Mitigating the risk of counterfeit products
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Mitigating the risk of counterfeit products

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Mitigating the Risk of Counterfeit Products

The manufacture and sale of counterfeit products is a widespread problem that affects manufacturers, distributors and retailers in virtually every industry. According to the
International Anti-Counterfeiting Coalition (IACC), the global trade in counterfeit products has increased from $5.5 billion (USD) in 1982 to approximately $600 billion
(USD) annually today. In the United States alone, the economic impact of counterfeit goods on businesses is estimated to be between $200 billion to $250 billion annually.

Counterfeit products present a number of potential challenges for legitimate companies all along the distribution channel. Unsafe or unreliable counterfeit products can negatively affect the market perception of the legitimate products that are being copied, thereby reducing potential sales of those products. In some cases, the adverse publicity surrounding unsafe or unreliable counterfeit products can also extend to companies manufacturing or selling legitimate products, damaging an industry’s overall reputation. Finally, unsafe counterfeit products that lead to injuries can ultimately subject legitimate suppliers to increased oversight and inadvertently ensnare them in legal actions targeted against counterfeit producers.

Many companies have already taken steps to prevent others from producing and selling counterfeit copies of their legitimate products, and to minimize their exposure to the risks associated with counterfeit products. Such efforts include the use of holographic labels, the application of overt and covert security coding, and employing special color schemes to identify specific product types. A number of companies have also partnered with customs officials in anti-counterfeiting efforts, resulting in the seizure of millions of counterfeit products.

But reducing the risk of being targeted by counterfeiters ultimately requires each company to develop and implement a formal brand protection program that addresses its unique requirements and vulnerabilities, and which is subject to rigorous periodic auditing to ensure that a program accounts for unanticipated vulnerabilities. This white paper discusses the key elements of such a program and presents a process for mitigating the risk of counterfeit products, from an initial risk analysis to program implementation.

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    Mitigating the risk of counterfeit products Mitigating the risk of counterfeit products Document Transcript

    • Mitigating the Risk ofCounterfeit Products
    • Mitigating the Risk of Counterfeit ProductsMitigating the Risk of Counterfeit ProductsThe manufacture and sale of counterfeit products is a widespread problem that affectsmanufacturers, distributors and retailers in virtually every industry. According to theInternational Anti-Counterfeiting Coalition (IACC), the global trade in counterfeitproducts has increased from $5.5 billion (USD) in 1982 to approximately $600 billion(USD) annually today. In the United States alone, the economic impact of counterfeitgoods on businesses is estimated to be between $200 billion to $250 billion annually1.Counterfeit products present a number of potential challenges for legitimatecompanies all along the distribution channel. Unsafe or unreliable counterfeit productscan negatively affect the market perception of the legitimate products that are beingcopied, thereby reducing potential sales of those products. In some cases, the adversepublicity surrounding unsafe or unreliable counterfeit products can also extend tocompanies manufacturing or selling legitimate products, damaging an industry’soverall reputation. Finally, unsafe counterfeit products that lead to injuries canultimately subject legitimate suppliers to increased oversight and inadvertently ensnarethem in legal actions targeted against counterfeit producers.Many companies have already taken steps to prevent others from producing and sellingcounterfeit copies of their legitimate products, and to minimize their exposure to therisks associated with counterfeit products. Such efforts include the use of holographiclabels, the application of overt and covert security coding, and employing special colorschemes to identify specific product types. A number of companies have also partneredwith customs officials in anti-counterfeiting efforts, resulting in the seizure of millionsof counterfeit products.But reducing the risk of being targeted by counterfeiters ultimately requires eachcompany to develop and implement a formal brand protection program that addressesits unique requirements and vulnerabilities, and which is subject to rigorous periodicauditing to ensure that a program accounts for unanticipated vulnerabilities. Thiswhite paper discusses the key elements of such a program and presents a process formitigating the risk of counterfeit products, from an initial risk analysis to programimplementation.page 2
    • Mitigating the Risk of Counterfeit ProductsConducting an Initial Counter- Products that lack security features:feiting Risk Analysis Security features, such as holographic Some of the key factorsLegitimate companies have the most labels or custom colors, deter leading to the greatestto lose from counterfeit products. Yet, counterfeiters since they make counterfeiting risksdespite widespread counterfeiting counterfeit products difficult to replicate include: and easier to identify. Legitimate productsactivities, many companies are unaware without such security features are easierthat they have a potential problem. to counterfeit.Therefore, it’s important to conduct an • High-volume, low-cost productsinitial analysis of potential counterfeiting Complex, loosely controlled supply and • Products in high demandrisks that exist within a given industry, distribution chains: • Products with large market shareand with certain types of products. Companies with a long and complex • Luxury productsHere are some of the key product supply or distribution chain present multiple opportunities for counterfeiting, • Products that lack security featuresfactors that often lead to the greatestcounterfeiting risks: since there are multiple points at which a • Complex, loosely controlled supply counterfeiter can enter or manipulate the and distribution chainsHigh-volume, low-cost products: chain. • Purchasing components andPopular, low-cost products that can be Purchasing components and materials materials based on price aloneeasily copied and sold in large numbersare frequently a target for counterfeiters. based on price alone: • Products sold on the InternetThe high volume of potential sales offsets Often, even product components arerelatively low profit margins. targets for counterfeit producers. Low-priced components may be attractiveProducts in high demand: to legitimate manufacturers, butA product that’s in demand, regardless counterfeit components present the sameof its price, will attract the attention of risks as counterfeit finished products.counterfeiters. Counterfeiters can exploitthe marketing and branding efforts of Products sold on the Internet:legitimate manufacturers by selling Selling products online means a potentiallook-alike versions of popular products. loss of control over distribution, making it easier for counterfeiters to sell counterfeitProducts with large market share: products without a manufacturer’sA product or group of products with a knowledge.large market share is an ideal target forcounterfeiters. If customers are looking Essential Elements of a Brandfor a top brand name, counterfeiters will Protection Programsee an excellent market for counterfeit A formal brand protection program is aversions of these products. vital component of a company’s overallLuxury products: effort to protect its products and itselfOften, savvy counterfeiters will focus on from the efforts of counterfeiters.counterfeiting expensive luxury products. This is certainly true for companiesThe higher profit margin potential whose products fall into one of the riskavailable with luxury products offsets the categories identified in the previoussmaller number of units available for sale. action of this white paper. However,page 3
    • Mitigating the Risk of Counterfeit Productseven those companies who products have third-party suppliers. This involves also includes due diligence checks atnot been the target of counterfeiters can identifying and working with reputable every stage of the product manufacturinggreatly reduce their potential future risk suppliers, proactively cultivating strong process, including assembly, packagingby establishing such a program. working relationships with them, and and distribution. These checks should implementing reporting systems that also ensure the proper managementThe following sections of this white paper allow suppliers to provide information of excess material and waste produceddiscuss essential elements of an effective through the supply chain whenever during the manufacturing process, sincebrand protection program. they detect suspicious activity2. counterfeiters often re-create productsProduct Security Features from scrap materials. Although switching to suppliers whoA critical element of an effective brand offer lower prices can result in short-term Intellectual Property Rightsprotection program is to ensure that cost savings, this activity introducesanti-counterfeiting security features are There are several logical steps that unknown vendors into the supply chain,integrated into product design from the companies can take to protect their exposing a company to increased securitybeginning. Depending on the product, intellectual assets from counterfeiters risks. Further, the continued practice ofthere are a range of product security and to preserve their intellectual property procuring parts on the basis of price alonefeatures that can be reasonably and rights. First and foremost, a company’s can be an unnecessarily risky strategy,economically implemented, including legal department should take the and an unusually low price for aholographic labels, overt and covert component may also be an indication necessary steps to ensure the promptsecurity coding, and radio frequency that it is not legitimate. Counterfeit registration of its patents and trademarksidentification (RFID) tracking. In addition, components in an otherwise legitimate in those countries where it intends toauthenticating features such as packaging finished product can expose a company sell its products. A company that fails tomaterials, labels and inks can be used in a diligently protect its intellectual property to the same level of risk as a completelyvariety of ways. may be at a significant disadvantage counterfeit product.Companies must also ensure that all in subsequent efforts to defend its A company’s purchasing departmentparties involved in the supply chain are rights to that property in its pursuit and should implement policies and proceduresactively involved in efforts to maintain the prosecution of counterfeiters. to ensure that the components it procuresintegrity of such product security features. In addition to registering intellectual are not counterfeit. One approach toA manufacturer of a finished product can avoiding counterfeit components is to property within the United States, animplement anti-counterfeiting measures purchase components through franchised attorney or appointed legal counselat the product level, but any benefit can distributors or the franchised aftermarket3 . should also register the company’sbe reversed through the use of counterfeit Third-party suppliers should be able to intellectual property according tocomponents and materials from suppliers. provide the documentation necessary to the patent and trademark laws inManufacturers should maintain security substantiate the origins of the parts they every jurisdiction in which a companythroughout the supply chain by using sell. If such documentation is not available, anticipates conducting business, includingappropriate features and methods to buyers should demand other evidence that product manufacturing, production, andauthenticate products. can identify the manufacturing source. distribution. Many countries follow theSecurity of Product Components A supplier’s inability to provide proof of “first to file” rule, granting intellectual legitimate component production is a property rights to the first person orIn addition to implementing product potential indication that the components organization registering a corporatesecurity features, it is equally involved are counterfeit4 .important to ensure the security of name, patent or trademark. In some cases,product components sourced through An effective anti-counterfeiting effort companies have attempted to registerpage 4
    • Mitigating the Risk of Counterfeit Productstheir proprietary intellectual property Communications share could be a signal that counterfeitin a new market, only to discover that a products are penetrating a particular Continuous communication is essentialcounterfeiter has filed a registration first. market. Alternatively, some companies to any effective brand protection have found that their products holdCompanies should also consider recording program, and another key element in leadership positions in markets in whichtheir registered marks with the U.S. determining whether a company has they have no presence, due to the sale ofCustoms and Border Protection (part a counterfeiting problem. Companies counterfeit versions of those products.of the U.S. Department of Homeland concerned about counterfeit productsSecurity). This step can help enforcement must be continuously aware of potentially Law Enforcement Engagementofficials block the importation of threatening activities in their marketplace Regardless of the degree of vigilancecounterfeit products at the borders, and ask questions of key people by a company, a successful brandbefore illegal products gain entry to the throughout the entire distribution chain. protection program cannot functionU.S. marketplace. A company’s own sales force can be a in a vacuum. Therefore, an essentialEmployee-Related Risks valuable resource in detecting suspicious part of an effective anti-counterfeiting activity. For example, sales people can effort involves working with U.S.Because intellectual property theft and pay close attention to marketplace Customs and Border Protection, andabuse are often due to internal causes, anomalies, such as selling prices that are with global law enforcement agencies.a company’s anti-counterfeiting efforts excessively low, a potential indicator of Providing information and training toshould also cover potential actions by the presence of counterfeit products. enforcement agencies, including productits own employees. A company’s human If a company’s returns department is identification manuals and informationresources department should establish consistently receiving defective products, on security features, can make it easierclear policies regarding employee it may want to evaluate those returns for enforcement officials to distinguishdisclosure of proprietary or confidential as possible counterfeit products. If a between genuine and counterfeitinformation, and any limits to the use product proves to be counterfeit, there products.of such knowledge and information may be an opportunity to gather valuableduring and following the term of their Working with customs and law information from the party thatemployment. In addition, a company enforcement also means committing returned it.should evaluate the potential benefit the necessary resources to supportof conducting background checks on Similarly, a company’s engineering these officials at all times. Doing so maypotential hires for key departments, department should regularly involve establishing a dedicated hot lineincluding engineering, production communicate with sales, marketing or secure website for exclusive access byand purchasing. and other company departments law enforcement officials so that they regarding changes in a product’s design can quickly and efficiently access criticalMany companies require employees to or configuration. Providing the entire product information when necessary.sign non-disclosure and non-compete internal distribution network with timelyagreements as a condition of employment. It’s also important to forge strong access to this information provides all keySome companies also require vendors, partnerships with other anti-counterfeit- departments with the tools necessaryindependent contractors and other ing resources, especially in those instances to distinguish between legitimate andthird-parties to execute non-disclosure where products are manufactured outside counterfeit products.agreements. However, all such policies of the United States. Increasing awarenessand agreements should receive proper Companies should also consider efforts and legislative activities can helplegal review to ensure that their terms are conducting market surveillance in place the counterfeiting issue in frontenforceable under all applicable laws in geographic areas where there are of those agencies that can take concretethe areas where a company operates. anomalies in market share. Low market action.page 5
    • Mitigating the Risk of Counterfeit ProductsOther measures companies can take Implementing the Plan UL works with local, national andinclude: The implementation of a company-wide international law enforcement agencies brand protection program must be to identify and seize counterfeit • Educating distributors and other products. UL has trained thousands of stakeholders tailored to an organization’s unique law enforcement authorities to identify needs. For example, the number of • Moving intellectual property and recognize legitimate UL certification company employees will often dictate the protection onto the agenda of trade Marks, and works with national and approach that should be taken regarding associations international governments, and with implementation. An organization with • Joining intellectual property international enforcement agencies, 100 employees will have a different set protection coalitions and associations including INTERPOL, EUROPOL, the FBI, of requirements than a company with Immigrant and Customs Enforcement, • Sharing best practices with other 20,000 employees. Likewise, a company Hong Kong Customs, the Royal Canadian manufacturers to help protect the that produces one or two high-demand Mounted Police and the World Customs industry products will have different needs than a Organization, to thwart counterfeiting manufacturer producing popular items inWhen collaborating with other and to help stop the flow of counterfeit several different product categories.manufacturers, it’s important to work goods. Finally, UL’s active participation inwith companies from different industries. Companies must also consider the various U.S. legislative efforts helped to obtainTypically, counterfeiters don’t observe geographic locations in which they do passage of the “Stop Counterfeiting inindustry boundaries, and today’s purveyor business. The location of suppliers and Manufactured Goods Act,” signed intoof counterfeit pharmaceuticals could be distributors is an important consideration law in 2006.tomorrow’s dealer of counterfeit printed in determining an approach to anti- Although no single source can provide allcircuit boards. Successful efforts to stem counterfeiting. If the supply chain extends the answers, a knowledgeable third-partycounterfeiting in one industry ultimately across multiple countries, companies resource can help bring clarity to eachwork to the benefit of companies in every must also consider applicable laws and specific situation and circumstance.industry. regulations in those regions.Commitment from the Top A manufacturer may choose to implementThe most successful anti-counterfeit- a brand protection program on its own,ing efforts are those that embody a but there is no “off-the-shelf” solutioncompany-wide commitment to combat that can address each organization’sproduct counterfeiting starting at the unique requirements. Because thetop. Leadership by the company’s senior implementation of such a program ismanagement on the issue of preventing a complex undertaking that involves acounterfeit products is essential to its significant commitment of resources,success, since employees will ultimately manufacturers often have difficultytake their cues from those in charge. knowing where to begin. Guidance fromWithout the active engagement and an independent third-party with expertisesupport of a company’s senior executives, in developing brand protection programs,individual departments may find it and with strong relationships with globaldifficult to get their anti-counterfeiting law enforcement authorities, can help putefforts off the ground. manufacturers on the right track.page 6
    • Mitigating the Risk of Counterfeit ProductsConclusionCounterfeiting is a serious crime that affects all industries, reduces profitability, andexposes the public to potential safety hazards and concerns about product reliability.Companies should actively and aggressively work to combat counterfeiting, but thebenefit that individual companies derive from any brand protection program dependson how much they are willing to invest in its success. A comprehensive approach and azero-tolerance attitude toward counterfeit products can help protect a company fromthe risks of counterfeit products, and help to stop their spread.For more information about the “Mitigating the Risk of Counterfeit Products” whitepaper, please contact Brian Monks, vice president of Anti-Counterfeiting Operations,at Brian.H.Monks@us.ul.com.References1. International Anticounterfeiting Coalition (IACC), About Anticounterfeiting, http://www.iacc.org/about-counterfeiting2. Livingston, Henry, “Avoiding Counterfeit Electronic Components,” IEEE Transactions, Vol. 30, No. 1, March 2007, pp. 187-1893. Wilson, John P., “Guidelines for Avoiding Counterfeit Components,” L3 Interstate Electronics, 2010, pp. 44. Keller, John, “The scourge of high tech,” Military and Aerospace, July 1, 2007Copyright©2011 Underwriters Laboratories Inc. All rights reserved.No part of this document may be copied or distributed without the prior written consent of Underwriters Laboratories Inc. 05/11page 7