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Unravelling the Global Impact: The Multifaceted Effect of Counterfeit Products on Legal Markets

What does experience teach us from the investigation of the counterfeiting of brand products and how do we apply this to a risk mitigation strategy.

counterfeit products

Quality is never an accident


Counterfeit products have become a pervasive issue in today's global economy, where the estimated annual value of global trade is $600 Billion, causing substantial repercussions for legitimate businesses, consumers, and economies alike. These imitations, often designed to mimic the appearance and functionality of genuine goods, have far-reaching consequences that extend beyond mere economic losses. This article delves into the multifaceted impact of counterfeit products on legal markets, exploring the challenges they pose and the strategies necessary to mitigate their adverse effects.


IMPACT OF COUNTERFEIT PRODUCTS

Dependent on the sector and the type of product counterfeited the impact to individuals, business and organisation operations can be minor in nature to life threatening when it comes to sector such as pharmaceuticals, engineering and chemicals. Common effect of counterfeit products include:

  1. Supply chain disruption: Infiltrating legitimate supply chains, counterfeit products can introduce vulnerabilities and disruption. Legitimate manufacturers can knowingly or unknowingly use counterfeit components, leading to defective final products and costly recalls. The cost in to tracing and rectify such instances can create significant financial impact.

  2. Health and safety: Fake pharmaceuticals, electronics, and automotive components, for example, may not meet the stringent quality and safety standards required of genuine products. Consumers unknowingly using counterfeit items put themselves at risk, leading to potential injuries, illnesses, or even fatalities.

  3. Economic consequences: Counterfeit products inflict severe economic damage on legitimate businesses and governments. Lost sales revenue and decreased market share directly affect a company's profitability and growth potential. Moreover, governments experience reduced tax revenues due to the underground nature of counterfeit transactions.

  4. Innovation and investment: When counterfeiters replicate products without investing in research, development, and quality control, they create an uneven playing field. This creates potential losses on investments, disincentivising business from pursuing new and innovative ideas or investing in regions where counterfeits are known to be in the marketplace.

  5. Intellectual property violations: The production and distribution of counterfeit products infringe upon intellectual property rights, undermining the value of trademarks, copyrights, and patents. This not only weakens a brand's identity but also devalues the entire intellectual property system.


CASE STUDY

Investigating counterfeit products and their national and international distribution networks can have some surprising findings. In addition to the brand reputation impact and how simple the counterfeiting was, including the magnitude of the distribution network and global marketing that allowed the counterfeit product to out perform the brand item.


Beware the allure of cheap; counterfeit products often come at the cost of your safety

THE BACKGROUND

Concern was raised that an exclusive product that had just been launched, had been copied and that the bottling, design and packaging was so similar to the original product that it was being marketed and sold as a cheaper version of this exclusive brand.


THE NETWORK

Having an already established distribution network and the ease of access and presence on numerous global shopping sites, adding a new counterfeit product into the market is simple.


Having a product manufactured and packaged in China in many cases makes good commercial sense, however where a manufacturer 'over-runs' a legitimate product, which was the case in this instance, creating an excess of the quantity required makes it easy for the brand product to be illegally sold off by the manufacture or rebranded as a new product and sold through a separate company or sold as a cheaper version of the original branded product.


procurement fraud and counterfeit products

LESSONS LEARNED

What became clear during this investigation was that counterfeiters in many cases have well established distribution networks and sales outlets and, in many cases, are more established than the original brand owner, using global ecommerce solution to sell their product with enforcement risk, allowing them to penetrate the market quickly with their counterfeit product or counterfeit packaged product.


The large percentage of counterfeit products are manufactured in China although there are an increasing number of countries where counterfeiting is on the rise.


Companies that manufacture their brand in China have a significantly higher risk of having the product copied and IP stolen. No suitable solution has yet to introduced to prevent the sale of counterfeit products through the online marketplace and continues to grow in scale. Until this area of risk is addressed then the counterfeit product market and risk will continue to grow.


RISK ASSESSMENT

In addition to any procurement fraud risk mitigation strategy, when considering the counterfeit risk and financial loss, an assessment of this risk should be planned at the design stage of the product to ensure that every opportunity to mitigate this risk is considered. The areas of risk that should be assessed may include:

  • Assessing the level and degree of risk from the design stage through to sale ensuring that IP is protected

  • Risk assessing how a manufacturer is going to protect the organisation's IP

  • Ensuring there is the contractual ability to audit the manufacturing process, including ability to substitute materials

  • That the manufacturer can provide evidence of current and previous clients to verify performance and risk

  • Assessing the distributor and distribution network for supply chain security

  • Establishing what anti-fraud standards and training are in place

  • Producing a plan to respond to any identified counterfeiting suspicion

The cost implications in being caught out by counterfeiters can be significant in addition to the cost in investigating the route cause and analysis of gaps in an anti-counterfeiting framework.


MITIGATION STRATEGIES

If an organisation takes the viewpoint that any product can be counterfeited if it can be reproduced in volume to maximise the profit for the counterfeiter. Introducing risk mitigation strategies in response to the outcomes of an organisation risk assessment might include:

  1. Staff education: Introducing education and awareness for staff working in risk areas including indicators of counterfeit products including current knowledge of the types of goods that are being counterfeited.

  2. Verification procedures: Implemented procedures at the point of receipt to check the authenticity of goods.

  3. Trust manufacturers: Purchase of original manufacturer parts directly rather than using a third party can be a route of reducing risk.

  4. Data analysis: Retaining data on quality assurance issues together with identified counterfeit products and the method of purchase will help the mapping of supply chain risk.

  5. Supplier collaboration: It is the responsibility of suppliers to ensure that they do not pass on their procurement fraud risk. In instances where counterfeit products are identified and to enhance supplier relations, discussion should take place with a supplier and agree on an approach to mitigate counterfeit product risk.


CONCLUSION

There is no 'one size fits all' approach to risk assessment because no two organisations are the same. Investigations teach us hard lessons around financial and reputation impact, introducing a lessons learned approach into your organisations risk assessment, understanding the global threats and continual testing of your mitigation strategy is a key step in protecting your global brand and your company's reputation.


Counterfeit products in many cases use legitimate supply chains for their distribution and greater use is being made of the international postal systems. Having a greater understanding of this global threat, the routes and up to date information on products being counterfeited will give an organisation a starting point in introducing an approach to mitigate a counterfeit product risk.



procurement fraud and counterfeit products

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