By Claire Ferris-Lay
Millions of dollars worth of illicit goods make their way around the world via a complex trading route.
The trade in fake goods in the region is now worth billions of dollars a year, with governments, law enforcement agencies and major companies battling to tackle a global problem. But can they ever succeed? Claire Ferris-Lay investigates.
Richard Partridge couldn't believe his luck. The London-based advertising executive had only been in Dubai for three hours, when his shopping spree started. "I got Paco Rabanne afershave for myself, Chanel perfume for my wife, and loads of Marlboro cigarettes. I don't even smoke, but at these prices I just had to buy," he says.
The money I am spending today on protecting my goods against counterfeiting is money I could be reinvesting into the business.
What Partrigde didn't know, and certainly didn't care about, is that in September last year Dubai Customs announced they had seized five million counterfeit tablets and expired food products from a warehouse belonging to Euro Gulf Trading in the Jebel Ali Free Zone.
The seizure wasn't unusual - every week millions of dollars worth of illicit goods are making their way around the world via a complex trading route. Counterfeit goods are not harmless; examinations have shown that they have a negative impact on the economy and the brands they fake.
And the trade is widespread. Arabian Business spoke to industry specialists in the cigarette, cosmetic, food and beverage and pharmaceutical trades who have all found their goods either smuggled into countries or counterfeited.
A recent report by KPMG shows that counterfeiters are not prejudiced about what is copied as long as a profit can be made. The study, Economic Impact Study Analysing Counterfeit Products in the United Arab Emirates, in association with Dubai's Brand Owners Protection Group (BPG), reveals that the value of fake goods in the UAE topped US$696m in 2006 with auto parts at the top of the list at 68.5%.
Counterfeit tobacco totalled 22.2%, while cosmetics reached 5.9%, food and beverage, 2.5%, household products, 0.6% and pharmaceuticals 0.2%. These goods won't be found in shopping centres and malls but can end up on the many street markets of the region. And it is there where they will find the most eager of buyers.
The report used only information given by members of the BPG, indicating that the problem could be much bigger. Omar Shteiwi, a regional intellectual property advisor and chairman of the group says it is impossible to know the extent of the problem.
The important issue is that we cannot know the true size of the problem because these are hidden activities and many of the products were imported from outside the country. It could be far bigger because the results are only limited to members of the BPG - the report doesn't even include information on the free zones," he explains.
While fake handbags and DVD's are considered "innocent" by many of the world's consumers, no counterfeit good is more alarming than the rising number of fake pharmaceuticals making their way into the marketplace.
The US-based Centre for Medicines in the Public Interest predicts that counterfeit drug sales will reach US$75bn globally in 2010 - up more than 90% from 2005. And in many cases these counterfeit drugs are fatal.
In 1999 at least 30 people in Cambodia died as a result of taking counterfeit anti-malerials prepared with an older less-effective antimalarial which were sold as Artesunate. In 1995 over 80 children in Haiti and 30 infants in India died after taking a paracetamol cough syrup containing a toxic chemical most commonly used in antifreeze products. These are not isolated cases.
"You can imagine the situation where the parent, who thinks their child has been protected from pneumococcal diseases, never finds out that in fact they were given a counterfeit that has no active ingredient," Robert Essner, CEO of Wyeth Pharmaceuticals tells Arabian Business.
Counterfeit cosmetics are also proving to be a growing market, and like medicine is a highly profitable trade with sometimes dangerous consequences. "It [the counterfeit cosmetic industry] is such a lucrative business because if you take any good brand and offer a product that looks the same but is cheaper then the product is good as cash.
One of the big problems today for us is with colour cosmetics because they are quite small, easy to move around and have a high ticket value per piece," says Robert Taylor-Hughes, managing director, Beiersdorf which represents brands such as Nivea.
One of the biggest problems is that both cosmetics and pharmaceuticals are being leaked into the marketplace without consumers realising they are fake. "People don't knowingly want to buy counterfeit cosmetics because ultimately they are applying it to the skin and the effects can be quite harmful.
The biggest issue with counterfeit cosmetics is microbiological contamination because they simply do not have the same high standard of manufacturing process or quality of raw materials that the branded companies use because these are factors which help keep the cost low," adds Taylor-Hughes.
The KPMG report reveals that the UAE does have a lower counterfeit trade than many other countries but that doesn't stop the products that do make it into the marketplace having a negative impact on the UAE economy.
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.
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.
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.
Is it difficult to stop? Because of the nature of the problem and the international nature of the crime, the weak penalties are something which doesn't help," adds Dr Ahmed El Hakim, external affairs and policy director, Pfizer-Middle East Region.
Essner is also adamant that governments must do more to stem the tide of pirated pills. "People who have historically been involved in narcotics and illicit drugs are finding they are better off doing their business now in counterfeit prescription drugs - they know they can make more money, and even if they're caught, typically the penalty is a slap on the wrist.
The BPG, which represents high-profile multinationals in the Gulf region such as Unilever, is also pushing for heavier sentences in the UAE. "There are a lot of things [which can be done to combat the problem]. We need severe penalties - most of the time only light sentences are given so the counterfeiters continue to repeat the crime. Cooperation between law enforcers is also needed," says Shteiwi.
Recent news coverage of large seizures by UAE customs indicates that tackling the counterfeit trade is high on the region's list of priorities, however, one of the largest problems is that the UAE remains a vulnerable target and an integral part of the complex trading route, from China to various countries around the world.
Dubai is particularly attractive because of its close proximity to the Persian Gulf between Asia, Europe and Africa. Records show that nearly one third of all counterfeit goods in Europe came through the UAE.
The pharmaceuticals from Dubai Customs' September seizure were traced back to China - the beginning of a trading route which continues to Hong Kong, the UAE, Britain and the Bahamas. If the drugs had made it to the Bahamas, they would have eventually been sold to customers in America who would have been led to believe the products originated from Canada.
One of the key problems we have in this region is that the UAE is very much a transshipment hub. Goods come into the free zones (such as Jebel Ali) from China - which is the source of most of our headaches - and at that point nothing illegal is happening. It is only when the goods leave the free zones and move into the general trade that something illegal is taking place and at that point the product has already been distributed," says Taylor-Hughes.
"I wouldn't necessarily say the UAE's problem is larger but a lot of goods are probably coming through Dubai and going on elsewhere.
A free zone area will be used to push goods onto other regions - it's basically a good place to repackage counterfeits and send them on," agrees Peter Lowe, director of ICC Counterfeiting Intelligence Bureau. For all that companies and groups such as BAT, Wyeth and BPG believe that the government needs to be playing a greater role in tracking down counterfeiters, there is a general agreement that security has been stepped up.
Dubai recently showed its commitment to tackling the problem through hosting the Global Congress Combating Counterfeiting & Piracy conference. "Dubai has taken a big step in fighting the counterfeiters," Ahmed Butti Ahmed, director general of Dubai Customs told the New York Times.
At the time of going to press Dubai Customs was unable to give a specific comment on the problem to Arabian Business. However, a recent media campaign in association with the fourth Global Conferencing on Combating Counterfeiting & Piracy this month, indicates that combating the counterfeit trade is high of its list of priorities.
September's announcement of the counterfeit drugs found in Jebel Ali followed a series of similar successful operations carried out by Dubai Customs in which they have seized large quantities of fake drugs and materials and destroyed them under controlled environment conditions.
The confiscation, carried out in cooperation between Dubai Customs and the Ministry of Health, Dubai Economic Crimes Police, Dubai Municipality and Dubai Public Prosecution, clearly indicates that the free zones in Dubai are highly secured and fully controlled," Butti told journalists at the press conference.
"Dubai Customs protects the interests of investors in the UAE and is also committed to implement the international agreements and the Federal laws of the UAE, thus contribute in the welfare and security in the UAE and turn it into an international leading centre for combating counterfeit products," he concluded.
El Hakim, agrees. "Has it grown over the last few years? On the contrary, the government is much more active." The brands themselves are also tackling the counterfeit trade, as in many cases the counterfeits are so good that customs and the brands themselves find it difficult to detect the goods.
I'm being honest when I say that only in the last couple of years, have we really taken this issue seriously," says Essner. "For the first time, we are really understanding its scope.
"If you don't look for counterfeits, then because they are so good, even the manufacturer doesn't know that they are out there," he continues. "So we've developed now, within the company, a whole group of people whose job is only to search out counterfeits, detect them, and publicise them." Putting in place investigative teams, tagging products and radio frequency tagging are all ways the brand can deal with counterfeiting.
But ultimately, the biggest obstacle both companies and governments face is the consumer, keen then ever for a bargain. Whether the likes of Richard Partridge will ever be deterred from their brand shopping sprees - fake or otherwise - remains to be seen.