The diverse facilitators of counterfeiting: a regional perspective.

AuthorShelley, Louise I.
PositionGlobal Commerce

Counterfeits may be the least policed form of transnational crime, although the profits from their sale total in the billions of dollars annually. The counterfeits traded by transnational criminals can be subdivided into two categories: those that merely represent copyright infringement and those that cause harm to life and society. In the first category are such counterfeits as clothing, purses, other consumer goods, and DVDs and other forms of intellectual property. In the second category are counterfeit pharmaceuticals, food, wine, cigarettes, and spare parts. Both forms of counterfeit, however, can be exploited by terrorists because of the low risk and high profits associated with this commerce that makes this trade more dangerous. The article will focus on the actors associated with this illicit trade, as well as the supply, the demand, and the limited law enforcement response. Particular focus will be paid to the counterfeits that cause harm to human life.

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Counterfeits may be the least policed form of transnational crime, even if the profits from their sale total in the billions of dollars annually? The counterfeits traded by transnational criminals can be subdivided into two categories: those that merely represent copyright infringement and those that can cause harm to life and society. In the first category are counterfeits such as clothing, purses, DVDs, and other forms of intellectual property. In the second category are counterfeit pharmaceuticals, food, wine, cigarettes, and spare parts. The trade of both forms of counterfeit goods result in profits to criminals, corrupt officials, businesses, and diverse terrorist groups. According to the UN Office on Drugs and Crime (UNODC), Chinese, South Asian, and European criminal groups are deeply involved in disseminating counterfeit goods. (2) For example, the illicit pharmaceutical trade involves post-Soviet organized criminals, Colombian drug cartels, Chinese triads, and Mexican drug gangs; Hezbollah and al-Qaeda are also believed to be involved. (3) Groups from the former Soviet Union are key figures in the marketing of counterfeit pharmaceuticals on the Internet. (4) Trade in counterfeits is attractive to diverse, illicit actors because of the low risk and high profits associated with this commerce.

While several counterfeit pharmaceuticals are produced in Asia, particularly in China and India, counterfeits of other commodities are produced in many other locales, including Turkey, the Balkans, and in several Middle Eastern countries, where factories exist for counterfeit cigarettes. (5) There are very complex supply chains for the distribution of counterfeits; the World Customs Organization reported in 2008 that detected counterfeits were destined for 140 different countries. (6) Asia, however, figured disproportionately as the source of the counterfeits. (7)

This article will focus on an area of transnational criminal activity--counterfeits-where there is a particularly strong nexus of crime, terrorism, and corruption. The interactions of all three phenomena have been identified in all regions of the world. There are significant opportunities for profit in this global trade. Markets exist because of the demand for cheap goods, and global supply chains make it difficult to monitor the authenticity and quality of goods that are sold. Different types of illicit actors may be associated with this trade at different points in the supply chain. This article discusses areas of counterfeit activity that are not adequately policed or regulated in many parts of the world, thus providing ample opportunities for criminals and terrorists to profit, often with the complicity of corrupt officials.

The research is based on a review of a significant body of literature, reports, congressional hearings as well as on interviews with law enforcement, corporate officials, and experts on counterfeiting from many regions of the world. (8)

WHO BENEFITS FROM COUNTERFEIT TRADE?

Counterfeiting of both money and commodities is a major source of funding for terrorists and criminals. (9) They profit by trading in consumer-related counterfeits such as clothing, spare parts, DVDs, video games, software, pharmaceuticals, and cigarettes, primarily because of their low risk and significant consumer demand, as well as the need for product diversification. Private entrepreneurs, state officials, and online criminals also benefit in their important role as facilitators of this trade. (10) The Internet, through digital spam, disseminates advertisements for much of this counterfeit and illicit trade, particularly counterfeit pharmaceuticals and counterfeit intellectual property such as software. (11) As analyses of the Internet trade indicate, banks in post-Soviet states are conduits for the money generated from the online sales of counterfeit and unregulated pharmaceuticals. (12) Hawala dealers--an informal value system of financial transfers--help move the money related to counterfeits in Africa and Asia. (13)

The illicit production of cigarettes occurs in illegal factories in many places, including Paraguay, the Balkans, Iraq, Russia, North Korea, and Georgia. (14) The corruption that facilitates this illicit trade involves senior officials; in Montenegro, the president was indicted in Italy for his role in the cigarette trade, and in North Korea it is state policy to benefit from the sale of counterfeits. (15)

An in-depth analysis of the counterfeit trade in Kenya reveals a diversity of actors, both at the government level and within the illicit economy, who make this trade possible. Corruption is key to facilitating this illicit trade.

Smuggling and trafficking in counterfeit goods is undertaken by networks of small-scale traders as well as by established criminal networks powerful enough to compromise senior figures in government, the police, the judiciary, and customs and administrative officials. The larger and more powerful networks tend to establish and then control their own turf. (16)

Trading in counterfeit crime is attractive because of the low risk of detection and prosecution. It is hard to detect counterfeits within massive shipments of legitimate goods, which helps explain why they command relatively little attention from law enforcement. (17) In 2011, approximately 1,300 people worldwide were arrested for the counterfeiting, diversion, and theft of pharmaceuticals with over half the arrests occurring in Asia. (18) With so many engaged in this large scale production, these arrests reveal the low level of risks for the participants.

According to a study by the Rand Corporation, trade in counterfeit goods in the United States is even more profitable than narcotics, which further supports this area's attractiveness as a market opportunity. (19) As a member of the Los Angeles County Sheriff's Department stated during a congressional hearing on intellectual property crime (IPC), crime is attractive to gang members "because of the high profit and minimal jail sentences... In the parlance of one suspect, 'it is better than the dope business. No one is going to prison for DVDs.'" (20) As both the customs expert from the European Commission and the Secretary general of INTERPOL pointed out in the early 2000s, counterfeit goods are becoming a prime funding mechanism for some terrorist groups for the same reasons: there are limited chances of detection, confiscation of assets, or prison sentences for offenders. (21)

The risk of detection for online criminals who market counterfeit goods through spam is also minimal. Many of them are located in countries with limited capability or political will to go after Internet crime. Furthermore, their computer skills often make it hard to detect their exact locale. They work through banks in countries that have little enforcement capacity over their financial institutions. (22)

Much more has been written about the involvement of criminals in counterfeit trade. (23) According to the secretary general of INTERPOL, Ronald Noble, there are two main ways that terrorists can engage in counterfeit trade:

Direct involvement where the relevant terrorist group is implicated in the production, distribution, or sale of counterfeit goods and remits a significant proportion of those funds for the activities of the group. Terrorist organizations with direct involvement include groups who resemble or behave more like organized criminal groups than traditional terrorist organizations. This is the case in Northern Ireland where paramilitary groups are engaged in crime activities. These crime activities include IPC. Involvement by these groups ranges from control or investment in manufacturing or fabrication to taxing the market stalls where counterfeit goods are sold. It is possible for illicit profit to be generated for terrorist groups at different points in the process. Indirect involvement where sympathizers or militants are involved in IPC and remit some of the funds, knowingly to terrorist groups via third parties. (24) SCALE OF THE PROBLEM

The problem of counterfeits dates back thousands of years to when product seals were counterfeited in the Roman era. (25) So, while the problem is not new, its scale has increased enormously, with globalization placing large profits in the hands of producers, intermediaries, and sellers. The rise of Internet marketing and the failure to disrupt the sales of counterfeits has meant that their distribution has proliferated. It is estimated that 2 billion consumers worldwide purchase counterfeits, and many suffer from the inferior quality of these goods. (26) In 2003, INTERPOL estimated the global trade in counterfeit goods to be $450 billion, representing between 5 to 7 percent of the overall value of global trade. (27) The figures provided by the Organisation for Economic Co-operation and Development (OECD) are substantially less, estimating losses of $250 billion in 2007. (28) In contrast, the...

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