other counterfeitproducts as spare parts, toys, and food and beverages. Other sectors are alsoaffected. In 2008, people in London were warned after fake condoms werediscovered during raids on shops. Consumers were warned that despite thepackaging looking genuine, the fakes were not effective contraceptives and wereunlikely to provide effective birth control and protection against sexualdiseases. In Canada, counterfeit shampoo was found in 2003, sold in drug storesor used in hair salons. The shampoo contained dangerous and potentially harmfulbacteria that could generate risks for the human health if coming in contactwith open wounds or the eyes. Counterfeit peanut butter was seized in China in1999 after different raids. The peanut butter factory was a disused schoolconverted into a factory and the hygiene conditions were totallyunsuitable for food manufacturing.

Counterfeiting can impose harm alsoin many other ways. To lower the production costs of counterfeit goods,criminals may use forced and exploitative labor to maximize the profits. Oncerecruited or forced to comply with the wishes of the criminals, victims areused for the manufacturing of goods. Also, the distribution of counterfeitgoods can include elements of human trafficking. Forced labor may includechildren and victims who are exploited in slavery-like conditions. This isparticularly important to keep in mind for those who believe thatcounterfeiting can generate new and fresh work opportunities in countriescharacterized by a lower level of industrialization. In reality, counterfeitingcreates more opportunities for exploitation and more opportunities forcriminals to obtain substantial profits.