At a glance
- The International Chamber of Commerce says the global trade in counterfeit goods is likely to exceed $1.7 trillion this year – more than the entire GDP of Australia
- Fake goods pose a real risk to businesses and can cost an organisation millions of pounds in liability claims, product recalls and expensive lawsuits, as well as potential jail terms for directors
- To prevent counterfeiting, businesses must treat it as a boardroom issue, as well as increasing internal resilience around intellectual property and supply chain management
Counterfeiting is far from a new phenomenon; the practice has been going strong for at least two millennia.
What has changed today, however, is the rapid growth of the globalised economy and – specifically – the surge in online trading, which has made it much easier, and more profitable, for counterfeiters to produce and sell counterfeit goods.
In 2014 a specialist police unit, launched by the City of London police seven months earlier, shut down more than 2,500 websites selling counterfeit goods believed to be worth tens of millions of pounds.
The sites had advertised authentic designer goods such as Gucci products, GHD hair straighteners, Ugg boots and Hollister clothing. But customers found the items were either poor quality counterfeits or were never delivered.
It is hard to put a precise figure on the global trade in counterfeit goods, the International Chamber of Commerce (ICC) expects the size of the problem to exceed $1.7 trillion this year – significantly more than the entire GDP of Australia.
Affecting many industries
Experts are alarmed at the rate at which these practices are evolving. Counterfeit products, traditionally, had a core market in art and luxury goods, such as perfumes. However, counterfeiting has now expanded to become a global phenomenon, affecting many industry sectors.
What is counterfeiting?
Counterfeiting is the practice of manufacturing products, often of inferior quality, and selling them under a brand name without the brand owner’s authorisation. It is an extremely profitable, illegal business because while fakes are sold at a lower price, counterfeiters do not have to invest in research and development, design, marketing and after-sales service.
An October 2013 report by accountants PwC revealed that British adults now regularly buy fake designer clothes, perfumes, alcohol, cigarettes and even medicine.
China is seen as the centre for churning out fake goods. US customs revealed that 93% of the value of counterfeit goods seized at US borders in 2013 originated from China and Hong Kong.
For businesses, becoming embroiled in a counterfeit incident can cause loss of revenue, damage to reputation, trademark dilution and also loss of consumer goodwill and trust.
“Legitimate providers in supply chains have taken positive steps to prevent infiltration of fake goods, but the scale and nature of the challenges mean that services have to continually improve their defences to prevent their capabilities from being hijacked to support illegal activity,” says Jeffrey Hardy, Director of the ICC’s Business Action to Stop Counterfeiting and Piracy initiative.
Criminals are also taking advantage of advanced manufacturing and packaging technologies, which make counterfeit products very difficult to detect. The increasing sophistication of counterfeiters means that their products are no longer limited to cheap imitations sold on the black market; counterfeits now infiltrate distribution chains, masquerading as authentic products to wholesalers and retailers.
The difficulty for distributors and manufacturers lies in identifying the fakes. If they don’t, they could be exposed to liability claims where the offending products cause harm to consumers, as well as costly product recalls and expensive lawsuits. And if counterfeit goods are being sold on a business’s premises, directors can be charged with money laundering offences, which can carry jail terms.
To prevent counterfeiting, businesses must now view it as a boardroom issue, as well as increasing internal resilience around intellectual property and supply chain management. New technology – ranging from unique markings on products, to smartphone apps and even mobile surveillance – is also increasingly being used by businesses in the fight against fakes.
Mitigating the risks
Counterfeiting can never be fully prevented, but significant collaboration between governments, regulators and the private sector could help disrupt these globally organised activities. Regulation must be applied more consistently at a regional and global level.
Brokers must ensure their corporate customers increase their internal resilience around IP, starting with registering a trademark, or industrial design, in the countries where the product is both manufactured and sold. Supply Chain risk management is also crucial, whereby regular inspections on in-house and external suppliers, including tier two and three, should be conducted.
Managers should also check their insurance coverage to clarify the extent to which risks posed by counterfeits are covered. They can then take appropriate action, drawing upon the risk engineering and safety expertise of providers where necessary.
Companies need a holistic view of counterfeit risk. …it’s a topic that needs funds and support from the top down
Joelle Gemayel, Head of Proposition Development at Zurich Insurance
“Companies need a holistic view of counterfeit risk,” says Joelle Gemayel, Head of Proposition Development at Zurich Insurance Group. “This starts with a solid intellectual property culture, a strategic anti-counterfeiting policy built around the core business and the commitment of top management and the board—it’s a topic that needs funds and support from the top down.”
Brokers are encouraged to discuss the significant risks that counterfeiting can pose with their customers, and assess the extent to which their risk management and insurance arrangements currently address this issue, something Zurich is happy to assist brokers with.
For more information please speak with your local Zurich contact.