Counterfeit culture

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BIG TROUBLE: China is the source of many of the cartons of counterfeit cigarettes flooding the international market today.

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DANGEROUS: Dubai Customs has intensified its campaign to combat fake drugs, according to director general Ahmed Butti Ahmed.

If no counterfeit goods were bought or sold in the UAE, the report estimates that the UAE could have increased its non-oil GDP by US$1.72bn, its tax collection by over US$110m and its employment level by around 31,000 positions.

But it is not only the UAE economy which suffers, it is the brands themselves. Putting in place an investigative unit as many multinationals have been forced to do requires large amounts of money that would otherwise be spent on growing the brand.

We have our own network of investigators, employed directly by the company, who work across the Middle East, China, Russia, Eastern Europe and South America. They work closely with customs authorities, local municipalities and all regional business bodies to help raise government's awareness of the repercussions and the severity of the counterfeiting," says Taylor-Hughes.

"We invest heavily in our business each year through growing the infrastructure in regions, recruiting new people and setting up new offices, but it's a struggle to sell your products [when] we are competing against counterfeit.

The money I am spending today on protecting my goods against counterfeiting is money I could be reinvesting into the business and into the industry," he continues.

The counterfeit cigarette trade is just as large - the losses suffered by Paraguay, one of the largest counterfeit cigarette producers after China, reflect how much a government can lose in revenues through lost tax.

While the legitimate market in Paraguay is worth around US$3bn, the country has an installed manufacturing capacity of over US$50bn. In other words, Paraguay has the potential to make US$50bn worth of cigarettes but only US$3bn worth of tax is declared.

"In terms of loss of government revenue worldwide the [cigarette] trade is worth about US$20bn. This figure includes legitimate cigarettes which have been smuggled into the supply chain, counterfeit cigarettes and local manufacturers who don't pay tax.

We [British American Tobacco] have a 17% cigarette marketshare worldwide and if we had that share of the business it would be worth an estimated US$700m to us alone. It's a big problem for governments and a big problem from us," says London-based Michael Prideaux, director of corporate & regulatory affairs at British American Tobacco (BAT).

As Taylor-Hughes mentions, the reason counterfeit goods are so cheap is because they use inferior materials and manufacturing processes. The theory that it is only the brand that suffers is a difficult one to dispel for consumers who believe they are getting a good deal.

Part of the problem historically is that there is this theory that counterfeit and contraband is done by lovable rouges and the consumer gets a bargain, so who cares if governments and big companies lose a bit of revenue. But it's not loveable rogues: it's organised crime," says Prideaux.

The counterfeit market is widespread. Donato Del Vecchio, head of corporate and regulatory affairs, Middle East & Caucasus at BAT, says. In one GCC country, for example, it is estimated that 50% of cigarettes are either counterfeit or have evaded taxes.

"It [stopping the growth of the trade] is becoming a key priority and it's really accelerated in the last five years. It's not just a developing world problem either - in the UK, for example 20-25% of the market is counterfeit," argues Prideaux.

In South Africa, as a result of a concerted effort, we are down to 5% so it can be reduced. Brazil is also a big problem for us because it is so close to Paraguay but we've managed to get it down."

The good results in South Africa and Brazil, Prideaux explains, is due to BAT's continued efforts to raise the government's awareness. "Governments are all about resource allocation and making choices, they tend to have other priorities [other than tackling counterfeit goods], and our job is to try and encourage them to make this one of their priorities.

There isn't a magic solution but there are three key components; the politicians being interested, intelligence and having the capacity to deal with it," says Prideaux.

Leading brands and even lawyers are now considering how they can help best - including calling on GCC governments to increase sentences, particularly as counterfeit goods can be as lucrative as narcotics but without the severe penalties. "Counterfeiting and the sale of counterfeit goods is a serious offense. However, the sanctions provided for under UAE laws, for instance, are very low.

This is quite insignificant compared to other jurisdictions which can be US$200,000. The sanctions should be raised to a similar level so that when a penalty is incurred, it causes serious damage to the parties trading in counterfeit goods and even drive them out of business. Sanctions should also include trade license revocation for repeat offenders and even deportation," says Lara Haidar, partner at therightslawyers, a consumer watchdog.

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