Waito Report 2011: Counterfeiting Crime a major challenge

2 IF2C Report 2011 Editorial team: WAITO Foundation, Villa Sise, Ch. Grand-‐Montfleury 48, 1290 Versoix, Switzerland Tel. +41 (0)22 566 87 30; Fax. +41 (0)22 566 87 40 Chairman: Chemavon CHAHBAZIAN Director general and Editor in chief: Pierre DELVAL Advisors: Alain BAUER and Xavier RAUFER Public relations: Laurent ULMANN Coordinator: Frédéric HAHN Technical coordinator: Nicole AGHROUM Translator: Esther BARRETT Board of experts: Alain BAUER, Professor of criminology at the Conservatoire National des Arts et Métiers (Paris), New York and Beijing, Member of the Board and Chairman of the WAITO Foundation Ethics and Code of Practice Committee. Ghazi BEN TOUNES, Economist, Member of the WAITO Foundation Board, Director of the WAITO Office in Tunis and Vice-‐chairman for Public Affairs in the Arab World. Pierre DELVAL, Criminologist and forensic scientist, Director General of the WAITO Foundation. Bernard MARQUET, Representative at the Parliamentary Assembly of the Council of Europe for Monaco and Reporter for the MEDICRIME Convention. President of the Commission on the Environment and Living Environment of the National Council of the Principality of Monaco. Member of the WAITO Foundation Board. Kunio MIKURIYA, Secretary general of the World Customs Organization (WCO). Marco MUSUMECI, UNICRI programme coordinator, Member of the WAITO Foundation Board. Eric PRZYSWA, Expert on Cybercrime, Risk05 blog editor. Xavier RAUFER, Criminologist, Director of studies and research at the MCC of Université Panthéon-‐Assas Paris II, Chairman of WAITO Foundation Scientific Committee Pau ROCA, Secretary general of the Federación Española del Vino. Michèle RUDLER, Emeritus university professor, holds a Phd in Pharmacy and is the former Director of the Scientific Police Laboratory in Paris. Christophe ZIMMERMANN, Anti-‐counterfeiting Coordinator at the World Customs Organization (WCO) Editor in Chief: Pierre DELVAL www.waitofoundation.org (Website coordinator: Nicole Aghroum) Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

3 Counterfeiting-‐crime© A major challenge Report 2011Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

4 Acknowledgements The WAITO Foundation wishes to thank the public and private, European and international organizations that have assisted us and contributed to the drafting of this report. In particular, we would like to thank: THE WORLD CUSTOMS ORGANIZATION (WCO-‐OMD) THE UNITED NATIONS INTERREGIONAL CRIME AND JUSTICE RESEARCH INSTITUTE (UNICRI) THE DEPARTMENT OF RESEARCH ON MODERN CRIMINAL THREATS (MCC) OF THE UNIVERSITY PANTHEON ASSAS PARIS II THE FRENCH CONTRUCTION FEDERATION (FBB) The proceeds from the sale of this report will be allocated in their entirety to the operation of the International Forum on Counterfeiting-‐crime© (IF2C). Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

5 Preface (by Alain Bauer) For a long time, counterfeiting was only seen as a threat to trademarks, particularly in the luxury sector. Then came the time when the issue of copyright and brand licensing was overtaken by concerns regarding public health and safety. Counterfeit medicines, cigarettes, aeroplane parts, electric switches and milk-‐bottles made their appearance, posing new risks for society. Counterfeiting does not just concern seizure volumes or taxes. It also represents a major threat to consumer safety and national stability. It has therefore become necessary to develop means to analyse these problems, overcoming confusion, particularly in terms of statistics, over the questions raised. Three problems require separate attention: real fakes, look-‐alikes and forgery. They have long been referred to using, often confused, terms and classing them indiscriminately as smuggling, counterfeiting and fraud offenses. The central issue is determining whether they constitute crimes or offenses. For us, as criminologists, in order to avoid ambiguity, these issues require simple and clear definitions: -‐ Real fake: a fiscal problem created by the channelling of genuine products towards sectors that increase profits lost elsewhere, and avoid taxes. Some right holders are accomplices to this practice. -‐ Look-‐alike: a technically compliant product, manufactured by a company lacking both the relevant rights and patents, producing illegal generics -‐ in the case of medicines-‐ or using a usurped trademark, without, however, endangering the consumer. This is a problem concerning the protection of intellectual property rights and the prejudice of right holders’ interests. Some States are accomplices to this practice. -‐ Forgery: the most dangerous scenario, with graver consequences for consumer safety and public health than for tax revenues or right holders’ interests, and constituting a major social problem. In the May 2010 issue of the journal The European Files, Professor Gentilini explained that a fifth of his patients in Africa came to him with problems caused counterfeit medicines. Organized crime is the main supplier of such products. The WAITO Foundation refers to this as Counterfeiting-‐crime©. The creation of a coalition of interests on public health and consumer safety is therefore crucial. This idea of control implies the need to develop and implement tools and mechanisms managed by producers, this being their interests, but controlled by the public authorities, this being a necessity. Public health and safety issues, and political, economic and social stability objectives require the construction of such tools, but also create the need to protect sovereignty and the criminal liability of right holders. These Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

6 should be deterrent and, above all, effective judicial tools, but they should also be technically preventive, providing irrefutable evidence of the good or bad faith of the manufacturer. For example, it is time that a reliable Community database was built, able to anticipate counterfeiting trends on an international and regional scale in order to take timely measures, in particular, by implementing tailor-‐made preventive and deterrent policies. It is also time that European and/or global public specifications were developed on the characteristics of a mandatory mechanism identifying the place of production and the destination market, marking every product and packet, whatever the contents, and ensuring that this device is visible and legible. Here I am thinking of the tobacco industry, but this also concerns the pharmaceutical industry, both at wholesale and retail level. These new stages also require judicial customs departments that are better equipped and prepared, with access to new files and devices enabling them to guarantee the security of their officers throughout their operations. This requires better targeting, which explains the need for early detection mentioned earlier. This has been demonstrated and recalled on various occasions since 09/11: here again, we must move from standard to customized procedures. Equipping and controlling everything is useless unless these measures are correctly adapted through cooperation. Excessive and incoherent control kills control. The effectiveness of the device is, therefore, important and requires both the private and public sectors to work together, putting aside any personal interests and disputes. The crisis, which has boosted crime-‐ not undergoing a recession, as it demonstrates on a daily basis-‐, has indicated that States must assume a proactive regulatory and disciplinary role, that they are not just another partner, but must deliver instructions, listen and, ultimately, decide. The rehabilitation of public service is of major importance for customs authorities, which have always defended its values with remarkable determination, but also for the police, which supplements the law-‐enforcement system at an intra-‐territorial level. Therefore, cooperation is required between producers, consumers, regulators, customs officers, judges and criminologists. But this is only one stage in a process that must result in practical measures to resolve these problems. Otherwise, contrary to what we have long believed, failing to act will be as harmful as acting incorrectly. Public opinion is always highly sensitive to the way in which States combat criminal activities, which benefit a large number of citizens. They blame the State both for having prevented them from taking advantage of it, and for having done so ineffectively. This difficulty, or schizophrenia, that exists in the public opinion must be taken into consideration. But we should now take full advantage of the options open to us through the diagnoses provided by volunteer criminologists. It is up to the authorities to decide which type of therapy they wish to undergo. The WAITO Foundation’s role is therefore essential in enabling this dialogue. This role will be enhanced within the International Forum against Counterfeiting-‐crime (IF2C) in Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

7 Geneva, in partnership with UNICRI, the WCO and the Chinese Research and Studies Centre on Counterfeiting-‐crime in Beijing, which WAITO is setting up together with the China University of Political Science and Law. The WAITO Foundation, with the support of UNICRI and the WCO, will carry out its public-‐interest mission by providing information for, uniting, communicating with and establishing partnerships between States and their public authorities, civil society and companies. This first report on the global situation of Counterfeiting-‐crime©, witness to their determination to combat counterfeiting as an enemy of democracy, is the starting point of this mission. I hope you enjoy the read. Alain Bauer Professor of criminology at the Conservatoire National des Arts et Métiers (Paris), New York and Beijing President of the Ethics Committee of the WAITO Foundation. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

8 Foreword (by Kunio Mikuriya, Secretary General of the World Customs Organization) The volume of illegally trafficked goods, irresolute criminal legislations, the lack of consumer information, and technological development all contribute to the escalation of counterfeiting and piracy. One only needs to look at the results of two major international operations, Operations TIGRE and FRED 60, carried out in April and May 2011 by the World Customs Organization. Operation TIGRE, from 11 to 15 April 2011, involved 9 countries and 13 ports in the Central America and Caribbean region. In 5 days, more than 3.5 million counterfeit products were intercepted, including 19 tonnes of insecticides, 151,020 bottles of body products and creams, 176,000 medicines, 648,000 spare mobile phone parts and 2 machines used to manufacture counterfeit cigarettes. It would appear that organized crime is becoming more diverse and, in particular, targets products with an effect on consumer health and safety. Operation Fred 60, carried out from 9 to 13 May 2011 in West and Central Africa, brought together 20 countries and 21 ports. In 5 days, 125 containers were intercepted containing some 43 million counterfeit products: more than 8 million medicines, hundreds of thousands of spare vehicle parts, thousands of toothpaste tubes, alcoholic drinks, food products, etc. The results of these two operations alone, confirm this as being a major pandemic phenomenon. The only way of overcoming it is to act together and on a global scale. The WCO has put forward a concrete action plan focusing on two main areas. The first is to strengthen the capacities of customs authorities, through a committed policy on education on legal and practical aspects in developing and least developed countries, which are prime targets for counterfeiters, by promoting risk analysis techniques. To this end, between 2010 and 2011, the Japanese government financed training in some 140 countries. The second focus is on communication between stakeholders, in particular customs authorities, the private sector and non-‐governmental organizations. A taskforce on counterfeiting and piracy (CAP) made up of customs representatives, has been set up by the WCO to enable customs authorities to exchange opinions, experiences, good practices and initiatives. Participants also include the members of the Right holders Consultative Group, a think tank attached to the WCO Secretariat, which works collecting the opinions of stakeholders, to assist in taking informed decision. This is not an institutional body of the WCO in the same capacity as the technical committees, but a WCO Secretariat debate and advice mechanism. The purpose of the Right holders Consultative Group is to provide the WCO with the direction it needs to effectively address the practical needs of right holders to fight against counterfeiting and piracy, and to offer a forum for exchange on cooperation between right holders and customs officials. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

9 To this end, the WCO has developed an interface known as the Interface Public-‐Members (IPM). This is a user-‐friendly and functional instrument that provides frontline customs officials with all the information required to identify counterfeit or pirated products. In addition to information on the products, IPM provides information on regular supply routes, packaging characteristics, previous cases of counterfeiting, right holders’ contact information in each country and information on distinctions between originals and fakes. While the WCO focuses on operational aspects, it is also important to build relationships that enable the up-‐stream consideration of issues. To this end, the WCO has recently established an agreement protocol with the WAITO Foundation, to assist in raising awareness about this phenomenon and in defining an effective policy to fight organized crime. I am convinced that this agreement protocol between the WCO and the WAITO Foundation, the activities of the latter and this report provide solid foundations for the establishment of a just and safe society. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

10 Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

11 Introduction (by Chemavon Chahbazian and Pierre Delval) Throughout history, man has toyed with the idea of world domination. Many people have strived to achieve it, often through religion, generally by use of force, and now, many pursue it through trade. In the wake of market globalization, organized crime has set its sights on the potential gains generated by human misery, whether in the food and agriculture sector, the pharmaceutical industry, or in any other sector producing goods bought by consumers on a daily basis. In these conditions, will the States step up to the task of avoiding or will they leave companies to fend for themselves against the mafias? Will we end up being governed by criminal organizations? Most probably it will be neither the one nor the other. States will hold on to their supremacy, and Mafias will become more and more powerful. However, the real power will be wielded by the markets, with all the forms of fraud, including counterfeiting, that this entails. Illicit trafficking has always existed but, with the fall of the Berlin Wall and globalization, it has acquired a transnational dimension. Everyone is now concerned, from the ordinary citizen to the government authorities. These markets have become interdependent, particularly in the consumer environment where, up till now, counterfeiting, food fraud and smuggling followed parallel paths. Despite their differences, these movements obey the age-‐old rules of supply and demand and the same principles of competition, profit, the drive to innovate, acquire market share and reduce production costs. Across the board, the aim is to generate profits as quickly as possible and at the lowest possible risk. In this way, the boundary between legal and illegal is becoming blurred, and the dangers, whether technical or counterfeiting-‐related, are increasing for all participants in consumer product chains. The risks of counterfeiting are generated by its capacity to deceive consumers through the production of identical copies of the visible parts of products and their trademarks. Through industrialization, counterfeiting is carried out on mass and is becoming hard to control. The annual global death-‐toll is proof of this threat in terms of public health and safety: in 2005, according to the United States Consumer Product Safety Commission (CPSC), in North America, some 73,000 children under 5 had to be rushed to hospital after handling counterfeit toys; 20 of them died from injuries or poisoning. Russia holds the record for aircraft accidents, with 8.6 crashes per million flights in 2007 -‐thirteen times the world average. These crashes were mainly due to the failure of counterfeit spare parts. Again in Russia, in 2005, the World Health Organization confirmed the deaths of thousands of people poisoned by adulterated vodka, some of which was sold under well-‐known brands. President Putin referred to this as a “national tragedy” justifying the stepping-‐up of control on the illicit traffic of alcohol. Unfortunately, these measures have not helped the situation. In 2007 illegal distilleries provided almost two thirds of the Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

12 alcohols consumed1. In the pharmaceutical sector, WHO statistics published in November 2006 estimated the “dangerous counterfeiting of active ingredients” at 10% of total consumption in Russia, 25% in India, 35% in Lebanon, 40% in Peru, 48% in Nigeria and 70% in Angola. There are thousands of cases of deaths or irreversible secondary effects among the poorest patients. Regarding electrical equipment, the 12 million pieces seized by European Union customs authorities in 2006 showed technical anomalies clearly contrary to the security standards in place. According to the WCO, seizures of counterfeit food products increased by more than 2500% in 2008, and those of spare vehicle parts increased by more than 2600% in 2009, with all the consequences implied in terms end-‐consumer risks. In their January 2011 report, MarketsandMarkets predicted that by 2014 the global budget for the anti-‐counterfeiting device market in the food and medicines sector would have reached 79.3 million US$, with 49 million US$ for North America alone, shedding light on the potential size of global illegal markets in four years’ time. The most important development in contemporary criminality is the convergence of crime. It is, thus, no longer uncommon to find combinations of fraud and counterfeiting or counterfeiting and smuggling. For a long time, there has been a tendency to underestimate the real dangers of counterfeiting. Intellectual property rights have provided practically the only shield against this illegal and protean activity. The situation is now explosive, although it is extremely difficult to measure the overall phenomenon. As with any illegal activity, the overall estimates available are questionable. However, an amalgamation of the statistics of all industrial sectors, added to those of the European customs authorities, confirm a definite upward trend2. Along with a number of other countries, France has always distinguished itself in the fight against counterfeiting. Aware of the developments in the domain of counterfeiting crime, it has consolidated the 1994 Longuet Act and its subsequent amendments3. France made significant progress with the anti-‐counterfeiting act of 29 October 2007-‐ one of the first acts Christine Lagarde, then French finance minister, presented to the Parliament 4 . Criminal sanctions were increased and simplified and accelerated procedures were 1 Communica-‐ Spring 2007-‐Swiss Magazine belonging to the federal department for the control of alcohols 2 A key information source to combat the global plague of counterfeiting-‐ The International anti-‐counterfeiting directory 2009-‐ICC 3 What does the Longuet Act do? Exhausted by interminable procedures, many industrial counterfeit victims ask themselves this question. According to the government “the Act of 5 February 1994 has established a solid legal foundation” in the French industrial landscape, in respect of the combat against counterfeiting. In reality, while this Act appears to be effective against counterfeiting, it reveals a number of weaknesses despite the addition of supplementary legal measures. In a general context of an extremely slow justice system, it appears to be powerless in resolving disputes between two companies in the same sector and based in the same city. It is common for a case to last five years and to result in “laughable compensation”, simply because the “the counterfeiters knew the legislation by heart”, as one specialized lawyer put it. Various on-‐going cases confirm the limitations of the current system. Apart from the cases of “servile copies”, where rapid summary proceedings can be ordered by the judges, most cases take a long time. The reparation of damages is another area of weakness. The justice system makes use of experts able to measure the economic impacts of counterfeiting and unfair business practices. However, in general, “judges have little concern from economic life”. The Longuet Act has aggravated the penalties against counterfeiters. But it has also probably made them more cunning. The result is that the proceedings become more complicated and expensive. On the other hand, victims do not consider that the penalties are sufficiently dissuasive. “In certain cases, we avoid publishing judicial decisions. The compensation sums are so low that they could give other counterfeiters ideas”, one of the case lawyers acknowledged. 4 Act n° 2007-‐1544 of 29 October 2007 on anti-‐counterfeiting. This act was published in the Official Gazette on 30 October 2007, transposing European directive of 29 April 2004 on the enforcement of intellectual property rights. Until then, only one draft act, dated 7 April 2007 had been produced, despite the deadline for the transposition of the directive, which expired on 29 April 2006. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

13 established for filing administrative proceedings, to prevent an imminent infringement of intellectual property rights. State department powers were extended. But in order to go even further and faster than this, during its presidency of the Council of the European Union (second semester of 2008), France also offered its European partners a series of measures aiming to reinforce anti-‐counterfeiting and anti-‐piracy measures. All the European states supported this initiative and the Competitiveness Council of 25 September 2008 adopted a resolution on a comprehensive European plan. This plan, in particular, aims to develop action to raise awareness and communicate. The Council also invited the European Commission to set up a European counterfeiting and piracy observatory to enable a regular assessment and a more precise analysis on the extent of the phenomenon. This observatory should be in place by end of December 2009. It was precisely during the discussion of the creation of this observatory that Jacques Toubon, then a member of the European Parliament 5 , warned his colleagues, the members of the committees concerned and anti-‐counterfeiting inter-‐professional federations of the risks of placing too much emphasis on intellectual property rights. He considers that counterfeiting also concerns consumers, who are too often forgotten in this type of approach. He acknowledged that French consumers enjoy one of the best protections in Europe. However, he stressed the fact that they are nonetheless European consumers. “There is no advantage to being in a highly protected area such as France or Germany, if these are within an economic area and in a domestic market with areas of weakness!” he declared in July 2009 in “Les Cahiers de la competitivité”. Jacques Toubon argues that there is no point in having an effective anti-‐counterfeiting system in France, if French products continue to be exported to Europe, where there is no criminal justice harmonization on intellectual property rights, and to areas outside its jurisdiction, outside the European Union. Jacques Toubon, therefore sees two priorities: “all EU countries need to harmonize their legislations and accept criminal sanctions at a 5 European Parliament debate-‐ Wednesday 17 December 2008-‐ Impact of counterfeiting on international trade. Speech by Jacques Toubon-‐ MEP. (…)counterfeiting is an economic, social and health menace of a size that, in my view, is often underestimated. Some people estimate that a third of the goods docked in containers at Antwerp or Rotterdam are counterfeits. I did say ‘a third’, and these are estimates produced by official departments. I would like to say very clearly, and I am not going to beat about the bush, that I am truly disappointed by the European Parliament’s proposals and by the debate this evening. For once, I am more disappointed by the Parliament than by the Commission or the Council, since in this sphere, the Council and the Commission have done their work. The action plan of 25 September, the seminar held on 25 November and the proposals which Mr Barrot has just set out on behalf of the Commission are real actions, not fine words. Commissioner, what I would simply like to say to you is that I would really like the observatory, for example, to be made operational during the first half of 2009 and for the regulation on market surveillance adopted by the Council to be adopted in this Parliament. As far as Mr Susta is concerned, I am not speaking here of his alternative proposal for a resolution, which unfortunately we are not going to debate. I am speaking of his report. It is much too weak, much too timid, and says nothing on indications of origin, says nothing on the observatory and is timid and reticent regarding the protection of intellectual and industrial property. You talk of ACTA and say that we need to adopt it, but you say that we should not use the means that would be effective in enforcing it. In addition, I must say that I was staggered by the comments made by my two fellow Members from Sweden, who give the impression that the danger comes not from counterfeiting but from the fight against counterfeiting. Ladies and gentlemen, we are completely mistaken if we do not take more resolute action. We are dealing with this subject as if it were a marginal economic activity, no more than that, whereas it could mark the end of our industries, it could signal widespread exploitation of workers from the emerging countries, let us not forget, and finally, could amount to widespread lack of safety for consumers. We must take action! Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

14 community level”. Two years earlier, Michel Danet, then Secretary General of the World Customs Organization (WCO), had already reached similar conclusions. He argued that the combination of overly restrictive TRIPS agreements and the lack of effective industrial property protection in more than 60 countries in the world, rendered European rights on intellectual protection impractical. Faced with this lack of cohesion, counterfeit offenders, generally from a background of organized crime, have all the financial and organizational facilities to get around obstacles. Although the defence of trademark rights is synonymous with consumer protection, Jacques Toubon also recognizes that the fight against counterfeiting must result in direct action on consumer protection: “this should, for example, include law enforcement action to ensure food and health safety and should not just be limited to the protection of intellectual or industrial property”. The harmonization of criminal law and consumer protection are two subjects that require further consideration. Harmonization of criminal law Criminal sanctions are dependent on the danger posed by a counterfeit product and the issues that this raises on a legal and practical level. Counterfeiting, by definition, violates the rights of right holders, but they need to provide proof of the danger implied. But this leads to the question of how this should be gauged. Should the presumption of danger be applied de facto or would this work against the right holder’s interests? This would raise questions about the genuine product. A medicine, for example, can be dangerous if the prescribed dosage is not respected or if it is not adapted to a specific pathology; it can also be dangerous, due to its secondary effects. If the right holder provides private evidence, he will be disinclined to expose the danger of his product. Moreover, how far should evidence be taken: is a comparison of the counterfeit product with the genuine product acceptable? And in that case, what about the possible dangers linked to a genuine product, such as the secondary effects of a medicine? Customs authorities in certain countries already apply heavier customs sanctions to dangerous counterfeits, without having elicited a reaction from the judiciary. All this is generally treated in terms of intellectual property law rather than using a more appropriate legal arsenal to supplement the intellectual property code. In theory, in the case of dangerous material goods, it is not the right holder that should intervene first, but the public authorities. The focus should not be on the violation of intellectual property rights, but on the intention to harm another person’s life through the danger posed by the suspected counterfeit product. Moreover, the limitations of seizures and legal proceedings, observed in recent years, speak in favour of a more nuanced implementation of intellectual property legislation. These limitations are largely the result of conflicts of interest between the right holders and public authorities when qualifying the act of counterfeiting. It is not uncommon for right holders to try to come to a friendly settlement with the counterfeiter to receive rapid compensation and avoid long and expensive legal proceedings. Nor is it uncommon for trademark owners to be unwilling to bring high-‐profile hazards to the public knowledge (the pharmaceutical industry kept the facts about the counterfeiting of its brand-‐name medicines hidden for a long time and the agri-‐food Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

15 industry continues to keep cases of dangerous counterfeits secret). This is not to mention the fear of customs authorities and right holders of being sued for unjustified infringement proceedings; nor of weak intellectual property claims being disputed or the possibility of losing a case for lack of control over supply and sub-‐contracting channels. With only minimal coherence between national practices, how can the issue of seizures be resolved? How can effective action be taken without the cooperation and evident expertise of right holders? How can more dissuasive criminal sentences be imposed without having to show evidence of a link to organized crime? Obstacles to implementation: “key” examples To understand the situation on the ground, it is important to consider two key examples: • the “syndrome of the customs officer in a goods port” • the judge and the demonstration of proof The “syndrome of the customs officer in a goods port” The intervention procedure of the customs authorities, at least in Europe, requires a certain level of responsiveness, largely due to time restrictions. Seizures are generally made after a detention at customs, with the exception of certain European Union Member States, such as France, that immediately seize the products of certain trademarks. The customs officers are therefore dependent on the right holders who must identify, authenticate and confirm the counterfeit. The procedure is generally the following: when Customs detect products that they suspect of counterfeiting, they search for the right holders and notify them of the suspicion of counterfeiting. Experts appointed by the right holders go to the customs control post and confirm or rejects the counterfeiting claim counterfeiting in a verbal statement. This confirmation results in detention at Customs, or a customs seizure depending on the type of counterfeited right (trademarks, designs and models, copyright, patents, etc.). Then a preventive seizure order must be requested from the local public prosecutor’s office and it must be implemented within a set period (10 days for ordinary goods and three days for perishable goods) after the detention at customs. In the event of a customs seizure, a summons must be issued or a criminal complaint filed against the counterfeiter or the distributor of counterfeit products, almost simultaneously. There is always time to file civil proceedings if this was not done when the case was filed. The “syndrome of a customs official in a goods port” is indicative of the impracticality lack of this procedure. If we take, for example, the port of Antwerp, 158 million tonnes of goods (2009) in thousands of containers arrive there every day. A small group of authorized customs officers must examine the manifestos6 transferred by the transporter onto their computer network, identify any anomalies, compare them with any on-‐going investigations, find the suspected containers and select only a few of them due to time restrictions and the available means of identification. 6 Transport documents. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

16 Moreover, when controls are carried out in the middle of the night, at the back of a container, without being able to contact the right holders to get the information required to start the detention procedure, customs officers have little room for manoeuvre. Despite the use of fixed scanners, this raises the question of how many of these containers, transporting illicit products, manage to slip through the control authorities’ nets. “Probably the majority”, is the baffled guess of the customs officers at the Port of Antwerp. The control authorities, essentially represented by customs and the police, evidently lack the tools to clearly distinguish genuine from counterfeit products, under pressure, without having to rely on the right holder. The “syndrome of a customs official in a goods port” must not be seen as unavoidable and the use of heavy and costly x-‐ray equipment, as suggested by some Member States, will only go so far in resolving this tricky problem, and not very far at that. The judge and the demonstration of proof In terms of judicial action, procedures must allow the evidence of counterfeiting as violation of intellectual property rights to be produced. This implies establishing that these rights exist and providing material evidence of their infraction through counterfeiting. Without these specific elements, and without the effective cooperation of the right holders, the judicial authorities cannot apply their law enforcement instruments effectively. Likewise, in proceedings involving the seizure of products suspected of counterfeiting, the judicial authorities need to be convinced. However, convincing does not always mean proving. Questioning the authenticity of a product and its origin, to determine whether it is a counterfeit, implies finding out whether the product has the fundamental characteristics constituting an infraction. To provide solid grounds for an inquiry, the nature of these characteristics must be established, before determining, practically and objectively, whether the suspect product presents them or not. The predominant litigious trend in recent case law highlights the importance in implementing law enforcement measures. The strengthening of penalties for counterfeiting crimes has crystallized the debate on the way in which the evidence of crime is administered. Procedures are lengthy and give counterfeiting networks the time to disappear and regroup. The research carried out by right holders and the control authorities (customs and police) are rendered useless. It is a waste of time and money, which is becoming unbearable for everyone. We are also increasingly seeing the validity of intellectual property licenses being contested. With increasingly “perfect” copies, proving that the genuine article is truly authentic requires that title-‐holders provide further information and thus reveal their trade secrets to whoever wants to use them. For companies, this is a dangerous spiral that only benefits the counterfeiters. But, above all, it is a spiral posing little constraints on criminal organizations, against which the intellectual property code, when applied to consumer goods, is too subtle to be effective. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

17 Pharmaceutical crime: an early form of counterfeiting-‐crime It was in this context that the Council of Europe examined an innovative legal alternative by developing a legal instrument to combat pharmaceutical crime more effectively. During the meeting at Moscow of 23 and 24 October 2006, the participants of the conference “Europe against counterfeit medicines” had put forward a proposal to develop this legal instrument in order to protect health in Europe. The participants agreed that the following elements should be taken into consideration when preparing a future convention: • the definition of pharmaceutical crimes as aggravated crimes; • the penalization of the manufacture and distribution of counterfeit medicines; • setting up a network of contacts in each of the sectors concerned, especially in the health and legal compliance sectors; • the adoption of provisions on a national level to monitor the quality of components for pharmaceutical use, packaging, manufacturing processes in accordance with the standards established by the European Pharmacopoeia; • greater cooperation between the bodies responsible for implementing laws on a national and European level. At the end of 2007, eleven experts were appointed and developed the draft Council of Europe Convention against Counterfeiting of Medical Products and Similar Crimes involving Threats to Public Health. Completed on 26 February 2009, this draft is currently being examined by the Committee of Ministers of the Council. This draft is of particular interest because, for the first time, it underlines the possibility of the development of an anti-‐counterfeiting law enforcement instrument that would constitute a complete departure from the model currently used. Thus, for example, the following acts are classified as crimes when they are committed intentionally: • the manufacture of counterfeit medical products, active ingredients or components, including their adulteration; • the falsification of any document relating to a medical product, an active ingredient or component; • the supply or offer of counterfeit medical products, active ingredients or components; • the promotion of counterfeit medical products, active ingredients or components. • the illicit trafficking of counterfeit medical products, active ingredients or components. Aggravating circumstances are a strong feature in this draft, therein highlighting the intention of harming another person’s life. These circumstances will be of great importance in determining the sanctions to be applied. This is evidently the case of an infraction that causes the death of the victim or harms the victim’s physical or mental health. This is also the case of the offenses of promotion and supply using mass distribution procedures, and offenses committed by various persons acting together, and those committed by a criminal organization. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

18 The signatory parties to this convention (47 Pan European Member States) will grant themselves the right to enter into bilateral or multilateral agreements on issues addressed by said convention, in order to complete or reinforce its provisions or facilitate the implementation of the principles that it enshrines. The Group of Specialists on Counterfeit Pharmaceutical Products, created by the Committee of Ministers of the Council of Europe and under the authority of the European Committee on Crime Problems, thus delivers a highly uncomplimentary verdict on the legal arsenal currently applied to curb the production of counterfeit medicines. Firstly, without severe sanctions to suppress the counterfeiting of pharmaceutical products and medical devices worldwide-‐ and often without any criminal law provisions whatsoever-‐, it is easy to produce and distribute counterfeit products without running any particular risks, let alone being penalized for it. This loophole partly explains why pharmaceutical crime has become an area of activity for organized crime. Moreover, national legislations, where they exist, vary considerably. The Group’s experts insist on the fact that varied, deterrent and proportionate penalties are essential in punishing the perpetrators of these violations and contributing to their effective prevention. They also specify that the control of this type of counterfeiting cannot be limited to violations of intellectual property rights7, and argue that the main objective of a future anti-‐counterfeiting instrument should focus on criminal law measures against criminal behaviour, targeting medicines and medical devices, and threatening public health. Lastly, the group of experts indicates that “There is no harmonisation or at least approximation in international law of the offences relating to counterfeiting of medicinal products and medical devices. Furthermore, at the time of internationalisation of trafficking of counterfeit medicinal products and medical devices, aggravated by internet trade, which undermines the credibility of legitimately distributed genuine products and makes it impossible to guarantee the quality and efficacy of products supplied, there is no international legal instrument, aiming to combat pharmaceutical crime and defining corresponding offences”. Consumer protection “There is no such thing as a good counterfeiter, who has anti-‐brand strategy and produces fake handbags, and a bad counterfeiter, who wants to poison medicine consumers or endanger children who are given counterfeit toys. They are one and the same. The purchase of counterfeit luxury products directly finances the counterfeiting of non-‐processed products. In the field of illegal imitation, there is no difference between criminal capital that kills and that which does not”. The situation, as described on 16 November 2004 by the President of an intellectual property rights defence association, has hardly changed. Although he is essentially right, he suggests that the consumer could be considered as the counterfeiter’s “accomplice”. It is therefore essential to re-‐establish the distinction between the good and bad intentions at play in the act of purchasing. 7 According to Information Solution for Pharmaceutical and Healthcare Industries, an international service provider that provides the pharmaceutical industry with commercial data and consultancy services, within European Union Member States, the proportion of the volume of medical products on the market that are not protected by a patent varies from 69% (Italy) to 90% (Cheque Republic). According to the European Generic medicines Association, the proportion of generic medical products (not protected by intellectual property rights) in comparison with the volume on the market in certain European countries lies between 7.2% (Italy) and 79.3% (Lithuania/Estonia). Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

19 The purchasing act: psychological considerations The large majority of consumers consider that illicit trafficking in general, and counterfeiting in particular, are major problems. To “buy genuine” or “compliant” products on a daily basis, the consumer has to feel at ease and be able to see that the whole consumption chain is fair and genuine, which is evidently not the case. The consumer and the trademark These personal strategies have been bolstered by a critical, almost moral, distance acquired in respect of the consumer system, raising strong doubts about it and making people disinclined to pay a high price. Why pay the price of the intangible value (the trademark) of products, when we do not know whether, and how, this can be justified? This price difference, which should indicate the originality and uniqueness of the trademark, is increasingly seen as a way to finance marketing and communication, rather than the work and creativity that go into the product. For the consumer, there are two alternatives: either to buy a similar product, meeting the same criteria as the brand product, but at a lower price; or find a brand product at an acceptable price. However, while the illicit purchase of so-‐called luxury product is generally done knowingly, the purchase of consumer goods is based on different criteria. Thus, buying brand-‐name clothes at a market’s cost price, knowing that only authorized shops can sell the brand, automatically makes the consumer aware of his responsibility. However, buying a brand product or its look-‐alike at a discount price in a hypermarket is an act of opportunism, done in good faith. This distinguishes the dishonest act, severely condemned by Marc Antoine Jamet (occurring in an illogical environment8), to an act of good faith (occurring in a logical environment), which is innocent until proven guilty. This nuance between the accomplice and victim consumer points to the potential solutions to counterfeiting. If we consider that the consumer is the victim, solutions should focus on prevention education and raising awareness. However, if we consider that the consumer is an accomplice, solutions require disciplinary and law enforcement measures. Consequently, penalties and law enforcement measures are only valid where the consumer’s legal situation is clearly defined. Moreover, the right holder is responsible for providing consumers with all the information needed to make an educated choice. For example, France is now affected by the transit of counterfeit medicines that pose health hazards. Consumers need to know that in some countries, especially in Africa, the volume of counterfeit medicines is particularly high. This is a question of information. Among the many forms of counterfeit Viagra, some do not even contain any active ingredients, while others contain adjuvants that increase the risks of heart attack. The risk in consuming counterfeit medicines is increased by online sales. The medicine 8 Counterfeiting is more and more easy. In front of a luxury leather goods shop in Rome, the shop window dressers sell counterfeit products of the same brand when the shop closes. Everyday consumables such as cigarettes can be bought outside distributions circles. What’s more, Internet and express freight enables consumers to receive counterfeit products in less than 48 hours. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

20 marketing system in France is not as protected as some might believe. This channel poses an identified risk. The marketing authorization system is efficient, but it is nevertheless possible to order medicines that have not yet received marketing authorization in France from Italian or Spanish pharmacies. Although the purchase itself is illegal, there is nothing to suggest that the medicine is a counterfeit. Therefore, can the patient be accused of being an accomplice if there is no evidence, not of the means by which the product has been purchased, but of its danger? Likewise, when consumers buy packets of cigarettes on the street, they are fully aware that buying tobacco outside the network of authorized tobacconists is illegal. They also know that the tobacco could have been smuggled. But there is nothing to protect them from the product being a dangerous, highly carcinogenic, counterfeit. Does a trademark guarantee compliance? From the right holder’s perspective, a trademark certifies the quality of the product, the distribution network and its authorization. But if the trademark is not physically protected, how can it provide all these guarantees? Counterfeit toys and vehicle parts can constitute a safety risk. The public authorities wish to protect the consumer, but the legal framework makes this difficult. On 23 October 2003, the Court of Justice of the European Union upheld the free movement of goods over the protection of trademark rights and powers to control, detain and confiscate products. Consequently, products that are freely manufactured in a European country can be distributed without undergoing any controls to determine their authenticity or whether they pose a health hazard! On 21 September 2004, the French Court of Cassation upheld the analysis made by the European Union Court of Justice. Much progress is still to be made regarding the means of detection, seizure and analysis, in order to protect endangered consumers, especially in the automobile part industry. It is, therefore, important to change thinking on consumer behaviour and safety. Consumers must not become “victims” of their own ignorance. They should be reminded of the regulations through information campaigns. The most important means of prevention is the use of law enforcement. Once people know that they can be penalized, they will think before acting. Nevertheless, criminal measures need to be progressive. The different response levels need to be improved, to raise consumer awareness and prevent consumers from believing themselves the victims of injustice. To this end, the solution involves providing evidence of intention. In addition, to establish the consumers as the victims, it is essential to refer to the right holders and of distributers’ ethical dimension. Finally, where appropriate, the victim status of consumers must be recognized in the criminal procedure, enabling them to file complaints and contribute to proceedings, thus allying product and consumer protection. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

21 Thus, the fight against counterfeiting cannot simply continue on the basis of the protection of right holders. The approach must ally proportionate technical prevention and deterrence, and harmonized criminal law enforcement, with the sole aim of eradicating organized crime, protecting consumers and increasing State control. To understand the approach behind the WAITO Foundation’s move to create the first international observatory for the fight against Counterfeiting-‐crime (IF2C), the basis for security policies against the counterfeiting, smuggling and fraud of mass-‐market products must be explained. It is equally necessary to evaluate the impact that these policies will have on the agri-‐food (food and drink), pharmaceutical, cosmetic and industrial (electric equipment, spare parts and toys) sectors. This raises three fundamental questions: What are the real risks for consumers? What solutions can the public authorities provide through principle of due diligence and related provisions? And lastly, what strategies can the public authorities and companies adopt to meet the new challenges of regulating and protecting consumer products in the face of globalization? These three questions provide the basis for this annual report. The objectives are self-‐evident. The protection of intellectual property rights is clearly useful. It defends the interests of right holders, but demonstrates its limitations. The rise of globalization, the free movement of goods, the 60 countries that are not covered by intellectual or industrial property law, the weaknesses in the TRIPS agreements9, the industrialization of organized counterfeiting, the mass production of illegal or irregular consumer products, are all obstacles that intellectual property law cannot seriously overcome. An innovative global approach is therefore needed, uniting intellectual property law, consumer rights, criminal law and other existing legal instruments that are compatible with the global growth of illegal trafficking, that could be immediately transposed to the field of anti-‐counterfeiting technical prevention and deterrence and are compatible with the legislative instruments of each country. This report has no polemic intention. It is simply the expression of a different approach, devoid of any commercial interest and convinced of the importance of preventing the globalization of fraud and counterfeiting. In this area, there can be no space for inevitability. The WAITO Foundation, its partners, such as the WCO, and the International Forum against Counterfeiting-‐crime© are prepared to take up this challenge. They have the capabilities, resources and skills required for the task. This first WAITO/UNICRI report will perhaps provide answers. Then it will be a question of using them! Chemavon Chahbazian Pierre Delval President Director general WAITO Foundation WAITO Foundation 9 The WTO TRIPS Agreement aims to decrease the differences in the way that these rights are protected throughout the world and to submit them to common international rules. It sets the minimum protection level for intellectual property that each government must ensure the other members of the WTO. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

22 I. COUNTERFEITING-‐CRIME: A MAJOR GLOBAL CHALLENGE A -‐ ORGANIZED CRIME: UNPRECEDENTED PROFIT FROM COUNTERFEITING-‐CRIME© Counterfeiting is increasingly the illegal activity targeted by organized crime, which finances and develops it, to such an extent that, along with drugs and prostitution, it has become one of its main sources of income. James Moody, the former head of the FBI Division on Organized Crime and Drugs, predicted that counterfeiting “will become the crime of the 21st century”. In fifteen years, the face of counterfeiting has changed: earlier cottage industry has given way to competitive and dynamic companies and holdings. These criminal businesses now use models, prototypes and market research to target lucrative products and rising brands. This dynamism among counterfeiters has made it possible to manufacture a product even before the official launch of the original. Electric equipment manufacturers suffer from this every year and, in the pharmaceutical sector, Sanofi-‐Aventis discovered the first case of counterfeit Rimonabant (Acomplia)10 trafficking before the French marketing authorization was issued in 2007. Counterfeiting currently offers criminal organizations an ideal opportunity11: there is little public awareness of this area of crime, the criminal sanctions are low, evidence is hard to prove, and overall losses are almost impossible to determine. It generates vast business opportunities worldwide and fabulous income prospects. The large supply of counterfeit or pirated products, the limited anti-‐counterfeiting provisions in national legislations, added to the significant profits that these products generate, make counterfeiting an attractive illegal activity, particularly for criminal organizations. Moreover, public awareness regarding the problem of counterfeiting is still low. In short, the economic potential of counterfeiting is particularly vast. This does not just concern one specific market but to multiple markets. Demand is not just limited to wealthy countries; it is equally strong in poor countries. Markets have become global and the profits generated by these illegal activities can be phenomenal. According to UNICRI12, the largest criminal organizations are involved in counterfeiting. The Chinese triads, the Yakuza (Japan), the Neapolitan Camorra and the Russian mafias are frequently cited by the World Customs Organization and by Interpol as major players in this problem. 10 Rimonabant (Acomplia) was withdrawn from the European market on 23 October 2008. ACOMPLIA is prescribed for the treatment of obese patients (BMI exceeding or equal to 30 kg/m2) or overweight patients (BMI exceeding 27 kg/m2) with the risk associated, such as type 2 diabetes or dyslipidaemia, in conjunction with a diet and physical exercise. 11 For further information on this please consult the 2003 report of the Union des Fabricants: “Contrefaçon et criminalité organisée” (www.unifab.com) 12 United Nations Interregional Crime and Justice Research Institute Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

23 a) The industrialization of counterfeiting Apart from its marketing, the industrialization of counterfeiting requires considerable investments. Drug traffickers, increasingly limited by bank regulations and the control of international and European anti-‐money laundering organizations, are much more eager to place part of their illegal income in investment funds for the construction of factories, especially in China. Equipment used in manufacturing counterfeits requires a considerable budget. According to the Union des Fabricants, certain moulds cost between 50,000 and 100,000 euros and a production line for plastic materials costs between 300,000 and 600,000 euros. Established in low-‐income countries (China, Thailand, Turkey, Morocco, etc.) or in ex-‐USSR countries, like Russia or Ukraine, local criminal organizations and mafias have considerable production capacities. China is a perfect example of the industrialization of counterfeiting. In the northern suburbs of Beijing, in the Zheng Guang Cun district, 1,500 shops selling heaps of random pieces of electric and electronic equipment stretch out on either side of a 4 kilometre-‐long street. The most amazing thing about this gigantic market is that it sells copies of devices that have only just appeared in the right holders’ professional catalogues. Chinese counterfeiting, therefore, appears to be tightening its grip and becoming unstoppable. It traditionally targeted toys, luxury items and leather goods; it is now extending its mass industry to the unlikely sector of electric and electronic equipment. The situation is getting worse without western industries based in China being able to protect their products. Local know-‐how, resulting from delocalization, outclasses Thailand, South Korea, Italy and Turkey. The strength of Chinese companies infiltrated by local organized crime is based on two well-‐known factors: finding technical niches in mass markets with a high exposure to increasingly savvy consumers and creating opaque production lines. The increasing number of distribution networks, built on a drug-‐cartel model, makes any enquiry highly complex, and attempts to identify the source of the problem comes up against one shell-‐company after another. This is a decentralized economy, widely spread and therefore hard to stamp out. It particularly affects unsophisticated consumer products. Designs are copied, but the components, such as electric parts, are rudimentary and dangerous. Thus, a third of Schneider circuit breakers sold under the Merlin-‐Gérin brand were found to be fakes. Hong-‐Kong is widely recognized as being the source of this business, and its traders pull the strings of a vast network of Chinese subcontractors. Here, professionalism has been taken to an extreme. Merlin-‐Gérin fakes have been produced for more than five years in approximately fifty Chinese factories, sometimes employing up to a hundred workers. These products are sent to the Hong Kong sorting station before being assigned to Egypt, Morocco, Algeria, Turkey and even Spain or Italy. The Chinese market itself is also well supplied. Mafia offshoots find willing accomplices in certain respectable companies, especially by selling their products via mail order or in large retail outlets. They are suspected of encouraging the production of counterfeiting electrical equipment in China, and then selling this on. This situation has a harmful impact on many European suppliers, who are under pressure to remain silent unless they want their products removed from the Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

24 shops. It is a well-‐oiled machine; as soon as one factory is shut down, another one opens a few kilometres away. Against this corruption, western response is too weak. Chinese courts, which have recently acquired panels specializing in industrial property rights, and the AIC (Administrations for Industry and Commerce), employing 350,000 civil servants, regularly hand out penalties, closing down a factory here, issuing a fine of several thousand euros there (3000 persons were convicted in 2005). The mass industry of counterfeit products is highly diverse and can therefore take on a number of different forms, even that of respectability. A typical example is that of Cipla, established in Bombay and directed by Yusuf Hamied. This Cambridge-‐educated chemist, currently offers hundreds medicines manufactured in his own industrial premises: these include Erecto, a copy of Viagra; Nuzac, a copy of Prozac; Forcan, a copy of Difucan, an antifungal, etc. In India, these products, marketed by Cipla, are sold at one twentieth or one fifteenth of the US price. Under Indian law, patents only cover the manufacturing procedures and not the products themselves. Indian laboratories can therefore sell copies at a lower price in India, in the interest of local health policy. In parallel to this blossoming and perfectly legal activity, this laboratory, like its local rival Rambaxy, supplies certain American and European laboratories with the substances used in their own production. However, although there is no clear evidence of this, it would appear that some of these Indian laboratories also offer these substances to other laboratories that produce illegal generics to be sold on the international market. According to Dr Javid Chowdhurry, the Indian Minister of Health in 2004, “western laboratories must take responsibility for their own pricing policy. We’re a self-‐contained, developing economy. We live on little, but we survive. The per-‐capita health expenditure in India is of $10 a year. If western pharmaceutical laboratories are able to lower their price by 80% for anti-‐retroviral medicines sent to Africa, it must be that their initial price was not correct”. In India, more than 17,000 companies manufacture medicines and most of them only produce substandard copies. However, 70% of the national market is held by 20 laboratories, some of which are subsidiaries of multinationals like Glaxo India, which belongs to GlaxoSmithKline. These laboratories are monitored by Western inspectors to ensure that the procedures are respected, but this provides no guarantees for other laboratories. b) Transportation and distribution of illegal products Apart from their commercial and industrial strength, these criminal organizations are also perfectly aware of real border control capacities; checks are only carried out on 3 to 5% of incoming goods. According to the European Commission Taxation and Customs Union Directorate-‐General, any attempt to push customs controls beyond this percentage would be doomed to failure. It is not so much the lack of resources that impinges customs action, but the simple fact that more controls would “block any international trade logistics”. Accordingly, 10,000 containers, particularly from Asia, leave Dubai every year bound for European ports. What’s more, a quarter of containers in transit in the world pass through China. In these conditions, there are few customs authorities that could even attempt to stem this trade for control purposes. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

25 However, customs seizures only concern the visible part of the phenomenon. Various administrative sources estimate that the volume of counterfeit products crossing European borders is, at least, 3 to 5 times higher than the number of items intercepted. However, some professionals consider that real figures are higher still, reaching, according to a Lacoste representative, up to 20 times the number of goods controlled. In short, not only is counterfeiting spreading, but also, as the abovementioned examples show, it is becoming a mass phenomenon. This affects all types of consumer items and not only in the luxury sector. Through its mass industrialization, counterfeiting has established a parallel global economy, and can be seen as being one of the main evils of globalization. This explains the increasing interest of organized crime in this particularly profitable market with little risk of criminal sanctions. Starting from common production areas, counterfeiters use complex and varied transportation and distribution networks, exploiting all possible means of transport. Counterfeiters have become particularly expert in intermediate reloading, which conceals the country of origin of the counterfeit, by making it pass through various countries or regions before reaching its final destination, mostly in Europe or the United States due the purchasing power of these regions. Moreover, an increasing number of goods are sent “decomposed”, in other words, containing all the unassembled elements that make up the product (label, textile, wrapping, etc.). This technique means that a counterfeit product can be partially manufactured in a country, assembled in another, transported by a third, before being marketed in a fourth. As the Union des Fabricants highlights, the mobility and opaqueness of these channels means that each counterfeit production line has its own method of transportation and distribution. Mafia organizations do not lack ideas for increasing their profits. In Botswana, where 40% of the population is HIV-‐positive, a laboratory offered patients free antiretrovirals in 2006. The medicines provided were diverted by a local mafia organization and then sold abroad. Meanwhile, the organization had imported counterfeits manufactured in Asia under the Chinese triads. Developed countries are not spared either. The United States is particularly vulnerable, as highlighted by two well-‐known cases. In 2002, GSK discovered flasks labelled Combivir® (lamivudine and zidovudine), a treatment for AIDS, which contained another antiviral, Ziagen®. Then in 2003, traffickers sold fake Lipitor through Med-‐Pro (a repackaging company in Nebraska) to Albers Medical, a distributor specializing in discount prices. Moreover, being closely linked to, and involved in, the legal globalized economy, counterfeiting uses the same operation systems and mechanisms. Counterfeiters use externalization and delocalization to reduce their production costs. They use the main distribution channels, mixing their good with millions of others, and their preferred means of transport are the gigantic containers loaded onto the multipurpose cargo ships that criss-‐cross the world’s seas. The withdrawal of customs barriers makes the distribution of counterfeit goods easier and more profitable. Laxity, corruption and the scarcity of customs officials have turned certain countries into thoroughfares for counterfeit goods controlled by organized crime. The ports of Antwerp, in Belgium, Schiphol airport and the port of Amsterdam in Holland, Roissy-‐Charles-‐de-‐Gaulle airport in France, the ports of Dubai, Hong Kong and various ports in the United States are very popular destinations for these goods. Surprisingly, however, Canada appears to be the Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

26 most “worrying” country according to IACC (International Anticounterfeiting Coalition), second only to China. Canada is on the “Special 301” surveillance list of the United States, established jointly with the IACC, denouncing countries with excessively lax intellectual property rights protection policies. “In Canada, the risk of being caught and the penalties incurred are very low. Traffickers can comfortably pay the couple of thousand fine if they are caught,” economist Jason Myers explains. Traffickers proceed in the following way: the products arrive through the ports in the Toronto area and through Pearson airport. Jason Myers explains that Canada is the entry point to the lucrative American market. A good is first manufactured in Asia, and if it is to be sold in the United States, it is sent to Canada, where the risks of it being intercepted are low. From there, the product can easily enter the United States, due to the North American Free Trade Agreement. William McKay claims that the contrary is also true13. “Most of the counterfeit batteries that are found on the Canadian market are imported by an American. That is something that the Americans do not brag about. Goods travel in both directions. The same happens in Europe and in all free trade areas”, he says. Everywhere you look, port authorities are overwhelmed. Counterfeiters exploit each administrative loophole. They can hide copied goods under tonnes of legal goods or mix them with authentic products, which have, of course, been stolen. “The authorities in charge of monitoring goods, such as Transport Canada, cannot check each container. That would take a tremendous amount of time and would cost a fortune” says Irene Marcheterre of the Canadian Air Transport Security Authority (ACTSA). On the ground, local mafias and urban gangs take over for the end-‐of-‐line sale of these goods shipped in via full or mixed containers, depending on the demand. The role of these street-‐sellers or “dealers” is well known. However, much less publicity is given to the role played by large distribution companies. Admittedly, distributers intervene at the end of the line and it is therefore hard for them to identify all the participants in the procedure. However, low-‐cost strategies, relying on unscrupulous wholesalers who do not hesitate to buy on the parallel imports distribution or counterfeits market, result in the sale of “real fakes” on the shelves of French supermarkets like Auchan or Carrefour. As highlighted by the Director-‐general of Customs and Indirect Taxes of the French Ministry of Economy and Industry, mass distribution procurement offices, used to buying batches of products on mass, cannot, in such conditions, avoid buying counterfeit products. Therefore, should the sale of these large batches in supermarkets be considered intentional or unintentional? The French Senate Commission, assigned in 2004 to examine the thorny subject of the anti-‐counterfeiting draft law, denounced the laxity of certain companies, which took little notice of their quality control obligations in respect of their customers, or of the fair competition regulations in respect of other retailers. Accordingly, the Versailles Court of Appeal (France), in an order of 20 June 2002, convicted a distributor of counterfeiting, following a complaint filed by Reebok that it had sold football shoes in its Velizy hypermarket under the CUP’s brand, with stripes imitating the “Reebok” sign, thereby creating the “same overall impression”, which could mislead consumers. In that case, the court ordered the payment of 12,000 euros in damages to Reebok International Limited and 1500 euros to Reebok France. Again, on 11 June 2002, the first division of the Regional Court of Pontoise (France), following a 13 Royal Canadian Mounted Police (RCMP) Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

27 complaint filed by Nike, ordered the company Continent to pay 34,301.03 euros in damages for having sold counterfeit products, t-‐shirts and jogging trousers in its Sannois and Montigny-‐les-‐Cormeilles shops, constituting “vulgar imitations”. In this case, the court declared that, “being a professional distributor, this company should check the origin of the products that it puts into circulation”. Finally, the regional court of Lyon (France), in a decision of 5 February 2004, ordered the company Auchan to pay the company Timberland 70,000 euros in damages for counterfeiting, due to the illicit use of its brands by selling brand products, at reduced prices and outside the authorized distribution networks in over 40 sale points. In this order, the court also stated that such behaviour constituted an act of unfair competition as, in this case, the distributor had sold these products without “having ensured the legality of its supply”, and, what’s more, it had done so at prices “largely inferior to those charged by the members of the network” and had thereby benefitted “from an advantageous position due to an equality breach in respect of other stockists”. The problem of the sale of illegal products by certain mass distribution supermarkets is taken so seriously by the European Economic and Social Committee, that in its Green Paper “combating counterfeiting and piracy in the single market”, it said that the distribution sector “should be encouraged -‐ in association with manufacturers -‐ to develop labels of quality and codes of ethics to root out suspect products and services”. In this way, the Committee suggests that the European Commission should take initiatives in this sector in conjunction with the representative trade associations, to raise awareness and educate its members as to the risks of being linked directly or indirectly to organized crime. When referring to this sector, it is important to specify that it concerns both wholesale and retail distribution circuits, mass distribution and small traditional shops, and service activities targeting both professional and private individuals. In conclusion, the danger is real because it is concealed behind the sale of legal products. This was the case of the fluoride-‐free toothpaste without fluoride sold on mass in the United States. In June 2007, Colgate-‐Palmolive, the biggest toothpaste manufacturer in the world, let it be known that counterfeit toothpaste possibly containing diethylene glycol (DEG) had been discovered in shops in the four American States of New York, New Jersey, Pennsylvania and Maryland. The FDA (Food and Drug Administration) had issued a warning on 1 June 2007 to stop the entry into the United States of toothpaste containing DEG and notified consumers, via the media, of the risks of using brand toothpaste produced in China. The FDA specified that deaths and injuries had been reported in other countries due to the use of cough medicine containing DEG. The situation in the United States was becoming alarming, following the warning of the FDA on the possible presence of DEG in imported toothpaste products. Since then, the Centres of Health Sciences of Mississauga, in Ontario and Santa Fe Springs, and California provide screening services for ethylene glycol and dyethylene glycol in toothpaste. Comparative analyses of the fake Colgate products and the Chinese brands identified by the FDA-‐ such Cooldent Spearmint, Cooldent ICE, Dr. Cool, Everfresh Toothpaste, Superdent Toothpaste, Clean Rite Toothpaste, Oralmax Extreme, Oral Bright Fresh Spearmint Flavor, ShiR Fresh Mint Fluoride Paste, DentalPro and DentaKleen-‐ produced identical results. Everything indicates that most of these products come from the same factories, manufacturing toothpaste for the local brands and for the counterfeiters. According to FDA, the shops suspected of having sold this illegal product, Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

28 had entered into deals with the import-‐export companies under the control of the Chinese triads. c) Internet: a major instrument for illegal distribution While retailing is a new mass distribution sector for counterfeit consumer goods, Internet is a major instrument in their promotion and sale to a large number of opportunist consumers. The Internet’s system architecture, allowing sellers to remain anonymous, makes it a counterfeiting goldmine and a prime instrument for the development of this criminal activity. One only needs to go onto the online auction site eBay, with pages posting “all counterfeits at one euro” offers, Burberry jacket, the indications “confidential” in the “Seller info” section or a discussion forum denouncing, for example, happyangel8899, selling fake Dior bags in China, etc. The Department of the International Chamber of Commerce in charge of anti-‐counterfeiting considers that the value of the counterfeit products exchanged on the Internet every year is of approximately 25 million dollars. This activity attracts even the most timid criminals. A recent study sponsored by the French Ministry of Economy14 highlighted this situation. The report was based on a qualitative analysis of approximately 1000 “mushroom” sites and on the observation of consumer-‐to-‐consumer sales sites. According to the study, counterfeiters operate on the Internet through these two separate channels: • The first, known as “mushroom sites”15, are short-‐lived web sites specializing in counterfeits and targeting intermediary sellers or directly targeting consumers. They mainly consist of large Asian platforms that offer anything from children’s toys to business jets, chemical products, medical devices or medicines. • The second types of sites are consumer-‐to-‐consumer platforms. Even the most famous sites (e.g. eBay) are affected. These findings pose a major challenge, not only for the authorities but also for the sales platforms (consumer or business to consumer, at fixed prices or at auction) whose activity is in full growth and which are being flooded with counterfeits. According to a French study, this area of counterfeiting can affect, up to 70% of certain products. The owners of these Internet sites are therefore confronted with major legal problems: their level of liability, the anonymity of sellers, the lack of a general supervision obligation for their sites, etc. Internet profiling gives an idea of the type of counterfeiters operating on the Internet. Among the three most recurrent profiles-‐ poly-‐delinquent, industrious and intermittent offenders -‐ the first two have caught our attention. 14 “Evaluation de l’ampleur de la vente des produits contrefaisants sur Internet” – Report directed by Erich Schmidt-‐ Study ordered by the General Directorate for Competitiveness, Industry and Services. Ministry of Economy, Industry and Employment. February 2009. 15 A significant percentage of B2C sites sell counterfeit products. Many of them are sales sites registered on Asian online B2B sales site platforms. The control of these so-‐called “mushroom sites” rendered particularly complex due to their rapidity of their appearance, disappearance and development. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

29 • Poly-‐delinquents. Although they are involved in other forms of trafficking and offenses, the Internet provides poly-‐delinquents with a new source of income, which is less risky in terms of visibility and penalties. Being, in general, known to the police, they try to keep risks at a minimum by working from home. • Industrious offenders. For these individuals, the sale of counterfeit products is a major activity, generating additional income, but with no connection to organized networks and other types of crime. Offenders are mainly students, seeking to finance their studies or hobbies, and unemployed persons, who use this as a means of sustenance. These two categories contribute significantly to the distribution of counterfeits produced by organized crime. The economic sectors that are victims of counterfeiting are not equally affected by this new means of communication via the Internet. Due to their purchasing and consumer practices, and the more or less structured organization of their physical distribution channels, highly specific counterfeit models have developed online for certain product types. The products thought to be dangerous include medicines, food products, spare vehicle parts, capital goods, cosmetics, perfumes and toys. New technologies provide a major outlet for counterfeit medicines, especially through frequent use of spamming techniques. The phenomenon affects a growing number of countries, reaching alarming proportions in developing countries, and adapting itself to needs and cultures. The sale of “fake” antimalarials or antiphrastic especially affects Sub-‐Saharan African countries, while developed countries are more affected by the counterfeiting of “comfort” medicines, which often require medical prescription. Within the European common market, food production and the consumption of all 27 Member States is, in theory, carefully measured for each product category. For food counterfeiters and, in particular, the criminal organizations that distribute their products, the aim is to infiltrate the first “bloc” of lightly-‐taxed imports, at the expense of genuine products. The supply of counterfeit food is not just a figment of criminologists’ imaginations. On the markets of Shenzhen and Canton, or of Tunisia and Turkey, it is increasingly common to find counterfeit products (Ketchup, chocolates, cereals, etc.). For the time being, the exportation of these products on mass is not viable, but in the wake of the financial crisis new Member States are starting to feel the pressure. Without new illegal export methods, this activity continues to be limited in general to Asian countries, where these products are manufactured (China, Thailand, Vietnam, Malaysia, South Korea, etc.), and to Africa. In this context, counterfeit food products are not often seen on the Internet, due to their perishable nature and to traditional purchasing trends, which are still not adapted to the Internet. Considering their increasing presence in physical distribution channels, the possibility of the online sale of this type of counterfeits should not be dismissed. Two prime examples are expensive rare wines, and alcohol for under-‐16s or 18s-‐ depending on the country-‐ bought on the internet in order to circumvent legal drinking age rules. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

30 Fake cosmetics, perfumes and toys are some of the most common counterfeits on the Internet due to the notoriety of their brands (creating a high demand among consumers), and their highly profitable investment cost-‐benefit relationship. This trafficking is seeing the rapid rise of the “trader-‐counterfeiter” who plays an intermediary role between the buyer and the supplier, but is never in (physical) possession of the products. The buyer is rarely aware of the real threats posed by these products. When counterfeit toys are detected on a “mushroom” website, the company attempts to find the supplier. But it normally encounters two major difficulties: the responsiveness of the criminal organizations in charge of distributing these products and the fact that they mainly operate from outside Europe (i.e. in China). However, detecting counterfeits on the Internet (excluding websites known for exclusively dealing in counterfeit products) continues to be very difficult and often requires right holders to order the products themselves to identify the counterfeit. With regards to cosmetics and perfumes, 90% of these products also come from China and pass through countries like Italy or Belgium, known for harbouring large quantities of counterfeit cosmetic products and perfumes. These are the countries that supply the sellers. In France, 75% of people selling false L’Oreal products live near borders, in cities like Lille, Roubaix and Nice. The networks are well established and often linked to organized crime. Right holders spend considerable amounts on combating the online sale of counterfeits16. However, the flexibility and transferability of online counterfeiters, and the difficulty in enforcing the payment of damages, raises doubts about the effectiveness of legal procedures. Criminal organizations are fully aware of this and therefore multiply their online activities. Spare vehicle parts and capital goods are, almost exclusively, sold via physical distribution channels, rarely on the Internet, even though some easily installable parts can be sold on C2C platforms, or on Asian B2B platforms. It is nevertheless important to highlight the alarming growth of the trade of electric equipment on the Internet. According to the 15 June 2006 issue of the French journal Contrefraçon-‐Riposte, various sites like as generic.electric.fr, alternative-‐elec.fr and, of course, ebay.fr, sell counterfeit products in France. Since 2007, in addition to the procedures of counterfeit-‐seizure, customs-‐seizures or provisional bans, which the French Intellectual Property Code already provided to help right holders collect material evidence of counterfeiting and to put a stop to it, new provisions set out strong investigatory measures, that are not just limited to original suspected counterfeiter. These provisions target all persons found in possession of counterfeit products, supplying services for counterfeiting activities, or having been identified as participating in the production, manufacture, or transport of these products or the provision of these services. In the case of spam17, the problem is aggravated by its global reach. The three countries that send out the most spam are the United States with 1513 domains, followed by China (477) and Russia (302). Spammers in Russia are organized under the control of local mafias and 114 of them send 80% of spam. Although there are less than in other areas, 16 A legal action against the counterfeiting of a trademark, including a preliminary counterfeiting-‐seizure, costs between 7000 and 15,000 euros (in particular the costs of the preliminary enquiry, lawyers’ fees, industrial property consultant fees, bailiff and IT expert fees). 17 Spam refers to a non-‐solicited electronic communication, mainly via email. In general it takes the form of mass publicity emailing, either bogus or with particular aim other than annoying the addressee. Other types of spam contain useless, and often provocative, messages with no link to the subject of discussion, are posted on mass on forums or news groups leading to a pollution of the network. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

31 Eastern European gangs appear to be the most dangerous: 6 of the 10 main spammers operate from Russia and Ukraine. To overcome the progressive improvement of security software, spammers are constantly changing their techniques. To get around the content analysis filters, spammers alter the appearance of words by inserting foreign accents, invisible text, colours, etc. Another widely used technique is to send spam in the form of images. Scammers also tend to use the identity of the sender through phishing18, which gets personal user information by going through a trusted third party or by using trusted host sites. Across the board, spam plays on the same recurrent themes: improving sexual performance, medicines, financial services, counterfeits and pornography. These sectors are constantly developing as spammers try to access new markets. A larger and increasing amount of spam promotes illegal pharmacies, which constitute a profitable and interesting business opportunity. The Federal Trade Commission recently said that it was aware of the identity of the persons involved in the campaigns for illegal pharmacies such as the European Pharmacy. Not only have these persons been identified by Interpol’s criminal files, but they have also been located geographically in Russia. Russia’s lack of collaboration has been denounced, since the mafias that specialize in the illegal sale of medicines can be easily identified. Moreover, this form of trafficking is well organized. Previously known as Pharmacy Express, European Pharmacy (or Canadian Pharmacy) has been identified by Spamhaus19 as the world’s worst spammer. Spam communication strategies are based on the principle of affiliation campaigns established by the company Glavmed. The principle is simple: the affiliate sites send out the advertiser’s publicity material and receives performance-‐based remuneration, starting at 40% of profits. d) Russia and its mafias Two facts sum up the situation of counterfeiting in Russia. Firstly, the main pharmaceutical counterfeiter is a member of the Duma, who goes nowhere without his armed bodyguards; and secondly the lawyer of Pernod-‐Ricard, who was a specialist in the protection of intellectual property rights in Russia, has been assassinated. Is this the work of organized crime or of the local mafias? In our view, organized crime should not be seen merely as a set of activities directed by criminal organizations. In Russia, these are increasingly taking on the form of coherent social interactions united by the common objective of illegal profit. From Moscow to St Petersburg, organized crime uses the front of firms, businesses or industries oriented towards the production of goods and/or services. Organized crime has a fundamental profit-‐making objective. In this sense, there is nothing to distinguish them from other economic enterprises. However, the difference lies in the methods they use. Criminal organizations generate profits by every possible means, in particular, through crime. All companies can resort to illicit, or clearly criminal practices, to achieve their objectives, but this tends to be referred to as white-‐collar crime or corporate crime. 18 A technique used by online fraudsters, aiming to usurp an individual’s identity or that of a known entity. The principle is the following: an internet user receives an unsolicited email (spam) which appears to have been sent by a recognizes entity( portal, bank, etc.). The aim is to lure Internet users onto fake sites to register their personal details (bank card, telephone number, etc.) This information, saved onto a fake form, can then be used by the online criminal. 19 The “Spamhaus Project” is an international non-‐profit student organization that studies spam, tracking the culprits and providing means of protection. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

32 The growth of criminal businesses in Russia is encouraged by the demand for illegal goods and services, dissatisfaction with the supply of legal goods and services (e.g. in the event of shortage), employment market conditions and the regulations on economic activities. According to Lev Timofeev20, “of all the possible methods of regulating a branch of activity-‐ taxation, nationalization, prohibition-‐ prohibition is the least effective. Prohibiting a market does not destroy it, but places it totally under the control of criminal organizations and allows the latter to exert an influence over the State and society”. Organized crime, as a social phenomenon, is not only linked to the economy but also to the political situation. Organized crime could be defined as a social phenomenon when it not only refers to the amalgamation of criminal organizations, but to global interaction between criminal, economic and political factors in a given country. This is the case of Russia today. From a legal point of view, article 35 of the Criminal Code of the Russian Federation makes a distinction between criminal groups (prestoupnaïa grouppa)-‐ organized and coordinate groups, created to commit serious or particularly serious offenses-‐ and criminal associations (prestoupnoe soobchtchestvo)-‐ associations of criminal groups. This imprecise definition underlies the action of organized crime control services. It is even harder, though, to provide a criminological definition of criminal organizations. It is best to exclude politically motivated criminal organizations (e.g. fascist political organizations), and legal organizations that use criminal methods to further their activities. This focuses our attention on criminal organization created to exploit the production and distribution of illegal goods and services. As social organizations, their structure is closer to a professional organization than to a family, interest group or company. As in all professional organizations, the size of criminal organizations can vary and they carry out their activities on a more or less sustainable and diversified basis. The complexity of their organizational structure also varies, and is based on clearly established rules that they try to impose; they protect their activities, in order to maximize their gains. Criminal organizations are characterized by considerable stability and adaptability, as a result of their strict rules on membership, discipline and recruiting the youngest, strongest and most motivated collaborators. They are therefore extremely competitive. Therefore, the criminal groups that most interest us have the following characteristics: • associative stability and sustainability • they seek to generate maximal profits • they produce and redistribute goods and services • they exercise both legal and illegal activities • they operate hierarchically and roles are clearly defined • they use corruption • they tend to monopolize a sector or geographical area 20 Lev Timofeev, An Initial Theory of the Drug Industy, Mosow, RGGOu, 1998 Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

33 In comparison with other professional organizations, criminal organizations are characterized by the systematic use of corruption and the production and redistribution of illegal goods and services. In the mid-‐1990s, the most profitable criminal activities were drug trafficking, real estate, the metal and arms trade, the production and sale of pirated discs, videos and software when the protection of copyright was weak, and the counterfeiting of wine and spirits. The purchase of factories or industrial wasteland also became important. The use of corruption and violence made it possible to purchase factories and start up new businesses, by converting them into clubs and restaurants, but also into counterfeiting workshops and, in the 2000s, copyright counterfeiting centres. Russia is one of the main copyright offenders: 64% of music and recordings, 90% of software and 75% of films sold are counterfeits. By 2005, the Special 301, published the figures produced by the American market, evaluating losses due to copyright piracy at 1.7 billion dollars. The director-‐general of Rospatent, the Russian agency for patents and trademarks, highlighted the significance of this phenomenon, specifying that in one of the three factories manufacturing pirated DVDs, closed by the authorities in 2006, the manufacturing material was labelled “US for Russian Products”. In other words, if the problem exists, it is largely because it has been imported from abroad! In the realm of film piracy, it is interesting to see that only foreign and no Russian films tend to be copied, no doubt as a result of an agreement between the mafia controlling the local film industry and the mafia controlling the manufacture of DVDs. Alcohol smuggling and counterfeiting have developed considerably. Know-‐how was acquired in 1985, when Mikhaïl Gorbatchev, having just come into power, introduced the so-‐called “dry law” to curb the consumption of alcohol in the Soviet Union. Since the beginning of the 1990s, legal alcohol production entailed low manufacturing costs and was often linked to embezzlement and low quality requirements. Various major foreign brands are produced in the distilleries and cellars of St Petersburg and the region. After an anti-‐counterfeiting reform launched in 2007, wines, cognacs, whiskeys and especially vodkas disappeared from Russian shops and restaurants. This was caused by a series of cases of poisoning from adulterated alcohol, some which had been sold under established trademarks. This episode, which had also occurred in previous years, in which thousands of people died from alcohol poisoning21, was seen as a “national tragedy”. A law came into force on 1 July 2007 requiring all importers, wholesalers and retailers to pass all their transactions through a centralized IT system EGAIS, to identify each bottle and the origin of its contents. It required that a tax label be used as a control guarantee and in proof of payment of the excise tax. While the Russian government should be commended for its attempts to stamp out this problem, its methods have had catastrophic results. The authentication labels are often out of stock, the EGAIS system is not very reliable as its server is often down. As for the companies responsible for fixing these labels, they are unwilling to buy the equipment due to their cost. The consequences have been rapid and shelves on alcohol aisles are often empty and some restaurants are out of stock. The loss of the main distribution channels has led to an estimated loss of over 100 million US$ and yet counterfeiting continues to thrive. Up till now, traffickers and counterfeiters controlled nearly 50% of the Russian alcohol market. 21 Source WHO. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

34 This market share is likely reach 90% under the current paralysis of the legal market. Moreover, this illegal production is exported and the Ukraine is the first country to bear the cost. Food products are also counterfeited. A few months after the companies Bonduelle and Lesaffre established themselves in Russia, their employees found counterfeit versions of their tins of green peas and their yeast sachets being sold in local markets. Both companies are reluctant to notify the authorities, as they could risk losing their client’s trust and custom. Nevertheless, they employ private detectives, including a former KGB agent, to identify the sale points of the counterfeit products, and contact the police to carry out raids. However, the aim is to “frighten or inconvenience” and not to stop the production of counterfeit by identifying and shutting down the source. These companies have not been able to identify the persons or companies counterfeiting their products. In the vehicle part sector, Renault, which has opened a factory with a 60,000 vehicles capacity to manufacture their Logan, expects to fall victim to counterfeiting. According to estimates, in 2002, 30% of spare parts on the Russian market were counterfeits, compared with a global average of 10%. The most affected are the maintenance and wearing parts, such as the filters and the spark plugs. In 2005, networks providing counterfeit spare parts became more complex, highlighting business relationships between the Chinese mafia and Russian criminal groups. Counterfeit spare Mercedes parts, made in China, were recently seized in Russia. These parts had passed through Hong Kong, Lebanon, the United-‐States and Finland, even though China and Russia share a common border. But this complexity does not end in Moscow. On 24 May 2009, the Algerian Trade Minister announced the seizure of 1316 tonnes of spare vehicle parts imported in 2008. This was 3% of the 44,250 tonne total of spare parts imported over the same period, and was valued at five million dollars. These counterfeits mainly come from China, but before reaching their final destination, the goods go through Russia, imported by local operators that all belong to the fartsovchtchiki groups, or speculators. Their activity consists in buying and reselling counterfeit consumer goods and spare vehicle and plane parts mixed in with legal products. To access these high-‐demand goods, speculators buy them in bulk directly from the producer (who is most often Chinese), through Russian contacts on the ground. In the case of pharmaceuticals, the volume of counterfeits is increasing, and represents between 12 and 15% of the Russian market. According to a source at the Russian Ministry of Health, counterfeit products imported from other CIS Member States, especially in Central Asia (e.g. Kazakhstan, which shares a 7000 km border with Russia) or China, represent 40% of the counterfeit medicines sold on the Russian market. Others, like the laboratories Servier, the first prescription medicine supplier in Russia, have highlighted the importance of local production, which they claim represents 80% of the available “supply”. Furthermore, in one proven case of counterfeiting, the representative of Servier further notified the rapporteur that the company had not able to mobilize the prosecutor assigned to the case. The company also pointed to the difficulty of controlling a market made up of more than 60,000 pharmacies, including “kiosks” selling “a bit of everything”. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

35 It should be added that one of the “institutional” counterfeiters, operating in the full light of day, is the army. A representative of Rusbrand, an association for the defence of right holders, told the rapporteur that the public authorities know which barracks, and even which factories, belonging to the Ministry of Defence and supposed to be “top secret”, manufacture counterfeits. In theory, there are a number of legal remedies in Russia that enable victims of counterfeiting to defend themselves. The Russian Civil Code provides for the reimbursement of losses suffered by trademark holders, and for the destruction of product stocks, at the counterfeiter’s expense, following a court decision. The Code of Criminal Procedure states that, in an enquiry, the prosecutor can ask the court to order a police seizure of all goods, the possession or use of which constitutes an offense. These proceedings can lead to fines of approximately 5500 euros, a community service sentence or to a 5-‐year prison sentence if the crime was committed by an organized gang. In practice, through, according to the abovementioned Rusbrand representative, prosecutors hardly ever use their powers. Moreover, according to this spokesperson, the Prosecutor General, despite the requests made by the embassies of various countries, so far refuses to meet foreign industrial victims of counterfeiting. Moreover, the Prosecutor’s office only investigates claims backed by a solid and precise body of evidence, thus increasing the obstacles for complainant companies. In the case of the violation of trademark law, documents are often required to certify the notoriety of the trademark, as well its use by another person, the duration of use, where the trademarks have been used and distributed, etc., all of which is practically impossible to obtain or extremely expensive to collect. According to the lawyers of Gide, Loyrette et Nouel, judges’ legal practices and culture can be “frustrating”. They highlight a lack of professionalism, leading to incorrect interpretations of the law, lack of training in the area of intellectual property rights and corruption, which pervades certain courts. On this last point, in one case, after the complaint had been filed, the procurator’s office inspector went to the law firm to make it understood that it would have to pay a cash sum for evidence to be investigated. With regard to police corruption, one of the representatives of Rusbrand gave the example of the outcome of the seizure of a container filled with Dior and Hugo Boss perfume packages. It came from India and was travelling to St Petersburg, where the bottles were going to be filled. The police took the contents of the container to their depot, but by the time the right holders arrived the goods had disappeared. Even when right holders victims of counterfeiting manage to draw up cases backed by solid and convincing evidence, there is still no guarantee. To obtain satisfaction, two essential but rare conditions must concur: political backing and the effective implementation of enforcement measures. Customs has the power to stop counterfeit products from entering Russia. Their intervention, however, requires the rights holder to file a request that counterfeit goods be prevented from crossing the border. Here again, corruption undermines the effectiveness of the procedure, which is therefore only theoretical: the secretary-‐general Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

36 of L’Oreal Russia has indicated that the company, which registered all its brands a few years ago, has since then only received a couple of calls from customs, even though counterfeit products, especially from Eastern European countries, are being sold everywhere. It also mentioned the case of a lorry full of beauty products of another brand, which was stopped, but where it appeared that the driver had simply gone to the wrong border crossing. The only satisfactory point is the procedure reserved to the anti-‐monopoly federal service (FAS), which has special police force that can initiate enquiries into cases of unfair competition, once the victim has filed a complaint. If there is sufficient evidence of counterfeiting, the authorities can issue an order suspending the production and marketing of the fake products. This has been identified on a number of occasions as the fastest (3 to 6 months) and most effective procedure, and it constitutes the only emergency procedure available in Russia. However, its major drawback is that the counterfeit products can only be seized while the complaint is being processed. Transnational organized crime, which has developed considerably in the last twenty years, has thus become the main threat to democratic societies in the 21st century. Its potential influence, due to its colossal financial power, enables it to influence national economies – all be it indirectly –, when it is not trying to take them over completely. It has directly benefitted from the opening up of borders, following the collapse of the Communist block, where although assets – especially monetary assets – and individuals can move freely, police forces and the judiciary encounter great difficulty in coordinating their action. In general, organized crime is careful in avoiding publicity, turning media limelight towards the threat of terrorism, the conflicts in Iraq and Afghanistan, etc. This secrecy enables it to prosper far from prying eyes, which it tries to avoid at all costs. Casual observers talk about the “disappearance of the mafias”, and the demise of the “last godfathers”, etc. However, the exact opposite is happening. According to Europol, there are currently more than 4000 criminal organizations, with 40,000 members in Western Europe! The key words of organized crime are “innovation, diversification and flexibility” to achieve the highest gains at the lowest risk. To that end, it makes the most of globalization and technological progress, especially in the information technology sector (and the Internet). A major concern is the appearance of so-‐called “grey zones”, in other words, cities, regions or countries where criminal groups operate under political or ideological protection. These zones run the risk of falling entirely under the control of organized crime. This is the case of Herzeg-‐Bosnia, an area under Croat control, the capital of which, Western Mostar, is currently considered to be one of the European capitals of crime. In Republika Srpska and in Montenegro, the authorities are directly involved in various trafficking activities-‐ famously in cigarettes-‐ in connection with Italian mafias. In Albania, criminal groups are better armed and are a lot richer than the security forces. Albanian mafias have gained a firm foothold in Kosovo, partly through unwitting western cooperation. Other particularly renowned regions are Transnistria, a self-‐proclaimed republic located between Moldavia and Ukraine. In view of the above, it is clear that organized crime in Russia, and in all former Soviet countries, cannot be controlled with traditional law enforcement methods alone, and even less on the basis of intellectual property rights. Countries need to rethink their Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

37 enforcement measures on a national, European and international level. These are already overwhelmed by routine crime and have to pay an increasing cost in terms of time, procedures, personnel and resources. Countries need to find solutions that will bring about profound changes, not limiting themselves to punishing individuals but aiming to dismantle the criminal organizations they belong to and to seize the profits obtained through their mass counterfeiting activities. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

38 Expert report: A criminologist’s perspective (Xavier Raufer) President of the WAITO Foundation Scientific Committee A. Counterfeiting as a criminal activity Firstly, let us consider the scale of this problem taking the example of the two Californian ports of Los Angeles and Long Beach. Together, these two ports see more than 50,000 ships a day, and manage 1 billion US$ of goods. Each 40-foot long containers can hold up to 12,300 boxes of shoes, 20,000 dolls or 6,000 dresses on hangers. One container full of contraband cigarettes, sold on the American black-market, means a loss of 350,000 US$ in fiscal income for the federal budget and for the US States concerned. As outlined in further detail below, mass criminal counterfeiting is dangerous and harmful for societies on both sides of the North-South divide. Both in the real and virtual worlds, and in various converging ways: • Criminal counterfeiting seriously harms public health (adulterated products, counterfeit medicines, etc.); • Criminal counterfeiting also constitutes a societal threat (falsification of identity or official documents, and social, economic and financial certificates); • Finally, it constitutes a social threat (job loss, etc.) Therefore, transnational organized crime no doubt sees criminal counterfeiting as a major st “cash cow” for the first part of the 21 century – and perhaps soon its main source of revenue, as is explained in the second part of A Criminologist’s Perspective, “Drugs and counterfeiting: a domino effect?”. Geopolitical approach: the Gulf awash with counterfeit objects Let us take a look at the wave of counterfeit material goods that is flooding the countries of the Arab Persian Gulf States, in particular the United Arab Emirates (UAE). Two reasons for this are that: • It is a society of well-off, or wealthy, consumers; • In geopolitical terms, the region is a unique crossroads for trade, half-way between Asia, Sub-Saharan Africa and Europe, and close to the Middle East; Moreover, the European Union observes that the United Arab Emirates are often used as a transit port for large shipments of counterfeit products arriving from Asia. Thus: • In 2008, 12.3% of counterfeits seized in Europe came from the Emirates; • In 2009, 14.6% of counterfeits seized in Europe also arrived from this region. In 2009, the Emirates were also the last identified ports of transit for 73% of counterfeit medicines, 30% counterfeit CD/DVDs and 15% counterfeit cigarettes seized in the 1 European Union. In the UAE themselves, except for the Emirate of Abu-Dhabi , counterfeit products in the following sectors are available on mass:Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

39 • Industrial sector Counterfeit refrigerators, ventilators, air-conditioning units, computers, printers, car batteries, chargers or telephone and computer batteries, neon strips, spare car parts, 2 counterfeit accessories, pieces and consumables (ink cartridges) HP or other cooling cylinders for refrigerators and air-conditioning units. • Pharmaceutical, healthcare, cosmetics and herbal sector Counterfeit erectile dysfunction products, antibiotics, body lotions, shampoo, soaps, slimming products, etc. • Luxury sector Watches with different trademarks and origins, handbags, suitcases, sunglasses, perfumes, clothes. • Electronic sector Mobile phones such as the fake Blackberry Curve, know as BB China (10 times cheaper than the genuine product), identical to the original, iPods, DVDs, hands-free sets, and fake earphones. • Food sector Packets of saffron, chocolate bars, fizzy drinks, etc. • Sportswear sector Clothes, gloves, shoes, etc. New and worrying: everyday consumer goods Not all these counterfeits are dangerous in practice. However, in the predatory world of crime, where professional specialization is not necessary, counterfeiting everyday consumer goods goes hand in hand with other abuses and trafficking, and helps to finance other criminal activities. Therefore there is an evident continuum between the phenomenon as a whole and each of its individual branches. In Australia, according to the customs authorities, the volume of counterfeit products constitutes a full-scale consumer product “black market”, operating from discount shops, street markets, etc. This includes products such as alcohol, batteries, toothbrushes, tobacco, nappies, household appliances, toys, shaving razors, spare vehicle parts, washing powder, soaps, mobile phones, etc. Trading losses are estimated at 635 million US$ a year, for the sportswear market alone. However, Australia is a minor target country when compared with the sportswear sector in Mexico, which suffers losses of 10 billion US$ a year. In the area of household products, US Customs is concerned by the development of a fake detergent market. In September 2010 alone, 25,000 packets of fake Ariel were seized. However, the greatest concern is for products that endanger consumers.Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

40 The Indian government estimates that, in the spare vehicle part sector, beyond the financial injury evaluated in 2009 at 340 million euros, these counterfeit products are directly or indirectly responsible for the deaths of 25,400 people and the injuries of 93,000 others. In the food sector, it is difficult to distinguish between the health risks of counterfeit products caused by the products themselves and their industrial environment, and those caused by the storage of these products.Counterfeiters have no qualms about adding forbidden antibiotics and sometimes even steroids to counterfeit products. But mostly, products are already contaminated with mycotoxins or heavy metals, not to mention the animals that absorb counterfeit veterinary or phytosanitary substances. And the list continues. Counterfeit medicines, in particular, are highly profitable, generating a turnover of approximately 200 billion US$ a year, according to the World Customs Organization, killing tens of thousand of patients. The official experts do not hesitate in comparing the drug market with the pharmaceutical crime market: 1000 US$ invested in the manufacture of heroine generate a 20,000 US$ return. The same sum invested in counterfeit medicines generates 450,000 US$. In the space of 4 years, from 2003 to 2007, one internet counterfeit medicine supplier alone sold 9 million US$ of counterfeit Viagra. The tobacco industry is not far behind the high profits generated by pharmaceutical crime. Counterfeit cigarettes and fake cigarettes together generate approximately 50 billion US$ a year. However, these counterfeit cigarettes are a highly toxic: they contain up to 30 times more toxic agents than legal cigarettes, capable of turning tobacco-hooked teenagers into a generation lung cancer victims under the age of 40. B. Drugs and counterfeiting: a “domino effect”? Does one swallow a summer make? No, but it is interesting to see that, for two years now, there has been a significant decrease in the use of drugs in the United Kingdom, home to the “Swinging London” of the 1960’s, which saw the start of the “fashion” for drugs in Europe. This was a disaster for the United Kingdom. While in 1960 only 5% of young Britons confessed to having taken drugs at least once, the figure had risen to almost 50% in 2005, the year when drug consumption peaked. Therefore, over 40 uninterrupted years, an increasing number of Britons consumed an increasing amount of drugs more often. Now, however, the trend seems to have become inverted, particularly among younger generations. According to the British National Health Service, only 20% of 16-24 year olds took some kind of drug in 2010 (22.6% in 2009)- an all-time low since the study began (1996: 30%). The same goes for the decrease in the consumption of the most toxic drugs (heroine, cocaine): 8.1% of young users in 2009, 7.1% in 2010. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

41 This trend was confirmed by a survey carried out regarding the consumption of drugs in nightclubs (Mixmag magazine, March 2011). At the beginning of 2011 (year-on-year) results showed that, in clubs, the consumption of cocaine had fallen by 20% and cannabis and ecstasy by 5%. This is a significant decrease given that, while in 2000, 9 out of 10 clubbers took drugs, today the figure has dropped to no more than 50%, 40% less drug users in a decade! The same goes for the youngest age group (11-15). In 2008, 85% had not taken drugs and in 2009 this had risen to 88%. This covers all temporal variants: taking drugs “at least once in your lifetime”, “in the last year” and “in the last month”. So even if, for the time being, this decrease only concerns the United Kingdom and although drug addiction continues to be a major and vicious problem on the continent, especially in France and Germany, this significant insular decrease- over several years now- is nevertheless, and our words are weighted, of considerable geopolitical importance. This is for two reasons: • The drugs market, starting with cannabis, is a mass market in our continent: according to the European Monitoring Centre for Drugs and Drug Addiction, there are 23 million cannabis consumers in Europe, of which 4 million consume various times a week. • According to the UN, this is, above all, because the international drugs market- worth a yearly 235 billion dollars for wholesale operations (enriching the cartels and st mafias)- is the third largest market in the world, after the (legal) petrol (1 ) and the arms nd (2 ) markets. Therefore, the decrease of drug-use in the United Kingdom is a trend that should be followed closely, and which raises two important questions: • Why has there been such a decrease among young people? This reversal of the trend is, of course, too recent to be able to give a proper explanation. But here is a first attempt: in a generation that increasingly operates “horizontally”; constantly linked to its peers via countless electronic means of communication (mobile phones, text messaging, Facebook, Twitter, etc.), currents of opinion develop rapidly and can win over a whole age group. One of these major currents says that drugs- at least those sold by drug-dealers- are “not cool”. In short, young people have no wish to resemble haggard zombies of the Pete Doherty or Amy Winehouse ilk, constantly shown by celebrity magazines staggering from one overdose to the next. • Does this decrease only affect the demand for drugs? In other words, is this decrease only produced by a younger generation, previously fascinated by drugs but now rejecting the “trashy” lifestyle of fallen celebrities? No, the drugs supply in the United Kingdom has also decreased for two different reasons: - In recent studies, young people say that they are less often offered drugs on the street, or in the normal dealing grounds (clubs, etc.); - When they do find some, the drugs are of a very poor, sometimes appalling, quality; e.g. highly diluted cocaine and ecstasy without any ecstasy! However, this quantitative and qualitative decline in supply among dealers, is the result of police work. The UK now has an effective criminal intelligence tool in the “Serious Organised Crime Agency” SOCA, which delivers stronger and increasingly precise blows against drug traffickers. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

42 Drug trafficking is increasingly controlled, the penalties against drug traffickers are heavier and confiscations are better targeted and more effective. However, we also know that when criminals consider that one cash source is too risky, or too complicated to mine, they switch to another. The displacement effect is an intangible law of criminology. No matter when or where, criminals with a predatory instinct relinquish prey that put up too much resistance, are too well protected or are sufficiently-equipped to defend themselves, for other, more fragile and more naïve targets. For example, if there is too much protection around banks, they will move on to supermarkets, and so on. Criminals do not aim to achieve great exploits or beat any records; they simply want to get rich as quickly as possible, running the least possible risk. The recipe for this is agility, opportunism, and a basic cost-benefit analysis. Although, there is no material evidence so far, this suggests that certain sectors of organized crime are leaving drug trafficking (too risky, less lucrative) for another source of revenue, just as lucrative and hardly and poorly controlled: mass counterfeiting. Is this theory justified? In any case, it is worth exploring, assessing and seeing whether it holds water in the long term. Conclusion- Looking to the future In terms of counterfeit-smuggling, the worst is yet to come. Particularly, in two particular areas: counterfeiting/identity theft, and the criminal colonization of e-commerce. Identity theft kits In April 2011, Customs at the Airport of Chicago seized 1700 high-quality American driving license falsifications, most probably ordered in China by Chinese students living in the United States. These falsified licenses claimed to have been issued in the States of South Dakota, Florida, Georgia, Illinois, Ohio, Pennsylvania and Wisconsin. This could herald the falsification of a whole range of ID and social documents, and bank cards. The invasion of e-commerce Bogus websites are flooding the Internet. They appear, operate and disappear in a short space of time- making them difficult to control. Often, these sites are used to sell counterfeit products and goods: CD/DVDs, luxury brands, toys, vehicle parts, mobile phones, wines, food products, software, beauty products and sportswear. They also sell medicines. Experts say that most of the medicines currently sold on the internet are counterfeits. In 2004, French customs’ seizures of products sold online accounted for 2% of all the products seized. In 2010 this had risen to 10%. Currently, out of 6.2 million counterfeit products seized, 1 million are sold online. What can be done? Firstly, we need to become aware of the gravity of the problem. Public opinion and the media need to demand that political leaders and professionals reveal the real state of play, including precise figures. Without such figures, we have no way of identifying any lack of figures. There should be more international conferences on this subject, with reports and publications. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

43 The global economy must encourage and help those who are focusing on the real problem - counterfeiting as a criminal activity - instead of losing time and money on those who just want to bury their heads in the sands of “intellectual property”. First, thought, the official services in charge of controlling criminal counterfeiting must be unified, harmonized, simplified and given precise mandates and clear instructions. The example here is taken from the United States, which in 2003 merged the Immigration and Naturalization service, the US Customs, the Border Patrols and the Federal Agriculture Inspectors. As a whole the US Customs and Border Protection (CBP) is a force of approximately 58 000 employees, the main preventive/control service in the country. In fighting criminal counterfeiting, Europe and large European countries, will also benefit from unifying their ranks and simplifying their administrations. Sources - Interviews with professionals concerned, - Recent media sources: 2001 Le Monde, 8/06/2011 “Contrefaçon : le fléau se propage dans l’e-commerce” Bellingham Herald, 22/05/2011 “Mexico’s crime groups grabbing lucrative market for pirated goods” AFP, 19/05/2011 “US companies losses to counterfeit goods in China” The National, 15/05/2011 “Brands urge big fines for fakes” The National, 15/05/2011 “Fakes prompt genuine concern” CBS News, 11/05/2011 “Counterfeiting threat looms over drug industry” Gulf Today, 10/05/2011 “Police deal with 198 fake cases in 4 months, 825 000 HP items seized” Le Figaro, 4/05/2011 “La déferlante des contrefaçons” The Age (Australia), 1/05/2011 “Fake detergent a new face on dirty money laundering” Associated Press, 14/04/2011 “Customs: fake US licences being sent from China” Los Angeles Times, 8/04/2011 “Los Angeles and Long Beach ports are on the font lines of a crackdown on counterfeit goods” EFE, 30/03/2011 “Piracy soars 500% in Mexico, security firm says” The Herald, (Ulster) 23/03/2011 “Warning over number of crime gangs” Gulf News, (& Department of Economic Development Dubai) 8/03/2011 “International anticounterfeiting coalition” Khaleej Times, (Emirates) 3/03/2011 “ UAE - Fake drugs, a dangerous choice” CNBC, 25/02/2011 “Gangs, terrorists, mafia make huge profits selling… cigarettes” The Economic Times, (India) 22/02/2011 “Counterfeit auto parts costing government Rupees 2 200 crore per annum”Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

44 Report RSSFeed/Zach Bowman (Automotive News China), 16/02/2011 “Counterfeit parts overwhelm China, include fake airbags, oil seals” Khaleej Times, (Emirates) 21/01/2011 “Fake Blackberries proliferate in Sharjah, Dubai” Reuters, 20/01/2011 “Nokia: out of five cell phones sold is one unlicensed copy” Scotland TV, 19/01/2011 “Investigation reveals true danger of counterfeit cigarettes” Seattle Times, 15/01/2011 “Port sleuths on the trail of counterfeit goods” The Hill, 2/01/2011 « Study: 24% of web traffic involves piracy » Emirates 24/7, 2/01/2011 “Abu Dhabi destroys 3 000 kilos of fake cosmetics” World Economic Forum - Global Risks 2011 - Table 3, Rough estimated market size of illicit goods based on public sources HAVOCSCOPE specialized site www.havocscope.com 2010 Emirates News Agency, 30/12/2010 “Economy ministry organises first conference on combating commercial fraud and counterfeiting” Korea Times, 21/12/2010 “Counterfeit Vuitton bags - distorted status symbol” Emirates 24/7, 13/10/2010 “Largest watchmaker ‘fed up’ with Gulf fakes” Le Monde, 7/10/2010 “L’agroalimentaire, source mondiale de trafics“ Le Figaro, 4/10/2010 “La contrefaçon sur Internet, fléau européen” International Herald Tribune, 21/08/2010 “Inside a factory making knockoff shoes” European Commission, Brussels - IP/10/995 - 22/07/2010 “Fight against fakes: Commission publishes Annual Report on EU Customs actions to enforce intellectual property rights” International Herald Tribune, 10/07/2010 “Pfizer sends its own agents on the trail of counterfeit Viagra” Reuters, 11/06/2010 “Customs group to fight $ 200 billion bogus drug industry” The Star, 11/06/2010 “UN - Illicit cigarette trade funds terrorism, organised crime. v v v 1 The authorities of this Emirate routinely carry out inspections and raids of workshops, warehouses, etc. Specific sanctions (10,000 dirhams, approx. 1900€) are imposed f or each infraction and shops are closed after the third offense. In total and for the whole of the UAE, some 444,000 counterfeit products were seized in 2008, 900,000 in 2010 from the 2.4 million products seized in the l arger M iddle East region. 2 In the first quarter of 2011, 825,000 HP products alone were seized in the E mirates. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

45 B -‐ STATISTICS: A DEAD WEIGHT AGAINST COUNTERFEITING-‐CRIME© Without reliable statistics, no effective action can be pursued to develop counterfeiting prevention and dissuasion policies. Likewise, inaccurate information used by right holders’ associations and inter-‐professional associations only increase the confusion and doubts of the public authorities. At this stage, it would be a great mistake to think that the State can act on unsubstantiated figures. It is no longer possible to operate on such an illogical basis. Since 2004, anti-‐counterfeiting associations have progressively outbid each other with their figures on this problem, going from a 350 billion US$ loss in 2005 to 600 billion US$ in 2009, and 1 billion US$ in 2010. In 2005 and 2006 the OECD22 made an effort to update the figures on counterfeiting, which had not been seriously evaluated since 1998. Although its conclusions were contested both by the industrial sectors and by the public authorities of various countries, they confirmed a 5 to 7% trend in world trade, already put forward in 2003 and 2004. This OECD report clearly raises doubts about the figures provided by the industrial sector and, in particular, about those provided by the International Chamber of Commerce, without denying the threat to the world economy. The report estimates that instead of “a minimum of 600 billion” dollars lost every year to pirates and counterfeiters, it is “at most 200 billion dollars”, in other words, only a third of the original figure. The International Chamber of Commerce, which reacted very rapidly to the OECD report, challenged the published figures. Guy Sebban, secretary general at the time, claimed that “up to 1000 million dollars” were lost every year in international transactions. The OECD, recognizing that the report was “politically sensitive”, was tactfully retracted its statement and finally admitted that it had not covered all the bases, in particular, piracy on the Internet. However, the OECD closely monitored another report, produced by the Government Accountability Office (GAO), the American government evaluation agency. The GAO, known for its neutrality and its indifference to lobbying, discredited the figures published recently by North American industrial groups reconfirming the “5 to 7% of world trade” figure. Far from finding these results in the United States, the GAO notes that out of 287,000 border spot-‐checks between 2000 and 2005, only 0.06% violated intellectual property rights. In value terms, even if seizures of counterfeit goods are increasing, violations only represent 0.02% of the total value of goods imported. This is 200 times lower than the figures provided by the industrial sector. The figures for North America have, however, considerably increased since 2005, and the GAO 2008 figures confirm the trends announced in 2005 by the industrial sector. However, this again shows major statistical inconsistencies between different authorities. In this matter, the GAO figures raised serious doubts about the credibility of the data provided by American industrial groups, who are constantly demanding more controls and clampdowns. 22 Organization for Economic Co-‐operation and Development. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

46 More control and clampdowns are exactly what is needed. However they should not be carried out haphazardly, but must follow a coherent and coercive strategy. In other words, counterfeiting is a global reality and its consequences are of great concern. Doing nothing would be a crime against the global economy. However, it is best to take an ordered approach based on clear data and objectives. Starting with the data, the figures quoted above are neither true nor false; they are obscure. Obscurantism, which is only too present in the fight against counterfeiting, is fostered by those who oppose the progress of truth and refuse to accept other more innovative and, above all, effective anti-‐counterfeiting approaches. The aim is simple: to withhold their expertise, protect their knowledge and, most importantly, continue their activities. In this context, the example of the pharmaceutical industry speaks volumes. It claims that, on average, counterfeiting affects 10% of its global turnover, amounting to more than 45 billion US$. According to Havocscope, in 2010 the Pharmaceutical industry lost out on 200 billion US$ due to counterfeiting. When referring to pharmaceutical counterfeiting a distinction must be drawn between trademark counterfeiting and constant struggle between brand-‐name 23 and generic medicines, which does not threaten consumers but is crucial to pharmaceutical industry’s economy, and on the other hand, placebo and under or over-‐dosed medicines that can be particularly dangerous for patients. Although some would apply this figure to both, in this context, can we really equate counterfeiting (in its IPR sense) and pharmaceutical crime or counterfeiting-‐crime® (in the criminal-‐law sense, affecting the safety of another person)? This ambiguity carries enormous weight and adds to the confusion regarding such problems. Aside from the public health sector, another source of concern are IPR consultancy firms, which focus on achieving the payment of damages to their clients by any means possible, thereby threatening to undermine the whole judicial procedure. Their under-‐the-‐table negotiations with counterfeiters preclude the production of reliable legal statistics. Some inter-‐professional associations could also be singled out, in particular those representing right holders, and whose entire activity consists in intense political lobbying, mainly focusing on the promotion of their governing body rather than on the legal actions filed by their members, who act as mere observers rather than participants. As for the customs authorities, they justify their existence using inaccurate statistics, and this at a time when the number of free-‐trade agreements is increasing. Stakeholders in targeted sectors, therefore, greatly benefit from grossly exaggerating the economic influence of counterfeiting in order to coerce public authorities into supporting them. Economic data traders have every interest in continuing their strong-‐arm and highly paid research, elaborating on the truth, to get the best price for their “expertise”. In turn, journalists have every incentive to reproduce this nonsense without bothering to follow-‐up on basic details. Underneath all these layers of suspect information, the real dangers blossom; industrial counterfeiters are becoming organized; small and medium companies suffer the full force of unfair competition and are completely unprotected in terms of their criminal liability; and consumers, who are, after all, the prime focus of this threat, are forgotten; 23 A brand-‐name medicine (brand-‐name assigned by the pharmaceutical laboratories) can, after 20 years, lead to the production of generic medicines with exactly the same characteristics as the original molecule, which has since passed into the public sector, but which have a lower sales price. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

47 so much so that they end up losing interest in the subject. Industrial sectors lacking the sufficient financial means simply give up. Organized crime supplies the local mafias. Customs authorities patrol their patch without coordinating with the other public authorities and policies continue to develop under the economic and social influence of right holders, omnipresent in the media and in the corridors of European and international powers. And this is not the worst of it. Counterfeiting is changing hands. It is becoming more and more professional and converging with smuggling and food fraud, producing products that endanger consumers. The luxury sector is now far from our concerns. Up till now, and with a few exceptions, no anti-‐counterfeiting, fraud or smuggling mechanism has managed to meet its main objective of affording universal access to economically acceptable products, while guaranteeing their integrity and compliance. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

48 Expert report: A statisticians perspective (Pierre Kopylow) Former United Nations demographic statistics officer The scale of the global phenomenon of counterfeiting has now been acknowledged, but the most reliable statistical method has yet to be identified. Precise assessments of such methods are hard to carry out for two reasons: • Measuring production. Counterfeiting is an underground activity and counterfeit products are produced, distributed and sold outside official channels. Counterfeiters never declare their activity and generally avoid paying taxes. Counterfeit production is therefore hard to quantify on a large scale. • Measuring sales. Income forgone by genuine product manufacturers cannot be calculated by subtracting the number of articles sold from the total number of articles that could have been absorbed by the market, or from the estimated total volume of the market. The genuine product market and the counterfeit product market must therefore be treated separately, and the statistical instruments to evaluate the one do not necessarily apply to the other. Indicators for each market can only be usefully and precisely compared if there are reliable ways of measuring counterfeiting. The different sources Customs seizures This is the main source of evidence used by national and international reports, mostly providing ratios of products seized to genuine products in a procedure that is influenced more by the estimates fitting their vision of the phenomenon than by a real statistical analysis (based on samples, requiring a methodology, sample tests, sample rates, the classification of each geographical area and product, and, as always, a significant financial investment). The basis of many reports, can be ascertained from the foreword by the Secretary General of the World Customs Organization, who makes no secret of the fact that the figures published for 2009 are largely under-estimated, even in respect of the number of seizures: • “The content of this year’s report clearly indicates that IPR seizures by Customs continue to increase and that pirated and counterfeit goods, particularly so those that have an adverse effect on consumer health and safety, remain a significant concern”. “Customs have responded to these changing global conditions in a proactive manner with a significant percentage of Members increasing surveillance for IPR infringing goods at international border crossings to protect both their revenues, brand holder’s rights and their citizens from harm”Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

49 There has certainly been an increase in the number of seizures, as indicated by the 13,280 seizures recorded in 2009 by the customs authorities, compared to the 11,176 1 seizures recorded in 2008 (+19%) , revealing an upward trend in counterfeiting, especially in sectors that could potentially affect the health and safety of consumers. However, statistical conclusions (and seemingly reliable indicators) on the real volume of counterfeit products and their economic and social impact on a global or regional level should not be drawn too hastily from these figures; with only 70 of the 176 WCO members providing statistics, customs and police seizures communicated to the CEN (Customs enforcement Network) are only part of total counterfeit products per sector comparable in terms of volume and especially price. Anyone wishing to carry out analyses on a global scale comes up against serious methodological problems; “the limitations of reports are not the same in all regions” and seizures meet criteria (number of items, price) fixed by the CEN, which tends to eliminate aggregate statistics, with a considerable number of small seizures being carried out on “small-time smugglers”, particularly in high-risk counterfeiting sectors (tobacco, medicines, etc.). Statistical data on seizures highlight contradictory trends, if we consider the increasing number of countries giving their customs and police services stricter orders to reinforce their border controls against fraudulent and counterfeit products. Even where identified, the increase of counterfeiting in high-risk sectors, going beyond the imitation of luxury brands (clothing, leather items, perfumes, etc.), could therefore diverge from published figures. Professional organizations The figures provided by professional associations and organizations give no clear indication regarding the origin of their sources and, in various sectors of trade and finance, there is a strong tendency to overestimate the effects of counterfeiting on 2 employment . Thus, for example, in April 2010 the Union des Fabricants (Unifab)- a French anticounterfeiting association with 300 members, sponsored by the French Ministry of the Economy, Industry and Employment- published a report evaluating the impact of counterfeiting on companies domiciled in France. This association claims, in a very generalized manner, without providing any reasoning or specific figures or indicators, that: “An overview of the global phenomenon has been established, country by country, product by product, through a catalogue produced by international organizations, local administrations, associations, private agencies, etc. The most severe consequences of this form of trafficking include national fiscal losses, prejudice to sustainable development, and increased unemployment.” The report only mentions a few figures, and includes many non-sourced statements. 3 The authors of this study acknowledge that their figures were not easy to analyse, even though they converges on the fact that here has been a surge in this phenomenon in recent years. v v v 1 291 million pieces in 2009 compared to 225 pieces in 2008. 2 On this subject, see the highly critical foreword by Pierre Delval, Le Marché Mondial du Faux et Contrefaçons, CNRS Editions, Paris 2010. 3 In its report Unifab publishes “a new study carried out in 2008 among 55 companies established in France on the damages caused by counterfeiting, in 17 sectors. These 55 companies, of which only a third were listed on the CAC 40, are not representative of the French industrial and commercial landscape.Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

50 C -‐ THE GLOBAL ECONOMIC CRISIS AND ITS MANY CONSEQUENCES World history shows that an economic crisis can have dire consequences on a great many levels. In January 2009, Resolution 1651 (2009) of the Council of Europe highlighted that the current crisis could have consequences “which could possibly threaten to undermine the very foundations of democracy” and reminded governments that “despite financial difficulties, citizens’ social, economic and human rights must be safeguarded”. Unfortunately, a year and a half later, a large number of Council of Europe Member States are no longer capable of “stimulating the economy, notably by increasing aggregate demand in order to boost consumer spending, through greater public authority investment in infrastructure and housing”. On the contrary, certain governments are obliged to reduce their spending and will therefore have to apply one or various of the following measures: reducing of public spending, freezing or reducing of the number of civil servants, increasing taxes, increasing the age of retirement and freezing or cutting salaries and pensions. Various governments have already announced salary cuts in the public sector. The social consequences will probably be a lot more serious than they have been imagined in recent years. But beyond an enlarged Europe, the global economic crisis is extremely serious and constitutes a challenge not only at a national level but also at a European and international level. The reassuring fiction of an international order of collaboration between states must now give way to global chaos24. In the face of such chaos everything goes very quickly. Criminal organizations rub their hands and continue to carry out their profitable trafficking on mass. The global crisis provides fertile ground for these dangerous organizations to sow, grow and harvest the fruits of their crimes. The convergence of food fraud, smuggling and counterfeiting displays the full firepower that these alliances, hybridizations and mutations are achieving, leaving us powerless to do anything, and sometimes oblivious to what is happening. The major axes search out the areas of strongest demands that provide the highest margins: medicines, foodstuffs, tobacco, construction material and machinery, spare parts, etc. Demand is vast. The economic crisis has created a weakened industry in the northern hemisphere with new manifestations of poverty. In the southern hemisphere it has further increased the gap between rich and poor. Everywhere, low-‐cost medicines are cruelly lacking in the South and the brand war is escalating in the North. Forecasts on food production have not yet begun to return to normality in developing countries and rich countries are seeing the sustainable establishment of “low-‐cost” mass distribution. 24 “La face noire de la mondialisation”-‐ Alain Bauer et Xavier Raufer – CNRS Editions 2009 Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

51 The Internet’s success continues and informal markets prosper without the public authorities being able to exert any real control over them. Construction machinery and materials are still suffering from the housing crisis and private individuals, victims of the decline in purchasing power, reinvent themselves as master-‐builders, looking for the best possible deals on low-‐cost materials. In all sectors, and under the influence of the crisis, the world is changing rapidly and consumer behaviour adapts itself instinctively, preparing itself for the worst and introducing widespread loss in confidence. The prospects for crime are much brighter. Business has never been so good. And on a global level, the consolidated turnover of illicit trafficking, in terms of fraud and counterfeiting of consumer goods, will soon top the 300 billion US$ mark, hot on the heels of drug trafficking. The dangers that have long been predicted by the most imminent criminologists and often weighed up by uninformed politicians, have deep roots in our societies. These many dangers can be external or internal and include subversive or anti-‐democratic activities against national institutions, symbols and ideologies. They also affect the cultural integrity of social groups. Lastly, they have an effect on the economy, due to industrial competition and unemployment. Thus, counterfeiting-‐crime© is a political threat because it uses corruption within a State to import illegal products. Certain crimes, like the traffic of medicines or food products, represent a societal threat with devastating effects for individuals and whole communities. Economically, organized crime feeds off legal trade and financial activities. In legal terms, it exploits loopholes in legislation, due to the inflexibility of intellectual property law, to carry out complex cross-‐border trafficking between North and South, or to participate in established trade activities, which are impossible to control in certain parts of the world where borders are often porous. a) Tunisia, a concrete example Illicit activities, counterfeiting, smuggling and food fraud are popular among organized crime and local mafias, which finance and develop them to the extent that they have become, along with drugs and prostitutions, one of their main sources of revenue. Tunisia is no different and the country’s post-‐revolution instability and the effects of the global economic crisis, only contribute to the speedy development of the illegal domestic and transit markets, which had previously established themselves and had been tolerated under Ben Ali. The size of this illegal sector is difficult to measure precisely without carrying out an in-‐depth study. According to the estimates of the Union Tunisienne de l’industrie, du commerce et de l’artisanat (Tunisian Union for Industry, Trade and Handicraft) and certain businessmen, it represented 15 to 20% of GDP at the end of December 2010 and employed at least 31.4% of the non-‐farming working population. Since the Jasmine Revolution, this figure has risen to over 40% of the working population. In Tunisia the informal sector, which contributes to the development of these illegal markets, is made up of a large number of medium-‐sized independent micro-‐businesses or family businesses of 2.4 to 3.6 employees. Employment conditions are based on occasional employment, family connections or personal and social relationships, rather than on contractual agreements providing proper guarantees. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

52 For many Tunisians, it would appear that this illegal situation is not concealed but tolerated. Thus, in a study carried out by the Tunisian Consumer Defence Organization in the spring of 2006, 77.6% of Tunisians buy products sold on parallel markets and 69.6% declared that they continued to buy unauthorized imitation products knowing that they posed a potential health or hygiene threat. 88.1% of consumers bought them because of their low price and 44.8% thought that they were simply markets with an abundant and diversified supply. Across the board, businessmen denounced the laxity of the authorities of the day, which, moreover, recognized that they made no attempt to enforce the legislation because it was not convenient. Tax authorities rarely prosecuted sellers and showed great, corruption-‐fuelled, tolerance, since the sector sustained more than 15,000 families and provided a social security and sustenance that the official sector was incapable of providing. However, the Ministry of Trade now plans to setting up a legal framework specific to products sold on parallel markets. All sorts of trafficking are also prospering along the borders between Algeria and Libya, so much so that some Algerian tourist agencies specialize in organizing bus trips to villages in the Kef Governorate. On weekends, the residents participate in full-‐blown illegal souks. This trafficking reportedly amounts to more than 200 million US$ according to Algerian customs statistics. In the interior of the country, a parallel economy is also developing in various cities. Goods come in from South-‐East Asia and arrive via container in the ports of Sousse, Sfax and Radès. They are then transported by lorry to large warehouses; from there they are distributed to wholesalers and retailers in various cities, El Djem, M’saken, Sousse or even Tunis (the Mocef Bey market, Zarkoun street, Sidi Boumendil street, etc.). The prices of these imported goods, which meet Tunisian demand, are affordable in comparison to the formal sector prices. Counterfeiting in particular, regardless of the legal brand-‐protection mechanism in place, has reached such as scale that it is very hard for companies to defend their rights. While Tunisia and Algeria are establishing themselves as consumer and transit areas, Morocco is the only northern African country that has been actually identified as a producer of brand counterfeits. However, Tunisia tends to specialize in food fraud and counterfeiting (olive oil, wines and vegetables in jars and tins), mainly exported to Europe, which makes the crime even more serious. The liberalization and diversification of foreign trade has flooded Tunisia with counterfeit products from countries like China, Turkey and Dubai. The counterfeiting of medicines (despite its health policy, Tunisia is not protected), food, cosmetics and spare parts not only harms the national economy but also constitutes a threat for consumer health and safety. Foreign carmakers, for instance, that have been operating for a long time on the Tunisian market, must now balance their production cost advantages with the losses from the counterfeiting of spare parts. As explained above, these counterfeits are especially sold on informal markets. It would seem that instead of losing ground, this parallel market is growing. In certain sensitive areas, shops selling mobile phones, household appliances, clothes and toys “sprout up like mushrooms”. Shopkeepers or individuals buy all sorts of products in such shops taking advantage of the price difference compared to official markets. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

53 In counterfeiting cases, it is possible to opt for either civil or criminal proceedings, and common sense will make right holders chose the civil courts as they will have more control over the process. Likewise, legal actions against unfair competition can be filed by brand owners if, as in the French system, they can prove that they have been prejudiced by specific acts of counterfeiting. The offense will most often be linked to the intention of stealing the brand owner’s clients or to create confusion in their minds regarding the origin of the products. Prejudice is generally defined as a financial loss or the loss of an opportunity for economic development. But do the damages paid meet the expectations of the trademark owners? It would be more accurate to say that damages are on a par with Tunisia’s level of economic development; in other words, they not very high in European terms, but represent considerable sums for Tunisians. As in France, damages cover nothing more than the prejudice itself. However, this prejudice is often extremely difficult to assess because most local counterfeiters do not keep accounts. Moreover, courts base their decisions on the seizures carried out and on the counterfeiter’s profits, which can be very frustrating for the right holder and not very helpful for Tunisia’s prevention and dissuasion policy. Companies affected by counterfeiting are not primarily interested in obtaining adequate compensation; above all they want to put a stop to the criminal activity. They can obtain satisfaction on this point as courts systematically order the destruction of the counterfeit products. This would be acceptable if it only concerned harmless products. However, this is far from being the case, and consumers are the first to pay the price. Smuggled goods include fuel, textiles, livestock, medicines, tobacco, copper, stolen cars, drugs, etc. which are transported illegally between the border “wilayas” (governorates) of Kasserine, Sidi Bouzid (a smuggler route), Kef on the Tunisian side and Souk-‐Ahras, El-‐Tarf, Tébessa and Oum El Bouagui on the Algerian side. Smuggling has never been so good in certain cross-‐border towns. In these areas, such in increase in smuggling is endemic, especially since part of the population has reconverted to this lucrative activity. Some people have happily left their farming activities to specialize in such customs infringements, from which they can make a profit quickly and relatively easily. Not a day goes by without land border authorities, either on the Tunisian or Algerian side, dismantling a criminal network, mainly smuggling fuel, copper scrap, watermelons, mobile phones and, above all, stolen vehicles. Likewise, not a day goes by without the Tunisian or Algeria media reporting on a new “Contra” or “Trabendo” case (local terms, used by the Tunisians and Algerians respectively to refer to smuggling). The irony is that the dynamism and resourcefulness of smugglers seems to be a character trait admired by both media and public authorities alike. Regarding tobacco, its illegal trafficking is particularly profitable for mafia organizations and catastrophic for the local economy. This infiltration of crime in the affairs of the Tunisian State results in social injustice, unfair competition, national impoverishment and, in the long term, the bankruptcy of the whole country, threatening the local economy and, above all, the health and safety of Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

54 its consumers. This could create new tensions capable of undermining their dearly bought democracy. In this context, the Tunisian State, along with transnational firms and other companies have a major responsibility in the social and economic stability of Tunisia, especially at a time when the country is seeking political stability. They must recognize and respect the rules of international law; legal and regulatory provisions and national administrative practices; the rule of law; public interest; development goals; social, economic and cultural policy, including the transparency of products sold and taxed; the liability and the illegality of corruption; and, in the case of multinational firms and other companies, in particular, the authority of the countries in which they operate. Multinational firms and other businesses must therefore abstain from any activity that could further, incite or encourage States or any other entity to violate human rights and consumer protection. They must ensure that the goods and services that they offer and produce are not used to violate citizens’ rights and to divert State revenues. In short, multinational firms and other companies must respect economic, social and cultural rights, as well as civil and political rights, and contribute to their implementation. In particular, they need to uphold the right to development, the right to sufficient and clearly identified food and to the total traceability of products imported or manufactured locally, and they must abstain from any action that could hinder or prevent the fulfilment of these rights. To this end, multinational firms and other companies must also adopt fair trade, marketing and publicity practices and establish the provisions required to ensure the safety and the quality of the products and services that they provide. They should not provide, distribute or market dangerous or potentially dangerous products for consumers, nor should they promote them. On the basis of these considerations, the Tunisian government has decided to act in order to protect consumer health and safety, national economic stability and fiscal equality, and to provide a sovereign guarantee for foreign investors. b) Health: a key area for organized crime25 We know from past experience that in times of crisis, health outcomes and the risk of health-‐related financial hardship may be affected by changes in the resources available for health systems (financial and human resources, drugs and medical devices, running costs and infrastructure), by changes in living conditions, lifestyles and consumer behaviours, and by changes in social norms and values. Ideally the health system can and should do three things: protect those most in need, concentrate on areas in which it is effective and adds value, and behave as an intelligent economic actor in terms of investment, expenditure and employment. In countries whose health system is financed through general tax revenues, decreases in GDP and economic outputs have resulted in significant reductions in public revenue for health. Alternatively, in countries that rely predominantly on wage-‐related 25 http://www.euro.who.int/__data/assets/pdf_file/0006/66957/RC59_edoc07.pdf Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

55 contributions to health insurance funds, increases in unemployment have constrained revenues earmarked for health. International prices for drugs and other consumables have increase owing to inflation and currency depreciation. These pressures on revenue generation and purchasing power persuade policy-‐makers to cut budgets, introduce or increase user fees, co-‐payments or other forms of private financing, reduce benefit packages or tolerate longer waiting times. However, although both detailed and synthetic economic reviews and forecasts have been published at least quarterly since mid 2009, the direct effects of this multidimensional crisis on health are still unclear. So far, the information and evidence available on the precise impact on individuals, vulnerable groups and the health system in general remain anecdotal and fragmented. Furthermore, this type of data is proving difficult to compile and analyse; existing health information and monitoring systems are proving rather unfit to serve the needs of policymakers regarding these critical issues in many countries. Few changes in health system expenditures have been observed. The European health sector (which employs about 10% of the total workforce) seems not to have lost many jobs and in fact appears as a stabilizing sector. As is also the case in the United States, health is indeed one of the very few economic sectors that is still creating jobs. The “credit crunch” seems to have mostly affected health-‐related private investors or medical insurance schemes and undermined some forms of public/private partnerships. Depreciations have increased the prices of imported medicines and medical devices in the countries concerned, causing initial problems to the less rich among the affected countries. Already facing threats in terms of expiry of patents on “blockbuster drugs” and rising research and development costs, the pharmaceutical industry has signalled difficulties in accessing credit and seems to expect additional downward pressures on drug prices. Whether or not it is related to unemployment, the foreseeable reduction in household income affects private expenditures on health and the ability of families to pay for health care. It is known that globally 150 million people are pushed into poverty yearly through the catastrophic household health costs that result from payments for access to health services. It is known that non-‐adherence to medical treatment could in the longer term result in wider prevalence of disease, complications of chronic conditions and increased drug resistance in the case of infectious diseases. Rising unemployment, the deterioration of millions of people’s living conditions, and the additional stress caused by the crisis have led to less healthy lifestyle choices or riskier behaviour – such as increased use of smuggled cigarettes, drugs and alcohol. It is known that even small changes in behaviour today, compounded over time, could manifest themselves in health outcomes years later. Signs of individuals changing their behaviour have been reported in ways that have a negative impact on health. For example, there have been reports of increasing consumption of fast food, and the purchase of cheap but uncontrolled food products, threatening to create new dangerous pathologies. The IMF, the World Bank, the Organization for Economic Co-‐operation and Development (OECD), the European Commission (EC) and some other agencies are producing very Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

56 similar economic forecasts. According to these, global growth rates could gradually recover in 2012, though only to lower levels than the ones observed in 2007 (up to 2%). However, in the current economic climate, all experts agree that the uncertainties attached to any forecasts are very large – there are many risks, financial market conditions will take time to normalize, whatever the approach adopted, and it takes longer for industries to recruit than to fire. Not only is the outlook on the downside, but also the risks of a long and deep recession or even a depression cannot be excluded. As the crisis evolves, some issues are emerging regarding possible approaches and measures to help resolve it. Some revolve around the relative priority to be given to investment versus boosting consumption in economic recovery programmes, around how to minimize social damage and protect the most vulnerable groups, and even around what role the health sector could play as an economic area to help countries get out of the crisis. Member States are considering different approaches to perform better and doubt whether the crisis should be used as an opportunity to introduce drastic, often long-‐postponed changes in functions and in the overall architecture of their health systems. The health impact of the rapid deterioration in public finances are already strongly felt. In view of the levels of public debt, it is more than likely that the fiscal “room to manoeuvre” will remain limited. The deterioration of public finances and a consequent shrinking of fiscal space could force governments to adopt drastic adjustment and austerity measures. Resources for health systems could be under severe pressure in the years ahead. Health authorities and related stakeholders will have to navigate through particularly difficult times in the foreseeable future, including focusing on what will happen after the crisis (for a start, debts will have to be paid). The effects of the crisis on health and health systems vary significantly from country to country, depending on the structure of their economy, their dependency on exports and/or fluctuations in their domestic currency, as well as the policy actions developed by their government. There will certainly be no “one size fits all” or ready-‐made approach. In such a context, solutions will have to be customized to meet countries’ specific needs. Exchange of information and experience between countries and coordination of activities will certainly be needed, but supporting the preparation and implementation of country-‐specific programmes has to be the top priority. Moreover, public authorities are becoming more sensitive to the crucial importance of the health sector and to the role of the health sector in the economy. Thanks to campaigns to introduce primary health care, Health for All and Health in All Policies, the work of the Commission on Social Determinants of Health and the Tallinn Charter on Health Systems for Health and Wealth, many policy-‐makers in the WHO European Region now recognize that making health services accessible is one of the most effective and efficient ways to reduce poverty and social inequalities, and that investing in health is good for social stability and for the economy. The experience in Finland in the crisis in the 1990s is being corroborated every day, indicating that in times of economic disaster robust health systems protect people and preclude many from having to face disease-‐related catastrophic expenses Since strong health systems are essential for weathering the storm, the commitment by Member States in the WHO European Region to strengthening their health systems Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

57 based on the values and principles agreed in the Tallinn Charter is more relevant than ever (“to promote shared values of solidarity, equity and participation through health policies, resource allocation and other actions, ensuring due attention is paid to the needs of the poor and other vulnerable groups”). The particular social context will need to be carefully taken into account in determining the precise way to strive for equitable health gain, financial protection, responsiveness and efficiency improvement. Member States need to carefully review the way they provide services, generate the necessary inputs, finance their services and provide stewardship for the ensemble of all public and private organizations, institutions and resources mandated to improve, maintain or restore health within the political and institutional framework of each country. Nevertheless, countries with a highly monitored public health system would be advised to be particularly vigilant of everything that might appear “under control”. In 2011, France underwent a healthcare crisis due to information revealed by the MEDIATOR (benfluorex) scandal, a drug that is thought to have caused a number of deaths (between 500 and 2000 depending on the study). According to the report carried out by IGAS, the French inter-‐ministerial audit and evaluation office for social, health, employment and labour policies, submitted on 15 January 2011 to the French authorities, the national agency in charge of medicine marketing authorizations, the AFSSAPS (Agence Nationale de Sécurité du Médicament), “incomprehensibly tolerant towards MEDIATOR” according to the IGAS members, was found to be seriously wanting in its approach and in the organization of its pharmacovigilance system. Likewise, the French public authorities have been blamed for their poor monitoring of pharmaceutical networks. This case has at least highlighted, among other things, the AFSSAPS’s lack of control, for lack of resources, over generic medicines sold in pharmacies. According to previous studies submitted to the Ministry of the Interior between 2004 and 2006, the dosage of certain generic medicines no longer meets marketing authorization requirements, once again indicating the vulnerability of renowned health systems to the risks of official and bona fide sales of potentially counterfeit medicines. In this context and considering the threat of organized crime in the area of pharmaceutical crime, as stewards of their respective health systems, ministries of health have a duty to offer a deal to the other stakeholders and advocate for government policies that take a central position in terms of stewardship and health financing, as well as a pro-‐health and pro-‐poor approach across all sectors. This is certainly the case when it comes to discussions with ministries of finance, in the context of economic recovery plans, regarding the share of the budget to be allocated to health and other social sectors, which should not focus merely on growth or on the immediate protection of existing jobs. In order to anticipate risks, it will be essential to make regular analyses at national and international levels of the economic and social situation and its effects on health and health systems. In many cases, the existing information systems in Member States may not be able to provide, in a timely manner, the health intelligence needed by decision-‐makers and other stakeholders. A WHO-‐supported virtual network and exchange platform and a “hot line” are being put in place at regional level, to help ministries and stakeholders access relevant information and advice. Ministries or other health-‐related authorities may also need to function in a “crisis management” mode, emphasizing the collection of information (including anecdotal), regularly analysing the situation, Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

58 articulating strategic options and suggesting anti-‐crisis measures and interventions, taking the criminal threats of dangerous counterfeits and illegal trafficking of medicines into account. With the scarce information available, it is hard to predict at this stage with any accuracy how people in Member States will be affected. However, the experience gained and lessons learned from previous crises helps to direct attention towards specific issues in order to anticipate difficulties, explore options and prepare anti-‐crisis measures. c) Overview of the pharmaceutical market in the WHO European Region The pharmaceutical market is affected by the financial crisis in that it is exerting upward pressure on medicine prices. In Lithuania, price rises are linked to VAT increases. Kazakhstan, the Republic of Moldova and Ukraine report pharmaceutical price increases of up to 30%. The general upward pressure on prices across the Region is exacerbated by country-‐specific currency depreciations, as in the case of Armenia. This pricing policy inevitably leads to a resurgence in illicit trafficking, given the lack of protection against this kind of overspill. Concerns about the effect of the crisis on the utilization of care are only now emerging. In Italy, the risk of excluding patients from dental care that traditionally comes with high levels of user charges and correspondingly heavy financial burdens on household budgets has led to a regional initiative to protect dental care for vulnerable population groups. In the eastern part of the European Region, there are substantial concerns about increases in the price of health services and pharmaceuticals. In Ukraine during first two months of 2009, for instance, health service prices increased by more than 30% compared with the same period in 2008. Price increases have a considerable effect on private health expenditures (in the form of official user charges and co-‐payments, payment for medicines, or informal payments) in numerous countries in the Region, and it is feared that this may deter patients from seeking the necessary care as it becomes unaffordable, who may turn to illegal services and online purchases. Even before the crisis, in 2005 WHO recorded private health expenditure as accounting for more than 50% of total expenditure in Albania, Armenia, Azerbaijan, Cyprus, Georgia, Greece, Kyrgyzstan, Tajikistan and Uzbekistan. In December 2008 Lithuania removed the VAT rate of 5% on pharmaceuticals. Medicines are now taxed at a standard rate of 19%, leading to a close to 14% increase in pharmaceutical prices and a 10% increase in health care expenditure as compared to December 2007 In Armenia, Consumer price inflation in 2008 stood at 9%, a relatively high level, but dropped to 5.3% at the end of the year. However, in early March 2009, Armenia abolished the fixed exchange rate for the Armenian dram and introduced a floating rate. This led to an immediate increase in prices of commodities such as oil and food of between 20 and 30%. This explosion in prices now also affects essential medicines such as antibiotics or vaccines, to the great delight of the local mafias. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

59 d) A general public health policy (African Region) According to the United Nations Millennium Development Goals Report, published in September 2009, the importance of commitments to combat poverty in the world had been heightened by the economic, food and climate crisis. 2010 saw no improvement and the socio-‐economic situation is now even more critical. The report ‘Strengthening the Global Partnership for Development in a Time of Crisis’ was drafted by the Millennium Development Goal (MDG) Gap Task Force, which included more than twenty UN agencies, the IMF, the World Bank, the WTO and the OECD, and whose purpose is to monitor the progress of the development partnership established in the eighth Millennium Development Goal. According to this report, official development assistance (ODA) had increased by 10% in 2008, to reach 119.8 billion $. ODA as a percentage of gross national income in donor countries also improved, going from 0.28% in 2007 to 0.30% in 2008. But this increase, sustained in 2010, is not strong enough to reach the goal of 0.7% before 2015. Donor countries also failed to meet the objective of bringing their annual assistance up to approximately 155 billion US dollars by 2010. The global crisis has put pressure on donor countries’ aid budgets, making this intermediate goal harder to reach. The report also indicated that the distribution of ODA was “skewed”, since much of the increase since 2000 had gone to a handful of countries recovering from war, such as Iraq and Afghanistan. Some of the poorest African countries have seen very little increase in assistance. Developing countries have been affected by the collapse of trade financing since the beginning of the financial crisis, with a decrease of 100 to 300 billion US$. The choking of trade financing adds itself to the negative effects of new trade restrictions in a many countries, and to the deadlock in trade negotiations under the Doha Development Agenda. A 2005 agreement of the World Trade Organization in Hong Kong to grant duty free access to 97% of imports from poor countries, resulted in only 80% of exports from least developed countries (LDC) being granted a “duty free” status on the markets of developed countries. Even after the success of two important debt relief initiatives, high fuel prices and imported foodstuffs, added to the low demand for export goods, have prevented many developing countries from paying their external debt. The consequences have been swift, especially through a strong increase in the illicit trafficking of medicines since 2010 (20 to 60% depending on the economic situation of Western and Eastern African States). e) Access to medicines At a time when the poor’s purchasing power is under pressure, the cost of many basic medicines is rising. On average, people living in developing countries are currently paying three to six times the international reference price for the cheapest generic medicines. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

60 The “Strengthening the Global Partnership for Development” report recommended the establishment of public/private partnerships to improve access to basic medicines. The main message that resulted from this study was that achieving the MDGs could encourage economically and ecologically sustainable growth, thereby mitigating climate change and addressing political, economic and public health needs linked to extreme poverty. However change is yet to be seen. In a joint programme with UNICEF and the Global Fund to Fight Aids, Tuberculosis and Malaria, UNITAID transferred more than 15 million US dollars to UNICEF for the purchase of more than 9 million artemisine-‐based combination therapy (ACT) antimalarials for eight African and Asian countries. Thanks to a UNITAID donation of 23 million dollars, in 2010, projects supported by the Global Fund extended access to ACTs to 13 African and Asian countries where malaria is endemic. In addition, UNITAID pledged 109.2 million US dollars to UNICEF in 2008 for the purchase and distribution in 2009 and 2010 of 20 million mosquito nets in eight of the worst affected countries. Although malaria can be cured in a matter of days, the lack of rapid diagnoses and effective treatment means that it is often still deadly. Immediate intervention is particularly important for the most vulnerable groups, i.e. under fives, pregnant women and persons with a weakened immune system, for example due to HIV/Aids. Today, malaria is mainly controlled through early diagnosis, effective medical treatment and by preventing transmission, essentially through the use of insecticide-‐treated mosquito nets. Resistance to traditional malaria treatment using chloroquine, for instance, which is already widespread in Africa and Asia, exacerbates the problem and contributes to the high death rates recorded since the 1990s. Artemisin-‐based combination therapies are the only truly effective treatments in regions where resistance to other medicines is widespread, but access is still not sufficient to reverse malaria’s fatal incidence. Malaria control comes up against two major obstacles: the high cost of ACTs and the time it takes to deliver mosquito nets. In addressing this situation UNITAID and its partners-‐ UNICEF and the Global Fund to Fight Aids Tuberculosis and Malaria-‐, have concentrated their actions on: • Strengthening ACT treatment, aiming to treat 54.5 million malaria cases by the end of 2011, and using its market model to influence the number of manufacturers and products on the market, lower prices and help expedite quality assurance procedures; • Improving access to mosquito nets by supplying 10 million mosquito nets in 2010, and using its market model to reduce price and delivery time. Despite the existence of ACTs that cure malaria in just three days, in 2010 close to one million deaths were registered owing to insufficient access to this effective treatment and the exponential growth in the traffic of counterfeit antimalarials. The high cost of ACTs constitutes a major obstacle, in addition to the scarcity of paediatric ACT formulas. Without sustainable funding that would allow for proper planning and an effective technical and legal prevention and deterrence policy against counterfeiting, countries are reluctant to switch from chloroquine, which is a lot cheaper, to ACTs. By way of comparison, the price goes from 5 American cents for chloroquine to 1 US dollar for Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

61 Coartem produced by Novartis and approximately 90 cents for an ACT manufactured by Cipla. Various manufacturers produce ACTs but only nine of these have been granted the World Health Organization prequalification programme quality assurance. And although under-‐fives have a higher risk of dying from malaria, only one ACT formula intended for paediatric use has received a quality label. As with other diseases, the lack of interest in paediatric medicines among manufacturers is of great concern. f) The danger of private labels 26 Europe remains true to its reputation for being a leading market for private labels, in particular because regional specificities that used to slow down them down, although still present, are decreasing. Private labels are not only boosted by consumer crisis behaviour, but also by the interest of retail chains, which can thus draw more of their supplies from Europe. As a result, the valuation of the top companies specialising in private labels tends to meet that of brand-‐name companies in mergers and acquisitions. Europe is the world’s leading market for private label products. Private labels have a 23% market share in Europe compared to just 16% in the US and between 2 and 4% in Latin America and Asia, according to a study carried out by Close Brothers International in 2009. However, there is great variation within the European zone, whether in terms of the market penetration of private labels or of the increase of their penetration. Private label market share, which is traditionally strong in the United Kingdom and in Switzerland has levelled off in the last two years having reached saturation point at 40% in value terms. In countries like France, Germany and Spain, where retail chains are strong, private labels hold 20% of the market and are still growing. Italy is a special case in Western Europe: its network of small retailers remains strong making it harder for private labels to establish themselves in the market and they are, therefore, growing more slowly. Central European countries, however, are an area of rapid growth, driven by the double push of higher purchasing power and the rapid and widespread establishment of large retail outlets. Regional brands are still widespread, but the situation is undergoing considerable change. Until recently, in the majority of European countries, end consumers’ main motivations for buying were the same and focused on value-‐for-‐money. However, the situation has now changed considerably and, depending on the category and country, consumers have a different image of private labels: • Consumer price perception places private labels approximately 20 to 30% below brand-‐name products (even though the difference is actually smaller); • An increasing number of consumers consider that private labels are high-‐quality products (up to 82% of Dutch consider that the quality of private labels is as good as that of brand products); • Private labels are considered to be increasingly innovative, and their products are seen to set trends. 26 This analysis has been developed on the basis of the most recent brand marketing studies for 2008-‐2009, in particular Close Brothers. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

62 In parallel, the range of private labels has become segmented in response to changes in the market; 3 types of private label can currently be identified: • Low-‐price products with a clear “price” positioning, in response to the development of discount shops, and which aim to “reclaim” consumers that have left traditional large retail outlets for discount prices; • The “me too” products, that are in direct competition with national brands; • “High quality” products, the most recent development among large retail outlets that have adopted a “quality” positioning (at a price) to attract and retain new consumers. A new and important characteristic of the private label market, providing a good outlook for the future, is that young people (16-‐34) are the most frequent buyers; so much so that the percentage of consumers that say they will buy more private label products is much higher than those who say that they will not. Within the private label sector, there continues to be a strong variation in terms of the market penetration of different products. However, there is no doubt as to the basic trend. Market penetration is increasing in almost all sectors, especially, and for some time now, for yoghurts and ready-‐made meals. What is even more surprising is that there has been recent rapid growth in sectors where brand-‐name products were generally safe from private label competition. Close Brothers indicates this to be the case for organic products and baby food, where consumers had traditionally sought the security of brand names, despite having to pay significantly higher prices; this, however, is the area of the private label market that is growing most (+34%). The only products that are now safe from private label competition are impulse-‐buy products such as chocolate confectionery, where the act of purchasing is largely irrational; brand names still have a strong influence here due to their strong innovative policies and associated publicity. In a difficult economic situation, which puts greater pressure on purchasing power, private labels are ideally positioned to meet increasing concerns among: • consumers: to obtain the best value for money; the next few years are likely to see the growth of private label market penetration for the large majority of products; • retail chains: to offer homogenous product ranges across certain markets such as Europe and the United States. Innovation is the greatest challenge facing private label products. In the past, they were mainly known for being copies of well-‐known brands. To change this trend, private labels now offer fair-‐trade products such as chocolate or coffee. The other important innovative trend is the launch of organic product ranges. This includes yoghurts, butter, biscuits, fruit and vegetables, to name but a few. In general, private labels are exploiting the fashion for traditional recipes, while paying attention to packaging. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

63 However, while this development in the private label market appears to be perfectly in line with the needs expressed by a population of consumers seeking value for money, the threat of food fraud and counterfeiting is nevertheless present. Private labels are rarely manufactured by the supermarket group itself, with certain exceptions such as Intermarché in France and Migros in Switzerland. These highly specialized industries have become focused on reaching their critical size, as in the United Kingdom. However, a large proportion (more than 70%) of private labels in France are still supplied by small and medium-‐sized enterprises (SME), given that large national brand manufacturers are becoming increasingly interested in them as a means of reducing their operating costs by putting their production mechanisms to full use, and to access the discount circuit. However, a specialized industry is beginning to emerge resulting in buy-‐outs and mergers in this sector27. The manufacture of private labels requires industrial known-‐how to produce high-‐quality and competitive products and services (logistics, innovation, etc.). These businesses, which often go unnoticed, are flexible, creative and responsive, permanently reinventing themselves to perfect their production mechanism and staff training. Nevertheless, there is a great temptation for some to import raw materials without carrying out proper quality controls, as in the Lesieur scandal in France, or simply to directly subcontract products in high-‐risk countries like China. Private labels play an important role in the relationship between producers and distributers. These relationships are complex, involving both collaboration and competition to gain control of the distribution chain. The dazzling success of the private label market has prompted a reaction from producers that are determined to remain standing. This competition between producers and distributers has been referred to as the “brand wars” and it can be analyzed on various different levels. Firstly, we can see that in terms of quality, certain distributers provide services (quality-‐control services relying on engineers and technicians) or commission external service providers to carry out audits to assess the reliability of suppliers7. Competition between producer and distributor is also present in terms of positioning. When they were first launched, private labels were entry point brands trying to break the monopoly held by brand manufacturers. Today, however, distributers invest in expanding markets, previously exploited by brand labels. This brand war is a potential risk factor both in terms of fraud and quality control. Catalyzed by the crisis, this situation will soon provide another mass market for organized crime, especially in emerging European markets, with all the risks that this entails for public health and safety. The European Union Committee on Environment, Public Health and Food Safety is aware of this risk. It invited the Agriculture and Rural Development Committee, specialized in this area, to incorporate the following proposals into the 2009 draft resolution: • the quality certification systems for food should offer consumers information and a guarantee regarding the authenticity of ingredients and the local production 27 Patrick Déniel, Yves Dougain, Concentrations dans les marques d’hypers, L’Usine Nouvelle, n°3057, 24/05/2007, p.24. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

64 methods; therefore, it is important to enforce and exploit these systems by applying more inspections and traceability systems; • labels should indicate the origin of the main ingredient or ingredients of a food product where the main ingredient is not covered by a “Protected Geographical Indication” (PGI) or a “Protected Designation of Origin” (PDO); the main ingredient being the ingredient constituting more than 50% of the product. However, the use of labelling systems should be optional; • further simplification of the marketing standards through a more precise definition of the main criteria to be applied; European Union guidelines should be developed for the use of general indications such as “low sugar content”, “low CO2 emissions”, “diet” or “natural”, to prevent misleading practices; • the promotion of organic products and farming methods, producing high-‐quality food products and contributing to the protection of the environment and the wellbeing of animals; a simplification of the certification system, for the further development of the organic market, and the speedy development of an obligatory EU logo, enabling consumers to recognize organic products more easily; • consumers have greater demands in terms of the food quality, regarding safety, but also on an ethical level, especially in respect of the protection of the environment, the wellbeing of animals and techniques using genetically modified organisms (GMO); the Commission should, therefore, define criteria for initiatives to promote quality, such as voluntary labelling systems certifying the absence of GMOs, thus enabling consumers to chose their products responsibly. In 2010, Asia was the frontrunner in the production of counterfeit food products with 70% of goods seized coming from China. A new development concerns the considerable increase in products from Africa. At 16.8%, Africa has taken second place in terms of counterfeit production. The third place is held by the European Union, with 9.1%, the most common products being biscuits, milk products and mineral water. This constitutes a genuine risk. In a difficult socio-‐economic context, consumer products, brand products and private label products, in particular, must establish a relationship of trust with consumers. This trust will be created through guarantees of compliance on technical aspects and origin, communicated using labels of authenticity and by setting up interactive communication/education channels between the producer and the consumer. g) Local products: a new market for illicit trafficking In 2009, Pau Roca, the Secretary General of the Spanish Wine Federation, drew attention to the subject of wine from a particularly interesting perspective; not in terms of wine itself, but more generally in terms of foodstuffs that are in high demand due to their high added value. Whether it is olive oil, wine, spirits, cheeses, hams (especially in Spain and Italy) or any other product that represents good taste, authenticity and exclusiveness, local products are a major target for all kinds of scammers and criminals. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

65 There were many examples of this in 2009. Counterfeiting and fraud have become a real problem for public health as we had foreseen this. Having already dealt in software, spare parts and medicines, counterfeiting has now moved onto luxury food products. Certain producers are prepared to add harmful chemical substances to food, as in the case of olive oil. In April 2009, during a conference-‐debate organized by the General Union of Algerian Traders and Craftsmen (UGCAA) on the production of olives and the olive oil market, Mr. Rachid Bouziane, Director of the Mitidja canning sector, claimed that certain retailers were selling counterfeits. He claimed that he had discovered that his own products, bearing his own label, had been counterfeited by a reseller who had added dangerous chemical substances to it (waste oil) to improve its colour. In view of combating this public health threat, the conference participants called on the competent public services to intensify their consumer awareness campaigns. In addition, producers requested that specialized laboratories and quality control be strengthened in order to control this type of counterfeiting. It should be noted that Algeria is the seventh oil producer in the world and imports a certain amount of oil to satisfy its domestic market demand. According to the Ministry of Agriculture, national olive oil production stands at an annual average of 35,000 tonnes and 80,000 table olives per year. On the other hand, Algeria imports 350,000 tonnes of vegetable oil, other than olive oil, for an oil and fat consumption estimated at 100 000 tonnes a year. Algeria is one of the olive oil producers in the Mediterranean region, which provides 98% of global production, with Spain in first place, followed by Italy, Greece, Portugal and Tunisia. There is no doubt that the increasing demand of high-‐end products amongst a certain consumer group provides fertile ground for the development of illegal trafficking. On 19 May 2009, the Italian farmers’ union Coldiretti and the French union FNSEA (National Federation of Farmers’ Unions) signed an agreement known as the “European Pact with Consumers”, to guarantee fair prices and protect registered products from food counterfeiters. According to the accompanying press release, the agreement between the two unions, signed by the Chairman of Coldiretty, Paolo Bedoni, and his FNSEA counterpart, Jean-‐Michel Lemetayer, is intended to guarantee honest prices, transparency regarding the origin of food, and the protection of health and the environment. It also provides for the protection of local products against international imitations and piracy. The WTO has a long list of products to protect. Among these, Regianito (instead of Parmigiano Reggiano) in Argentina, Grana Padona (instead of Grana Padana) in South America. Parmesan is the most imitated Italian food speciality in the world. All these products are part of a list of 41 food specialties (including 14 Italian and 15 French specialities), which were examined by the negotiators of the WTO in Hong Kong in December 2009, under the discussion on the protection of products in geographical indications. Products to be protected include, Chianti, Marsala, Gorgonzola, Parmigiano Reggiano, Parma Ham and Bologna Mortadella for Italy, and Beaujolais, Bordeaux, Burgundy, Chablis, Champagne, Saint-‐Emilion, Sauternes, Comté, Reblochon and Roquefort for France. Both organizations thus support the European Union proposal to Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

66 afford greater protection to geographical indications to combat food fraud in global markets. Winegrowers and wine traders, eager to protect the reputation of their products, make great efforts throughout the world to avoid their products being copied or falsified. The market is vast: 2.3 billion bottles are produce in Spain every year, and 900 million are exported outside the European Union. Argentina and Chile alone produce 1.7 billion bottles a year and China claims it produces 7 billion bottles a year! The situation is becoming complex. Confidence in these products is suffering, especially when wines are found to be sub-‐standard and the sale prices in certain wine-‐growing areas defy all market logic. For the first time, during a conference at the 2011 International Wine Exhibition in France, Philippe Casteja, chairman of the Council of Grands Crus Classés du Médoc et Sauternes, admitted that “counterfeiting now particularly affects Bordeaux wines and our classified Grand Crus. While the protection of our brands and chateaux is naturally and primarily the responsibility of their owners, the protection of our geographical indications is a matter of public interest”. In this light, Pau Roca considers that it is essential to react decisively against a phenomenon that will undoubtedly harm consumers and producers if nothing is done to stop it. Wine is one of the rare agricultural products that is presented, in a bottle, but still in its natural state. The use of a labelled bottle with a cork stopper to transport the wine to the end-‐consumer is a relatively recent invention. Wine, as has often been the case in the food and drink industry, set the precedent for packaging. Wine was the first foodstuff to be presented in packaging on the consumer’s table, in the way many bought food and drink products are today. Wine is therefore classified as a foodstuff. It is consumed, digested, metabolized, it makes up part of our calorific and nutritional intake and is finally excreted. In Spain, a law in 2003 confirmed wine’s status as a “foodstuff”, subject to food standards, especially regarding traceability. Wines and their packaging in wine bottles have therefore progressively adopted various safety measures. Depending on the value of the wine, winegrowers have opted for more or less expensive protection, marking being one of them. For example, when wine began to be bottled, corks had iron markings and bottles were labelled. Until very recently, lead capsules were also used. These were eventually replaced with tin and other materials. Certain bottlenecks were even sealed and some bottles were wrapped with a net held by a lead seal. Trade documents from the 18th and 19th centuries show that importers were the ones that required exporters to place precise marks on their barrels or bottles. The exporter’s mark, symbols and seal provided a guarantee for the importer. If these could not be produced, the letter of credit or the trade letter was not paid and the transaction was cancelled. More recently, producers have added labels on the back of bottles, appellation of origin labels, registration numbers, holograms, etc. Today, all these elements have taken on an identification and marketing function and are starting to lose their initial purpose, that of guaranteeing the authenticity of the product. For example, due to their redundancy and cost, lead seals or metal nets are no longer used. They are now no more than a decoration suggesting quality, while, at one time, they represented a proper Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

67 guarantee system. Likewise certain labels can be photocopied, the shape of the bottles, produced using unique moulds, can be copied and even holograms can be counterfeited. Wine has therefore been a precursor in terms of food law and policies on quality. Certain countries have imposed taxes on wine and have consequently had to increase the volumes in circulation. In Roman times, the emperor Diocletian established a vineyard register and issued a ban on planting vines without official authorization. These decrees had a fiscal objective; but, subsequently, the system developed to permit a better identification of land and better traceability, to thus meet tax-‐payers’ expectations. In the history of wine-‐growing, fraud (wines mixing), wine swapping and tampered mixed wine have been a constant problem that the authorities have prosecuted and condemned. In France, the authorities under the Second Empire supported Louis Pasteur’s research out of economic interest. This research developed science-‐based oenological practices, the first example of what today we call “food security policy”. Fraud and scandals continue to exist but now certain instruments and mechanisms can be used to combat them. The mass poisoning from adulterated rapeseed oil in Spain28 caused great social concern, but this phenomenon was geographically limited. A few years later, mad cow disease, while the European common market was being established, indicated that governments needed to place part of their sovereignty over food and health under community and international control. The principle of due diligence as an administrative criteria for consumer protection is often considered to be disproportionate; it is nevertheless completely accepted by the food industry and integrated into cost calculations. This recent development in food law, triggered by the need to find new solutions in a globalized world where communication is easy and where there are few obstacles to the circulation of goods, requires an international regulation as well as protocols on traceability and safety. All this had been anticipated in the 1970s in European winegrowing legislation, which established a precise list of tested oenological practices. In addition, there is a system of registered designations of origin, recognized by the TRIPS agreement on intellectual property-‐ an agreement enshrined in the Marrakesh Agreement Establishing the World Trade Organization (1993). As we can see, the European winegrowing sector has made considerable regulatory progress. It has developed a system that enables food fraud to be brought to light (a traceability system based on registers and certificates, with a precise procedure). It relies on the identification of geographical areas where production meets regulated criteria. In addition to this considerable regulatory capital, there is a basic multilateral recognition framework. Unfortunately this framework has seen little progress, as seen in the failure of the Doha round29. It nevertheless met with some success with bilateral 28 In 1981 adulterated rapeseed oil caused the death of thousands of consumers. 29 The Doha round was a round-‐table negotiation carried out under the auspices of the WTO. It mainly focused on the “liberalization of international trade” with an explicit purpose to “develop” what was formally known as the “third world”. The Ministerial Conference of Doha (Qatar) was held from 9 to 13 November 2001, while the fourth ministerial conference of the WTO launched a new round of multilateral negotiations (started under GATT, the predecessor to the WTO) known as the “Development Agenda”. Most of the Doha negotiations focused on agriculture and on improving access for agricultural produce from developing countries to the markets of rich countries. The Doha round-‐ which failed due to the different countries failure to reach an agreement-‐ included an agreement on TRIPS. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

68 expansion in certain areas. Thus, the European Union has concluded specific agreements with various countries for certain wines. These agreements run along similar lines: the adoption of oenological practices for the production of wines throughout the world; and the recognition of registered appellations of origin and, more generally, of geographical indications of origin identifying wine as a product belonging to collective territorial brands. The advantage of a well-‐designed regulatory framework, is the guarantee of safety that it procures. But this framework has to apply to everyone on an international level. A standardization procedure is currently under way but it is not fast enough to keep up with the growth of international trade. Here again, rules and regulations are overtaken by reality. Moreover, an international legal framework would establish common rules and therefore considerably reduce unfair competition. Therefore, in comparison with other agri-‐food sectors, winegrowing has had a practically fraud-‐free past, has been a pioneer in terms of research and, early on, established mechanisms to prevent fraud. This progress has gradually established itself on an international level. Although this is a very mature product and market, price differentiation and segmentation is still strong, from table wine to grand crus registered under particular vintages, sold on auction at extremely high prices and making the headlines. These different prices provide an average supply with sufficient added value, and it is perhaps the very structure of this supply that protects its price and value from erosion. Only two years ago, counterfeiting did not particularly affect the wine sector for the simple reason that counterfeiting focused on high-‐end wines at a high added value. Today, the wine sector provides fertile ground for the development of the latest forms of fraud and counterfeiting because it is a highly regulated sector where infringement can generate considerable profits. The possibility of tax fraud also exists, in particular due to the incapacity of certain regulatory bodies to operate effectively on an international level. There are, therefore, major flaws in the wine industry that are open to perfected forms of illegal trafficking. In the context of globalization, amid economic crisis, where surplus production boosts the export of low-‐cost wine in bulk, the wine industry is threatened by these highly complex crimes combining the counterfeiting of various brands and appellations of origin, the extortion of small businesses and the breach of the internal control and security systems of certification bodies. The strengths of this highly regulated sector with apparently solid foundations can also become weaknesses; security systems have become more sophisticated but they are powerless against the latest attacks. Means of protection must be developed against mafia organizations, capable of infiltrating and gaining control over the wine sector. The sector’s greatest weakness lies in its organizational complexity and in its independent entrepreneurship. Just as counterfeiters operate using lower value bank notes to pass under surveillance radars, organized crime or local mafias will produce lower quality wine, on mass, from bulk. These counterfeit products can then be distributes in emerging markets with a weaker wine culture, destroying the image of quality that producers try to protect and exploiting the current weakness of small producers. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

69 D -‐ TREATIES AND REGULATIONS: THE DISCONNECT BETWEEN NATIONAL INTERESTS AND MORAL CRITERIA The avowed wish of many countries in the world, in particular in the European Union and the United States, is to eradicate counterfeiting as far as possible, and at least in its most harmful and dangerous forms. The example of the European Union, however, shows the obstacles to an effective policy on criminal deterrence. In recent years, EU law has attempted to take this criminal phenomenon into consideration to develop criminal legislation to counter the development of counterfeiting-‐crime©. This reinforced legislation was to be one of the constituents in a comprehensive European Union policy to guarantee a better protection of all intellectual property rights. Given that criminal penalties must be proportionate to the seriousness of the offence, the objective was to bring Member States’ criminal laws into line and strengthen such laws through existing provision. In particular, this involved tackling the most serious cases of counterfeiting, such as those committed by criminal organizations and those endangering the health and safety of consumers. Given the gravity of such acts, it was not only a question of obtaining compensation for damage caused, but also of taking appropriate criminal measures that were sufficiently deterrent to prevent the (re)occurrence of such acts. Unfortunately, the criminal guidelines that were used focused on the basic principles of IPR protection and not on principles governing the most serious violations of consumer safety. Intellectual property rights are included under the fundamental rights protected under article 17 of the Charter of Fundamental Rights of the European Union. It was therefore legitimate to sanction serious infringement of these essential rights with measures severe enough to demonstrate intolerance towards such acts. This approach, which has currently lost momentum in the Council of the European Union, is a continuation of an indecisive policy that has been conducted for various years. However, a number of important initiatives have been taken in recent years within the EU and on its borders. In 1994, the European Community adopted the so-‐called Customs Regulation, allowing border controls of imported fake goods30 . Later, in 1998, the Commission published its Green paper on Combating Counterfeiting and Piracy in the Single market31. As a result of reactions to the Green Paper, the Commission presented an Action Plan on 30 November 200032. This action plan was followed by a directive harmonizing Community IPR enforcement measures33 and a regulation improving the customs mechanisms provided under the previous customs regulation to combat counterfeit or pirated goods 34 . Moreover, on 10 November 2004, the Commission 30 http://ec.europa.eu/justice/doc_centre/criminal/doc/sec_2005_848_en.pdf 31 COM (98)569 final 32 COM(2000)789 final 33 Directive 2004/48/EC, OJ L17, 30/04/2004, p45 34 Council Regulation (EC) No 1383/2003 of 22 July 2003 OJ L 196, 02/08/2003 p.7 Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

70 adopted a strategy aiming to ensure the respect of intellectual property rights in third countries35. Combating counterfeiting is included in the actions to be taken for the protection of intellectual property in the first Commission action plan for innovation in Europe36. The Commission’s 1998-‐99 work programme for the fight against fraud37 also expressly targets counterfeiting and piracy as areas requiring measures to strengthen the fight against economic crime. Moreover, the conclusions of the Brussels European Council of 20 and 21 March 200338 called on the Commission and the Member States to improve the exploitation of intellectual property rights by taking measures against counterfeiting and piracy. One of the Commission’s responses to counterfeiting was the anti-‐counterfeiting initiative directed by the Forum on the prevention and control of organized crime, set up by the Directorate-‐General for Justice Freedom and Security. The aim was to direct efforts towards raising awareness and mobilizing all stakeholders in the fight against organized crime, particularly at the prevention stage. On 30 January 2003, a meeting was organized, enabling the private sector, public authorities and law enforcement services to discuss the means of controlling, preventing and detecting intellectual property violations. The parties concluded that they needed to take legislative action to harmonize law enforcement standards. Subsequently, a round table was held on 30 September 2003 on the partnership between the public and private sectors. Here again, participants concluded that criminal legislation was essential at Union level to combat counterfeiting and piracy. The proposed criminal measures are in keeping with Community efforts to fight counterfeiting and piracy and supplement existing mechanisms. They also dovetail with EU policy combating organized crime, of which counterfeiting and piracy are one important form. Already, the Amsterdam European Council of 16 and 17 June 1997 had adopted a detailed action plan to fight organized crime proposing specific initiatives with a coherent and coordinated approach mobilizing Community and 3rd pillar instruments simultaneously. A multidisciplinary group was created with the task of implementing the programme. The provisions of the Amsterdam Treaty were designed to give European citizens a high level of protection in a space of freedom, security and justice. For the first time, it was stated that this objective would be achieved by prevention and the fight against organized crime. The Tampere European Council of 15 and 16 October 1999 defined a number of guidelines concerning the definition of minimum standards for harmonizing legislation and intensifying cooperation in the fight against crime. Since 3 May 2000, the EU’s actions in the fight against organized crime have been based on a document entitled “The prevention and control of organized crime: a strategy for the beginning of the new millennium”. The European Council of 4 and 5 November 2004 ended with the adoption of the Hague Programme, a new, multi-‐annual work programme on issues relating to justice, freedom and security for the period 2005-2010. The programme’s aim was to strengthen cooperation between European states in justice and home affairs and to make operational a strategic concept informing the fight against organized cross-‐border crime at EU level. 35 COM (2004) 749, 10/11/2004 36 COM (96) 589, 20/11/1996 37 COM (98)278, 06/05/1998 (cf. p10) 38 Paragraph 37 of the conclusions of the Council of Europe Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

71 Lastly, the AGIS framework programme was adopted on 22 July 2002. It promoted police and judicial cooperation in criminal matters and supported experts’ contribution to the development of European policy in this area. The programme incorporated the counterfeiting issue into cooperation projects to be co-‐financed in 2005 as part of efforts to prevent and combat organized crime. The work programme focused on awareness raising, information, the training of experts in infringements of intellectual property rights and the issue of links between counterfeiting/piracy and organized crime and terrorism. Lastly, it encourages public/private partnerships in the exchange and processing of data on counterfeiting. However, in spite of the work carried out over these years, action against counterfeiting can be effective only if based on a comprehensive and uniform approach that encompasses prevention, civil and administrative issues, customs aspects and criminal law. The proposed measure, which set out to strengthen and improve the criminal-‐law framework for combating infringements of intellectual property rights, followed on from the work that the Community has already carried out in this field over various years. In terms of criminal law, the proposed measure was essentially against serious forms of crime, in particular organized crime, but not particularly against consumer safety violations. Security and justice practitioners in Europe were widely mobilized against counterfeiting, which posed a serious challenge. A core body of criminal legislation was a vital factor here, although not sufficient on its own. Such a mechanism would have complemented the substantial body of customs rules -‐ used as a basis for intercepting many counterfeit products -‐ and other measures adopted for the internal market and at international level. The scale of counterfeiting and piracy in the European Union, its spread to all branches of economic activity, its internationalization, its links to organized crime and the dangers it poses both in economic terms and for the safety of individuals – all these factors point to the need for a harmonized body of European criminal provisions in order to combat the most serious forms of this phenomenon. In order to cover this field while respecting the breakdown of responsibilities laid down by the Treaty, two instruments were needed to supplement the present legislation, and in particular Directive 2004/48/EC on the enforcement of intellectual property rights: one under the first pillar and a second under the third pillar. In this directive, the experts established that any serious infringement of intellectual property rights -‐ or any act of attempting, aiding and abetting or inciting such an infringement -‐ must be subject to criminal penalties. Such a provision was in line with the undertakings given under the TRIPS Agreement, in particular its Article 61, while having the added advantage of clearly enshrining this obligation in a Community instrument. The text provided for criminal penalties, which comprised imprisonment for natural persons and, for both natural and legal persons, fines and the seizure of the infringing goods and the materials, instruments or media used predominantly in the manufacture or distribution of those goods. Other possible penalties might include the destruction of the infringing goods, the total or partial closure, permanently or temporarily, of the establishment used to commit the infringement, a permanent or temporary ban on engaging in commercial activities, placement under judicial supervision or judicial winding-‐up, and a ban on access to public assistance or subsidies. Lastly, the publication of judicial decisions was to serve as an additional deterrent and could also be used as an information channel for both right holders and the public at large. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

72 A second legal instrument, in the form of a framework decision, also supplemented the provisions of the above directive with appropriate implementing rules for the criminal field. This text could contain measures aligning criminal penalties and measures on cooperation and criminal proceedings: Measures aligning criminal penalties could include, for example: • Prison sentences comparable with those for offences relating to organized crime, at least where the acts of counterfeiting or piracy had been committed under the aegis of a criminal organization, and a more serious penalty where the offences carried or had carried a health or safety risk. • Sufficiently dissuasive financial penalties. • In the most serious cases, extensive powers to confiscate goods belonging to the offender. • Measures on cooperation and criminal proceedings designed to: • Ensure that the Member States take the necessary steps to set up joint investigation teams so as to forge closer cooperation between their competent authorities for the effective pursuit of investigations. The holders of intellectual property rights or their representatives should be allowed to assist in investigations carried out by the joint investigation teams into the offences; • Provide for coordination between the Member States to decide which of them will prosecute offenders, when the offence falls within the jurisdiction of more than one Member State and any of those States can validly commence proceedings on the basis of the same facts, the aim being to centralize proceedings in a single Member State, where possible. A list of the criteria for determining jurisdiction would make it easier to apply such a provision. • Ensure that investigations into -‐ or criminal prosecution of -‐ counterfeiting and piracy offences are not dependent on a report or accusation made by a victim of the offence, so as to speed up investigations and avoid delays that would be harmful to the victims. This is the option that was most strongly advocated by the EU Directorate-‐General for Justice-‐Freedom-‐Security, an option that fell under the measures that could be taken in the field of justice and home affairs and was the only solution that could provide the Union with common minimum core rules of criminal law. These measures were vital to ensure smooth cooperation between the Member States in criminal proceedings and could also serve as a reference framework for future negotiations at international level. They provided a follow-‐up -‐ in the justice and home affairs field -‐ to other Community measures to combat counterfeiting and piracy. How could subsidiarity and proportionality be taken into account? There are currently considerable differences in the criminal legislation and regulations of the Member States on enforcement of intellectual property rights. Counterfeiters take Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

73 advantage of these discrepancies by carrying out illegal activities in those Member States where enforcement mechanisms tend to be applied less effectively, thereby trafficking on a truly transnational scale. In 2004 it was therefore clear that counterfeiting and piracy could not be effectively countered solely by action on the part of individual Member States, hence the need for an EU initiative aimed at stepping up criminal-‐law measures in order to align the rules in the Member States while respecting their different legal traditions and systems. In accordance with the principle of proportionality, the proposed measures did not go beyond what was necessary to achieve the objective set. These measures respected fundamental rights and observed the principles recognized by the Charter of Fundamental Rights of the European Union. It should be pointed out here that Article 17, paragraph 2 of the Charter states that, “Intellectual property shall be protected”. Once applied, the proposal was intended to supplement the legislation already in place and help curb the most serious types of intellectual property offences. When assessing the positive effects of the measure, it should be borne in mind that, for the most part, those effects were the result only of a reduction in illegal activities and that the absence of any measures would make the consequences even more serious. The measure had various objectives: improve the level of cooperation between the police services and the judiciary, a reduction of crime, impact business, impact employment, investment and competition of European businesses, increase tax revenues, improve awareness regarding the criminal nature of intellectual property infringement, etc. a) Improvements expected from cooperation between police services and the judiciary One aim was to improve the level of cooperation between the authorities responsible for investigating, prosecuting and trying counterfeiting and piracy offences, considering that the authorities charged with enforcing the law would thus have appropriate investigation powers. Moreover, it was thought that the establishment of contact points for exchanging information would facilitate and speed up investigations and that the definition of criteria for determining jurisdiction would prevent conflicts of jurisdiction; and the setting-‐up of joint investigation teams would guarantee a cross-‐border approach that is vital for combating counterfeiting. b) Reduction of crime The introduction of tougher penalties -‐ with minimum levels of maximum sentences -‐ and improved cooperation commendably aimed to make it more difficult to commit infringements of intellectual property rights and have a deterrent effect. The tougher penalties targeted, in particular, the more serious forms of counterfeiting, such as infringements committed under the aegis of a criminal organization and those resulting in serious risks to public health and safety. The Union experts thus hoped to draw the attention of judges and public authorities to the seriousness of certain acts of counterfeiting and to the need to come up with an appropriate response in the criminal law field. These experts also hoped to encourage holders of intellectual property rights to bring criminal proceedings and thereby help to improve the effectiveness of the police Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

74 and the criminal justice system. The measures, when applied would therefore constitute a deterrent by creating a feeling of insecurity among criminals. This deterrent effect was to be heightened by the imposition of exemplary penalties to increase the criminals’ sense of insecurity. According to the criminal lawyers at the time, these traditional criminal-‐law mechanisms would make counterfeiting less attractive for criminal organizations and help bring about a general reduction in crime. A naïve vision of a process that will never have the expected results due to the deep roots of mafia organizations in Member States! c) Impact on business According to the same Union experts, it was agreed that the instrument they were developing should: “avoid any abuse and misuse of criminal proceedings by right holders wrongly claiming to be victims”. They also agreed that they should avoid the risk of only benefiting large firms with the system, since counterfeit versions of their products might be more readily identifiable than those of smaller firms. Had they already identified a two-‐tier mechanism in their anti-‐counterfeiting arsenal? d) Impact on employment Continuing to display much naivety, the experts considered that the harm to business due to intellectual property infringement would have a knock-‐on effect on the number of jobs on offer, although “the precise impact on employment across the industry as a whole is difficult to quantify”. Nevertheless, they were convinced that the effectiveness of the criminal measures taken would serve to step up the fight against counterfeiting and hence improve the employment situation in the Community. In as much as in its most serious forms, counterfeiting, like other criminal activities, contributes to an increase in undeclared work, the dismantling of criminal organizations on the basis of criminal legislation was expected to help clean up the labour market. e) Impact on investment and the competitiveness of European businesses Under European guidance, businesses were to enjoy equivalent levels of protection across the whole Community territory: “this favourable environment will shore up their confidence in the internal market as a place where they can exercise their creativity and innovation in a secure setting.” This situation would ensure that they received a fair return on the investments they had made on research and development -‐ or on the process of artistic creation -‐ and would encourage them to invest further. It is true that innovation and creativity play a key role in business competitiveness. Firms must constantly improve or renew their products if they want to maintain or increase their market share. Sustained innovative and creative activity developing new products or services, places businesses at an advantage on the market and are an important factor in their competitiveness. For firms to be in a position to innovate and be creative, they need an environment that is conducive to their activities, particularly as regards the protection of intellectual property. According to the experts, the effectiveness of criminal measures to combat counterfeiting would help Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

75 foster the innovative activities of businesses in the internal market and thereby secure their competitiveness at both an European and international level. This would also have a beneficial effect on the diversity of products available to consumers. f) Impact on tax revenue Since trade in counterfeit and pirated products is by definition illegal and undeclared, it deprives governments of significant amounts of tax revenue (VAT, customs duties, etc). Effective measures to counter those phenomena reduce lost tax revenue. An effective criminal policy would also cut financial fraud associated with undeclared labour. g) Limits of the measure’s effectiveness A reading of these draft Community criminal-‐law provisions reveals the naivety and lack of vision, in respect of real and future risks, with which this problem was examined. This approach of even greater concern in that it is not up to date with the reality on the ground. In response to the rapid changes in modern crime, drafts submitted and adopted after various years of unending discussion and debates, are outdated even before they come into force. The proposed measure is only one weapon in the fight against counterfeiting, which, six years ago, formed part of a wider picture. It could be effective only if there was sufficient awareness within the Union of the seriousness of the problems in question; and that was not the case at the time. The measure was intended to improve the effectiveness of the fight against the most serious forms of counterfeiting only, not against all forms. However, the seriousness of the problem as it was perceived, only included the problem of the risk for consumers as a subsidiary concern. This threat was mainly identified in terms of organized crime. This measure was therefore only to be considered as an additional element in the Community’s anti-‐counterfeiting policy. Moreover, like any other criminal measure, this legislative measure would only be effective if it was actually enforced by national judiciaries. In this respect, it had the benefit of sending a strong message to national judges regarding the seriousness of counterfeiting and piracy and the need to put a stop to it. This is what happened when Directive 2004 was transposed to France via law 2007-‐1544 of 29 October 2007, when, on 11 April 2008, four years after the directive, the Ministry of Justice sent round a notification 39 on the criminal aspects of this law. The Member States were not only required to put in place legislation that complied with the new rules, but also had to raise awareness among -‐ and give appropriate training to – those responsible for combating counterfeiting and piracy. This therefore required appropriate training and awareness-‐raising measures aimed at the police forces and judicial authorities that had to deal with counterfeiting cases. Moreover, these provisions would only be fully effective if action was also taken at an international level. Introducing, toughening and harmonizing criminal penalties did not suffice in itself to eliminate counterfeiting. If it was to be highly effective, the legislation must go hand-‐in-‐hand with campaigns designed to increase consumer awareness. Criminal proceedings 39 Directorate of Criminal Affairs and Pardons (DACG) Notification No. CRIM 08-‐10/G3 of 11 April 2008. Various criminal provision were introduced in parallel with new measures that could be ordered by the civil judge; others aim to improve the treatment of criminal proceedings for cases of counterfeiting. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

76 would be truly effective only if consumers were fully aware that counterfeiting was a criminal offence, posing a direct threat their own safety. Before the debate on the criminal approach had time to be integrated by the EU Council of Ministers, a preliminary consultation process had already identified the need for Commission initiatives to protection of intellectual property rights. In October 1998 the Commission had published a Green Paper on combating counterfeiting and piracy in the single market (COM (98)569 final), six years before any directive was published. It received nearly 145 written contributions from all the sectors concerned. A summary of these contributions was published. The European Parliament and the Economic and Social Committee had also been given an opportunity to submit their comments on the Green Paper. In addition, the Commission, together with the German Presidency of the Council of the European Union, organized a hearing open to all interested parties in Munich on 2 and 3 March 1999 and a meeting with experts from Community Member States on 3 November 1999, to hear their views on this issue. During the consultation, participants had already pointed out that the current anti-‐counterfeiting measures lacked a deterrent effect; they also pinpointed the same weaknesses, i.e. that the penalties imposed were far too lenient and not sufficiently deterrent. Disparities between national penalty systems had also been mentioned as an obstacle to effective action against counterfeiting and piracy in domestic markets. More recently, the Commission’s Directorate-‐General for Justice and Home Affairs commissioned a study on the impact of counterfeiting and piracy in Europe. The study, carried out by the research team of the Centre d’études internationales de la propriété industrielle (CEIPI), published its findings in a final report on 9 July 2004. To carry out its research, the team had had to consult a large number of public bodies at a European and national level and private sector representatives. They also contacted manufacturers in a wide variety of sectors – pharmaceuticals and medical equipment, perfumes and cosmetics, food products, alcohol and beverages, cigarettes, clothing and clothing accessories, toys, watches and jewellery, spare parts and accessories, electrical appliances and equipment, computer material, software, CDs and DVDs. Finally, the data obtained from these various stakeholders was supplemented by consultations with consumer organizations. In parallel, consultations were held under the auspices of the Forum on the prevention of organized crime. As part of its work in 2003, the Forum looked at anti-‐counterfeiting measures, the aim being to concentrate efforts on raising awareness among – and mobilizing -‐ all the bodies responsible for combating these activities, particularly at the prevention stage. A Forum meeting on 30 January 2003 provided an opportunity for dialogue between the private sector, governments and law enforcement services on the means of combating, preventing and detecting intellectual property offences. Among the main recommendations made for increasing the effectiveness of anti-‐counterfeiting measures was the need to harmonize legislation and step-‐up law enforcement. In addition, a round table on the public-‐private sector partnership was held on 30 September 2003, mainly involving private bodies representing the various industries affected by counterfeiting and piracy. This meeting confirmed the need for action on criminal legislation, which was taken up on 9 December 2004 when private sector representatives came together to contribute to the report of 9 July 2004. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

77 Over these years, until the 2004 directive, and especially the first Directive to harmonize national criminal law in 2006 (still under debate in the Council of Ministers), public and private stakeholders affected directly or indirectly by the problem of counterfeiting have continually discussed and re-‐discussed these criminal aspects, without reaching any real agreement. In general, the lack of a deterrent effect in the current measures for combating intellectual property has been highlighted on numerous occasions. The disparities between national penalty systems are considered to be an obstacle to effective action against counterfeiting. The sectors concerned want penalties and other means of enforcing intellectual property rights to be equally effective across all Member States. It is widely felt that there is an urgent need for tougher and more closely aligned criminal legislation. European Union public authorities therefore note that this type of crime, which is most often committed by criminal organizations and sometimes even by terrorist groups, poses a threat to the economy, to creativity and to health and safety. They stress the need for Union-‐wide harmonization of criminal legislation on counterfeiting and for maximum police and judicial cooperation, particularly where offenses are linked to organized crime. To this end, these authorities consider that substantial prison sentences need to be imposed, fines must be sufficiently high and provision must be made for the seizure of assets linked to the offences committed. Lastly, the bodies consulted observe a link between the introduction of criminal penalties and raising public awareness. However, nothing seems to change in practice. While, in theory, the world wants to change things, in practice, the initial point of the discussions has been missed, or possibly ignored. Thus, there continue to be great disparities within the EU, which stop intellectual property right holders from receiving uniform protection throughout the European Union. There are considerable differences regarding criminal sanctions, especially in respect of the penalties set out in national legislations. At an international level, the situation is even worse. The Agreement on Trade-‐related Aspects of Intellectual Property Rights (TRIPS) has been the subject of painstaking and up-‐hill WTO negotiations, but it rightly predicts that developing countries will have to wait for a long time before they can benefit from the Agreement measures. The freedom applied to emerging countries has resulted in an implementation of these measures, which has been, at best, fragmentary, and TRIPS flexibility created great disparity in national application of these controls, rendering international cooperation in this area even more complex. Ultimately, despite the efforts made on the protection of intellectual property rights, results vary. Enforcement instruments are undoubtedly stronger and collaboration between public and private sectors is progressively falling into place. Public authorities are well aware of the need to protect consumers, but in practice, crime in this area is not decreasing. On the contrary, it is spreading to new, vast and eclectic markets. Intellectual property law naturally reveals its limitations and right holders are in a clearly vulnerable position. Beyond the luxury brand sector, consumers are no longer accomplices to counterfeiting, but its victims. The world is changing, as is crime, and citizens are becoming the prime target for Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

78 entrepreneur-‐counterfeiters in a context of disorder. As a result, action should no longer be directed against counterfeiting, but against counterfeiting-‐crime. Counterfeiting-‐crime mainly affects consumer safety and patient’s health. Its objective is not necessarily to kill, but the products generated by industries directly or indirectly linked to local mafias and organized crime seriously endanger Southern Hemisphere populations with potential consequences for the populations in the Northern Hemisphere40. If we consider that despite the efforts of national and international players in the fight against counterfeiting, this problem continues to grow and become more complex; If we acknowledge that we can no longer ignore the convergence between counterfeiting-‐crime, food fraud and smuggling; if, according to Philippe Collier of Contrefaçon Riposte41, customs in France only controls 3% of products and is more interested in counterfeiting in terms of trademarks, designs and models, than in terms of product conformity; if intellectual property law does not have the most effective weapons against new criminal trends and if this law cannot be applied correctly throughout the world; and lastly, if consumer protection has become a matter of public concern triggering action, of political importance and supported by public opinion, a new criminal-‐law approach must be taken, in addition to the intellectual property law approach. Beyond this change of approach, new regulations and state controls, checking the flow of dangerous products also requires corporate investment and innovation, especially to protect the entire supply and distribution channel. However, according to Les cahiers de la Compétitivité du Figaro42, companies are still not doing enough and are, above all, reluctant to talk about the subject for fear of raising doubts among their clients. However, in order to compete with low-‐cost products, brands, especially flagship brands such as Nestle or Unilever for food, l’Oreal for cosmetics, Johnson & Johnson, Pfizer or Sanofi-‐Aventis for medicines, have no other alternative than to provide additional guarantees, to strengthen confidence in their products. In this light, providing sufficiently effective evidence to try counterfeiters or scammers in a criminal court and to apply truly dissuasive criminal-‐law mechanism to them, would lend previously unexploited dimensions to the fight against counterfeiting. h) The ACTA agreements In parallel to this initiative, a proposed multilateral international treaty on intellectual property rights, drawn up by the members of ACTA has entered the final signature stage. This Agreement is a clear improvement in terms of consumer protection, but nevertheless, remains too focused on the protection of intellectual property rights, making it considerably difficult to reach a general consensus on anti-‐counterfeiting in global terms. Thus, for example, only brands are protected in the US while protected designations of origin are not recognized. 40 The issues addressed in the following chapters illustrate these statements. 41 Chief Editor of the Contrefaçon Riposte newsletter 42 “Monde” dossier, 9 July 2009-‐ No 20047. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

79 ACTA has been drafted by various States that meet regularly to negotiate: Australia, Canada, South Korea, the United Arab Emirates, the United States, Japan, Jordan, Morocco, Mexico, New Zealand, Singapore, Switzerland and the European Union (EU), and it is described as a response to “the increase in global trade of counterfeit goods and pirated copyright protected works”. The idea of creating a multilateral treaty on counterfeiting was developed by Japan and the United States in 2006. Canada, the European Union and Switzerland joined the preliminary discussions between 2006 and 2007. The official negotiations began in June 2008, with Australia, Mexico, Morocco, and New Zealand, joined by the Republic of Korea and Singapore along the way. According to the minutes, the negotiations led to an initial agreement at the beginning of October 2010, with few strong disagreements43. According to the EU, a final agreement was expected in the following weeks44. After a series of drafts in 2008, 2009 and 2010, the parties published an official version of the “draft” on 20 April 2010. A reworked version of the text, resulting from the last round of negotiations in Tokyo was made public on 6 October 2010. The themes presented by the European Commission proposal for a Council decision (Brussels, 24 June 2011-‐ COM (2011) 380 final). ACTA aims to establish a comprehensive international framework that will assist the EU in its efforts to effectively combat the infringement of intellectual property rights (IPR)45. This infringement undermines legitimate trade and the EUs competitiveness with the subsequent negative repercussions on growth and jobs. ACTA includes state-‐of-‐the-‐art provisions on the enforcement of IPR, including provisions on civil, criminal, border and digital environment enforcement measures, robust cooperation mechanisms among ACTA Parties to assist in their enforcement efforts, and the establishment of best practices for effective IPR enforcement. Although ACTA does not modify the EU acquis, because EU law is already considerably more advanced than the current international standards, it will introduce a new international standard, building upon the World Trade Organizations TRIPS Agreement (adopted in 1994). Thus, it will provide benefits for EU exporting right holders operating in the global market who currently suffer systematic and widespread infringements of their copyrights, trademarks, patents, designs and geographical indications abroad. At the same time, ACTA wishes to be a balanced agreement, because it fully respects the rights of citizens and the concerns of important stakeholders such as consumers, internet providers and partners in developing countries. Further to the adoption of the negotiating directives by the Council on 14 April 2008, negotiations were launched on 3 June 2008. The agreement was concluded on 15 43 “Countries Reach Tentative Anti-‐Counterfeiting Pact” [archive], ABC News, 2 October 2010. 44 “Global anti-‐counterfeiting agreement still weeks away” [archive], L.A. Times, 1 October 2010. 45 http://eur-‐lex.europa.eu/Notice.do?mode=dbl&lang=en&ihmlang=en&lng1=en,fr&lng2=bg,cs,da,de,el,en,es,et,fi,fr,hu,it,lt,lv,mt,nl,pl,pt,ro,sk,sl,sv,&val=577911:cs&page= Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

80 November 2010 and the text was initialled on 25 November, after 11 rounds of negotiations. The EU Member States were kept informed of the negotiations orally and in writing via the Councils Trade Policy Committee. The rotating EU Presidency led the negotiations on criminal enforcement, based on positions unanimously agreed and adopted by the Council in COREPER46. The European Parliament has also been kept regularly informed on developments via its Committee on International Trade (INTA) and by Commissioner De Gucht in three plenary debates in 2010. On 24 November 2010, the European Parliament adopted a Resolution supporting ACTA. ACTA contains a number of provisions on criminal enforcement that fall within the scope of Article 83, paragraph 2 of TFEU47. Those parts of the agreement, in distinction to those parts falling under Article 207, fall under the area of shared competences (Article 2, paragraph 2, TFEU). Where a matter falls under shared competence either the European Union or Member States may legislate and adopt legally binding acts. Regarding the signature and conclusion of ACTA, the Commission has opted not to propose that the European Union exercise its potential competence in the area of criminal enforcement pursuant to Article 83, paragraph 2, TFEU. The Commission considers this appropriate because it has never been the intention, as regards the negotiation of ACTA, to modify the EU acquis or to harmonize EU legislation as regards criminal enforcement of intellectual property rights. For this reason, the Commission proposes that ACTA be signed and concluded both by the EU and by all the Member States. The Commissions position as regards ACTA and Article 83, paragraph 2 of TFEU is without prejudice to the position of the Commission on the future EU exercise of the shared competences established in Article 83, paragraph 2, TFEU as regards other initiatives. Thus ACTA aims to provide a new legal framework that States can adhere to on a voluntary basis and to create it own governance body outside already existent international institutions (e.g. World Intellectual Property Organization or the United Nations). The lack of transparency in negotiations, denounced by certain politicians, was met with strong criticism, indicating the greater comprehensiveness and restrictiveness of the provisions of new agreement in comparison with those established in TRIPS (WTO agreement on intellectual property), negotiated at the end of the GATT Uruguay Round in 1994. However, certain documents were leaked in May 2008 by Wikileaks, provoking a strong reaction among civil society against the agreement, demanding a democratic negotiation procedure. An official version was therefore not published until 20 April 2010, with another version published on 6 October. Although initiated in 2007, negotiations did not officially begin until 2008, two years before an initial text was made public. 46 EU Committee of Permanent Representatives 47 Treaty on the Functioning of the European Union Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

81 With regards to the reasons for not pursuing ACTA through the G8, the WTO, the WIPO or other existing structures, the European Commission explains that this kind of path breaking project requires great flexibility to pursue this project in interested countries, while membership to these organizations (G8, WTO and WIPO) is simply not the best way of bringing it about48. An official summary of the key elements of discussion, published in November 2009, indicates that the aim of ACTA is to: “ACTA aims to build on existing international rules in the area of intellectual property, in particular on the TRIPS Agreement, and is intended to address a number of enforcement issues where participants have identified that an international legal framework does not exist or needs to be strengthened. 49.” The European Commission indicates that it aims to improve international standards on measures against large-‐scale infringements of intellectual property rights. To this end, ACTA is pursued through three primary components: • international cooperation; • enforcement practices; and • a legal framework for the enforcement of intellectual property rights. Officially, ACTA mainly targets emerging economies, “where IPR enforcement could be improved, such as China or Russia”, and who would sign up to the “global pact”. This could be justified in France by the fact that 70% of counterfeit products seized by customs come from China. The Special 301 Report, published in 2008 by the United States Trade Representative (USTR), indicates that, “ACTA will bring together countries that recognize the critical importance of strong IPR enforcement for a prosperous economy. ACTA is envisioned as a leadership effort by countries that will raise the international standard for IPR enforcement to address today’s challenges of counterfeiting and piracy. It will build upon the Administration’s prior bilateral and regional cooperation successes”50. Articles 5 and 6 include the creation of an “ACTA Committee” which could amend the agreement, with the approval of the participants. A public or judicial report is not required to make amendments to text, and industry representatives will be able to provide advisory opinions on amendments. Among other measures and for anti-‐counterfeiting purposes, the text would establish measures to block the circulation of generic medicines. Generic medicines, especially those produced in India, are recognized in certain countries and approved by the World Health Organization. However, they remain under the monopoly of patents in many of the countries that they are transported through. In view of strengthening the fight against counterfeiting, ACTA would systematize the measures to block generic 48 “Fact Sheet: Anti-‐Counterfeiting Trade Agreement” [archive] -‐ European Commission, 23 October 2007 (Updated November 2008) 49 "The Anti-‐Counterfeiting Trade Agreement – Summary of Key Elements Under Discussion” (PDF)-‐ Swiss Intellectual Property Federation, November 2009. 50 http://www.ustr.gov/sites/default/files/asset_upload_file553_14869.pdf Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

82 medicines, treated as counterfeits. This fear is based on recent events, such as the blockage of antiretroviral medicines, bought by the UNITAID procurement department, carried out for more than a month by the customs authorities in Amsterdam in February 200951. In the United States, the agreement was treated as a “sole executive agreement” requiring only President Barack Obama’s signature, without the Senate’s ratification. At the end of October 2010, 75 law professors criticized this procedure in an open letter, claiming that the executive was overstepping its rights since the “sole executive agreement” is limited to certain domains not including intellectual property. A request for the transfer of preparatory documents, submitted by James Love, the director of Knowledge Ecology International (a non-‐governmental organization founded by Ralph Nader), on the basis of the FOIA (Freedom of Information Act), was refused by Washington in March 2009. The Obama administration stated that these documents were classified in the interest of “national security”, pursuant to Executive Order 1259852. Following the declarations of the United States Trade Representative, the socialist MEP Françoise Castex inquired whether ACTA was legally biding, since article 1.2 grants each State the responsibility of transposing the agreement to domestic law according to its own procedure and the United States government had stated that this transposition would be carried out in a flexible manner. Castex highlighted that ACTA article 2.2 contradicted certain provisions in the Patient Protection and Affordable Care Act (law of 2010 reforming the United States health system), which established a limit on damages in cases of medicine patent infringements. Did this mean, asked F. Castex, that ACTA was only legally binding for Southern States? In the European Parliament, political divergence increased the difficulty of implementing the Agreement. On 17 September 2008, the EPP (European People’s Party, right), the UEN (Union for Europe of the Nations) and two members of ALDE (Alliance of Liberals and Democrats for Europe), including Silvana Kock-‐Mehrin (of the German FDP) submitted, on behalf of ALDE, a draft resolution on European priorities for 2009, which “invites the Commission to conclude the ACTA (Anti-‐Counterfeiting Trade Agreement) as soon as possible”. On 18 December 2008, the European Parliament adopted, by 309 votes to 232, the resolution presented by the Green Party, inviting it to make the preparatory documents public. On 10 March 2010, the European Parliament adopted, by 633 votes to 13, a resolution endorsed by five of the most important political groups, urging the European Commission and the Council of Europe to publish the documents of the ACTA negotiations. The Parliament threatened to bring an action before the European Court of Justice if the European Commission did not respect the Lisbon treaty, which requires the European Parliament to be kept informed at all stages of negotiations. 51 “UNITAID statement on Dutch confiscation of medicines shipment”, 2009. Consulted on 21 March 2010. 52 James Love (director of Knowledge Ecology International, Obama Administration Rules Texts of New IPR Agreement are State Secrets, Huffington Post, 12 mars 2009. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

83 In France, Europe Ecology opposed ACTA. On 9 September 2010, the European Parliament adopted “written declaration 12” on ACTA, after this obtained the 369 signatures required for its adoption. Submitted by MEPs Françoise Castex (S&D), Alexander Alvaro (ALDE), Stavros Lambrinidis (S&D) and Zuzana Roithová (EPP), this text requests that the Commission show greater transparency by releasing all the documents relating to the negotiations. According to the declaration, the agreement must not “force limitations upon judicial due process or weaken fundamental rights” and should “not indirectly impose harmonization of EU copyright, patent or trademark law, and that the principle of subsidiarity should be respected”. It also highlights that “economic and innovation risks must be evaluated prior to introducing criminal sanctions where civil measures are already in place”. The declaration also considers that technical intermediaries “should not bear liability for the data they transmit or host (…) to an extent that would necessitate prior surveillance or filtering of such data”. In June 2010, India and China, which are not involved in the negotiations, described ACTA as “TRIPS-‐plus” measures, arguing that the draft agreement went beyond the TRIPS agreements, which were being negotiated through the WTO. Concern that ACTA could disrupt trade was also expressed within the WTO TRIPS Council and was reportedly backed by “the bulk of the WTO’s 153 members”. Different national and private interests made this process complex and tedious, threatening to make it impracticable or ill adapted in the long term. ACTA is therefore one of the many measures used by the various trade representatives of the United States, the EU, Japan and other partisans of a strict enforcement of intellectual property rights, thereby forgetting the prime victim: the consumer. Similar agreements where examined by the World Customs Organization in 2008, under SECURE. Certain bilateral free trade agreements between the United States, the European Union and third parties also contain similar provisions. i) The WCO SECURE programme The negotiation process of SECURE Standards is an initiative to promote TRIPS-‐plus-‐plus standards on intellectual property enforcement by the WCO and assist developing countries in addressing emerging global challenges in intellectual property enforcement initiatives. Although the proponents of SECURE had adopted a fast-‐track approach for its speedy conclusion, effective coordination among developing countries foiled attempts to adopt the SECURE draft at the June 2008 WCO Council and led to the suspension of the SECURE working group at the WCO Policy Commission in Argentina in December 2008. This struggle provides a good opportunity for in-‐depth thinking on the whole negotiation process and to find forward thinking plans in view of future challenges and struggles, in the interest of long-‐term sustainable development in developing countries. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

84 This approach was particularly commendable due to the highly positive response to the WCO initiative from African States, particularly affected by counterfeiting-‐crime©. The World Customs Organizations, which, in 2008, had 173 member customs administrations, launched an ambitious action plan to assist countries wishing to strengthen their anti-‐counterfeiting and piracy measures. To this end, the WCO developed SECURE (Standards Employed by Customs for Uniform Rights Enforcement). This instrument included WCO legislation on intellectual property rights (IPC), risk management directives to strengthen the effectiveness of controls, a diagnosis on IPR, a WCO e-‐learning module on IPR, proposals to reinforce cooperation with the private sector, work methods adapted to the specific nature of anti-‐counterfeiting activities, and the use of the customs anti-‐counterfeiting network (CEN) and its communication tools. By 25 April 2008, various African countries had indicated their wish to participate in the SECURE programme, these included Angola, Botswana, Burkina Faso, Burundi, Cape Verde, Côte d’Ivoire, Ethiopia, Ghana, Madagascar, Malawi, Maurice, Niger, Nigeria, Central African Republic, Senegal, Togo, Zimbabwe. The WCO also planned to publish an annual statistical report to document the main trends and an instrument to diagnose members’ needs, and to provide specific training. The WCO also carried out specific anti-‐counterfeiting and piracy operations with the customs authorities of various African countries. Known as “Vice GRIPs”, the last operation was launched on 2 June 2008, in Egypt, Morocco, Tunisia, Ghana, Nigeria and Senegal. According to the WCO press release, the aim was to test the enforcement of SECURE on the ground, in terms of targeting and risk assessment. This series of operations had enabled the interception of several tonnes of goods, amounting to more than 1.4 million items. It should be noted that, in many cases, it was not possible to seize these counterfeit goods for lack of appropriate legal grounds in the legislations of the countries concerned. E -‐ MAPPING DANGEROUS COUNTERFEIT TRADE AND ITS CONTROL a) China Today, the triads are key players both in Asia’s informal economy and in all other major continents. These groups can be compared to the Italian mafia. They are involved in racketing, prostitution or the counterfeit trade. They are becoming increasingly specialized in human trafficking, which is one of the most profitable branches of criminal activity. Poor segments of the Chinese population seeking to improve their lot, give themselves up to smuggling networks controlled by the triads. They pay considerable sums and often work for long periods in underground workshops set up in host countries. This is a modern form of slavery that has been associated, for a number of years, to the manufacture and assembly of counterfeit products in market areas. The triads are also behind the trafficking of drugs from the Golden Triangle. This region spanning Laos, Thailand and Burma, every year produces half of the world’s opium and its derivatives, the most important of which is cocaine. All these activities are now carried out on a global scale. The triads operate through the Chinese Diaspora, which, with 60 million people, is the largest in the world. A quarter of a million of this number are triad members. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

85 Operating mostly from Asia, the triads have contacts in North America and Europe. The members, established in “Chinatowns”, become the local links for these activities as part of the Tongs. These public organizations are mutual aid communities that welcome new arrivals and help them settle in. Some of them serve as a cover for money laundering centres. With the exception of one triad, they are all established on the fringes of the People’s Republic of China, mainly in Hong Kong. The handover of Hong Kong to China in 1997 caused concern among certain triad leaders. However, the communist authorities quickly calmed these fears. The Chinese government shows a strange level of indulgence towards the triads. In reality, it was quick on the uptake as to the benefits to be had. These extremely wealthy groups reinvest a large part of their laundered capital back into China. Thus in 1995, Tao Si, then Chinese Minister of Public Security, declared that “triad members are not all gangsters. If they are good patriots, if they ensure the prosperity of Hong Kong, we must respect them”. He even declared that the “Chinese government is glad to be able to unite itself with them”. The arrests of various triad members in 2004 did little to cover up the close ties that have developed between the Chinese authorities and these secret societies. China is currently one of the most important counterfeit producers in the world. Traditionally known for its illegal production of luxury goods, various Chinese regions are seeing the mass industrialization of the counterfeiting of medicines, food products, toys and spare car and plane parts. In addition to the economic damage, these practices constitute a real threat to the health and safety of populations, both in China and in export countries. For a number of years, the Chinese government has adopted anti-‐counterfeiting measures to counter criticism from countries affected by it, but also because it has realized the threat that counterfeiting poses to its own economy. According to an article published in 2004 in the French magazine l’Expansion, “China is one of the primary victims of counterfeiting… 97% of disputes are Sino-‐Chinese”, as reported by a European diplomat, specialized in intellectual property, and quoted by AFP. These Chinese statistics indicate that counterfeiting affecting foreign companies represents less than 10.5% of the cases discovered. Counterfeiting does not only affect foreign luxury brands, but also well-‐known Chinese brands, medicines and the inventions of small firms. The Chinese Deputy Prime Minister bemoaned the fact that “99% of Chinese companies have never requested a patent or a copyright. Only 40% have a trademark”. From 21 to 24 May 2008, the Public Security teams of a city in the South of China, directly monitored and assisted by a high-‐ranking official of the Ministry of Public Security of Beijing, mobilized more than a hundred police officers in an operation to dismantle a criminal network. After various weeks of painstaking investigation, phone tapping and infiltrating the network, simultaneous raids were organized on seven different factories. 74 people (referred to as “persons in charge”) were arrested and placed under police custody, 9 were remanded and placed in custody, and 2 underwent court investigation. All the factories were closed down and placed under permanent police surveillance. Thousands of pieces of documentary evidence were seized, catalogued and filed. The matter was referred to the authorities in Hong Kong, from Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

86 where some of the network leaders came, and they collaborated with their continental counterparts. At the end of May, the case was transferred to the Procuratorate to be referred to the criminal court competent to hear, among others, various citizens of the former British colony. The case, raised to a status of “national priority” by the Public Security was qualified by the Procuratorate as “major and important”. There would have been nothing extraordinary if the criminals in this case had been luxury watch counterfeiters, with little to fear from criminal procedures until recently. China is becoming aware of the modern phenomenon of counterfeiting; its penal code defines it and penalizes it; its judicial personnel are tackling it. A criminal phenomenon In 2001, the annual turnover of Chinese counterfeiting was evaluated at 16 billion US dollars (evaluation provided by the Chinese authorities). Counterfeiting represented at least 10% of national industrial production and an annual loss (sales foregone) of various tens of billions of dollars (USD) for foreign companies. In February 2000, the Chinese government recognized having lost 2.4 trillion RMB through counterfeiting. In 2007, a marketing study sponsored by the American industrial sector estimated the turnover of counterfeiting (including cigarettes) at 150 billion dollars. This market is believed to operate 30% of Chinese industry and to employ at least 5 million people. The market thrives on all kinds of products: watches, handbags, perfumes, alcohols, beers, food, soaps, shampoo, razor blades, toiletries, televisions, cars, medicines, spare plane parts, furniture, cigarettes, DVDs, etc. In Canton, 99% of SUZUKI two-‐wheel vehicles had reportedly never seen the Japanese manufacturer. Counterfeiting is carried out on mass, it is diversified and, above all, highly profitable. Its undeniable importance for (or against) Chinese economy, its profitability and the low risks it so far entailed, have attracted organized crime, and the Chinese triads in particular. Counterfeiting professionals have now replaced amateur opportunists producing small batches of “Alain Belon” socks alongside their day job, joint venture partners who kept their production chains operating for an extra hour to produce better products under their own brand and municipal factories that produced their local “coca-‐ cola”-‐ its only similarity with the American drink being that it was black and fizzy. These professionals sometimes employ several thousands of workers per factory and make the most of China’s size to spread their production sites hundreds of kilometres away from each other. They communicate via encrypted satellite phone, use the Chinese and international smuggling networks, manufacture products of similar quality to that of the products they imitate, buy their protection from the local authorities who are often totally corrupt and use counterfeiting to launder income from other criminal activities (illegal immigration, drugs, prostitution, etc.). In this way, perfume counterfeiters will first have three different factories produce a faithful copy of the original bottle, each manufacturing only one part of the bottle. Only in certain cases do these elements, taken separately, constitute a violation of intellectual property rights (model in this case). A fourth factory will be responsible for assembling the bottle and filling it. As the operation has become more “dangerous” for counterfeiters, a “just in time” strategy is used, whereby thousands of workers, in a Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

87 factory whose declared activity is perfectly legal, can assemble, fill with “perfume” and package several thousand bottles in one day, the separate parts having only arrived that same morning. The assembly plant holds no stocks and the anti-‐counterfeiting agents will find no evidence of the counterfeiter’s crime. And were these agents to be sufficiently quick, they would only be able to seize that day’s production: bottles with an identical shape, but with Chinese brand names, legally registered by the counterfeiter. They would also find that the scented liquid inside the bottles has nothing in common with the refined fragrances sold by the counterfeiting victim. In Russia or in Eastern Europe the Chinese brand name will be replaced with the brand that the consumer associates with the bottles; these will be emptied of their Chinese liquid and refilled with a closer imitation of the target perfume. Its industrial workforce, its low salaries and its organization has turned China into the most powerful counterfeit producer in the world. Although they are developing a modern and effective legal system, the Chinese authorities are aware that traditional anti-‐counterfeiting measures, however effective, are no longer adapted to the current situation; the Administrations for Industry and Commerce (in the case of trademarks), those in charge of the protection of patents, designs, models, copyright, unfair competition or product quality control, the customs authority, etc., cannot fight alone against these criminal organizations. These organizations know that in the worst-‐case scenario they are only liable to civil penalties. Criminal-‐law measures On 1 October 1997 the new criminal code voted by the Popular Assembly on 14 March of the same year came into force. This reform had become necessary in view of an obsolete criminal act of 1979, which was no longer adapted to the new social and political situation in China. It did not take market economy and foreign investment into account and, above all, had been followed by twenty years of texts (acts, regulations, decrees) that had added various criminal provisions to the interpretations of the Supreme Court and the Supreme Procuratorate. In 1997, approximately 130 civil, economic or administrative provisions carried criminal liability. A comprehensive overhaul was therefore ordered. The new Chinese criminal code came into force on 1 October 1997 and was revised on 28 February 2009 by amendment VII, and the Chinese code of criminal procedure published on 17 March 1996 came into force on 1 January 1997. The general provisions of these codes specify that their purpose is to ensure the precise establishment of the facts of a case, the correct application of the law, the punishment of criminals and the protection of innocent persons in view of protecting the socialist judicial system and guaranteeing the protection of the human rights, property rights, democratic and other rights of its citizens, ensure economic and social security and promote the socialist cause. Articles 213 to 220 and 255 presents the criminal liability regime established for counterfeiters. The non-‐authorized use of a registered trademark, the sale of products counterfeiting a trademark or a patent, the non-‐authorized use of a patented invention and copyright and trade secret infringement are expressly defined as constituting a criminal offense. These can incur fines or prison sentences of up to seven years. Depending on the severity of the case and the charges, the scale of penalties is of 0 to 3 Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

88 years, or 3 to 7 years. More generally, articles 140 and following of the criminal code prohibit the production and the sale of imitated products and the sale and production of inferior quality products. These can incur the criminal liability of legal persons, in addition to that of individuals (article 220 of the Criminal Code). The criminal provisions are therefore enable the Procuratorate to hear proceedings. However, the implementation of these texts is not without difficulty. Chinese criminal law applies to offenses committed in China and to certain offenses committed abroad. The scope of its extraterritorial competence is determined by the nationality of the offender and the nature of the offense. In Chinese law the elements constituting an offense are the same as in French law. The intentional element has a great importance in Chinese criminal law as it determines the classification of the offense. Instead of the tripartite classification that exists in French law, Chinese law separates offenses into two categories; firstly, intentional offenses, and secondly, non-‐intentional offenses. Minor offenses equivalent to infringement in French law, are qualified as “administrative” offenses and are not included under the courts’ jurisdiction. Difficulties in the implementation of criminal law The implementation of the provision can be problematic since they mostly only apply to “significant” of “highly significant” sales or income, or “severe” or “exceptionally severe circumstances”. Moreover, cases may be required to satisfy cumulative conditions such as the sale of counterfeit products in full awareness of the intellectual property rights infringed, at high prices. In the absence of further texts or interpretative jurisprudence, the Supreme Procuratorate and the Supreme Court have proceeded, via recommendations, to specify the implementation criteria of these legal provisions. This is the case of article 140 of the criminal code, establishing the minimum amounts for its application, and for which a recommendation in 1993 established the threshold for trademark counterfeiting at 50,000 RMB. A new recommendation, which came into force on 10 April 2001, amended the criteria for the enforcement of article 140 (the amount of 50,000 RMB was increased) and, by extension, widened the scope of article 140; this has simplified the prosecution of accomplices and persons who finance counterfeiting. Confronted with highly organized counterfeiters, aware of all the loopholes in judicial procedures, companies that have fallen victims to counterfeiting must concentrate their efforts on the court investigation, which will provide the elements enabling the referral of the case to Public Security. Since the reform of the code of criminal procedure of 17 March 1996 (in force since 1 January 1997), a criminal complaint cannot be filed with the Procuratorate. The complainant must proceed via private prosecution, this being rarely possible due to a private company’s limited capacity to provide sufficient evidence to justify the criminal conviction of the defendants. Otherwise, the case must be referred to the police. The police will only accept to study the claim and, where applicable, to open a preliminary enquiry if “initial evidence” is provided; this includes samples of the counterfeits, names and addresses of production points, names (photos) of persons in charge, the approximate number of workers, estimates of monthly production, export capacity, potential danger for consumers, existence of an organized Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

89 network, involvement of foreign investors, etc., and, of course, the prior demonstration of the plaintiff’s competence and interest in filing the complaint. The plaintiff’s task is complex because Public Security does not always apply criteria regarding the severity of cases consistently throughout China (which is not necessarily to the disadvantage of the plaintiff). Some Public Security teams apply texts extremely strictly, considering that the abovementioned criteria only apply to trademark counterfeiters or to producers of fake or poor-‐quality products. Therefore, these teams consider that the criteria do not apply to other rights infringements (copyright, patents, etc.) and evaluate the severity or importance of the case at its sole discretion. Other teams consider that a counterfeit product is always of inferior quality and apply the criteria of the recommendation of 9 April 2001, or they consider that they should at least refer to this, in order to avoid intervening in minor cases, whereby the objectivity of the criteria protects them from being suspected of laxity. In most Chinese provinces, a single Public Security department (known as “Public Security Service” or “General Service”) is competent for counterfeiting. But in some provinces like Guangdong, a pioneer in this area, counterfeiting cases can be referred to two Public Security services: the service in charge of “Public Security”, which mainly (although not exclusively) deals with cases that could pose a potential threat to consumers; and the service in charge of “Economic Crime” which addresses cases of counterfeiting (trademarks, patents, copyrights, etc.) that do not include other crimes. The scope of each of these services has yet to be clearly defined; each service will therefore be able to intervene in all cases of counterfeiting, highlighting, where applicable, the factor which best accounts for its intervention: threat to the consumer or other offenses (smuggling, corruption, etc.) in the case of “Public Security” and the infringement of trademark rights or patents in the case of “Economic Crime”, etc. Law enforcement The panels specializing in intellectual property, currently attached to the Supreme Court and found in most major cities, have not yet dealt with enough criminal cases (in some cases, none at all). The few sentences issued by the criminal courts mostly concern counterfeiting cases that could endanger the consumer, and only incur fines without a prison sentence. Chinese judges in the Courts, Procuratorate and Public Security department are to be applauded for reviewing the laws that China has adopted over the last twenty years. It should be remembered that the involvement of criminal organizations in the Chinese counterfeiting industry makes any anti-‐counterfeiting action difficult or even dangerous. Companies that fall victims to counterfeiting, among which Chinese companies hold the first position, must be aware of these difficulties and assist the Public Security as much as possible in collecting evidence. The Chinese police are confronted with a large criminal phenomenon and concentrate its efforts, due to limited resources, on cases that it considers to be “major and important”. Their credibility depends on the way they handle these new missions. This is why Public Security refuses to hear cases where it considers that the evidence provided by the plaintiff is insufficient. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

90 Despite considerable legislative progress and the various actions that the Chinese authorities carry out on the ground (publicity campaigns, training courses for judges, the establishment of specialized court panels, anti-‐corruption operations, etc.), in practice, foreign companies have great difficulties in protecting their rights. The corruption of the civil service by local mafias, supported by the triads, does nothing to help their efforts. Moreover, the economic significance of the counterfeiting business in certain regions (8 to 10% of China’s GDP) explains the lack of enthusiasm of certain local bodies (administration, police, etc.), which as well as having other priorities, also want to preserve the local economy. b) Japan In Japan, counterfeit products still mainly come from Asia (China, Korea, Thailand) and concern luxury products such as bags, clothes and their accessories, watches, shoes, etc. The crave among Japanese consumers for major brands means that this market continues to be attractive despite the considerable measures taken by such brands and both local and foreign IPR protection organizations. However, Japan is also starting to see the effects of counterfeiting-‐crime©, especially in the pharmaceutical and food sector. Kikkoman soya sauce is a prime example of this. While there has been little change in the brands targeted by counterfeiting (we continually come up against the same names: Louis Vuitton, Cartier, Christian Dior, Chanel, Hermès, Gucci, Rolex, Dunhill), the same cannot be said for distribution methods, which adjust themselves both to changes in distribution itself, and to increasing precision in the monitoring of counterfeit sales. Today, online sales have outdistanced street sales and parallel import distribution networks. On the Internet itself, distribution methods have multiplied and changed to keep up with the development of control methods. First, they used online auctioning sites, then virtual shopping malls and now auctioning platforms that can be accessed via mobile phone. The products sold on these sites are imported by postal order and cargo, but also “privately” by persons claiming to be tourists. Control mechanisms have systematically countered these changes in an attempt to dry out counterfeiting sources through an increase in border controls and exerting pressure on the networks themselves by strengthening measures applied to internet sites. Strengthened border controls Control has been stepped-‐up in recent years by various customs initiatives. In 2006 these focused on achieving a better control of commercial imports disguised as personal imports. To this end, customs send a notification to recipients of suspect packages asking them to confirm that the product is exclusively intended for personal use. At first, this worked well, as recipients were reluctant to reply to this kind of customs notification. However, it became ineffective when recipients realized that there was no risk in replying. In 2006, customs improved its counterfeiting control system by sending photographs of suspect products to brand right holders via email (instead of them having to go and examine the products item by item). This measure is however limited Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

91 to cases involving no more than ten suspect products, thus considerably reducing its effectiveness. In 2008, another improvement extended customs’ competence to goods in transit. Customs officers have the power to suspend the importation of any product that appears, at first sight, to infringe the law. Therefore, a major effort has been on training. Firstly, customs officers are assisted by intellectual property specialists, sent to strategic border controls. These specialists work for a national centre responsible for collecting information, developing strategies and coordinating the action of the specialists on the ground. Secondly, courses and meetings are organized with the brand right holders to familiarise the officers with specific brands. Despite these improvements, the Japanese customs continues to face significant difficulties. The fragmentation of shipments into regular postal mail and so-‐called “private” imports, limit the effectiveness of controls. These shipments are rarely sanctioned, due to the difficulty in establishing proof of the intentionality of the offense, a prerequisite for filing criminal proceedings. Control measures refocused on the Internet The Internet is now the easiest, and therefore the most common, way of selling counterfeit products on the Japanese market. Among its other advantages for counterfeiters, the Internet enables certain information to be kept secret during transactions and the use cross-‐border networks, with operators located outside Japan and Japanese jurisdiction. The most affected websites include the Yahoo, Rakuten and Bidders online auction sites, virtual shopping malls such as Rakuten Ichiba, Yahoo! Shopping and Bidders Shopping and finally the mobile phone auction sites (Moba-‐Oku, Garu-‐Oku, Guru-‐Guru). It is also important to distinguish between the various categories of counterfeiting that exist: “blatant” counterfeits that anyone can identify and describe with words such as “counterfeit” or “imitation”; “clearly visible” counterfeits that experts can easily recognize by observing the physical and commercial characteristics of a product; and finally, “non-‐visible” counterfeits that cannot be recognized visually but need to undergo a physical examination to determine their authenticity. This last category includes cases where publicity images display genuine products but the vendor, in fact, sells and ships counterfeits. Online auction sites contain many clearly visible counterfeits (more than 90% for certain brands), which are therefore easy to crack down on. On the other hand, less counterfeit luxury products are sold on virtual shopping malls for the simple reason that there are stricter conditions for opening a virtual store (depending on the sites: copy of tax return, certificate of residence or of registration to the register of commerce). Auctions via mobile phone deal with a great number of counterfeit products but their sale volumes are lower than those of online sites. What are the measures used to combat these online sales? Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

92 Existing but insufficient legal measures On a strictly legal level, legislative changes have been made but the current measures continue to be inadequate in preventing the online sale of counterfeit products. The legal framework in Japan is an interesting combination of laws and regulations that have not yet given rise to much interpretation in Japanese courts. Firstly, we will consider Japanese trademark law. Its article 2 does not specifically refer to the online sale of counterfeit products, but a legal opinion issued by the Japanese Patent Office in February 2005 upheld the application of this article to online auctions. The situation is therefore clear with regard to trademarks. Regarding e-‐commerce specifically, the basic law is the act on telecommunication services of 30 November 2001, supplemented by a 2005 directive imposing certain control obligations on website operators. In addition, there is a specific law on business transactions placed under the control of METI (Ministry of the Economy, Trade and Industry), requiring sellers on online auction sites to provide their personal information (name, address and telephone number) on their auction page if they sell more than twenty products classified as “brand products”. However, the accuracy of this information is not always strictly monitored and in practice therefore, the law is not widely enforced. Note should also be taken of the role played by the Council for the Protection of Intellectual Property on the Internet (CPPI). This council is a private forum that brings together the main auction platform companies (Yahoo! Japan, Rakuten, the Dena group), major Japanese brands (Honda and Panasonic) and professional associations. Japanese government representatives (Ministry of the Economy, Trade and Industry, the Ministry of Culture, the Ministry of Internal Affairs and Communications, the Secretariat of Intellectual Property Strategy Headquarters, the National Police Agency) also attend these meetings as observers. In its directives, the Council recognizes that right holders and website operators must cooperate in fighting counterfeiting, not only in their own interest, but to protect the interests of consumers. These same directives make operators responsible for drawing up voluntary control procedures capable of dealing with the volume of products placed on auction (volume processed). In response, for example, the operator Yahoo has developed a control system that works all year round, day and night and employs more than 200 people. Cooperation between websites and trademark owners Aware of the need to cooperate with trademark owners, and following CPPI recommendation, the most important Japanese auction sites (Yahoo! Japan, Rakuten and DeNA) agreed to negotiate with certain trademark holders to establish agreements on systematic control procedures. These agreements establish three stages in the control of suspect product listings. First, the websites themselves or their technical subcontractor platforms immediately delete Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

93 blatant counterfeit products. This refers to entries containing words such as “counterfeit”, “fake”, or “copy”. Next, the internal team of the Union des Fabricants (Unifab) in Tokyo removes any contentious product from the list on behalf of its members if an opinion is requested from the website operator, the right holders or the police. The third stage requires the trademark holder to monitor the remaining products on auction that have not been identified or deleted in the previous stages. One of the main difficulties is identifying repeat offenders. The lack of a strict vendor identity control means that vendors can use various different pseudonyms. As a measure against this, Yahoo has established a vendor pre-‐selection system to verify their identity by sending them a PIN code via registered mail. Without this PIN code, auction sellers will not be able to activate their accounts or sell products. This system also prevents vendors outside Japan from selling illegal products via these sites to Japanese clients. Progress in the surveillance of these traditional sites has, however, resulted in the transfer of sales to sites that are harder to control, and in particular, those using mobile phones. The reduced screen size and the fact that certain sites (e.g. Powa Oku) do not provide computer access to their databases represent considerable obstacles. Despite the efforts of certain sites, like Garu Oku, which provides trademark owners with special access to their databases, the images posted by vendors are generally of poor quality or non-‐existent, and do not allow for reliable authentication. Another difficulty is controlling so-‐called “non-‐visible” counterfeits because, in these cases, there is no way of identifying them. The only option, in these cases, is to purchase control samples, which are by nature unpredictable. In these cases, sales can only be limited by obliging vendors to establish the origin of the product before listing it online, but for both technical and legal reasons, there is still a long way to go before this can happen. It is therefore no small paradox to see that in an increasingly controlled society where technology is constantly improving, illegal activities such as counterfeiting can continue to flourish, either through or in spite of this same technology. Major brands in Japan have therefore not yet seen the last of counterfeiting. c) The example of Russia and European control mechanisms The example of Russia (c.f. Chapter (d)-‐ Russia and its mafias pg. 33) European control mechanisms This section provides a brief overview of those international agreements and conventions on intellectual property rights to which European countries and the European Union are party. Most European countries are among the contracting parties of the first document regulating Intellectual Property at an international level: the Paris Convention for the Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

94 Protection of Industrial Property53, signed in 1883. The Convention covers industrial property in general, including patents, marks, industrial designs, utility models, trade names, geographical indications and protection against unfair competition. The Convention has been ratified by Albania, Armenia, Austria, Belarus, Belgium, Bosnia and Herzegovina, Bulgaria, Croatia, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Liechtenstein, Lithuania, Luxemburg, Malta, the Netherlands, Norway, Poland, Portugal, the Republic of Moldova, Romania, Serbia, Slovakia, Slovenia, Spain, Sweden, Switzerland, the former Yugoslav Republic of Macedonia, Turkey, Ukraine and the United Kingdom54. Several European countries are also part of the Madrid Agreement concerning the International Registration of Marks; these include Albania, Armenia, Austria, Belarus, Belgium, Bosnia and Herzegovina, Bulgaria, Croatia, Cyprus, the Czech Republic, France, Germany, Hungary, Italy, Latvia, Liechtenstein, Luxemburg, the Netherlands, Poland, Portugal, the Republic of Moldova, Romania, Serbia, Slovakia, Slovenia, Spain, Switzerland, and Ukraine55. The agreement was adopted in 1891 and it entered into force in 1892; then, following several revisions, it was amended in 1979. In 1989, the Madrid Protocol was also adopted and the European Union joined in 2004, “thus including the possibility to use Community Trademarks as a basis for international trademark applications and for the Community Trademarks to be applied for via international routes.”56: The European Union, together with the large majority of European countries57, is a contracting party of the World Trade Organization (WTO) Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS), negotiated during the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) in 1986 – 1994. “The Agreement introduced, for the first time, intellectual property rules into the multilateral trading system while fixing the minimum standards for many forms of intellectual property regulation.”58 Switzerland, Bulgaria, Romania, Denmark, Latvia, the Republic of Moldova, France, Spain, Poland, Estonia, Italy, Liechtenstein, Serbia, Slovakia, and Ukraine also ratified the Singapore Treaty on the Law of Trademarks, signed in March 2006. The Treaty establishes common standards for procedural aspects of trademark registration and licensing. 53 The full text of the Paris Convention is available at the following link: www.wipo.int/treaties/en/ip/paris/ 54 The full list of the Paris Convention contracting parties is available here: http://www.wipo.int/treaties/en/ShowResults.jsp?lang=en&treaty_id=2 55 The full list of the Madrid Agreement contracting parties is available here: http://www.wipo.int/treaties/en/ShowResults.jsp?country_id=ALL&start_year=ANY&end_year=ANY&search_what=C&treaty_id=3 56 UNICRI, Transcrime, GACG, 2010, Anti Brand Counterfeiting in the EU: Report on International and National Existing Standards, pag .39 57 The full list of the TRIPS Agreement contracting parties is available here: http://en.wikipedia.org/wiki/List_of_parties_to_international_copyright_agreements 58 UNICRI, Transcrime, GACG, Anti Brand Counterfeiting cit., pg. 39 Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

95 The European legislative framework “Activities of the European Community (EC) in the field of intellectual property have mainly focussed on the harmonization of national substantive law and the creation of a unitary right at Community level.”59 To this end, the EC has produced Green papers, regulations and directives concerning the protection of intellectual property rights and actions against the production and trade of counterfeit goods. Among these, it is worth mentioning: • The 1998 EU Green Paper 60 with the primary objectives of assessing the economic impact of counterfeiting and piracy in the Single Market, reviewing the existing legislation in the field, and examining the need for Community action in this sphere. • Regulation 1383/200361, which was the first document addressing the issue of how EU customs should deal with counterfeit goods in view of a progressive harmonization of the customs procedures and systems of EU Member States. • Regulation 1891/200462, implementing the previous regulation in respect of customs measures against goods infringing IP rights. • Directive 48/2004 63 , defining measures, procedures and remedies for the enforcement of Intellectual Property Rights in EU countries. The Directive sets minimum standards for Member States, which are free to apply stricter measures and sanctions to prosecute offenders. In particular, article 2, on the observance of intellectual property rights (IPR), of Declaration 2005/295/CE64. Furthermore, in view of supplementing Directive 2004/48/EC, the Commission of the European Communities put forward a directive in July 2008 aimed at ensuring the enforcement of intellectual property rights through the strengthening of the criminal law framework65. The proposal has been criticized by a variety of stakeholders claiming that according to the EC Treaties, criminal measures and criminal law in general should not fall within the jurisdiction of the European Union. Nevertheless, a revised version of the Directive is currently being discussed. Border measures In general, there are three main procedures: • ex officio measures, subject to sufficient grounds to suspect that goods infringe intellectual property rights, where customs officials may detain suspected goods prior to informing the registered trademark owner; 59 UNICRI, Transcrime, GACG, previously cited work, pag .42 60 The full text of the EU Green Paper is available here: europa.eu/documentation/official-‐docs/green-‐papers/index_en.htm 61The full text is available at: http://eur-‐lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32003R1383:EN:HTML 62 The full text is available at: http://eur-‐lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32004R1891:EN:HTML 63 The so called “Enforcement Directive” 64 More details concerning Declaration 2005/295/CE are available here: http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32005C0295:FR:NOT 65 More details concerning the proposed Directive on criminal measures are available here: http://eur-‐lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52005PC0276%2801%29:EN:NOT Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

96 • requests for action, which allow trademark owners to file an intervention request with the competent authorities; • simplified procedures, usually applied in cases where the infringement of intellectual property rights is obvious, and can result in the destruction of the infringing goods once the trademark owner has confirmed the goods as counterfeits. Western European countries In Finland, right holders may request the intervention of Finnish customs to stop the trafficking of goods suspected of being counterfeits or pirated. A special feature of Finnish rules on border measures is that, under a 2005 amendment to the Copyright Act, customs may seize goods infringing copyright even if the goods are imported or exported as a part of a traveller’s personal baggage. Under both French and EC legislation, French customs authorities may seize goods that appear to infringe intellectual property rights, enabling IP right holders to prevent infringing goods from being imported illegally into France. In France two different types of seizure exist: the ‘effective seizure’ -‐ whereby a court authorizes law enforcement officials to seize infringing goods, and the ‘descriptive seizure’ -‐ authorizing law enforcement officials to inspect the seller’s premises to collect evidence of the infringement. In Italy, customs is authorized to destroy counterfeit goods even without an order from the competent judicial authority. Italian laws provide for two procedures: ex officio actions and actions on the request of the injured party. A simplified procedure is also applied, although Italian law does not provide for agreements between the right holder and the potential infringer. However, if customs officials identify goods suspected of infringing intellectual property rights, they may confiscate the goods following ex officio procedures or by order of the competent judge66. Furthermore, it should be noted that customs do not carry out inspections in cases of parallel imports or overproduction. In the Netherlands, Dutch legislation establishes three different customs procedures: ex officio measures, requests for action and simplified procedures. Customs authorities acting ex officio may suspend, release or withhold goods that are thought to infringe an intellectual property right. According to Article 2.20 of the Benelux Convention, Dutch customs can intervene, not only in cases where trademarks are identical to other registered trademarks, but also where there it is thought that products may mislead consumers on a sound, visual or conceptual level67. Eastern European countries In Latvia, remedies specific to certain intellectual property rights permit right holders to file both civil and criminal proceedings. Criminal proceedings are preferable if the infringement is blatant and serious, while civil proceedings are advisable if the right 66 See Finance Act 2004 (law dicember, 24, 2003, no. 350 (G.U. n.299 del 27/12/2003). 67 Vrins O, Schneider M., 2006, Intellectual property rights through border measures, Oxford University Press, p.797 Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

97 holder wishes to obtain a decision determining the probably existence of an infringement. In Lithuania, the legislation provides for the three procedures listed above. However, note should be taken of the lack of administrative remedies. The Administrative Code provides for administrative liability for copyright infringement but does not include the infringement of trademarks and other intellectual property rights. In Poland, aside from the actions listed above, officers employed at the Patent and Trade Mark Office have declared that approximately 80% of cases where a trademark holder is informed by Customs of a suspected violation, result in private agreements between the right holder and the importer. Such agreements usually involve the destruction of the counterfeit goods and end without proceeding to examination in court68. In Romania, the simplified procedure may lead to the destruction of goods seized by customs. The operation is carried out by companies approved by the authorities, at the expense of the rightful owner of the trademark. Since such measures can be rather expensive, right holders usually only choose this procedure if there is a significant quantity of seized goods to be destroyed. Civil measures in Western European countries In Finland, IPR infringement is sanctioned by the Civil Code of Procedure, which provides a series of measures against intellectual property violations. These include injunctive relief for right holders, as a preliminary measure; the payment of the real damages suffered by the right holder; financial compensation equivalent to the licence fee that the offender would have paid had the use of the mark been authorized; confiscation, delivery or destruction of the infringing goods and of the equipment used to produce them. In France, IPR holders can file civil proceedings or seek pre-‐trial remedies, such as interim injunctions. IPRs holders should be compensated and the situation prior to the infringement restored. The evaluation of damages is generally evaluated according to the losses suffered and to the profits foregone by the right holders. In Germany, the legislative framework offers protection against counterfeiting under the Unfair Competition Act, providing requests for cessation, compensation, information and reimbursement of costs generated by imitations of a product’s overall appearance, slogan or other visible features. In 2008, the Markengesetz69 was amended to meet the standards of Directive 2004/48. The most relevant amendment to the Markengesetz was the extension of the right to information. This right has been expanded to allow trademark holders to request information from third parties involved in the commercial circuit, regarding the origin of the illicit products, their distribution channels and the quantities and costs of the infringing goods. Another improvement has been the confirmation of the right to disclose and access relevant documents, even if the infringer 68 Barchanski A., Zoszuk, W., 2007, Effective ways to combat counterfeiting in Poland, IP Risk Management Review, pg. 33-‐34. 69 The Markengesetz provides protection for trademarks, trade designation and appellation of geographical origins. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

98 has the right to withhold confidential documents70. Preliminary measures to protect right holders, including the use of cease and desist orders, are also available in Germany and they are fast and cost effective options. Right holders can also obtain corrective measures such as the withdrawal of infringing goods from the market; the destruction of infringing goods and machinery used for their production; the payment of damages and the publication of the court’s decision. In Italy, the implementation of the Enforcement Directive resulted in the adoption of significant amendments. One example is that injunctions can be issued not only for the offender, but also for any third party involved in the criminal act. Moreover, except for those using counterfeit goods to personal ends, it is compulsory to return counterfeit goods to the right holder71, who can also claim compensation for damages72. In Spain act L. 19/2006 transpose Directive 2004/48/EC into the law. Right holders may use a series of actions to obtain the cessation of the infringing activity; the implementation of counter measures to prevent future infringements; the destruction of counterfeit goods and their packaging and the donation of these goods to charity; the handing over of the infringing goods or compensation of their equivalent value; and the publication of the court’s decision. In addition, right holders may also claim damages. It should be noted that the law provides for the compensation of right holders for direct damages and entitles them to claim damages for prejudice to the brand image 73 . However, the majority of Spanish courts only grant the minimum level of compensation provided by the law (i.e., 1% of the offender’s turnover)74. In the Netherlands, in the event of infringement of a registered trademark there are different procedures available to right holders. In urgent cases the registered trademark owner can file proceedings to obtain an interim injunction, which consists in an order to carry out or cease certain actions, or to hand over goods. However, this procedure does not provide for damages. Pre-‐trial seizures75 can also be used together with provisional measures, such as: the “seizure of the evidence” (art.1019b-‐c); a detailed report of the findings; the right to information on the origin of suspected goods and their distribution channels. It should be noted that where criminal organizations are involved, criminal law may apply instead of civil law. Where an infringement is established, right holders can obtain a series of measures, including corrective measures; the payment of damages; the payment of legal costs and the publication of the judicial decision. In the United Kingdom, various procedures are available to right holders wishing to file proceedings for counterfeiting. Right holders may issue a cease and desist letter, whereby they may also file a claim for the delivery or destruction of the infringing goods. The payment of damages can also be requested as well as recognition of gains and/or reimbursement of legal costs. Pre-‐judgment measures include the request by the right holders that “search and seizure measures” be carried out. Urgent cases can be expedited via “an interim injunction”. It is also possible to file proceedings on the merits. 70 Grabienski, K., Weber, N., 2009, World Trade Mark Review: Germany, pag. 90-‐91. 71 Italian IP Code, Art.124, co. 1 and 2 and Art. 128 72 Italian IP Code Art. 126 73 UNICRI, Transcrime, GACG, previously cited work, pag.199 74 Miranda De Sousa J., Sirimarco A., 2009, World Trademark Review: Spain, pag. 109 75 This is an ex parte procedure used as a protective measure and it obliges the party who obtained the seizure to introduce the procedure on the merits within a fixed time. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

99 Right holders may obtain a permanent injunction; the withdrawal of infringing goods; the delivery of goods; an order to erase, remove or obliterate signs from the infringing goods or even the destruction thereof; the payment of an account of gains or damages and the payment of legal costs76. Civil measures in Eastern European countries In Hungary right holders may have recourse to provisional/preliminary measures as well as proceedings on the merits. With regard to proceedings on the merits, the judge may order precautionary measures, access to the alleged infringer’s bank accounts, financial and/or commercial documents and the lodging of security. In proceedings on the merits, courts may issue a cease and desist order; order the infringer to submit an apology; and order the disclosure of relevant information regarding the identity of those involved in manufacturing and distributing the infringing goods, in their commercial channels and distributing networks. The judicial authorities may also order corrective measures such as the seizure of counterfeit goods, their transfer to a specific person; their removal from the market, the destruction of the infringing goods and of their packaging, the payment of damages; and the publication of the final court ruling. Under Latvian Trademark Law, trademark holders may file a complaint with the Regional Court of Riga for the unlawful use of their trademark. If the infringement is established, the court may order the cessation of the unlawful use of the trademark, the payment of damages and legal costs. In Poland, courts are governed by the general law of tort and civil procedures. Art. 296 of the Industrial Property Law stipulates that in cases of IPR infringement “Any person whose trademark right has been infringed or any person legally entitled to do so, may demand that the infringing party cease the infringement, surrender any illegal profits and, in cases of infringement due to error, to redress the damage.” In the Czech Republic, both the right holders and the agents of the IPR holders or owners have recourse to a series of actions77. In particular, these persons may claim the right to information, the adoption of corrective measures (such as the removal and the destruction of infringing goods), the payment of damages and the publication of the court ruling. Since its accession to the EU, anti-‐counterfeiting legislation in Romania has become stricter. The Government Ordinance on Enforcing Intellectual Property Rights (no. 100/2005) implements Directive 2004/48/EC and provides right holders with number of remedies. Among the preliminary measures available where there is a suspicion of infringement of an intellectual property right, the complainant may request an interim injunction. The court may also order the provision of a guarantee of the compensation of the right holder. Where the injured party can provide evidence that the recovery of damages is impossible, the court may freeze the bank accounts and seize goods in the 76 UNICRI, Transcrime, GACG, previously cited work, pag. p.212 77 Under Subsection 2, the licensee may enforce the right only upon the consent of the right holder or the proprietor. The consent shall not be required when the right holder fails to initiate a claim within one month from the receipt of the licensee’s notification of the infringement. Section 2 of Act no 221/2006 which implements the EU Directive 2004/48, Enforcement of Industrial Property Rights Act Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

100 possession of the defendant. Regarding proceedings on the merit, once the infringement is established, right holders can obtain a cease and desist order; the removal of the counterfeit goods from the market and/or from distribution channels; the destruction of the counterfeit goods and of the materials used to manufacture such products; the payment of damages and the publication of the court ruling as a partial or integral part of the ordinance. Criminal prosecution in Western European countries The Finnish Criminal Code provides for criminal-‐law measures and legal proceedings for cases involving counterfeiting. The intentional infringement of trademarks, patents and design rights is punishable by a fine. The penalty may also include a prison sentence of up to two years or a fine if the infringement causes substantial economic damage. Persons who, intentionally or out of gross negligence, infringe copyright or related rights or import copies that they knew or should have known constituted an infringement, will be liable to a fine. Legal entities may incur a corporate fine of €850 to €850,000. In Finland, even though criminal proceedings in the area of intellectual property rights are not rare, civil actions are more common. In France, the infringement of intellectual property rights can be classed as a criminal offence. Criminal measures for counterfeiting are not included in the Criminal Code but in the French Intellectual Property Code. In particular, offenders may face imprisonment for up to three years and a maximum fine of € 300,000. If the infringer is a legal entity, the fine may reach € 750,000. Sanctions are doubled for repeat offences, while, if the involvement of organized crime can be proven, imprisonment may reach up to ten years and fines may be increased to € 500,000. In Germany, the maximum penalty is a fine and five year’s imprisonment for commercial infringement acts on a commercial scale78. The maximum fine is of €10.00079. According to Art. 473 of the Italian Criminal Code, “any person aware of the existence of an industrial property right who counterfeits or alters national or foreign trademarks, or brands associated with industrial products; or any person who, without resorting to counterfeiting or alterations, uses counterfeit or altered trademarks or brands, is liable to a prison sentence of six months to three years and a fine of €2,500 to €25,000”. Any person who “for profit, imports industrial goods bearing national or foreign counterfeit or altered trademarks and/or brands within the national borders” is liable to one to four years’ imprisonment and a fine of €3,500 to €35,00080. Furthermore, the sale, offer for sale, and circulation of counterfeit goods for profit are punishable with up to two years’ imprisonment and a fine of up to €20,000. Furthermore the Code of Administrative Law provides a fine of at least €100 for consumers who have purchased a counterfeit product, when aware of its counterfeit nature81. 78 See Section 143 79 In case of violation of Section 145, Subsection 2 80 See Art. 374 81 See decree no. 35 of 14th March 2005 which amended Art. 1 paragraph 7 of the Code of Administrative Law Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

101 The Spanish Criminal Code establishes prison terms of six months to two years and fine for cases of counterfeiting82 . Cases that present aggravating circumstances83 carry a prison term of one to four years, a fine and disqualification from work for a period of two to five years. In 2005 an inter-‐ministerial Commission was created with the task of promoting the implementation of precautionary and enforcement measures against counterfeiting and piracy, through an effective collaboration between Spanish administrative bodies. Unlike in Finland, criminal proceedings seem to be preferred to civil ones because they are less costly and take less time84. In The Netherlands, criminal proceedings are considered as a last resort. Among the legal provisions applied, imprisonment does not exceed four years and it is only applied when an infringement is committed on a commercial scale or if the crime poses a collective threat for persons or property. In other cases, the term of imprisonment is up to one year. Fines are also an option; in particular, if the offender is a legal entity the fine may go up to €740,000. In the United Kingdom, according to the Trademarks Act, offenders are punishable by a fine and/or imprisonment for up to ten years85. Criminal prosecution in Eastern European countries The maximum prison term applied in Hungary is of three years. The punishment may be doubled if it is established that the counterfeiter has intentionally committed a criminal act in connection with organized crime86. The competent authorities may order the confiscation of tools, machinery or other instruments and property which: (i) have been used or were intended to carry out the criminal offense; (ii) may endanger public safety or are considered illegal; (iii) were obtained through means deriving from or related to criminal activities. Once the infringing goods have been confiscated and all the counterfeit marks have been removed, with the consent of the trademark owner, the goods will be donated to charity. Any financial gain or advantages resulting from the infringing activities must be reimbursed. Any seized assets shall become State property. In Latvia, sanctions for the deliberate unauthorized use of registered trademarks include prison terms not exceeding one year; custodial arrest; community service; and/or a fine, with or without confiscation of property. The Lithuanian criminal code establishes criminal sanctions for the illicit use of a trademark causing damage or violating patent and design rights. Sentences applied depend on the gravity of the crime and may amount to a term of imprisonment of up two years. After negotiations regarding Romania’s accession to the EU, a specialized department was created to combat counterfeiting and, more specifically, to prevent intellectual property right infringement. If the infringement jeopardizes the health and/or safety of consumers, the offender is liable to two to ten years’ imprisonment and the loss of 82 Crinminal Code, Art. 274 83 See Art. 276 of the Criminal Code 84 UNICRI, Transcrime, GACG, previously cited work, pag .201 85 See Section 92 of the Trademarks Act 86 See Section 98 of the Penal Code, Crimes committed as an activity of organized crime. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

102 certain rights. In Romania the State is though to suffer much damage from counterfeiting activities and, for this reason, proceedings are conducted by state institutions. Consequently, criminal proceedings tend to be slower than civil ones and, on average, investigations take three to six months. The Criminal Code in Slovakia, establishes harsher penalties for IPR infringements87. Offenders that earn a significant profit or carry out their infringing activities on a large scale, may face six months to five years’ imprisonment, a fine or the seizure of the infringing goods. Recent cases 2010: In Romania, over 78,000 glass containers marked with various brand names including Dolce & Gabbana, Clinique and Gucci were seized, on suspicion of counterfeiting. Source: Business Action to Stop Counterfeiting And Piracy (BASCAP) Digest 15-‐28 February 2010 2010: In the UK, £180,000 worth of counterfeit medicines were seized in a joint operation between police and the UK Medicine and Healthcare products Regulatory Agency (MHRA). Source: BASCAP Digest 1-‐14 March 2010 2009: As of 1 April 2009 and in just four months, the UK Border Agency (UKBA) seized £1,646,173 of counterfeit goods. The fakes seized by UKBA officers included England football shirts, GHD hair-‐straighteners, designer watches, handbags, shoes and cigarettes. A spokesman said that the popular hair-‐straighteners and cigarettes were made with potentially dangerous materials. Source: The Independent (Press association) 2009: Italian police seized counterfeit goods from China worth more than €20 million ($28 million) during raids on 17 warehouses in Rome. Italys financial police say 18 Chinese citizens are being investigated for importing counterfeit goods including clothes, electronic goods and some 150,000 childrens toys. Source: Associated Press The involvement of organized crime in Central, Eastern and Western Europe The globalization of markets and information technology progress have boosted demand for both legal and illegal goods. In terms of illegal goods and services, the increase in demand means new profit opportunities for organized crime and the creation of a series of alliances among various organizations to better manage production and distribution networks. Alliances among criminal organizations, often involved in simultaneously trafficking several illicit products, enable counterfeit goods to be transported along the same trade routes used for drug and arms trafficking. The Italian Camorra, which often collaborates with criminal groups from China or Eastern Europe, plays a fundamental role in the production and trafficking of counterfeit 87 See Section 152 of the Criminal Code Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

103 goods. Albanian and Turkish gangs also seem very active and control criminal networks operating in the counterfeiting industry. With regard to the Camorra’s operations, investigations confirm that counterfeit goods are often also sold through retail channels – not only by exploited immigrants but also by regular retailers who purchase such goods because of their low costs. Although Italy is affected as a whole, the Campania region, especially the port of Naples, is particularly active. This criminal organization often controls legal commercial activities which it uses to introduce imitation goods into the market, creating a large economic-‐financial web involving a number of countries – particularly Western European countries, the United States, Brazil, Canada and Australia. This entrenched financial system– which indicates the Camorra’s high level of organization and internationalization– generates capital funds, which, after being “laundered”, can be reinvested in a variety of different legal commercial activities, thereby increasing the organization’s operational capacity. The Camorra manages all the stages of the production, distribution and sale of counterfeit products and is extremely active in the clothes and fashion goods sector and in respect of pirated CDs and DVDs. Several cases show the entrepreneurial approach taken by the leaders of organized crime, intent on satisfying their “clients” requests and on differentiating the quality of their imitations to meet their clients’ needs. Complex production and distribution networks link the Italian Camorra with Chinese and African criminal organizations based in Italy, ensuring that production and distribution (even at street level) are under the organization’s control. Albanian gangs are particularly active in the port of Antwerp in Belgium and they deal with all types of counterfeit products. Asian gangs operating in the EU specialize in manufacturing and distributing counterfeit products. They are known to collaborate with organized criminal groups in Eastern Europe, Eastern India and Nigeria. The complexity of the distribution network makes it extremely difficult to identify supply chains precisely, especially because criminal groups are capable of deftly modifying their trade routes. As a result, known cases only enable us to identify a few of the major collection points: the ports of Antwerp, Hamburg and Amsterdam or the airports of Schipol and Roissy, in Europe. Outside of Europe, Dubai, Hong Kong and some US ports serve as important transit points. The majority of counterfeit products sold in the EU come from outside the EU, in particular from China, Thailand, Morocco and Turkey. However, the EU itself is very active in producing a certain range of imitation products. Countries like Italy or Portugal, are often associated with the counterfeiting of clothing items, while Spain and Italy are the countries most associated with counterfeiting spare vehicle parts. These products are not only intended for domestic markets, but are also exported. As a result, the European Union is a major strategic area for the sale, production and transit of counterfeit goods. d) The United States This next chapter provides an overview of the legal framework regulating counterfeiting control as well as the mechanisms implemented by the Governments of the United Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

104 States of America and Canada to combat this growing problem. This also includes an overview of the counterfeit goods market and the organized crime networks present in these two countries. In particular, it examines the multilateral efforts to combat crime, trends in investigation/prosecution and the rapid development of international crime networks. The US legal framework The Lanham Act has been the basic legislative text on trademark law in the United States since 1946. In view of the rampant growth of trafficking in counterfeit goods over the past few decades, the US Congress passed four additional laws strengthening the Lanham Act: • The Trademark Counterfeiting Act of 1984; • The Anti-‐counterfeiting Consumer Protection Act of 1996; • The Stop Counterfeiting in Manufactured Goods Act of 2006: • The Prioritizing Resources and Organization for Intellectual Property Act of 2007. Their objective is to increase both criminal and civil penalties for intentional trademark counterfeiting and extend the powers of US Customs and Border Protection. Criminal prosecution US law provides penalties of up to 5 years in prison and a fine of $250.000 for first-‐time offenders and 15 years in prison and fines of up to $1 million for repeat offenders. Furthermore, and under the Prioritizing Resources and Organization for Intellectual Property Act of 2007, if the defendant knowingly or recklessly causes or attempts to cause prejudice to consumer health and safety, the penalty he/she may face is increased to life imprisonment.88 The 2007 Act also provides fines of up to $1 million for first-‐time offenders and up to $5 millions for repeat corporate offenders. The 2007 Act contributed to strengthening the Lanham Act by expanding its scope beyond import, to export and trans-‐shipment of counterfeit goods. Regarding penalties, the Stop Counterfeiting in Manufactured Goods Act of 2006 provides that a counterfeiter must forfeit not only the goods bearing counterfeit marks, but also any proceeds of the activity, and any property used or intended to be used to commit the offense. The counterfeiter must also pay damages to the trademark holder. Furthermore “the 2006 Act expands the definition of ‘counterfeit good’ to include labels, containers and all forms of packaging not actually attached to the goods.” 89 The Anti-‐counterfeiting Consumer Protection Act of 1996 allows law enforcement officials to seize not only counterfeit goods, but also equipment and materials used to manufacture counterfeit goods and vehicles used to carry out the offense. 88 G.R. Elings, S. Gelin, The World Trademark Review, Anti-‐Counterfeiting 2010 – A global guide: United States”, pg. 236 89 G.R. Elings, S. Gelin, The World Trademark cit., pag. 236 Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

105 Border intellectual property (IP) enforcement In the United States, the Customs and Borders Protection (CBP) is competent, under federal law (19 USC §1595), to inspect carriers and seize counterfeit goods that enter the country. The CBP also has the authority to detain goods entering the U.S.A. if they are suspected of being counterfeits. The maximum detention period is 30 days, during which the trademark owner and the importer will be informed and summoned to authenticate the goods. If they do not succeed, the goods will be formally seized and confiscation proceedings initiated. Trademark owners play an important role in supporting the work of the CBP. First, they must register their trademarks with the CBP and provide information that may help to identify counterfeit goods. They can initiate the seizure process through the CBP, or they can file a civil action with the US International Trade Commission (ITC) -‐ under Section 337 on the Tariff Act of 1930. In this last case, proceedings directly target the import of specific infringing goods and the aim is to obtain an exclusion order from the ITC, enabling the CBP to exclude infringing products from entering the United States. The order generally concerns products issued by specific sources, but in certain cases, it can apply to any source worldwide. “In addition, the ITC may issue cease and desist orders that prohibit domestic entities from importing and selling infringing products in the United States”90. The investigations carried out under Section 337 are in rem actions, and “commission exclusion orders may even cover products imported by entities that were never named as parties and never had notice of the commission’s investigations”.91 Courts have consistently recognized the commissions trademark rulings as having preclusive effect (Union Manufacturing Co. v. Han Baek Trading Co., 763 F.2d 42 (2d Cir. 1985)). Civil measures Trademark owners usually prefer to file civil proceedings against counterfeiters since there is no mechanism that gives them a private right of action to enforce criminal-‐law provisions. The anti-‐counterfeiting provisions of the Lanham Act specifies that trademark owners are entitled to receive treble the defendant’s profits, the plaintiff’s damages or statutory damages. The minimum and maximum damages awarded have been doubled by the Prioritizing Resources and Organization for Intellectual Property Act of 2007, to $1 million and $2 million respectively per counterfeit mark per type of goods sold, offered for sale or distributed (see 15 USC §1117(c)(1)) 92. Civil proceedings have one major limitation in that the infringer receives an advance notice of the action filed by the trademark owner. This is a great obstacle in identifying the counterfeiters and uncovering their real identities, and the location and scale of their operations. Civil proceedings give counterfeiters the time to destroy evidence, such as business records, counterfeit goods production and assets. However, in this respect, 90 M.L.Doane, V.J.Adduci II, Curbing Counterfeit Goods, available here: http://www.adduci.com/articles/Curbing%20Counterfeit%20Goods 91 M.L.Doane, V.J.Adduci II, Curbing Counterfeit cit. 92 G.R. Elings, S. Gelin, previously cited work, pag. 236 Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

106 section 34 of the Lanham Act (15 USC §1116) provides the possibility of filing an ex parte action, whereby a brand owner can unilaterally appear before a judge in a federal court to seek an injunction authorizing surprise seizures of goods and records93. The context Internet piracy and anti-‐counterfeiting online The growth of e-‐commerce and globalization has also created new possibilities for criminals and has contributed to altering the dynamics of the trade of counterfeit goods. The anonymity granted by the Internet and the possibility of offering goods to a vast range of potential buyers, makes online advertising and sales an unmissable opportunity for counterfeiters. In this light, the doctrine of contributory liability has become a useful tool in the control of counterfeiting. According to this doctrine, a third party is considered liable when it deliberately assists or enables counterfeiting activities to take place, even where the third party does not directly engage in the counterfeiting activity94. The following box provides an example of a recent contributory liability ruling involving an e-‐commerce service provider. On August 28 2009 a unanimous federal jury in California awarded Louis Vuitton Mallettier SA $32.4 million against the internet service provider Akanoc Solutions Inc for failing to shut down dozens of websites it had hosted that were selling counterfeit Louis Vuitton bags, even if Louis Vuitton had sent 19 notices to Akanoc. Source: G.R. Ellings, S. Gelin, The World Trademark Review, Anti-‐Counterfeiting 2010 – A global guide: United States, pag. 237 The doctrine of contributory liability has primarily developed through case law, even though it has also been codified in at least one instance. “Section 231(2) of the New York Real Property Law provides that landlords can be held jointly and severally liable for damage resulting from unlawful use, occupancy, trade, manufacture or business on their premises”95. In the box below the ruling provides an example of the type of efforts made by the Department of Justice Task Force on Intellectual Property (IP Task Force). The IP Task Force was created to combat the growing number of domestic and international intellectual property crimes, to protect the health and safety of consumers, and safeguard US economic security. The IP Task Force aims to strengthen intellectual property rights protection through heightened criminal and civil enforcement, greater coordination among federal, state and local law enforcement partners, and an increased focus on international enforcement, including reinforcing relationships with key foreign partners and US industry leaders96. 93 G.R. Elings, S. Gelin, previously cited work, pag. 236 94 G.R. Elings, S. Gelin, previously cited work, pag. 237 95 G.R. Elings, S. Gelin, previously cited work, pag. 237 96 http://www.justice.gov/opa/pr/2010/October/10-‐crm-‐1229.html Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

107 On October 29 2010 Todd Alan Cook, 24, of Wichita Falls, Texas, was sentenced to 18 months in prison by U.S. District Court Judge T.S. Ellis III for selling more than $1 million worth of pirated computer software through the Internet, in violation of criminal copyright infringement laws, announced Assistant Attorney General Lanny A. Breuer of the Criminal Division, U.S. Attorney Neil H. MacBride for the Eastern District of Virginia and John Morton, Department of Homeland Security’s Director of U.S. Immigration and Customs Enforcement. Cook was also sentenced to three years of supervised release and was ordered to pay restitution in the amount of $599,771. Cook pleaded guilty on March 11, 2010, to criminal copyright infringement in the U.S. District Court in Alexandria, Va. This case is part of the Department of Justice’s ongoing initiative to combat online commercial counterfeiting and piracy. Including Todd Cook’s guilty plea, the department has obtained 46 convictions involving online auction and commercial distribution of counterfeit software. Source: “Texas Man Who Was Part of Father and Son Team of Pirated Software Sellers Sentenced to 18 Months in Prison”, The United States Department of Justice, 29 October, 2010, available here: http://www.justice.gov/opa/pr/2010/October/10-‐crm-‐1229.html Counterfeit drugs Counterfeit medicines have grown exponentially over the last decade, largely due to the wide availability of technology at affordable prices enabling counterfeiters to build up their capacities to imitate any product on the market. The ease with which they can be manufactured and anonymity in distribution has made counterfeit medicines a lucrative business for criminal networks. Sadly, the consequences for consumer’s health are far from favourable. Consumers in the United States often dismiss counterfeit medicines as a problem limited to developing countries. Counterfeit medicines are reaching unsuspecting American patients with increasing frequency. In 2010 the United States held $307.4bn of the world’s $856.4bn pharmaceutical market. Holding 40% of the world market, the United States is the first pharmaceutical consumer. Europe is a close second with $245.3bn and other regions account for the remaining share.97 In 2009 the United States Food and Drug Administration estimated that less than 1% of the United States pharmaceutical market was made up of counterfeits. Even though comparisons with certain African regions, where the World Health Organization reports that counterfeit pharmaceuticals can account for up to 30% of the entire pharmaceutical market98, may lead to underestimating the significance of this 1%, we have to consider that 3.99 billion prescription medications were issued in the United States in 2010. Accordingly, one percent equals a staggering 39.9 million counterfeit pharmaceuticals on the United States market99. 97 IMS Health Market Prognosis, March 2011 available here : http://www.imshealth.com/deployedfiles/imshealth/Global/Content/StaticFile/Top_Line_Data/Total_Regional_Market_Size.pdf 98 WHO-‐IMPACT, Counterfeit Medicines: an update on estimates, page 1. 99 IMS Health Market Prognosis, March 2011 available here: http://www.imshealth.com/deployedfiles/imshealth/Global/Content/StaticFile/Top_Line_Data/Total_Regional_Market_Size.pdf Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

108 The increase of counterfeit drugs has urged the Federal government to establish task forces dedicated to aggressively protecting citizens from infiltrating the legal supply chain. The task forces in the United States report to the Federal Food and Drug Administration (FDA). The purpose of the team is to develop recommendations that the FDA, the federal, state and local agencies, and the private sector partners can implement to minimize the risks for the public. Even in the case of medicines, fines are the most frequent penalty for counterfeiters, although prison terms are applied to higher volume cases. The box below provides an example of the legal consequences of trafficking counterfeit drugs. A Jordanian national was sentenced to 48 months in prison for trafficking more than 38 000 counterfeit Viagra tablets. The counterfeit pills replicated the size, shape and colour of legitimate Viagra pills. Testing revealed that the counterfeit Viagra pills contained none of the active pharmaceutical ingredient sildenafil citrate; the tablets did contain metronidazole. Metronidazole is an antibiotic, which if consumed with alcoholic beverages can cause abdominal cramps, nausea, vomiting, headaches and flushing. Consequences for the patient may be deadly. The foreign national was not fined, however he will be undergoing immediate deportation once his sentence is completed. Source: « US court sentences fake Viagra dealer » by the pharmaletter.com, 28 July 2008. Available here: http://www.thepharmaletter.com/file/36538/us-‐court-‐sentences-‐fake-‐ viagra-‐dealer.html Canada and the United States share a unique relationship. As a free market economy, prices in the U.S. are decided by industrial standards. In Canada, prices are fixed below those found in the free market economy by government regulations. The price difference allows criminals to establish an illicit trade linking Canada and the United States, often exploiting the Internet to establish a sophisticated and illegal post and courier system relying on false documentation100. This is the case, for instance, of illegal online pharmacies. They typically sell a range of medicines that may constitute health and safety risks. These businesses operate without any authorized doctor/patient relationship. Consumers receive medicines from unidentified origins, without medical supervision and with no guarantee of authenticity. As with other websites that operate illegally, it is difficult to track and examine the activities and the goods of illegal Internet pharmacies. These sites are constantly appearing and disappearing and frequently change their names. Law enforcement authorities in both the U.S.A. and Canada have found that some illegal internet pharmacies imitate the format of licensed sites stating that their products come from Canada to take advantage of U.S. consumers seeking cheap alternatives to pharmaceuticals sold through the regular channels or simply trusting the online pharmacy they purchase from. Counterfeit spare parts and electronics The United States possess one of the world’s most diverse and exclusive automotive markets. The number of cars on the road creates an extremely lucrative market for 100IMS Health Market Prognosis, March 2011 available here: http://www.imshealth.com/deployedfiles/imshealth/Global/Content/StaticFile/Top_Line_Data/Total_Regional_Market_Size.pdf Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

109 vehicle parts. Every major car manufacturer has its own commercial network to distribute spare parts to customers. This network is comprised of subsidiaries, showrooms, dealers and agents under contract with the manufacturer, who shares the market with them in return for the quality service they are expected to provide for customers. Counterfeiters infiltrate the market by producing copies of industrial parts. Some produce their own parts and add the manufacturer’s service marks. Counterfeit vehicle parts threaten consumers’ safety as they are produced using low-‐quality materials, omitting certain security procedures, without undergoing component-‐type approval testing or “test drives”. For distribution purposes, counterfeiters may also use a parallel distribution network involving companies outside the manufacturers’ networks. The customers at the end of this parallel network are mechanics or private individuals who are unaware of what they are buying or are trying to cut corners and are not concerned about the quality or safety aspects of the part. Counterfeit batteries are a good example in the electronics sector. They are manufactured with inadequate vent mechanisms to discharge any excess internal pressure. This makes counterfeit batteries inclined to violent explosions that can harm people or break external devices. For a variety of reasons, counterfeiters usually also add high levels of mercury to batteries. Overexposure to mercury can cause learning difficulties, kidney damage, it can immune functions and, in extreme cases, lead to the loss of sight and hearing, particularly in children, infants and unborn babies. Below is a case involving a legal commercial company engaged in the distribution of counterfeit electronics. Shannon Wren and Stephanie McCloskey -‐ respectively the owner and administrator of a company called VisionTech, based in Clearwater, Florida ran an integrated circuits counterfeiting operation. An integrated circuit is a high-‐tech device that controls the flow of electricity; counterfeit integrated circuits can result in product or system failure or malfunction and can cause costly system repairs, property damage and serious body injury, including death. Between December 6, 2006 and August 18, 2010 Wren and McClosky imported from China and Hong Kong 59,540 integrated circuits bearing counterfeit marks, including military-‐grade markings, valued approximately $425,293. The indictment said defective parts were discovered in chips intended to be used by Navy ships, by a Raytheon classified missile program, by an antiballistic missile antenna system, as well as a "life-‐critical" control system for a high-‐speed trains. A federal grand jury in the U.S. District Court of the District of Columbia charged Shannon Wren and Stephanie McCloskey with conspiracy, trafficking in counterfeit goods and mail fraud. They were arrested on September 2010 and Wren was held at the Pinellas County Jail on Tuesday night at the request of U.S. marshals, while McCloskey was released on $25,000 bail and restricted from travel. A sentencing date has not yet been set. Source: press release “Administrator of Florida-‐based VisionTech Components, LLC Pleads Guilty in Connection With Sales of Counterfeit High Tech Devices Destined to the U.S. Military and Other Industries”, The United States Department of Justice, 19 November, 2010. Available here: http://www.docstoc.com/docs/72021415/NWMiller-‐McCloskey-‐Stephanie-‐wpd Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

110 Organized crime involvement Domestic and international framework Combating organized crime is a multilateral federal operation. The Department of Justice, more specifically the U.S. Attorney General’s Organized Crime Council, is responsible for developing policy on domestic organized crime. The council is chaired by the Deputy Attorney General and has representatives from the Federal Bureau of Investigation (FBI); the U.S. Drug Enforcement Agency (DEA); the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF); the U.S. Immigration and Customs Enforcement (ICE); the U.S. Secret Service; the Internal Revenue Service (IRS); the U.S. Postal Inspection Service; Diplomatic Security; and the U.S. Department of Labor, Office of the Inspector General101. Although many federal and state departments and agencies are engaged in fighting organized crime, the primary agency is the FBI. The Transnational Criminal Enterprise Section in the Criminal Enterprise Branch is responsible for investigating organized crime. International framework In March 2004, the Department of Justice created an Intellectual Property Task Force to combat the increase in counterfeiting and piracy by organized crime groups. In addition, an Anti-‐Counterfeiting Trade Agreement (ACTA) is being drawn up with other countries, including Australia, Canada, EU, Japan, Jordan, Korea, Mexico, Morocco, New Zealand, Singapore, Switzerland, and the United Arab Emirates. According to the USTR, one benefit of ACTA is that it will help combat the piracy and counterfeiting, which is an “easy source of revenue for organized crime.” 102 In 2005, the U.S. Congress took a step towards working with foreign governments and law enforcement agencies to combat organized crime, by ratifying the United Nations Convention Against Transnational Organized Crime. In particular, this Convention provides a framework for international cooperation by requiring mutual legal assistance between countries in fighting organized crime, and extradition for certain organized crime offenses specified in the Convention103. Organized Crime Networks in the United States Organized crime in the United States goes far beyond the Italian mafia, to include Russian, Asian, Balkan, Middle Eastern, and African groups. Federal law enforcement agencies in the United States and in Italy participate in the Italian American Working Group, which first met in 1984. This working group addresses problems common to both countries, including organized crime, counterfeiting and extradition issues. The Pantheon Project furthers the law enforcement relationship between the United States and Italy. The project places two FBI agents at the Italian National Police headquarters and two Italian officers at the FBI. Russian organized crime 101 Organized crime and racketeering section, The United States Department of Justice. Available here: http://www.justice.gov/criminal/about/ocrs.html 102K. M. Finklea, Organized Crime in the United States: Trends and Issues for Congress -‐ Analyst in Domestic Security, Congressional Research Service, pag. 23, available here: http://www.fas.org/sgp/crs/misc/R40525.pdf 103 K. M. Finklea, Organized Crime cit, pag. 9 Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

111 initiatives are handled by the FBI in partnership with international working groups. This includes the Eurasian Organized Crime Working Group, the Central European Working Group, and the Southern European Cooperative Initiative. In addition, the FBI set up a joint FBI/Hungarian National Police task force in Budapest, Hungary, to combat Russian organized crime. This task force was established in 2000 to counter the increasing threat of Russian organized crime and is the only international task force in which the FBI is currently involved. The FBI requested additional funding for this task force in its 2011-‐2015 budget. Transnational counterfeiting operations in the United States seem to be spearheaded by Asian syndicates. Research indicates that there is no one unified Asian organized crime group; instead, there are numerous crime syndicates. Traditional groups include the Chinese triads from Hong Kong, Taiwan, and Macau, and the Japanese Yakuza. Less traditional groups include tongs, triads, and Asian street gangs such as the Big Circle and the Fuk Ching. An emerging trend among Asian crime syndicates is a willingness to cooperate across ethnic and racial lines if it benefits their business. The application of U.S. law draws heavily on RICO, money laundering, and asset forfeiture statutes to prosecute Asian crime syndicates. U.S. law enforcement participates in domestic and international working groups aimed at combating Asian organized crime. Nationally, the FBI is also involved in international working groups concerned with Asian organized crime, including the FBI/National Police Agency of Japan Working Group, Interpol’s Project Bridge, the International Asian Organized Crime Conference, the Canadian/United States Cross-‐Border Crime Forum, and the International Law Enforcement Academy in Bangkok, Thailand104. Balkan and Albanian organized crime groups are also among the most thriving criminal businesses today and are active in the United States. Final remarks The United States legislative structure has taken extensive measures to tackle the introduction of counterfeit goods into the economic market. Developing communication technology and globalization have altered the dynamics of counterfeit trade. The Department of Justice Task Force on Intellectual Property (IP Task Force) has pioneered the fight against counterfeit goods. This proactive approach to combating entry of counterfeits into the market is a reaction to the rapid growth in the phenomenon. Unfortunately, consumer health is dangerously at risk. The trafficking of counterfeit goods involves a sophisticated network of criminal businesses. Active organized crime syndicates within the United States include the Italian, Russian, Asian, Balkan, Middle Eastern, and African syndicates. A recommendation made by the Organized Crime Council indicates that laws and regulations should be expanded, updated, or amended to enable the government to investigate and prosecute organized crime members affecting American society from outside U.S. borders. This suggests that federal law enforcement may not currently have 104 K. M. Finklea, previously cited work, pag. 18 Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

112 the interstate jurisdiction or the most effective tools for combating the growing danger of organized crime in the United States. e) Canada The legal framework Combating counterfeiting in Canada involves the use of the Trademarks Act (RSC 1985, c T-‐13), the Copyright Act (RSC 1985, c C-‐42) and the Criminal Code (RSC 1985, c C-‐46). In 2007, following Parliament’s call for government action against counterfeiting and piracy, two standing committees met with experts and representatives of several departments and agencies involved in the fight against counterfeiting. The Report published on June 2007 by the Committee on Public Safety stated: “It seems undeniable that the counterfeiting of goods is a growing phenomenon in Canada, and one that increasingly involves goods that present health and safety hazards for consumers. The representatives of industry and of law enforcement who testified to the Committee painted a rather alarming portrait of the situation in Canada. It is not only a disturbing phenomenon, but one that calls for solutions with some urgency”. This report presented fourteen specific recommendations for reforms. Moreover, the report elaborated by the Committee on Industry, Science and Technology presented nineteen other specific recommendations. The main recommendations included new criminal provisions relating to counterfeit goods, the express authorization of border agents to target, detain and destroy counterfeit goods on their own initiative, and the creation of an IP crime taskforce. Criminal prosecution In Canada, existing criminal laws and remedies do not specifically address the theft of intellectual property, with the sole exception of amendments to the Criminal Code (sec. 431.2) concerning the illegal cam cording of movies. Canada’s criminal provisions on the manufacture, distribution and sale of products displaying counterfeit trademarks are still not adequate and they are seldom used by law enforcers or prosecutors. While the Copyright Act includes criminal provisions for copyright infringement, the Trademarks Act lacks provisions on criminal offences and penalties. For this reason, criminal prosecutions for counterfeit trademark goods must often proceed using the provisions contained in the Criminal Code that refer to fraud or deception. Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

113 In Canada, the Royal Canadian Mounted Police (RCMP) investigate many counterfeiting activities, although local police may also be involved in certain criminal investigations. However, the “RCMP has quite limited resources available to pursue counterfeiting and, accordingly, will usually only investigate counterfeiting on a larger commercial scale, where the target is a manufacturer, wholesaler or importer”.105 Moreover, there may be cultural and historical impediments to prosecuting counterfeiters for their criminal activities. For many years, the authorities have viewed intellectual property enforcement as a private civil matter and there were few criminal proceedings. As a result, there are relatively few members of the police with sufficient specific experience in investigating and prosecuting intellectual property crimes. Intellectual property right holders can assist the authorities in pursuing counterfeiters. First of all an effort should be made to report all counterfeiting; secondly, right holders should file civil proceedings because the development of the civil case will often lead to a criminal investigation, particularly where the civil case is well developed; thirdly, considering that criminal proceedings may follow the civil case, proper care should be taken in handling evidence used in any civil investigation or related proceedings. Criminal prosecution requires, as a necessary element of conviction, the proof of subjective knowledge (mens rea), which can be proved by circumstantial evidence. Sections 406-‐412 of the Criminal Code, which specifically address trademark counterfeiting, hider enforcement, including the mens rea requirement under the only section specifically addressing the distribution of counterfeit products. The other difficulty is the lack of provisions against importing such products. As far as punishments are concerned, the penalties for infringement provided by the Copyright Act include: • fines of up to 1 million of CAD and / or • imprisonment for up to five years. Criminal Code provisions for fraud and deception include: • fines of up to 10,000 CAD and / or • imprisonment for up to two years. Although prison terms can be applied, courts and prosecutors tend to avoid imposing prison sentences. In the following box a recent court decision in the R v Borge case illustrates the existing sentencing rationale. 105 Baker and McKenzie, Canadian Anti-‐Counterfeiting Law and Practice: A Case for Change, April 2005, p.12 Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

114 Borge involved a corporate retailer and its principal, who were selling counterfeit computer software. They were charged with 14 counts of contravening Section 42 of the Copyright Act. The Crown decided to proceed summarily, which meant that if convicted, the maximum penalties per count were a fine not exceeding CAD 25,000 or imprisonment for a term not exceeding six months, or both. The trial proceeded on two counts against the individual and five counts against the corporation. After trial, the individual was convicted on both counts and sentenced to a fine of CAD 30,000 (CAD 15,000 on each count) and 60 days custody to be served intermittently. The corporation was convicted to a total of five counts and was fined for CAD 75,000 (CAD 15,000 per count). The defendants appealed. The conviction was maintained, but the sentencing appeal was allowed. The Court of Appeal held: I am satisfied… that the sentences imposed do warrant this Court’s intervention… [I]mposing a term of imprisonment, as well as fines in the amounts indicated are harsh and excessive in the circumstances. This excessiveness resulted from an over emphasis on the principles of general deterrence and denunciation, rather than a consideration of the individual circumstances of the Appellant…Nowhere in the reasons for sentence did the trial judge give effect or make reference to the Appellant’s lack of criminal record, the [individual’s] personal circumstances, or the lack of evidence establishing the volume of commerce or profit involved in the offences. The Court of Appeal observed that the trial judge considered evidence of prior civil proceeding involving companies in which the individual defendant was involved as a significant aggravating factor. It held that by doing so, “the trial judgment effectively treated past civil proceedings as tantamount to prior criminal conduct and sentence,” which was an error in principle. The sentences were reduced to fines only – CAD 10,000 per count. Many in the IP community question whether such penalties deter the offender or others from engaging in counterfeiting. Source: The World Trademark Review, Anti-‐Counterfeiting 2010 – A global guide, Lipkus L.M., Slatha T.M., Canada, 2010 Border Intellectual Property Enforcement The Canadian Border Service Agency (CBSA) is responsible for processing the importation of goods into Canada. The Customs Act lacks express provisions authorizing the ex officio detention by CBSA officers of suspected counterfeit goods. In order to stop counterfeit goods at the border, IP right holders must obtain a court order for the CBSA to detain the goods in question. Obtaining and implementing the detention order depends on the quality of information provided by IP right holders. Gathering the evidence for an application requires great effort, time and expense. To increase the likelihood of obtaining a detention order the court application needs to be supported by the following elements: a complete description of the goods, the quantity and value of the goods, the identity of the importer, the identity of the exporter and vendor, the country of export, the country of origin, the place of import and release, Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

115 confirmation of arrival, the mode of transport and the notification of the applicant in the event of the goods being detected.106 Therefore, the conditions for detention at customs require that the IPR holder collect sufficient information to anticipate the importation of illegal goods, well enough in advance to initiate court proceedings, obtain an order and have the order implemented when the goods arrive at the border or before they are released on the Canadian market. In addition to these obstacles, the scope of IP protection is limited. In fact, detention orders only apply to imports that violate copyright and trademark rights. It does not apply to industrial designs, patents or any other intellectual property right. The slowness of the system, combined with Canada’s extensive borders, which provide many entry points for infringing products, render this system largely ineffective. In order to address the problem, the RCMP, the CBSA and private right holders have begun to apply Criminal Code provisions to stop infringing goods.107 Moreover, RCMP and CBSA have established joint taskforces in various Canadian ports and have taken steps to establish a working protocol to conduct joint investigations on criminal activities involving counterfeit goods and to seize and dispose of counterfeit merchandise. Civil measures Counterfeiting issues are mostly addressed through civil proceedings. The relevant statutes of the Trademarks Act and the Copyright Act provide the following remedies: injunctions, payment of damages, valuation of gains; destruction of infringing goods; punitive damages and the recovery of a percentage of legal costs. In civil proceedings for IPR infringement two provisional measures can be applied: a provisional preservation order and the John Doe /Jane Doe Anton Piller order. An Anton Piller order, issued ex parte, enables right holders to gather evidence of suspected infringement in cases where there is a high likelihood that the evidence will be destroyed. This order is often applied with a provisional preservation order authorizing the defendant’s premises to be searched and the seizure of any relevant evidence. The prompt application of a preservation order or an Anton Piller order, can ensure that counterfeit goods are removed from the market. The context In Canada, as well as in several other countries, IP crimes constitute a threat to “economic integrity”. According to the results of the STRIDER project, the Canadian economy “is mainly based on knowledge, and innovation is the main engine of economic growth, productivity and competitiveness. The creative industry represents 7.4% of GDP in Canada, and it 106 The World Trademark Review, Anti-‐Counterfeiting 2010 – A global guide, Lipkus L.M., Slatha T.M., Canada, 2010, p.76 107 Baker and McCanzie, Intellectual Property Enforcement at the Canadian Border, April 2005, p. 6 Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

116 employs more than one million people. Protecting intellectual property rights is vital for innovation and creativity, and consequently it is crucial in guaranteeing the country’s long-‐term prosperity”.108 Canadian copyright and trademark law has been criticized by several commercial stakeholders who claim that it neglects intellectual property. These criticisms mainly relate to the lack of official mandate for border services to target, seize, and destroy counterfeit goods. Moreover, Canada has not yet implemented the WIPO Copyright Treaty and the WIPO Performances and Phonograms Treaty. In Canada, the Royal Canadian Mounted Police is responsible for the investigation of alleged IP crimes. IP law enforcement concerns primarily inland rather than border measures as the Canada Border Services Agency (CBSA) does not currently have a mandate to actively search for IP-‐infringing goods.109 As the CBSA does not have the legislative authority to take appropriate enforcement measures by targeting, seizing, and destroying counterfeit goods, it must rely on the Royal Canadian Mounted Police (RCMP), or other government departments, such as Health Canada, when counterfeit or pirated products are identified through the course of regular border controls. The Canadian government has recently committed itself to implementing reform strategies in the area of IP crime, including possible legislative measures to supplement copyright and trademark laws. According to the RCMP, the “retail value” of seizures carried out between 2005 and 2008 exceeded 63.6 millions CAD (about 67 millions USD) 110 highlighting the financial incentive of intellectual property crime. Improvement in counterfeiting and piracy techniques means that it is increasingly difficult for police officers, customs officers and right holders to distinguish between original and fake products. As highlighted by the results of the STRIDER project, evaluating the danger of IP crime in Canada, “the difficulty of detecting crime linked to intellectual property, the lack of police resources allocated to this area and light penalties make IP crime more and more attractive for criminal organizations, especially when compared to other serious crimes such as drug trafficking”.111 The Joint Border Threat and Risk Assessment elaborated by the United States of America and Canada states that transnational organized criminal groups are actively involved in intellectual property infringement. As the RCMP also points out, these organizations are aware that profit margins for counterfeiting can be higher than for narcotics, while the penalties are less severe. “Chinese criminal organizations lead the production and 108 Projet STRIDER, Évaluation nationale des menaces concernant la criminalité liée à la proprieté intellectuelle 2005 à 2008, August 2010, p.5 109 US Customs and Border Protection, Canada Border Service Agency, Royal Canadian mounted Police, United States-‐Canada Joint Border Threat and Risk Assessment, July 2010, p.10 110 Projet STRIDER, Évaluation nationale des menaces concernant la criminalité liée à la proprieté intellectuelle 2005 à 2008, August 2010, p.4 111 Ibid, p.4 Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

117 distribution of counterfeit goods, although many other groups and operators are also involved worldwide”.112 An overview of the main characteristics of IPR infringement in Canada is outlined below. Consumers and counterfeiting In 2008 the Canadian Council on Intellectual Property carried out a public opinion poll for the private firm Environics Research Groups. The results showed that two thirds of Canadians think that purchasing counterfeit goods prejudices right holders and retailers as well as their employees. Moreover, consumers support the measures taken by the Government against counterfeit products, especially when organized crime is involved. Nevertheless, even if consumers are aware of the negative consequences of counterfeiting and of the risks for their health and safety, a quarter of the persons interviewed admitted to having purchased fake products. This result suggests that people have developed a certain degree of tolerance regarding the purchase of cheap counterfeit goods. The box below gives an example of products detected by the RCMP and Health Canada that are a consumer health hazard: In 2007, 500,000 counterfeit toothpaste products, falsely labelled as Colgate Fluoride Toothpaste Herbal and Colgate Fluoride Toothpaste Maximum Cavity Protection, were found to contain high levels of harmful bacteria. These products were found on the Canadian market and posed a significant risk to health, especially to children and individuals with compromised immune systems. The merchandise was seized by Health Canada. Health Canada also assisted in the criminal investigation conducted by the Royal Canadian Mounted Police. Source: Health Canada, http://www.hc-sc.gc.ca/ahc-asc/media/advisories- avis/_2007/2007_79-eng.php Counterfeit Medicines 113 The Canadian Health Products and Food Branch Inspectorate focused part of its anti-‐counterfeit policy on the potential infiltration of counterfeit medicines into the country’s supply chain. The threat of infiltration is generally distributed among different sections of the supply chain, including the manufacture, packaging, labelling, importation, distribution and purchase of health products. 112 US Customs and Border Protection, Canada Border Service Agency, Royal Canadian mounted Police, United States-‐Canada Joint Border Threat and Risk Assessment, July 2010, p.10 113 Health Canada, Health Products and Food Branch Inspectorate. Policy on Counterfeit Health Products, May 2010, p.3 Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

118 Since counterfeit medicines and their related activities infringe the Food and Drugs Act (FDA), the Inspectorate has the power to adopt specific enforcement measures against the production, distribution and purchase of counterfeit drugs. However, the responsibility of consumer protection is shared with other government institutions, healthcare professionals and industries. One of these bodies is the Royal Canadian Mounted Police. Internet piracy and combating counterfeiting on line Luxury goods, electrical, electronic, high-‐tech and pharmaceutical products are among the preferred targets of counterfeiting sales through third party or unregulated websites. There are certain loopholes in Canadian legislation preventing it from properly addressing the problem. This situation, coupled with inadequate allocation of resources to anti-‐counterfeiting, encourages counterfeiters to import imitation goods into Canada to be sold online and shipped across North America. Right holders maintain that the first step towards addressing the problems of the virtual marketplace is for Canada to ratify the World Intellectual Property Organization internet treaties, which Canada signed more than a decade ago. f) Latin America Latin America is a vast area including South America, Central America, parts of North America and the Caribbean. It is made up of more than 30 countries and territories. Anti-‐counterfeiting measures in Latin America come up against obstacles that are unique to this region. In 2010, almost 200 million USD of counterfeit goods were seized and 1000 people arrested in operations coordinated by Interpol and the WCO. This points to the importance of this continent in the fight against counterfeiting, especially in respect of consumer goods. Legal framework In general, Latin American countries have domestic regulations against counterfeiting. In addition, many of them are also party to various international conventions and agreements on trademark and IP rights. The Paris Convention for the Protection of Industrial Property114; and the WTO Agreement on Trade-‐Related Aspects of Intellectual Property Rights (TRIPS)115 are the two most ratified agreements. The table below indicates the international and regional treaties on industrial property rights ratified by Latin American and Caribbean countries. 114 For more information on the text of the document and contracting parties: http://www.wipo.int/treaties/en/ip/paris/ 115 For more information on the text of the document and contracting parties: http://www.wto.org/english/docs_e/legal_e/27-‐trips_01_e.htm Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

119 TABLE OF TREATIES ON INDUSTRIAL PROPERTY RIGHTS RATIFIED BY LATIN AMERICAN AND CARIBBEAN COUNTRIES116 INTERNATIONAL TREATIES REGIONAL TREATY COUNTRY PARIS TRIPS MERCOSUR CONVENTION Antigua and Barbuda MS MS Argentina MS MS MS Bahamas MS Barbados MS MS Belize MS MS Bolivia MS MS AM Brazil MS MS MS Chile MS MS AM Colombia MS MS AM Costa Rica MS MS Cuba MS MS Dominica MS MS Dominican Republic MS MS Ecuador MS MS AM El Salvador MS MS Grenada MS MS Guatemala MS MS Guyana MS MS Haiti MS MS Honduras MS MS Jamaica MS MS Mexico MS MS OM Nicaragua MS MS Panama MS MS Paraguay MS MS MS Peru MS MS AM Puerto Rico MS MS Saint Kitts and Nevis MS MS Saint Lucia MS MS Saint Vincent and the MS MS Grenadines Suriname MS MS Trinidad and Tobago MS MS Uruguay MS MS MS Venezuela MS MS AM MS = Member State AM = Associate Member OM = Observer Member At a regional level, it is worth mentioning the Protocol for the Harmonization of Intellectual Property Norms in MERCOSUR (Common Southern Market) in respect of Trademarks and Indications and Denominations of Origin 117 . The protocol was approved by the Governments of Argentina, Brazil, Paraguay and Uruguay, recognizing the need to promote an adequate protection of intellectual property rights and to ensure that the exercise of these rights does not create a barrier for legitimate trade. Mercosur Member States recognized the need to establish rules to guide the administrative, 116 International Trademark Association, Latin America and Caribbean Subcommittee, Report: Legislative trends regarding trademarks in Latin America and the Caribbean: an outline of current bills and on the legislative process, p. 5 117 Argentina, Brazil, Paraguay and Uruguay are the contracting parties of the Protocol. The text of the document is available: http://untreaty.un.org/unts/144078_158780/12/10/5009.pdf Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

120 legislative and judicial actions of each State Party regarding the recognition and application of intellectual property rights. Legal proceedings In Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, El Salvador, Guatemala, Mexico, Panama, Paraguay, Peru, Uruguay and Venezuela counterfeiters can face imprisonment. However prison sentences vary considerably. In addition to prison sentences, many countries also impose fines for trademark infringement118. Destruction of infringing goods Judges in Latin American countries can usually order the destruction of infringing goods. Panama, Uruguay and Venezuela also allow for the donation to charity of counterfeit products, after all the distinctive trademarks have been fully removed. In Paraguay, if an expert opinion confirms the unauthorized nature of products, goods can be destroyed even before the final decision is issued119. Additional penalties In Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, El Salvador, Guatemala, Mexico, Panama, Paraguay and Uruguay, judges are also entitled to order additional measures, such as searches, seizures and injunctions, whereas in Guatemala, Peru and Venezuela interim measures are up to the public prosecutor, not the judiciary120. Probation In various Latin American countries such as Argentina, Bolivia, Brazil, Guatemala, Paraguay, Peru and Uruguay, probation – which is the suspension of prosecution and/or the substitution of criminal sentences with fines or community service -‐ is an alternative sanction for counterfeiting activities. In Ecuador and Panama probation can be applied if the prison sentence does not exceed one year. In Venezuela, probation is known as a reparation agreement and only enters into force once a judge has approved it. In Chile, probation can only be used if the parties agree to it. “In Colombia there is a similar provision called “integral amends” that consists of reparation of damages that the infringer caused to the titleholder”121. In El Salvador equivalent additional measures can be applied by the judge without appeal, as a temporary suspension of the case for one to four years. As a consequence the infringer must refrain from certain actions and must pay damages to the injured party, set by the judge. Failure to comply may lead to the reopening of proceedings. 118 International Trademark Association, Criminal Prosecution for Counterfeiting in Latin America, 2010 Bulletin, available at: http://www.inta.org/INTABulletin/Pages/CriminalProsecutionforCounterfeitinginLatinAmerica6503.aspx 119 International Trademark Association, Criminal Prosecution cit. 120 International Trademark Association, previously cited work 121 International Trademark Association, previously cited work Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

121 In Mexico, the judge can decide to reduce the counterfeiter’s sentence to probation. In general, criminal judges can award damages to injured parties. This happens in Argentina, Bolivia, Ecuador, Guatemala, Paraguay and in a number of other jurisdictions. In Chile and El Salvador, damages can be awarded by the judge only if the criminal complaint is attached to civil proceedings. Similar conditions are applied in Colombia, where damages can only be awarded to the injured party in a civil court. Under Mexican law, damages can be awarded for prejudice suffered by the intellectual property right holder. Venezuelan courts only award damages in criminal trials once the court has made its decision. The injured party will receive damages after filing a claim for damages with a criminal court. In Peru, the injured party is awarded damages together with the reimbursement of legal fees and expenses incurred, even though damages are usually awarded through civil proceedings. In Paraguay the Criminal Code makes damages dependent on a favourable criminal court decision. Brazil and Panama do not award damages in criminal cases. This is also the case in Uruguay, although courts can order the seizure and destruction of goods for criminal complaints122. Regarding enforcement, several examples are presented below regarding the penalties imposed in certain Latin American countries. The Mexican system is pretty unique in that it imposes different penalties for pharmaceutical intellectual property infringement. “The legal system differentiates between trademark and copyright infringement and pharmaceutical counterfeiting. For trademark and copyright infringement, penalties are three to ten years in jail and fines up to $85,000. Counterfeiting pharmaceuticals, on the other hand, carries a prison sentence of one to nine years and a maximum fine of $420,000.”123 In Brazil, crimes against industrial property rights carry fines and prison sentences from one month to one year. The law also provides the alternative of fines determined by the nature of the crime. In 2003 a law was introduced to increase penalties for copyright violations to four years’ imprisonment, with a minimum term of two years. In addition, a new draft law (Bill 333/1999), which is currently being considered by the Brazilian National Congress, aims to increase penalties to four years’ imprisonment for counterfeiting cases potentially involving other criminal activity. However the bill has been under consideration by the National Congress since 1999.124 Under Colombian criminal law, the unlawful use of trademarks is punishable by prison sentences of four to eight years and fines of 26.66 to 1,500 times the minimum wage (approximately $6,000 to $337,000). In Panama, criminal actions must be brought before the courts. “Any person who forges, alters or imitates a trademark, trade name or slogan, or uses it to commercialize or circulate a product or render services, will face imprisonment of between two and four years.”125 Penalties may be harsher where infringements endanger public health, in 122 International Trademark Association, previously cited work 123 “International Trademark Association, previously cited work 124 J.H. Vasi Werner, N.V. Montan, The World Trademark Review, Anti-‐Counterfeiting 2010 – A global guide: Brazil, pg. 72 125 R. Candanedo N, J. Atencio de Jaén, The World Trademark Review, Yearbook 2008 – A global guide: Panama, Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

122 which case, prison sentences may range from 30 months to six years. However, where offenders are travelling vendors or peddlers, they receive one-‐sixth of the prison sentence established for each crime and, if the infringement endangers public health, prison sentences range from one to two years. Other penalties that can be applied by the criminal judge include the suspension of the right to engage in business or industry for three months, or the withdrawal or cancellation of the permit to engage in business, granted by the administration of a free zone. Civil Measures In Panama, civil actions must be brought before the courts. The judge may issue fines of $10,000 to $200,000. However, where the offender is a travelling vendor or a peddler, the fine is lowered to $500 to $5,000. Companies operating in a free trade zone, export processing zone or special economic zone in Panama can be forced to pay a fine equivalent to 25% of the company’s commercial activity, but not lower than $75,000. The judge can also suspend their right to trade or engage in industry for three months or withdraw or cancel of the operating licence granted by the administration of the free zone or other export zone126. In Chile, Article 85 of the Copyright Law allows civil proceedings to be initiated for any registered trademark violation. However, the copyright law does permit specific civil proceedings to be filed until the right holder has appeared before a civil court. Current civil remedies are vague and vary from case to case. When determining appropriate compensation for copyright violations the trademark owner may be awarded damages based on the following criteria: the offender’s earnings, the price of the licence fee, or the earnings forgone by the right holder as a result of the infringement. The Industrial Property Law establishes similar methods for calculating damages. However, civil proceedings may take several years and there is no guarantee that the offender will pay the damages. The inconsistency of proceedings means that the majority of right holders prefer to uphold their rights through criminal proceedings127. Brazilian civil courts encounter similar problems, especially due to lengthy civil proceedings. Brazilian civil courts provide substantial compensation for injured parties, on the basis of actual and statutory damages. However, the slowness of court proceedings undermines any financial benefits. Compensation is calculated based on the following: benefits that would have been gained by the right holder had the infringement not occurred; or benefits gained by the offender through the infringement. However, significant compensation is only payable if the accused persons or legal entities have sufficient assets to bear the damages. In Mexico, the Mexican Institute of Industrial Property is the initial determinant of any Intellectual Property rights infringement. Investigations are in depth and detailed, and decisions issued are final and without appeal. Right holders are responsible for bringing the infringement case to the attention of the Mexican Institute of Industrial Property in order to initiate proceedings. In these preliminary stages of civil proceedings, right pg. 197 126 R. Candanedo N, J. Atencio de Jaén, The World Trademark cit., pag. 196 127 A. Marinovic L.I. Olmedo, The World Trademark Review, Anti-‐Counterfeiting 2010 – A global guide: Chile, pg. 80 Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

123 holders may be granted measures including the search and seizure of the suspect merchandise and the prohibition to sell and distribute merchandise. Additional preliminary injunctions are available if right holders satisfy the requirements. Administrative measures taken by the Mexican Institute of Industrial Property generally take three years to be brought before civil courts. If the defendant is found guilty, civil courts receive 40 % of the counterfeit product’s sales. As the civil action is pursued through a full trial, with further instances of appeal, it may take considerable time for the right holder to obtain a final decision. The relationship between civil and criminal proceedings In Latin American countries, civil and criminal proceedings for counterfeiting crimes used to be independent of each other. There are, however, a few noteworthy caveats. In Argentina, for example, there is a complex relationship between civil and criminal proceedings, even though they are independent. Civil proceedings are not considered as formally closed unless the complainant has filed criminal proceedings, has dropped the charges, or has abandoned criminal proceedings for a civil action. However, where IPR holders renounce civil action or agree to a damages settlement, the criminal proceeding must also be dropped. Furthermore, where a criminal action has preceded a civil action or is filed while the latter is still pending, no judgment shall be rendered in the civil action before the conviction of the defendant in the criminal action. Another interesting case occurs in Chile: while civil and criminal complaints are usually considered independently, they can be linked and filed together in a criminal court. In Uruguay, it is procedurally expedient to wait until a verdict has been handed down for the criminal action, before proceeding with a civil action. In El Salvador, although it is possible to file civil and criminal actions independently, they are usually heard together during the criminal proceeding. In Mexico, proceedings are independent; however, to bring a civil action it is necessary to have a previous final administrative ruling.128 Border measures With regard to customs procedures, the Central American Uniform Customs Code (Codigo Uniforme Aduanero para Centro América) and its related provisions are of particular interest. This Code is a common regulation on intellectual property and relevant border measures. The region has been undergoing a process of economic integration. The creation of a Customs Union is one of the measures in this process, aiming to strengthen border controls in order to detect counterfeit goods. The Customs Union would establish one single customs authority for member countries, subject to the same laws. 128 Anti-‐Counterfeiting and Enforcement Committee’s Latin America & Caribbean Subcommittee, Criminal Prosecution for Counterfeiting in Latin America, Part Three in a Three-‐Part Series: Legal Proceedings, February 15, 2010 Vol. 65 No. 4 Copyright-‐ This confidential report is the Intellectual property of the WAITO Foundation all rights reserved. No part of this publication may be reproduced or diffused under any form or by any means, including photocopies and recordings, or by any information storage or recovery system.

124 So far, Colombia, Chile and Peru have developed special regulations against counterfeiting. They mainly provide for the suspension, by means of a writ, of the importation of counterfeit products or products that infringe copyright, on the right holder’s request. Panama is a special case, with one of the most interesting legislative systems on intellectual property rights, mainly due to its geographical position in the region. Panama’s customs authorities can stop counterfeit and pirated goods from entering the country either at the border or while in transit toward other countries. Some countries such as the Dominican Republic, Ecuador, El Salvador and Mexico do not apply specific regulations on border measures; apart from Ecuador, these countries do not even provide information on special customs regulations and procedures. In many Latin American countries, as soon as the customs authorities detect illegal goods, they proceed to the inspection of the goods, they withhold them and immediately inform the law enforcement services and the right holder. Certain customs procedures permit the destruction of counterfeit goods during control procedures. Moreover, when a complaint is filed, a deposit is required in order to guarantee the payment of any damages. The need of databases has been discussed on several occasions. Updated databases would make it easier to identify right holders, notify

Waito Report 2011: Counterfeiting Crime a major challenge

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