Security & Fraud

The Extremely High Cost Of Counterfeit

Given that counterfeiting is driven largely by the desire for cheap goods, it can be somewhat shocking to see exactly just how high the annual cost of counterfeiting and digital piracy is around the world.

According to the latest edition of “Transnational Crime and the Developing World” recently released by Global Financial Integrity (GFI), the global trade value of counterfeit and pirated goods is estimated to generate between US$923 billion to $1.13 trillion annually. To put that in more comprehensible numbers: The global value of the counterfeit goods market is about the same size as the GDP of Canada.

Counterfeiting and digital piracy is far-and-away the largest and most lucrative category of transnational crime — a category that for GFI’s purposes also includes the entire international trade in illegal drugs, human trafficking, illicit weapons sales and the illegal organ trade. In fact, if one were to add up the combined value of drug, human, weapons and organ traffic, it would still total only a little more than half the value of the counterfeit and piracy market.

The economic costs of counterfeiting is staggering — and obvious. Those costs are also, according to GFI, only the beginning.

“Combatting counterfeiting and piracy is not simply about protecting corporate profits; it has direct implications on global health, safety and security, as well as economic growth.”

So what’s being counterfeited, where is it happening and how is it shaping (and reshaping) the world around us? The data is sobering.

  1. What Is Being Counterfeited?
  2. Literally Everything

Most of us have a fairly standard mental image that comes to mind when we picture the average counterfeit — the faux Fendi bag on the street or the “Rolex” wristwatch that is a surprisingly good deal. But while most counterfeiting in the public mind manifests in knock-off retail items associated with high-end, high-price goods, the reality of the situation is that counterfeiters are not nearly so discerning.

“From the ‘traditional’ handbags, watches and movies to cigarettes, computers, laundry detergent and olive oil. Criminals will counterfeit or pirate almost any product as long there is profit to be made,” the report noted.

There are favored categories, of course, and they are the categories one might expect: Consumer electronics, apparel, computers, appliances and foodstuffs round out the top five — luxury goods don’t make the list until the #7 spot.

The report notes the most dangerous products that show up as fakes in the market are actually the least expensive, particularly the foodstuffs. This happens for two reasons. First, knock-off food and beverage products are more likely to be passed off as real in primary markets — meaning consumers who buy them usually believe they are buying real goods (as they are buying them at a store from a retailer that also believes it is selling real goods), which means they will not think twice about consuming them. Secondly, food and beverage items are low-cost to start with — meaning the sorts of quality shortcuts taken to make them even cheaper than an already low-market price often makes those products dangerous to consumers.

“Food counterfeiting, also known as food fraud or food crime, is more prevalent than consumers would believe, impacting both their pocketbooks and their health. Extra virgin olive oil is one of the most widely counterfeited food items.”

At best, the “olive oil” in question is not really olive oil — it is mixed liberally with plain vegetable oil. At worst, there is something inorganic in the olive oil into which consumers shouldn’t be dipping their bread.

The problem, the report noted, only gets more serious when the goods in question aren’t food, but are pharmaceuticals.

“Counterfeit medicines also contribute to public health crises. Reduced or missing levels of active ingredients in anti-infective medicines and combination drug therapies can lead to microbial resistance and more virulent strains, in addition to failing to treat the disease, thereby helping it to continue to spread.”

These effects are particularly felt in developing nations, where public health systems are already underdeveloped.

And, the report notes, the economic harms of counterfeiting also tend to hit developing nations the hardest in the form of lost tax revenue and lost opportunity for legitimate merchants that can’t compete on price with counterfeit goods.

“For developing countries, one of the biggest impacts of counterfeit and pirated goods is lost tax revenue. In international trade, counterfeit goods are often under-invoiced or smuggled (undeclared) when imported, causing governments to lose beneficial excise and value-added tax. Domestically, countries lose sales tax when goods are sold below fair market value or if they are sold on the black market.”

Kenya was one example given. The nation’s counterfeit goods market is worth approximately US$900 million annually, which robs the government of US$84 million to $490 million in tax revenues per year.

  1. Where Do Most Counterfeits Come From?
  2. China

While the developing world endures many of the worst social and economic harms associated with counterfeiting, the report noted that generally middle-class nations do most of the counterfeiting, since industrial production capacity is key to making it a profitable enterprise.

That middle-class industrial capacity, however, needs to be wedded with two other things: weak local control over supply chains and weak enforcement of intellectual property laws.

“Counterfeit and pirated goods are often produced in middle-income countries, which typically lack strong IP legislation and enforcement, a characteristic of low-income countries, but have the resources and capacity to produce a variety of goods like high-income countries. China, Hong Kong and India are the top provenance countries of IP seizures, and while this does not necessarily indicate that the seized items were produced in those countries, China and India are known for their large counterfeit and piracy industries.”

China, the report notes, is particularly a problem, despite recent efforts by the Chinese government to crack down on the counterfeiting industry.

“It is estimated that between two thirds and three quarters of counterfeit and pirated goods come from China,” the report stated, before noting that the situation is unlikely to change despite government efforts.

“Counterfeiting is essentially an industry in itself in China, and there are hundreds of thousands of people employed in the trade. A serious effort by the Chinese government to significantly curtail counterfeiting could lead to a huge increase in unemployment and a major impact on the economy.”

  1. What’s Needed?
  2. Technology And Education

Given the size and scope of the problem, GFI notes that counterfeiting is likely an established part of the global commerce landscape for the foreseeable future.

But, the report noted, technology has made some inroads against the problem.

“Some organizations have introduced technology that allows for the verification and monitoring of products in an attempt to protect legitimate businesses as well as consumers. The organization TechTrace introduced the Anti-Counterfeiting Tool (ACT), which provides a platform for stakeholders — brands, consumers, governments and others —to monitor cases involving the illicit trade in counterfeit goods. The WCO has developed a similar product called Interface Public-Members (IPM) that connects customs agents to rights holders, aiding the detection of counterfeit goods in real time. Another group, Sproxil, has harnessed the worldwide popularity of mobile phones to combat counterfeiting by embedding scratch-off SMS verification codes in products — from agricultural goods to pharmaceuticals — that consumers can use to check if the item they are purchasing is genuine.”

But, the report noted, there is an essential problem that technology cannot solve — global demand — which remains high and growing. Consumers are not spending US$1.3 trillion a year for ill-gotten goods because they don’t want them.

But the costs are staggering. And perhaps fewer consumers would be excited about the “good deal” they were getting if they understood the raw deal for many others across the globe that counterfeit goods make possible.

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Latest Insights: 

The Payments 2022 Study: Building A High-Performance Payments Team For Fraud Detection, a PYMNTS collaboration with Stripe, examines how digital platforms of all sectors and sizes plan to develop their anti-fraud teams as part of their their broader growth and development strategies. Drawing from an extensive survey from approximately 250 payments heads at digital platforms in the U.S. and abroad, our study analyzes how poor anti-fraud capabilities can harm platforms’ long-term growth strategies, and how they can build high-performing teams to tackle these challenges.

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