The high cost of cheap fakes

COUNTERFEIT GOODS:Nearly everything that is made can be faked and that ranges from medicines to alcohol, cigarettes to watches - it's a massive illegal global business and the trade in counterfeit goods is as big as the drug trade

IT’S AS BIG AS the illegal drugs trade and accounts for up to eight per cent of world commerce, yet rarely grabs the headlines. It costs jobs and cuts tax revenues, but no-one raises a fuss. It can damage your health or even cost you your life, but many of us accept the risks involved.

Counterfeiting and piracy stays under the radar most likely because of public ambivalence. Most of us have at some time bought fake goods, even knowingly, whether it was an unfeasibly cheap “Rolex” in the Far East or a cut-price carton of cigarettes in an Irish market. It’s seen, rightly or wrongly, as a victimless crime, and even the courts are reluctant to hand out heavy penalties.

The counterfeiting of branded goods is an activity with a long pedigree. Back in the 1970s, fake fire detectors were found on a Boeing 737, and fake heart pump valves in US hospitals. Fake transistors were even found on board the space shuttle.

Today, however, the globalisation of commerce, the creation of global brands and the huge increase in the volume of trade make product counterfeiting potentially much more lucrative. If everyone, everywhere is wearing Armani jeans or playing Grand Theft Auto, the potential profit from cheap clones can be enormous. The internet provides the perfect route for black-market traders to reach the market and escape the consequences felt by customers thousands of miles away.

In 2008, the OECD estimated the size of the international trade in pirated and counterfeit goods at $250 billion, but domestic counterfeiting and digital piracy is reckoned to be as big again. In the UK alone, the business alliance fighting counterfeiting and piracy claims it costs 200,000 jobs and €5 billion in lost revenues for the Exchequer with resulting higher welfare spending.

Here in Ireland, cigarette smuggling alone costs the State at least €300 million in lost earnings from taxes and duty. But as Sean Murphy, deputy chief executive of Chambers Ireland points out, this estimate should be multiplied by four or five to take account of income tax not collected because workers are not employed or corporation tax falls in line with depressed profits.

As well as cigarettes, the main areas where counterfeiters are active are clothing, electrical goods, alcohol and medicines, according to Det Sgt Nigel Mulleady of the Garda’s intellectual property crime unit. CDs and DVDs used to be another big problem area, but this trade has moved online.

“Everything can be counterfeited, and people generally know when they’re buying dodgy goods,” Mulleady remarks. Recent examples that have come to the attention of the Garda range from fake hair straighteners to chainsaws. Alcohol, especially vodka, is another favourite of black-marketeers; recently, the Garda seized thousands of bottle-tops of a well-known vodka brand which were destined for use on bogus bottles.

As their business has grown, the counterfeiters’ output has become ever more sophisticated and diverse. Counterfeits are no longer restricted to luxury goods and large national brands are also being copied. Last year, for example, saw the first seizures of counterfeit John Player Blue cigarettes, a brand popular in and exclusive to Ireland. Gardaí recently seized an entire container-load of fake Abercrombie Fitch clothing, imported by an ethnic group involved already in the rag trade.

It can still be something of a cottage industry, at least at the Irish end. One recent prosecution involved a small trader running a website selling electrical goods, handbags and sunglasses. As orders came in, he simply sourced the goods from a Chinese online trading website where cheap counterfeits could be obtained. “He got caught because he was so busy,” says Mulleady.

Since appearance is everything in the world of piracy, packaging has evolved rapidly, to the extent that it is now almost impossible to distinguish bogus goods from the originals. Cigarettes smuggled into Ireland all carry the required health warnings in English and Irish as well as a good pass-off of the Revenue stamp.

About 70 per cent of goods seized originate in China and for fast-moving consumer goods this figure is as high as 85 per cent. Richard Heath, policy adviser to Business Action to Stop Counterfeiting and Piracy (Bascap), a UK initiative by leading manufacturers, says there is nothing surprising about this, as China is also the world’s biggest producer of manufactured goods.

“Forty years ago, Japan had a reputation for shoddy goods and fake copies, but the government overhauled its intellectual property protection and today it comes up with more patents, trademarks and designs than any other country in the world,” says Heath.

Industry throws up a raft of arguments to dissuade consumers from buying counterfeit goods. The scariest involve warnings about shoddy goods and even life-threatening substances used by counterfeiters. Three years ago, for example, fake toothpaste manufactured in China was found to contain a poison, diethylene glycol.

In Ireland, the tobacco industry has warned about the dangers of finding rat droppings and the like in blackmarket cigarettes, though no-one has forensically analysed their content to confirm these claims. The fact that cigarettes of any kind are bad for your health only serves to heighten consumer ambivalence.

Other arguments are economic. Counterfeit products rob the Exchequer of payments due in customs, VAT and duties, we are told, and it puts workers in genuine factories out of work and, by reducing profitability, stunts innovation and growth.

Moral arm-twisting also comes into play. Buying pirated goods damages the environment, it is claimed, because counterfeit manufacturers are unlikely to adhere to good practice. It may also bolster criminals because, according to industry and sometimes the police, counterfeits are often used to launder drug money.

Heath says industry is operating along a “continuum” of consumer attitudes. He talks about a “lack of resource” of some consumers who can’t afford the real thing, a “lack of recourse” of others who figures there’s no risk of going to jail for buying fakes and a “lack of remorse” of a third group who, frankly, don’t give a damn about arguments against buying counterfeit goods.

Bascap divides counterfeit buyers into two distinct groups. The first comprises those who know they are purchasing a fake but don’t care, says Heath. It might be that they can’t afford to buy the real thing or they may consider themselves “Robin Hoods” expressing their opposition to corporate culture. Those of us who have bought a “Rolex” watch for $10 in the Far East belong to this group.

More serious for industry and purchasers is when consumers aren’t aware they are buying fakes. Usually, this group is being fleeced, because the price must be kept high to sustain the illusion and they may be at risk of being harmed, as the recent controversy over fake hair straighteners demonstrated.

Ironically, some brand-owners are reluctant to highlight counterfeiting for fear that their warnings might affect sales of the genuine items.

Unilever is one company which takes cases very seriously; a case in the UK over the counterfeiting of Persil washing powder resulted in a number of custodial sentences. The company says it is important for customers to protect themselves against counterfeits. “They can be dangerous but are difficult to spot, especially as consumers do not always get pricing cues. We are doing all we can but this is a global issue and we need everybody to play their part,” says Deirdre O’Brien of Unilever Ireland.

In Ireland, prosecutions for infringement of copyright are taken under the 1996 Trademarks Act. In theory, offenders face up to five years in jail if convicted but in practice the courts take a far more lenient view and fines of a few hundred euro are typical. Most of those caught plead guilty, arguably because the penalties are so low.

Mulleady says the Garda works closely with the owners of brands to fight counterfeiting. Cigarette manufacturers employ staff to gather intelligence by, for example, checking discarded packs in clubs and pubs for fakes. However, the fact that many brand-owners are based in the UK means they are less likely to possess this local knowledge or complain.