The view from the counterfeiting front line

Studies show that counterfeits now account for approximately 5% of all branded products in the market across a broad range of industries. Yet while many rights holders agonise over the threat of low-cost fakes of their branded products in emerging economies, it is exact imitations in mature economies that are the real threat.

Alarmingly, counterfeits are now sold at the same price as original branded goods for the simple reason that resellers believe that they are handling legal goods. It is common for wholesale supply chains to be interrupted and contaminated with counterfeits, meaning that everyone from buyers all the way through to end users are unaware of the nature of the goods. It is becoming increasingly common that even the most experienced of technical analysts cannot determine whether a product is original or fake.

As a result, brand owners big and small are finding it impossible to calculate the size of their counterfeiting problems, let alone financial losses and short to long-term brand damage. Some brand owners may not even be aware that their products are being counterfeited. Others are aware, but then apply desk-top logic to the problem, satisfying themselves that nothing can happen outside the limits of their own comprehension.

Paul Polman, CEO of Unilever, confesses that counterfeiting costs the company over €1 billion and criticises many for “lacking capability to put words into action”. Elsewhere, competitor Procter & Gamble recently recorded a 5% drop in turnover, partly attributing the downturn to unprecedented currency fluctuations - but could the presence of counterfeits in the market also be having an adverse effect?

The main problem perhaps lies within. Those who develop, finance and market products are quite rightly immersed in doing just that. However, the job of a predatory counterfeiter is to copy, infiltrate the awaiting market, dodge capture and make money. This level of criminality – and, more to the point, expertise – is not readily understood by the average law-abiding brand owner.

Life on the front line

The following is no fictional tale. It is derived from the street-level sharp end of over 25 years working with the police against illegal merchandise.

My life in intellectual property began 30 years ago. I was prosecuting patents, designs and trademarks, but due to a particular event, I was sprung into the rough and tumble of international counterfeit control, where I would operate in over 20 different countries for various brand owners.

After the first five years of interventions around the world, my focus settled on China, which is responsible for approximately 80% of the world’s fakes and counterfeits. Over time, I built a team of trustworthy, competent people to work with.

The chosen approach I adopt has always been to go undercover. This involves holing up in the rough geographical area where we know rogue manufacturers to be located, immersing ourselves in the peripheral service or material supply chain and being patient. The art is to work around counterfeiters to cause them, and the people they work with, to fall into prepared traps. By necessity, we assume a number of different nationalities, identities, business cards, websites, SIM numbers and emails.

If no brand owner can provide background through which a target can be traced, I operate through a process of elimination, which eventually highlights the goal. Manufacturing in China today is structured similarly to how numerous mature Western economies operated years ago, when industries gathered in particular locations. This is due in part to skills availability and natural resources; but concentrating in this way also obviates the need to cart materials across the country, which is itself difficult due to poor and expensive transport links. The natural clustering tendency typical in China adds to this and greatly helps to narrow down the key areas in which to concentrate searches.

It is also worth touching on how counterfeiters decide which brands to copy next. The major household and fashion brands are a given, but what of emerging brands? Trade fairs are the most common venues at which counterfeiters can observe which brands are generating the most public and media interest. As a first step, all trade fairs should have a strict no photography policy and keep records of those who violate this rule.

In China, no new counterfeit passes unnoticed by other counterfeiters in the same market. In the early days of a brand being copied, it is common to see a slight mistake made by counterfeiter A on counterfeiter B’s product. In time, this is corrected; but in the interim, an affected brand owner might conclude that it has only one counterfeiter to deal with, when in fact it is being targeted by several.

Over the years Chinese counterfeiters have favoured Vancouver (above) as the easiest port of entry for North America. However, there are plentiful hubs around the world, Panama being high on the list

Picture: JPL Designs/ shutterstock

First enforcement action

My first assignment in China was a baptism of fire. What started as 30 targets in the east-coast city of Wenzhou ended up being some 450 companies at different levels of the supply chain. There is insufficient space here to set out the details of the eight-month intervention, but there were two main elements to our success. The first, and most important, was that we were acting for a coalition of like-minded brand owners, which were all cooperating rather than competing. The second was that we successfully secured the backing of government officials in Beijing, who protected us against local Wenzhou government protectionism and corruption, which was rife at the time and remains so today in many parts of China. With these two factors in place, we had the muscle and authority to achieve the required clean-up.

Another assignment started in Malaysia, where we were investigating Chinese dealing in counterfeits for a coalition of sportswear brand owners. Being far from home, the traders we spoke to relaxed their guard and a few of them foolishly mentioned a supplier area in southern China. We visited the area, but discovered no counterfeits until we mentioned the trader names we had met in Malaysia. Over a few visits, pieces of information came together and we learned that the goods originated near Quanzhou, in Fujian Province. Decamping there, we called up various wholesale suppliers of cloth and embroidery equipment, who directed us to the nearby town of Shishi. Over time, we were introduced to eight different counterfeiters and one sizeable factory, which was ingeniously concealed in the substantial grounds of a junior school.

Having integrated with the counterfeiters to gather evidence, we met with the leader of the Administration for Industry and Commerce (AIC), which agreed to allocate 50 enforcement officers while bringing in an armed unit of the Public Security Bureau (PSB). The raid took place at dawn after I handed over a dossier of trademark registrations, powers of attorney and complaints for each counterfeiter. All of the vehicles departed for their individual destinations, each carrying one of my operatives – only they knew the targets’ details, a precaution that I had agreed with the chief of the AIC to avoid corrupt officers accepting payments for advanced details of our raids.

I lost count of the number of laden trucks that carted seized products – as well as computers, production equipment, templates and tools – to the secure AIC depot. By midnight, not only was the depot full, but so too were the parking areas. Empty polystyrene containers of Chinese food littered the area as officers nodded off against boxes. The media filed in for the orchestrated beauty parade, after which we made our goodbyes, until such time as our witness support statements were required. For the many hundreds of interventions I have run in China, there has never been a requirement to work through a Chinese lawyer.

By daybreak the following morning, I sensed that it was time to be gone. Steering my bleary-eyed operatives into taxis, we headed for the airport just ahead of the baseball-bat wielding thugs who descended on our hotel, as the panic-stricken manager later recounted to me over the phone.

On busy routes, cargo agents will also offer a groupage service for regular goods and counterfeits to be mixed together. Agents decide which containers should be filled with which goods and when they will be dispatched according to their knowledge of customs workloads and rotas

Picture: Prasit Rodphan/ shutterstock

Best weapons

Consumer protection laws in China can be ferocious and may be utilised indirectly as a brand protection tool. However, the other most valuable weapons in the counterfeit wars are pieces of paper. IP rights have a degree of importance that can only be fully appreciated by witnessing an apparently simple registration becoming the means by which entire factories and networks are closed down.

Michael Leathes – the ex-head of intellectual property at British American Tobacco – perfectly summarised the significance, commenting that without the skill of his sea of trademark attorneys, the company would be a mere shadow selling products with no meaning. Leathes held this to be so important that he assigned attorneys on a cyclical basis to attend some of my lighter-weight police interventions in order to observe the results of their office toils first hand.

Bigger assignments can last months or even longer, to allow targets to work up an appetite for what looks like good business coming their way. Patience is key. While a brand owner anxious to minimise costs by bagging an early catch might well instruct an early strike, this often translates into unnecessary lost opportunities. Every investigation that I have conducted has resulted in counterfeiters inadvertently pointing us in the direction of other targets – whether suppliers, distributors, conniving cargo agents or, occasionally, even fellow counterfeiters.

Most factories that I have raided have been well concealed. From the outside, they might appear to be derelict, but inside they are buzzing with activity all hours of the day. Even apparently legitimate factories can have cunning false walls, behind which the production of counterfeits takes place. One such factory I investigated adjoined two other factories with completely different owners and making non-related products. One was used for access by delivery and collection trucks for the counterfeits, and the other for staff, who all arrived and left through a giant sliding store cupboard which revealed a link passage to the work area.

No factory of illegal products is in a hurry to be caught, yet over the years some have, due to lax security or the failure to cultivate sufficient local connections, known as guanxi (using relationships with those of influence), to facilitate protection through bribery and corruption of local officials. Although central government is gradually cracking down on this, it remains rampant, except where officials in Beijing mobilise by focusing on a geographic area, in which case there is nowhere for corrupt senior officials to run and hide.

Smaller producers of counterfeits have a tendency to buckle under pressure and hand their customer base to bigger players which have invested in this crucial area of guanxi, other forms of protection and the safe transit of goods after they left the factory. Naturally, overheads have climbed; but many are trading away from low-profit fakes to concentrate on higher-profit counterfeits, the market for which is potentially limitless.

Too much complacency?

One eyebrow-raiser is that many brand owners see counterfeiting not as a threat, but as more of an itchy flea requiring a modicum of effort and attention. Gazing across their production plants, management cannot perceive that counterfeiters stand the remotest chance of affecting their business. This notion is at best misguided and at worst ridiculous.

For example, I recently spent time in one eastern Chinese city known for the production of everyday cosmetics and other such consumables. After the usual gestation period, I was introduced to 11 factories of varying shapes and sizes, all safely tucked away and secure in the belief that they would never be caught. Some confessed to paying off brand owners’ staff for product updates and formulas, while others bribed corporate investigators to stay away from their factories. Some did both.

The common factor for all of these particular manufacturers was convincing export packaging – whether in Arabic, Russian, English or other non-Chinese languages. Some counterfeits were agency sold outside China through the busy commodities market in Yiwu, Zhejiang Province; but the majority went direct to middlemen, based in the United Arab Emirates.

Unable to arouse the realistic interest of the brand owner in question, I continued – self-funded – to identify the truckers moving the goods to the port, the cargo agents issuing paperwork, the port labourers handling the goods and the customs clearance agents processing the paperwork with customs officials. Through a mix of corruption and knowledge of how to work the customs systems, the counterfeits sailed cleanly through and on to the waiting container ships.

I witnessed Chinese cargo agents living and working in the United Arab Emirates, employing remarkably similar tactics – albeit in reverse – to their colleagues in China. I was introduced to money launderers, many with ordinary trading company fronts, who provided illegal money-shifting services to ensure that no money touched either recognised banks or the tentacles of any tax department.

Not being authorised by the police to investigate in the United Arab Emirates, I had to rely on information being made available. However, it was clear that the imported counterfeits had had new paperwork issued, with some mixed in with original product paperwork for a semblance of authenticity, then sold to other countries in shipping containers of non-Chinese origin – it being more likely that the goods were original brands from an international hub, such as the United Arab Emirates.

After two weeks of digging in Hong Kong – where authority to investigate is not required – I witnessed a similar process.

More recently, in Vancouver, I spent three weeks with Chinese cargo agents learning their procedures for shipping counterfeits into Canada and then to the United States via the Blaine border. Over the years Chinese counterfeiters have favoured Vancouver as the easiest port of entry for North America. However, there are plentiful hubs around the world, Panama being high on the list.

Much attention has focused on preparing shipping documents so that the Chinese sender cannot be traced and the receiver is sufficiently elusive to vanish if things go wrong and a container is seized. For example, cargo agents commonly offer worthless paper companies for their customers that make it all but impossible for Customs to succeed in taking action against an importer. Often these companies are used several times to import regular goods so that they show up clean on customs computers, after which they switch to importing counterfeits.

On busy routes, cargo agents will also offer a groupage service for regular goods and counterfeits to be mixed together. Agents decide which container should be filled with which goods and when they will be dispatched according to their knowledge of customs workloads and rotas. The counterfeiter or its customer is then told that the goods will arrive at the destination in a certain number of weeks, but is not told of any shipment details.

Other tricks played on Customs include bills of lading that give the illusion that containers of goods being sent from China to, for instance, Germany were originally sent to China from, for instance, France.

The papers suggest that the Chinese importer refused the goods, so they are now being shipped from China to Germany – crucially, in a different container. The goods arriving in Germany are counterfeits made and from China, but the bills of lading presented to German Customs persuasively show that the goods originated from France.

Counterfeiters like to choose cargo agents which are sufficiently sizeable to be regarded as reputable, can shift more than the average volume of cargo, are well connected if trouble arises and – above all – have a flexible relationship with the law. In my experience, a counterfeiter does not have to look far to find such an agent. As Jeff Hardy of Business Action to Stop Counterfeiting and Piracy has correctly pointed out, shipping is the choke point which is routinely ignored.

Trade fairs are the most common venues at which counterfeiters can observe which brands are generating the most public and media interest. As a first step, all trade fairs should have a strict no photography policy and keep records of those who violate this rule

Picture: Lucas Photo/ shutterstock

Conclusion

Is all lost? Probably not. Brand owners will eventually awaken to the reality that doing minimum is no longer an option and the business of counterfeiting is attacking their very foundations – a realisation that will undoubtedly cause shareholder activists to roll up their sleeves.

Counterfeit control must no longer be the sole responsibility of managers who have not worked closely in the field among the perpetrators of this now highly sophisticated expanding zone of crime.

Just as companies employ highly qualified people for areas such as product development and marketing, with proportionately meaningful budgets, so they must start doing the same in order to address the scourge of counterfeiting.

From amateurish manufacturers of often blindingly obvious knock-offs, the enemy have become evolved criminals. They are instinctively parasitical and, as a result, are becoming eye wateringly wealthy. Make no mistake: they are now a force to be reckoned with. Ignore them at your peril.