The economic impact of counterfeiting

According to most estimates, businesses worldwide are losing between $600 billion and $700 billion annually to the black market trade of counterfeit goods and theft of intellectual property. A large majority of these goods include clothing, handbags and multi-media products like CDs and DVDS, but more recently, counterfeiters have delved into pharmaceuticals and car parts, putting a large portion of the public at risk.

One of the people at the frontlines in the war against economic espionage is Camilla Herron, a former intelligence analyst for the United States Drug Enforcement Agency, who has participated in anti-counterfeiting efforts for software giants Microsoft and Symantec.

"It’s growing every year," she said. "Often times these groups, though not affiliated, will help each other get their products to the market."

What was once a small collection of "mom and pop" operations, Herron says that the counterfeiting industry is now run by organized crime syndicates, complete with sophisticated global supply chains.

Another concern among those who are trying to put a stop to the production of counterfeit goods is that in some cases, the money from the sale of these items not only serves to prop up organized crime, but is also being funneled to terrorist organizations.

Despite the recent economic losses of certain businesses and banks, those numbers are minuscule when compared to the losses incurred by the sales of counterfeit goods.

"Its’ gotten to the point where if you think the Wall Street problem is huge, it pales in comparison with the economic losses that this country and other industrialized countries are facing because of this problem," said Lynn Mattice, chairman of the board of advisors of the Security Executive Council.

Mattice, who has served as chairman of the board of directors for the National Intellectual Property Law Institute in Washington, D.C., and as an industry advisor to the U.S. Intelligence Communities National Counterintelligence Center, has seen the counterfeiting problem grow by leaps and bounds and says that many businesses either underestimate or don’t have the resources to deal with this crisis.

"Some of the real challenges companies face is really understanding the risks and threats that they face. When you look at high-technology areas where there’s a lot of patenting done, 97 percent of companies patenting in the telecommunications field have 500 or fewer employees, 95 percent of companies patenting in the area of software development have 500 or fewer employees, and on and on and on," he said. "(These companies) don’t understand -- when they’re trying to do things around the world -- the risks and threats that they face. They don’t have sophisticated security departments like the Fortune 500 companies have to help show them how to mitigate risks and threats. They don’t know that many times when they turn to a company to help them that that company may be off-shoring its work somewhere around the world and there’s no protection for their intellectual property."

Brett Kingstone, author of the book, ""The Real War Against America," can personally testify to the economic impact that counterfeiters have on business owners. As a 19-year-old student at Stanford University, Kingstone founded Super Vision International, a manufacturer of fiber optic systems and components. He then saw his business nearly ruined by Chinese counterfeiters.

"At one point, our company saw close to 50 percent of its sales overseas evaporate in a 12-month period. We went from being one of the top 50 fastest growing companies in the state of Florida, one of the top 500 fastest growing technology companies in the U.S. … to one year where our sales dropped by nearly 50 percent and that was due to our products being counterfeited," he said.

Refusing to give up, however, Kingstone launched his own fight against the counterfeiters with the help of private investigators and was eventually awarded a $42 million verdict from a Florida court against nearly a dozen companies based in Hong Kong, Shanghai and Panama. Kingstone has yet to receive a penny from the judgment.

"The annual costs of counterfeiting, industrial espionage and trade secret theft by China actually exceeds our annual costs of the war on terror. It’s a huge economic impact," Kingstone added.

Facilitators of counterfeiters

Despite efforts by some in law enforcement to stem the tide of counterfeiting goods by implementing new anti-piracy laws and ratcheting up enforcement, some members of the global community have either turned a blind eye to the problem or are actually enabling counterfeiters to manufacture and peddle their wares.

Most experts agree that the main facilitator of counterfeiters is China, and they also agree that there is a virtual lack of enforcement when it comes to tackling the problem. According to Herron, nearly 80 percent of the world’s counterfeit goods come from the communist state.

"There’s a lot of lip service on the part of the Chinese that they’re increasing the number of cases and that they’re doing this and they’re doing that," she said. "But the reality is that it’s still exploding everywhere."

In fact, according to Mattice, some countries are actively engaged in economic espionage on behalf of businesses in their own country.

"As we’ve seen with what’s going on with China, India and a broad range of a number of our allies, some (countries) have even gone to the extent of having entire sections of their training manuals for their intelligence agencies on how to collect intellectual property and technology from countries for the economic advantage of companies in their own country," he said. "It’s taking the concept of stealing state secrets for military and political purposes… to the point of stealing company information for use in the supporting the economies of their own countries."

Kingstone agreed, adding that not only are the Chinese and other governments facilitators of counterfeiting, but that they actually encourage and support the crime.

"Basically, my experience confirms that the Chinese government is [working] hand-in-hand with all of these organizations, giving them both support and encouragement to steal American technology and counterfeit it," he said.

According to Kingstone, one of the reasons that Chinese counterfeiting has gone unchecked is due to the lack of will of the U.S. government to ensure that anti-piracy laws are enforced.

"I just think it’s a shame that we’ve allowed ourselves to get to the point where we’ve lost our sovereignty," he said. "We can’t even enforce our laws for fear that a country that has bought up all our debt will put us further into an economic depression."

Though the Chinese have been the biggest purveyors of intellectual property theft, industry experts also say they are seeing emerging counterfeit markets in Russia, Eastern Europe, Latin America, and in certain parts of Africa.

"The United States economy is literally being stolen out from under us while those Neros in Congress continue to fiddle. If this continues we will completely lose our industrial base to China and all those middle class manufacturing jobs will completely evaporate," Kingstone said. "We’ve lost four million manufacturing jobs to this counterfeiting and trade secret theft just in the last few years and it continues."

Finding a solution

Most counterintelligence experts agree that the biggest obstacle to stopping the counterfeiting plague is getting the governments of the U.S. and other industrialized nations involved in the enforcement of anti-piracy laws.

"You cant’ blame thieves for stealing if there is absolutely no deterrent or disincentive for them to do so," Kingstone said. "If you expect someone who breaks into your house and steals your TV set to go to jail, why wouldn’t you expect someone who breaks into your place of business and steals your entire livelihood and that of all your employees to go to jail?"

According to Kingstone, not only do governments have to start enforcing anti-piracy and counterfeiting laws, but they also have to stop rewarding nations that facilitate industrial espionage by not allowing them to join such things as the World Trade Organization. Kingstone also supports placing tariffs and duties on imported products to make purchasing and manufacturing counterfeit products less economically appealing.

Mattice says that one the most important things that business leaders can do to protect themselves is to educate their company and themselves about the dangers they face, as well as do their due diligence when it comes to the process of getting a product to the market.

"The most important thing is awareness. People need to become aware of the risks and threats they face and take appropriate steps to protect themselves," he said. "The other thing that needs to be done is we need to have a reassessment of this drive for the cheapest, fastest, quickest way to development and manufacture [a product]. No one is looking at long-term strategic values anymore. Everyone is looking for the short-term quick hit."

Kingstone also recommends that businesses take care to guard their trade secrets with the use of physical security tools by implementing such solutions as biometric verification and access control. He also advises employers to highly scrutinize the backgrounds of potential employees and conduct credit checks to determine if that person could potentially sell your company’s secrets for their own financial benefit.

"The economic security of this country is the number one national security issue we face and without economic security, we don’t have national security," Mattice said.

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