With Western companies increasingly buying and sourcing in Asia, Dr Alan Waring and Robert Youill examine the risks posed by counterfeit products

The Asian economic miracle has a dark side. Unsafe products, product counterfeiting and other theft of intellectual property feature prominently in trade concerns raised by Western governments against Asian countries.

The Al Ghaeda connection

Who has not at least been tempted to buy those dirt-cheap ‘global branded’ DVDs, computer games, T-shirts, perfumes or trainers from the car boot sale or street hawker? Apart from the fact that such fakes are often of poor quality and functionality, international terrorists are also making and/or distributing such fakes as an easy, low-cost, inconspicuous and low-risk way to raise funds.

The US government is so concerned about counterfeiting and its connections with money laundering and international terrorism that its embassies have a special office that monitors the host country’s commitment and programmes to anti-counterfeiting and advises the US government on progress. One of the authors, Bob Youill, has been working closely with such offices for many years. Annually, the US Trade Representative publishes its ‘301 Reports’ on anti-counterfeiting country-by-country. A good 301 report is required to ensure that the country receives substantial US government aid and grants so the 301 reports are crucial for developing countries.

Dangerous fakes

Some two-thirds of all US product recalls are of imported goods and the large majority are made in China. There has been widespread media attention to a number of cases of alleged unsafe Chinese products exported to the West. For example: 20m toys recalled by Mattel, 100,000 drink bottles recalled by Asda, pet food recall by Wal-Mart, contaminated toothpaste and Bindeez/Aqua Dots toys recalled in USA and Australia.

Counterfeiting may create unsafe products. Fake pharmaceuticals in particular often have attenuated or no pharmacological effect or else toxic side-effects. Recent cases of fake medications reportedly made in China or Hong Kong include: anti-cancer drugs, anti-malaria pills and other medicines. Patients have died or been seriously harmed. Fake car and aircraft spares are also of safety concern.

Corporate implications

For Western companies buying or sourcing in Asia, the risks to their corporate reputation are huge. Equally, Western luxury brands now want to sell into China and Asia generally to tap the new consumer wave there. Global brands and their reputations are at high risk from unscrupulous criminal gangs and lax regulatory enforcement in Asia.

IP & Brand Risks and Product Liability affect the whole enterprise. Increasingly, there is recognition that risk exposures interact and therefore an integrated and systemic approach to managing Enterprise Risks is required. Meeting corporate governance obligations to shareholders and other stakeholders depends on it. Tackling different kinds of risk exposure as a set of isolated silos is no longer tenable. The whole fabric of a company is threatened since Intellectual Property and Brand Risks interact with other risk areas as finance, HR, corporate security, R&D, manufacturing and product safety. Both supply and value chains are also vulnerable to IP threats. Ultimately, but often with remarkable speed and stealth, a company’s overall image and reputation may suffer. Sales, revenues and share values may be hit to such an extent that the survival of the organisation itself becomes uncertain.

Case examples

One of the following anti-counterfeit operations was personally co-ordinated by Bob Youill.

Chinese counterfeit retail goods

In December 2007, following an 18-month undercover operation, US Government federal law enforcement officials arrested 10 individuals on criminal charges related to smuggling counterfeit goods worth some $200 million.

“Some two-thirds of all US product recalls are of imported goods and the large majority are made in China.

Posing as a corrupt union official at the Port of Newark, a law enforcement agent reportedly received nearly US$500,000 in bribes from the arrested persons and co-conspirators. The money allegedly was paid to clear the illicit cargo - including counterfeit Nike, Burberry, Chanel, and Baby Phat footwear, apparel, and accessories - through Customs undetected. The Chinese-made counterfeits were shipped with falsified bills of lading through Port Newark to a number of warehouses throughout New York City, and the surrounding metropolitan area, where they were then distributed to retailers.

Optical disc counterfeiting in Malaysia

In November 2007, the Royal Malaysian Police working with music industry anti-piracy operatives raided three illegal optical disc manufacturing plants. They recovered six multi-million $ replication lines, several hundred infringing master copies and thousands of infringing optical discs containing both popular music and Hollywood movies. At the third plant, the owners were caught attempting to remove a replication line in a heavy goods vehicle. The illegal factories were part of the same organized crime syndicate and the illegal discs were destined for both local Malaysian and overseas markets.

Fake anti-malarial drugs (Newton et al 2008)

Since 1998 the serious public health problem in South East Asia of counterfeit artesunate,

containing no or sub-therapeutic amounts of the active anti-malarial ingredient, has led to

deaths from untreated malaria, reduced confidence in this vital drug, large economic losses for the legitimate manufacturers, and concerns that artemisinin resistance might result.

A group of police, criminal analysts, chemists, palynologists, and health workers collaborated to determine the source of these counterfeits under the auspices of the INTERPOL and the Western Pacific World Health Organization Regional Office. A total of 391 samples of genuine and counterfeit artesunate collected in Vietnam (75), Cambodia (48), Lao PDR (115), Myanmar (Burma) (137) and the Thai/Myanmar border (16), were available for analysis. Sixteen different fake hologram types were identified. Tests confirmed that all specimens thought to be counterfeit (195/391, 49.9%) on the basis of packaging contained no or small quantities of artesunate. Chemical analysis demonstrated a wide diversity of wrong and sometimes toxic active ingredients. Evidence suggesting that at least some of the counterfeits were manufactured in southeast People’s Republic of China prompted the Chinese Government to act quickly against the criminal traders with arrests and seizures.

Current approaches to protection

Most companies continue to seek solutions to their IP requirements either by contracting-out to service providers or by creating an in-house ‘security’ capability. Research and experience by Asia Risk’s team reveal that such solutions are invariably:

• Reactive

• Focussed on monitoring and treating symptoms

• Short-term in nature

• Narrow in scope

“Global brands and their reputations are at high risk from unscrupulous criminal gangs and lax regulatory enforcement in Asia.

• Fragmented

• Not integrated with overall Enterprise Risk Management

• Lacking in long-term cost-effectiveness.

Both companies and service providers often assume that low-level general security and litigation responses offer sufficient protection and that top-down corporate IP and Brand Protection is somehow unnecessary. Effective IP and Brand Protection is usually beyond the skill and time resources of general security staff faced with many other legitimate demands. Many external service providers describe what they do as ‘enforcement’, ‘litigation support’, ‘investigations’ and ‘intelligence gathering’, all of which indicate reactive piece-meal solutions to the problem.

In the new industrial nations, there may be a tendency to cut corners and turn blind eyes. Cheap labour and a contract-out culture may encourage false assumptions by principals that all necessary monitoring, tests and risk controls have been carried out by sub-contractors. In societies with lax regulatory enforcement and widespread corruption, false test certificates and safety documentation may be obtained easily.

A new blueprint

The approach to IP & Brand Protection developed and recommended by the authors has the following features:

• Proactive

• Focussed on tackling causes not symptoms

• Long-term in nature

• Broad and comprehensive in scope

• Life-cycle approach and joined-up systemic thinking

• Integrated with overall Enterprise Risk Management

• Long-term cost-effectiveness

The protection of a company’s IP and Brands requires a life-cycle approach, which is necessarily holistic, strategic and takes account of multiple contexts and risk interactions. This approach takes in the entire life of a product, starting from the earliest kernel of an idea for a product through design stages, piloting, component sourcing, production, marketing, sales, advertising, distribution and so on into the future.

The costs

The following are some recent Interpol data (2007) on intellectual property theft:

Counterfeiting costs legitimate businesses $200bn (£100bn, Euro 125bn) to $250bn annually.

Since 1982, the global trade in illegitimate goods has increased from $5.5bn to approximately $600bn annually.

Approximately 5%-7% of the world trade is in counterfeit goods.

Each year an estimated US$ 8bn worth of drugs sold is counterfeit.

The entertainment industry loses over US$1bn annually to piracy.

Fortune 500 companies each spend an average of US$4m per year combating the theft of their intellectual property.

In the United States alone, over 750,000 jobs are lost annually as a result of counterfeit merchandise.

Some companies are losing 40% of revenue to such theft.

For the Asia Pacific Region, for the two years 2005 and 2006 the total estimated trade losses were just over US$6bn in each year.