Fraud busters

With the loss to genuine UK manufacturing running into billions an effective anti-counterfeiting programme is a must, says Gary Miller.


The effect of counterfeiting in the UK is profound. In 2004 the estimated loss to this country’s manufacturing was £8bn and fake items seized at EU borders topped 103 million.

Reports show that the growing presence of Asian producers in the electronics manufacturing marketplace has had a direct impact on the increase in the circulation of counterfeit parts. Frustratingly, it is incredibly difficult to determine the true cost of the counterfeit trade. Some studies believe it is equivalent to six per cent of GDP. If accurate, its impact on the UK in 2004 was closer to £72bn.

With counterfeiters producing everything from toys and games to aircraft parts and branded drinks, the risk of intellectual property (IP) theft is on the increase. Thankfully, the severity of the problem has prompted governments to act. Our government’s introduction of the Serious Organised Crime Agency and the joint initiative between the EU and US to address counterfeiting are two examples.

In addition, many organisations have developed highly effective anti-counterfeiting programmes that remove knock-off products from the marketplace and deliver a healthy return on investment.



Key areas

An effective anti-counterfeiting programme focuses on three key areas — preventing counterfeiting from occurring; detecting if counterfeit goods are entering the marketplace; and taking action to recoup lost profits if counterfeiting does occur.

Design and manufacturing departments can have a large impact on the ability of counterfeiters to enter the market. Fake products frequently enter the marketplace when a brand owner engages a sub-contractor to produce legitimate products. These same manufacturing facilities are then used for ‘moonlighting’ operations, resulting in genuine quality products entering the marketplace illegally. To eliminate these run-on products, brand owners must carefully consider several critical factors when selecting a sub-contractor:

First, does the geographical location of the facility have a reputation for effective IP protection? Often companies find that the countries with the lowest manufacturing costs pose the greatest risk due to undeveloped legal systems for protecting IP rights.

Second, how strong is the financial profile of the sub-contractor? An organisation with poor finances may be more inclined to seek ‘alternative’ sources of revenue.

Third, what background checks have been conducted on key members of the sub-contractor’s team who have access to the design and manufacturing IP? In many instances, companies should insist on designating their own personnel to the site or maintaining sole responsibility for the production of any product security features.

Finally, what audit rights have been built into the replication agreement? A well-prepared agreement provides the brand owner with the right to regular and systematic examination of the contractor’s facilities and records, including numbers of products produced and their shipping destination.

But even with appropriate measures in place, companies must be vigilant to identify fake products entering the market. An effective counterfeiting detection programme begins with a ‘test purchase’ programme and includes input from every stage of the supply chain. Routine and thorough examinations of data and intelligence from the marketplace to detect changes in sales patterns can often provide firms with the necessary tip-off that counterfeit products are altering the supply chain and affecting revenue.

Detection of fake goods can be further enhanced with a strong communication programme. Aimed at customers, distributors and other members of the supply chain, the programme should provide each audience with easy tips to identify the genuine product and encourage them to report any suspicious items directly back to the brand owner. Critically, the intelligence gained in these detection efforts should be fed back directly to the design and manufacturing team, so that appropriate enhancements to the design and manufacturing process can be made to keep that manufacturer one step ahead of the crooks.



Effective weapons

If counterfeit products are detected, there are effective weapons that can be used via the civil court process that puts the power and the lost profit back in the hands of the brand owners. Historically, the approach used to combat counterfeiting through the civil courts has concentrated on seizing fake products, rather than taking the profits made from their sale and distribution. Focusing on the money instead of the product could be more lucrative for manufacturers and also be more effective in shutting the illegal operators down permanently.

The key to this approach is to treat counterfeiting as fraud. For instance, Turning Losses into Profits (Tulip) a legal approach pioneered by Mishcon de Reya, aims to turn faking into a moneymaking exercise for those who are being ripped off. This approach is about recovering from the counterfeiters not only money to pay for legal and investigative costs but also to earn an impressive return on that investment. A Tulip campaign only goes after viable targets and, when needed, will utilise the full power of the courts to raid premises, issue disclosure orders and seize assets word-wide on behalf of the brand owner.

Run successfully, an anti-counterfeiting programme can actively contribute to a firm’s overall performance through legitimate sales, and maintain brand value and reputation.



Gary Miller is a partner in the Fraud & Insolvency Group at law firm Mishcon de Reya

www.mishcon.co.uk