The Financial Aspects of the Trade in Counterfeit Products: An Exploratory Study

Lead Research Organisation: University of Teesside
Department Name: Sch of Social Sciences, Humanities & Law

Abstract

The trade in counterfeit goods is growing and has been linked to the operations of transnational organised crime (TOC). Much work and popular scrutiny has examined these flows of illicit goods. Less scrutinised are the financial mechanisms that enable them. To enter this criminal market at the wholesale level, 'organised criminals' may need significant financial resources, from credit facilities to processing international transactions. Their need for financing can concern every 'stage' of illicit supply, from production, shipping, to retail, be that small or large scale. However, while large sums of investment may be needed to enter a specific counterfeit market at the wholesale level, participation at the retail stage requires only modest resources; a process that has been simplified for criminal entrepreneurs as late-modern information and communication technologies (ICTs) and electronic commerce have developed over time and space. The appropriation of e-commerce could have a scaling effect allowing 'petty' traders to act globally. The development of the counterfeit trade in cyber-space is significant. Yet little is known about how the financing of counterfeit goods is facilitated by digital technologies. There is also a general lack of information on the blurring of TOC into legitimate actors, which is particularly apparent in the context of the grey market in counterfeit goods.

This project will address these issues. Drawing upon cross-disciplinary research expertise in social sciences (criminology and sociology) the humanities (law and geography), and working in collaboration with practitioners from the National Trading Standards e-Crime Team (NSeCT), the research seeks to investigate the financing of the trade in counterfeit goods. The study focuses specifically on financing and financing-related aspects of illicit markets in material counterfeit goods. Furthermore, while focusing on the UK context, it will contribute to our understanding of TOC by examining financial and physical flows in the counterfeit trade over borders. In this context, China, the dominant manufacturing force in the global economy with an advanced export infrastructure (see Intellectual Property Office and Foreign & Commonwealth Office, 2015), is part of the focus of this project.

Lasting for twelve months, this exploratory project's key objectives are to:
1. Identify the various forms and sources of financing that are being used to trade in counterfeit goods.
2. Map the transnational physical and financial flows relating to the trade in counterfeit products, focusing in particular on UK-China.
3. Examine how the Internet and electronic commerce presents financial opportunities for counterfeiters and to explore how these online processes interact with the material trade in counterfeit products.
4. Consider the role of licit financial and business structures in relation to the illicit trade in counterfeit products.
5. Develop the team's network and expertise in a way that will enrich future research and enhance their contribution to enforcement and regulatory policy and practice on a larger scale beyond the scope of this exploratory project.

The project will begin to develop an important knowledge base for law enforcement, regulatory agencies and policy makers. This will support informed decision making about resource allocation and measures to tackle counterfeiting, criminal financing and transnational organised crime. In addition, the project will establish a cross-disciplinary and cross-sector counterfeiting research network, an innovative methodology to research counterfeiting, and more generally provide an important contribution to the TOC knowledge base.

Planned Impact

The research will make contributions to practice and policy that will be of interest to a range of groups outside the academic community.
First, it will be of considerable value to law enforcement agencies, regulatory agencies, criminal investigators and other officials working to combat transnational organised crime at local, national and international levels (e.g. Trading Standards, UK Border Force, National Crime Agency, Medicines and Healthcare products Regulatory Agency, Europol, Interpol). Law enforcement faces many difficulties in targeting and dismantling transnational criminal activities. Illicit financial and physical flows are vast and constant, operations are increasingly moving online and significant resources are required for investigations. This is particularly apparent in the context of the counterfeiting business, wherein a number of economic, political and technological processes and structures provide abundant opportunities to finance, produce and distribute counterfeit goods around the world. However, the trade in counterfeit goods and the mechanisms used to finance it can often be neglected as priority areas. Existing action on TOC instead tends to focus on the most extreme criminal activities and illicit markets, rather than the more common entwining of illicit supply into everyday trade and with licit financial actors. By systematically analysing counterfeiting and criminal financing through co-produced and user-engaged knowledge creation, this project has the potential to directly impact on enforcement priorities, resource allocation and tactics in the field.

Second, the project will also indirectly benefit non-governmental agencies who work in collaboration, or are supportive of, anti-counterfeiting objectives. These include the Anti-Counterfeiting Group, Federation Against Copyright Theft, and Fight The Fakes among others.

Third, the project will benefit policy makers at national and international levels. They will profit from the broader and deeper understanding of criminal financing and counterfeiting that the research will provide, which will help in the development of future measures and policies to raise awareness and tackle it.

Fourth, knowledge of counterfeiting and criminal financing can generate financial and non-financial returns and benefits to the UK economy and society. The counterfeit trade poses a range of economic, physical and social costs to citizens, businesses and creative industries. Better knowledge and awareness leading to the development of more effective enforcement can protect consumers, and businesses in terms of intellectual property rights, trademarks and profits in the UK.

In order to maximise the impact on practice and policy the proposed exploratory study includes:
- Research that will actively consider potential benefits and beneficiaries outside academia from the outset, including the input of practitioners and policy makers throughout the study. This will include the development of an impact strategy with simple evaluation measures during the initial stages of the project;
- A visualisation and a final study report, both of which will be published and distributed throughout a number of official channels in order to spread knowledge relating to counterfeiting and criminal financing in the UK and beyond;
- A final cross-sector conference that will provide academics, practitioners and policy makers with the opportunity to exchange experience and better focus their work on dismantling criminal groups and criminal financing, while raising awareness in the public domain;
- Research dissemination in the media, academic publications (e.g. in peer-reviewed journals in criminology and geography) and papers at academic and non-academic conferences (e.g. on brand protection);
- A cross-disciplinary and cross-sector team dedicated to considering potential future research, knowledge exchange and impact in this area beyond the 12 month exploratory project.

Publications

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Antonopoulos G (2019) Counterfeit goods fraud: an account of its financial management in European Journal on Criminal Policy and Research

 
Description A number of major findings were produced in the context of the project:
- Counterfeiters are often self-employed entrepreneurs. What may be viewed by some as criminal collaboration between a producer and a seller, or a wholesaler and a retailer, does not necessarily involve an employer-employee relationship but a business-to-business relationship. Individuals are involved in the counterfeiting business via familial, kinship, ethnic, and neighbourhood contacts. An environment of great importance for the formation and consolidation of relationships for the counterfeit products trade is legal businesses. The structure of the counterfeiting business is largely fragmented i.e. a chain of local transactions.
- An important aspect of the counterfeiting business is its embeddedness in legal production and trade practices in a globalised economy.
- The increase in counterfeit goods being traded has been particularly apparent in the context of various evolutionary phases in information and communications technologies and electronic commerce since the late twentieth century, with the Internet now acting as an important avenue through which the counterfeiting market is expanding.
- There is a variety of sources of capital for initiating and sustaining a counterfeiting schemes including small funds from legitimate work and savings, state benefits, money from legal businesses, money invested in counterfeiting from criminals involved in other manifestations of 'organised crime', and loans.
- Usually, small-scale criminal entrepreneurs involved in the counterfeiting business tend to procure merchandise from legal retailers in other countries. Irrespective of the supplier, there are no special arrangements with regards to payment. Cash is almost always given up-front, which is also the arrangement in the transactions between sellers and buyers at the retail level. Occasionally, merchandise is given to customers on credit, if the customer is a regular customer with a good record of payments. In the wholesale/importation level credit may be regularly present, if the business people involved trust each other and have collaborated in previous legal or illegal projects.
- When the internet is used as a medium for the transactions involving counterfeit products, the payments are made either by PayPal or by credit card. Legal businesses are used as front companies and existing payment facilities are used for the sale of counterfeit products. In terms of payments, e-commerce has simplified the process of buying and selling counterfeit goods.
- Payments between entrepreneurs can be settled outside the strict context of the illegal business, and spill over to legal business. When a financial or other settlement cannot be made, it is 'information' that is provided as currency in exchange. This can be information about the legal and illegal dealings of a competitor, another illegal business opportunity or a legal business opportunity.
- Counterfeiting business costs depend on the type of counterfeit products manufactured and their quality, the scale of the project and its logistical complexity, and the level/position on the entrepreneur in the supply chain. For large-scale entrepreneurs there are a number of diverse, functional expenses that are not usually present for small-scale entrepreneurs. For instance, some entrepreneurs incur costs from initial trips to meet with entrepreneurs abroad to set up counterfeiting businesses, the actual transportation of the merchandise, storage of the merchandise, costs associated with securing better quality merchandise, payment to other actors in the counterfeiting business as well as contingency expenses.
- Generally, large-scale entrepreneurs, who operate within the confines of their businesses tend to absorb some of the costs relating to their illegal business and the risks associated with them. For example, transportations/logistic companies do not pay for transportation expenses since this is embedded in their everyday, normal business. Moreover, their ability - due to connections internationally and the bigger amount they can invest to the importation - to buy in bulk and effectively buy with better prices from manufacturers, creates an economy of scale, allowing the reduction of overheads.
- How counterfeiting money is spent and/or invested naturally depends on the profits but also the social microcosm of the entrepreneurs, the opportunities this microcosm offers, as well as the entrepreneur's values and priorities. Four types of counterfeiting money spending/investing are identified although in many instances there is an overlap between and among different types: Survivalist spending, impulsive/chaotic spending, family-oriented spending/investment and business-oriented investment (including re-investment in the counterfeiting business).
- In the UK in most cases there is no money laundering as such because criminal entrepreneurs make relatively small profits enough to guarantee the entrepreneur and his/her family (in the UK and abroad in case of foreign entrepreneurs) a 'middle-class existence' through spending. There are cases involving large-scale projects in which criminal entrepreneurs need to launder significant profits. Entrepreneurs who own a legal business can integrate their counterfeiting proceeds with financial streams in their legal business. Our research has also identified a diverse set of money laundering techniques involving investment in payday loans companies, pawn shops or shops that deal in high value items, illicit puppy farms, and cash intensive businesses.
- Profits from the counterfeiting business are also sent via money transfer services and 'underground 'banking' from the UK to other countries in which there is a less diligent approach to money laundering. The (normal) banking system has also been used towards low intensity laundering of money from counterfeiting as is donations to charities or aid foundations in the entrepreneurs' countries and in local mosques in the UK.
Exploitation Route The findings of the study as well as the actual data in the repository can be used by colleagues in further investigating counterfeiting and its financial aspects as well as by colleagues working on criminal finances in general. Findings of the study may also be used further by law enforcement agencies and policy makers working on counterfeiting in particular and criminal finances in general.
Sectors Aerospace, Defence and Marine,Agriculture, Food and Drink,Chemicals,Communities and Social Services/Policy,Creative Economy,Digital/Communication/Information Technologies (including Software),Electronics,Financial Services, and Management Consultancy,Healthcare,Government, Democracy and Justice,Manufacturing, including Industrial Biotechology,Pharmaceuticals and Medical Biotechnology,Retail

 
Description On May 2, 2018, the PI of the project, Prof. Antonopoulos was invited for an interview by the Spanish radio station, Talk Radio Europe (tre). In this interview he presented the main findings of the project and described the threats posed by counterfeiting and its financing to the public, society and economy. Moreover, in July 2018, Prof. Antonopoulos was invited as an expert for the US Patent and Trademark Office (of the US Department of Commerce). Within this context, he provided a detailed report with the main characteristics of the counterfeiting business, its actors and its financial management. This report which effectively summarised the findings of the funded project, was also forwarded (by the US Department of Commerce) to the US Department of State and the US Department of Justice, and formed the platform of discussion in a policy event held in the United Stated in September 2018. Finally, on the basis of the funded research, the team have submitted a policy briefing to PaCCS' Policy Briefing series. This policy briefing, which provides clear recommendation for policy makers and practitioners can be found at http://www.paccsresearch.org.uk/paccs-policy-briefing-financial-management-of-counterfeiting/ It should also be noted that the research team is in the process of co-authoring (with National Trading Standards) a set of guidelines that translate the findings of the research into practical advice for law enforcement. The guidelines will be published by the National Trading Standards.
First Year Of Impact 2018
Sector Communities and Social Services/Policy,Government, Democracy and Justice,Other
Impact Types Societal,Policy & public services

 
Description The PI, Antonopoulos, was invited as expert for the US Patent and Trademark Office (US Department of State)
Geographic Reach North America 
Policy Influence Type Participation in a advisory committee
 
Description FINAC 2017 project's twitter account 
Form Of Engagement Activity Engagement focused website, blog or social media channel
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Professional Practitioners
Results and Impact The intended purpose of the twitter account FINAC 2017 ('Financial Aspects of Counterfeiting') is to make the public aware of the project, and for us to promote the findings and outputs of the project once these are produced (Currently we are in data collection phase)
Year(s) Of Engagement Activity 2017
URL https://twitter.com/FINAC2017