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Counterfeiting Becomes A REALLY Big Business

BY TIM PHILLIPS

"A newly released congressional report calls for 'direct and forceful action' by the federal government to halt the distribution of bogus goods," according to an article in Discount Store News. "Product counterfeiting is a rapidly growing problem which seriously threatens the health and safety of consumers."

The report, detailing the early involvement of organized crime in the counterfeiting business, was published in May 1984, and like many well-intentioned statements produced by government agencies world-wide on the subject of counterfeiting, it attracted brief press interest before disappearing from view. If the threat wasn't serious enough to mandate action 22 years ago, is it any worse now?

Since 1984, one thing about counterfeiting has certainly changed: the scale and danger of the crime. It is approximately 100 times larger now than it was then. The organized crime gangs that were fingered in the government's 1984 report have expanded their business into a sophisticated global enterprise. Yet the response from government, law enforcement and even the affected brands looks much the same. "Knockoff Incorporated" is now twice the size of Wal-Mart. Knockoffs account for 7 percent of world trade. Arguably it's the business success story of the modern era.

Counterfeiters have diversified. In researching my book, Knockoff The Deadly Trade In Counterfeit Goods, I encountered everything from counterfeit tea bags, filled with the floor sweepings from a tea factory, to entire fake gasoline stations. There is little today that can't be counterfeited for profit. We know about designer purses and watches, but that's only 4 percent of the business today, and gives a fake impression of the fake business.

Counterfeiters now have also globalized successfully, free from tariffs, quotas and working visas; united by the desire for a quick buck. Since China's accession to the WTO in 2001, its manufacturing centers have opened up to the West. Try Chaosan if you are shopping for fake electronics and CDs; try Wenzhou City for bogus auto spares; in Yuxiao County, it's counterfeit cigarettes; and Jintan City has factories where you can get great deals on knockoff pesticides. Today, two-thirds of the counterfeits in the world come from mainland China, but centers for counterfeiting exist wherever there is low-cost manufacturing and lax law enforcement.

In Israel, Arabs and Jews co-operate to distribute counterfeit products. In Paraguay, investigators discovered a CD pressing plant run by Hong Kong Chinese. And in 2005 in Lagos, Nigeria, 17 Chinese entrepreneurs were discovered running an illegal CD pressing plant with 11 lines.

The counterfeiting trade exploded in 2001 due to the terrorist attacks. Tightened banking regulations meant it was harder for criminals to store cash, so reinvesting it in a cash-generative business like counterfeiting makes sense. The War on Terror changed priorities in law enforcement, diverting attention away from 'harmless' crimes like counterfeiting and focusing Customs inspectors' attention on other threats.

It's tough for consumers to decide there's a problem when they see the same counterfeits openly on sale in the flea markets, Internet sites and local stores where they live, week after week. Far from being intolerable -- as the CEOs of the entertainment, clothing, drugs, auto and software business claim -- a certain level of counterfeiting is clearly tolerated in the developed world. Consumers might forgive brand owners and governments when those counterfeits are purses, but they will not be so indulgent when they hear about the counterfeit cancer treatments, brake pads made from sawdust and bogus aircraft parts that are part of the business too.

Who tolerates this? We all do.

The military is often accused of fighting the previous war with its technology and tactics. It seems that those in charge of fighting the knockoff business have the same characteristic. No one can criticize those in the anti-counterfeiting business for lack of effort, but could the resources be used more productively?

First, many brand owners are still locked into the fallacy that their counterfeiting problem is their business alone. For example, for reasons not hard to understand, the auto business does not even try to measure the scale of counterfeiting in spare parts, or to estimate their effect on road safety. In many industries, information that may be useful to police and customs is rarely shared with them. There is no obligation and little incentive to inform customers of dangerous counterfeit products, and companies routinely work in isolation to enforce only against counterfeiters of their brand. If the counterfeiters switch brands, the problem has gone away -- but it has actually just mutated. Recent history tells us that they will return. This is a long-term failure dressed up as a short-term success.

Law enforcement needs to accept the reality of the problem. One intellectual property lawyer told me that he was told by law enforcement that unless there was a dead body involved, "don't even pick up the phone." Law enforcement agencies are overwhelmed by counterfeiting problems, but this is no excuse for a lack of coordinated and forceful action.

In the United States, the best example of this is New York's Office of Midtown enforcement, where a group of brand owners cooperate with the police in high-profile raids on Manhattan warehouses known to contain counterfeit goods. The raids are deliberate shows of strength. The brand owners, many of whom are competitors in daily life, stand together against a common enemy.

Too often we're fighting a sophisticated global crime business with patchy local resources. Much of law enforcement against counterfeiting is regional or at best national; it needs the intelligence that global corporations can provide to work effectively.

Ultimately though, if there were no customers, there would be no knockoff business. If counterfeits become commonplace then we educate a generation of consumers that intellectual property has little value -- at precisely the moment the developed world, with its high cost of manufacturing, is coming to rely on it as the engine of development. Some industries sue customers who pirate their product: The Business Software Alliance is trying to educate its way out of the problem, experimenting with teaching the concept of intellectual property to eight year olds in elementary schools in Virginia. "We conducted research in 2004 asking 1,000 eight to 18 year olds about piracy," says Debbi Mayster at the BSA. "We found that they generally understood what piracy was. But they still do it."

It's time to stop pretending this problem can be fixed by calls to action, trade delegations and piecemeal private enforcement. Zero tolerance of counterfeiters through coordinated action between brand owners and law enforcement, married to the education of the next generation of consumers in the value of IP will be time consuming and expensive -- but it's not something that can be left to the federal government, or another 22 years may pass. Manufacturing industries and consumers are already paying the price of counterfeiting, and that price is getting steeper every day.

--Tim Phillips is author of the recently published book "Knockoff: The Deadly Trade In Counterfeit Goods" published by Kogan Page. He can be reached via e-mail at tim@timphillips.co.uk.


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