As demand grows in emerging markets for luxury consumer goods, the latest technology and access to medicines, the number of people knowingly or unknowingly buying fake goods is on the rise. In developed markets, highly taxed products like tobacco and alcohol join the list, as do artworks, car parts, and even airplane engine spares.
Alibaba, the Chinese online retailing behemoth whose shares started trading on the New York Stock Exchange last week (valuing the company at $231 billion in the biggest-ever initial public offering in the United States) has taken steps to reduce the number of fakes on its site, but warned investors in its IPO prospectus that it could still be censured for alleged counterfeit activity. Sportswear brand Columbia has said it asks Alibaba to take down as many as 3,000 fake product listings a month, and that monitoring for counterfeits is a never-ending task.
A report by Frontier Economics for the International Chamber of Commerce estimates the total global value of counterfeit and pirated goods is as much as $650 billion a year, including pirated digital downloads.
The damage caused by fake goods goes far beyond the revenue lost to the companies making the originals—there can be fatal consequences to “medicines” made from any old concoction of powders (more than a third of anti-malarial drugs available in sub-Saharan Africa and Southeast Asia are counterfeit or substandard, according to the U.S. Food and Drug Administration) and safety-critical parts for cars or planes that do not have the high tolerance levels of the genuine parts.
“In the counterfeit drugs which are made in China, the substitute product could be toxic,” says Jordan Arnold of K2 Intelligence, a former Manhattan prosecutor. “What you’re ingesting could kill you.”
Furthermore, organized crime gangs are behind much counterfeit activity, using the revenue to fund their activities.
As well as fake end products, companies can be hit by product substitution in their supply chain. As a result, they may unwittingly be selling dangerous goods or offering an unreliable service.
“If you are supplied with a counterfeit product, it may not be your responsibility but when there is a problem and the counterfeit is found out, the negative publicity and litigation which emerges is against your company,” says Mr. Arnold.
So what can companies and organisations do to protect themselves against having their intellectual property stolen or falling victim to counterfeit goods or product substitution in their supply chain?
“We would advise due diligence in the form of background investigations when you begin a relationship with a new vendor—is the company mired in litigation, are there any bankruptcies in the backgrounds of the owners or any other red flags?” says Mr. Arnold, who has worked on counterfeit investigations, including the supply of knock-off parts and fuel to New York City’s subway and bus networks.
Thorough checks along the supply chain can also flag up issues with child or trafficked labor being used by parts suppliers, an issue brands such as Nike take very seriously.
Internal checks are also vital, says Darren Matthews of K2 Intelligence in London. An investigation he worked on into sales of counterfeit vodka found a criminal gang was able to access genuine bottles, labels, and tax strips for the brand because they were working in collusion with employees of the company making the real thing.
“Very often there is a link to the original company because the counterfeiters need specific information on details like packaging to make their product look legitimate,” says Mr. Matthews.
Technology also has a considerable role to play, with Mr. Arnold advising companies to engage specialists to monitor the “deep web,” the part of the internet where information which is not indexed by search engines resides. Experts can locate mentions of brands or products in forums or other deep web locations.
“It’s extremely difficult to make your products harder to copy, although brands are trying all the time,” says Mr. Matthews. “Prevention is more a case of due diligence of vendors and your supply chain, and good contracts with suppliers, and of course finding the people making the copies if a problem is discovered.”