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Sat 21 Dec 2013 01:07 PM

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The phony war

The global counterfeit industry is worth $800bn annually, and Dubai is now a key battleground. What can regional policymakers do to prevent fake products from entering the market?

The phony war
(Photo for illustrative purpose only)

The number of containers that pass through Dubai’s Jebel Ali Port is proudly recorded: more than 13 million annually and rising every year. What is not known is how many of those containers hold illegal fake goods — from copycat watches and clothes to dangerous drugs that claim to be legitimate pharmaceuticals.

In parallel with the rise of Dubai as an international trading hub, where East meets West, the issue of intellectual property (IP) rights across a vast range of industries is also gaining in importance. While the majority of the counterfeit goods originate from Asia and continue on — undetected — to Europe and Africa, merely using Dubai as a stop-over for ships to refuel, the emirate has become a natural thoroughfare for fake products.

The European Union Taxation and Customs Union considers the UAE the second-most common origin point for counterfeit goods that reach its borders, despite its annual report recognising most shipments have likely started their journeys further east. The UAE is the last port of call for more than 8 percent of goods suspected of infringing on intellectual property rights, with perfumes, cosmetics, body care items, cigarettes and mobile phones and their parts and accessories the most common items.

It’s an issue likely to get worse as Jebel Ali grows — it’s already the world’s biggest container port outside East Asia — and Dubai gears up to host World Expo 2020, drawing in countless new traders, foreign investment and tourists. The Expo, awarded to Dubai on 27 November, is the ultimate showcase of ideas and innovation, the very thing that requires strong IP protection.

At the same time, the Gulf countries are working towards diversifying their economies, particularly towards knowledge-based industries, which rely on IP rights.

“The protection of intellectual property... is the cornerstone of attracting foreign investments and establishing a balanced economy — an economy that is based on legitimate competition which brings about benefits to society and the economy, and all consumers, as well,” UAE Ministry of Economy Undersecretary Mohammed Ahmed Bin Abdul Aziz Al Shehhi says.

“This phenomenon... hampers the objectives of a sustainable economy and causes many losses to the economy. It also underlines the efforts of those dedicated to innovation and development because of counterfeit goods, which also deprives consumers of original projects.”

Just how much is lost to the black market financially is anyone’s guess. The chairman of the Brand Owners’ Protection Group in the UAE, Omar Shteiwi, says research values the counterfeit industry at $800bn globally, of which at least $50bn is in the Arab world.

“It’s not getting better; it might [even] be getting worse,” Shteiwi says. “The signs we are receiving from the authorities say that it’s getting better — even the EU Customs are saying it’s getting better — but the signs we’re seeing from the owners [suggest] it’s not getting better.

“Ninety percent of anything you think of [could be] counterfeited. Imagine everything can be counterfeited.”

The UAE’s counterfeit, trademark and patent legislation is of international standard and the government has signed multiple international treaties as well as memorandums of understanding with local intellectual property protection organisations. However, IP experts and multi-national corporations argue the country falls short when it comes to enforcement.

Global Anti-Counterfeiting Network chairman John Anderson says the UAE needs a more scientific approach to help it improve the detection of counterfeit containers.

“They need to develop their risk analysis... so they don’t waste time opening containers that are not going to yield anything,” he says. “They can only x-ray so many and they can only prise open so many [containers].

“They [also] need to work more closely with Chinese customs to stop them getting out of China in the first place.”

But Dubai Economic Council director of legal policy Tarek Hajjiri says brand owners must take greater responsibility.

“I think it’s the duty of the brand owners as well as the traders to make the effort to inform Dubai Customs about any suspicious shipment. If I give you a toy and I ask you to pass it to your friend, you will not be able to say this is counterfeit or not unless I tell you that. So I believe it is the duty of all parties.

“Dubai Customs does a very good job, tremendous work. They have been very successful and they are very co-operative and their doors are always open. You can’t blame Dubai or Dubai Customs for any transit goods; it is the duty of the brand owners to really do more work.

“Dubai Customs handle more than 13 million deliveries every year, which is a massive number. If you call for opening every single box and inspecting every single box I can tell you it is impossible; it doesn’t happen anywhere in the world.”

Jebel Ali Free Zone Authority (JAFZA) vice president, customer relations and developments, Omar Bin Hendi, says of the 7,100 companies in JAFZA, 120 are from the Fortune 500, proving the free zone is “a secure place, a trusted domain for those multinational companies to set up their business”.

“People look at the region as a transit or bridge for counterfeit products but there are a lot of enforced laws and regulations,” Bin Hendi says. “One hand cannot do it; it needs to be a joint effort. We have to tackle the head of the snake, rather than the tail and the body. That lies somewhere else, it’s beyond our jurisdiction.”

Yet brand owners, from entrepreneurs to decades-old multinational corporations, pay huge fees to trademark or patent their brands and inventions, with the expectation that the certificate will guarantee protection of the intellectual property.

The 150-year-old food and beverage conglomerate Nestle has 18,000 trademarks and 150,000 protections for designs, as well as 9,000 internet domain names — each of which it has had to pay for and then continuously pay to protect.

“A lot of effort has been put in the brand protection because it stands as a sign of trust for consumers,” Nestle’s global counterfeit legal counsel Laurent Venetz says.

“But trust in food and beverage products means complying with highly regulated standards: standards for quality of the ingredients, standards for quality in the manufacturing process, standards for supply chain when putting the product on the market and making the product available for customers. Obviously when we talk about counterfeit food and beverage products none of this can be guaranteed.”

Globalisation and the increase in international trade have seen the prevalence of counterfeit food and beverage products soar in the past decade, Venetz says.

“Until recently counterfeiting for food and beverage products was mainly local issues, domestically producing fakes for their own country,” he says. “The world changed when we saw containers of products, mainly manufactured in China, moving across to Africa, Latin America or to the Middle East countries. This was a real game changer for us.

“We have to move from a rights- and seizure-driven approach, which was very efficient when we were targeting domestic counterfeiting, to a more holistic approach. This holistic approach means to understand the business model of the counterfeiters, understand the value creation chain of the counterfeit business. Then we have to [have interception capabilities] at key points of the counterfeiting creation chain... and create a definitive effect that pushes counterfeiters away from our customers.”

The world’s fourth-largest pharmaceutical company, France-based Sanofi, has also changed tack in recent years to now focus on preventing fake medicines from hitting the streets in the first place.

In 2010 the company discovered a significant chain of counterfeit drugs that claimed to be Sanofi brands in Yemen.

Sanofi regional security director Dominique Woloch says none of the drugs had any active medicinal ingredients, potentially risking users’ lives. The fakes were traced back to Pakistan, where they had been manufactured in extremely unhygienic conditions, exacerbating the potential health implications.

By working backwards, the company helped authorities to shut down the manufacturer and supply chain.

In 2011, the World Economic Forum estimated the counterfeit medicine trade was worth about $200bn, while the World Health Organisation estimates fake drugs make up 10 percent of the global pharmaceuticals market and between 20-30 percent in developing countries, including in the Middle East.

Between 2005 and 2010, counterfeit medicine sales grew 20 percent more than the legal market worldwide, according to Woloch, who has helped dismantle several counterfeit production facilities in the Middle East.

Dubai-based IP lawyer Nayiri Boghossian says much of the problem in the UAE is a lack of deterrence because fines are low and the judiciary are reluctant to impose the maximum penalties.

The six Gulf Cooperation Council member states have recognised the low fines for importing fake goods – AED10,000 ($2,700) under UAE trademark law – and lifted the maximum to the equivalent of AED1m under a new GCC-wide law due to come into effect next year.

“The low fines are not much of a deterrent because as a counterfeiter or infringer it doesn’t cost much to go back to being active after you’ve been sentenced,” Boghossian says. “That discourages the rights holder from filing cases with the courts, especially when it comes to civil law suits where you’re claiming damages because damages are very low [and] a trademark owner will have to incur the expenses of a lawyer and court fees and they won’t be able to recoup those expenses.”

Boghossian says some judges also perceive multinationals as huge profit-making corporates that suffer little from others copying their intellectual property.

“When we conduct judiciary trainings we always get the same response by courts: those companies are already making a lot of money so what’s the big deal?” she says.

“Also the judge feels sorry for [the offender]. Often you have an employee who gets arrested by police and then the court will have a lot of empathy because it will be some poor Asian employee who doesn’t run the shop himself so the courts will reduce the sentence for reasons of empathy.

“The UAE legislation is one of the most developed in the region so it’s a question of getting the judiciary to be a little bit tougher.”

The head of quality control at Dubai Police, Major General Abdul Quddus Abdul Razak Obaidli, says law enforcement agencies are focusing on the customer by appealing to their morality and making them more aware of the impacts of counterfeit goods — on the economy, their health, national security and the brand owner.

He says it would help authorities if it became illegal to purchase not only copied DVDs and music but also handbags, watches, perfumes and other personal effects, which are regulated under trademark law and are legal to buy.

“It’s illegal to have the goods in your premises in order to sell it, but when you’re buying [the fake goods] it’s legal,” Obaidli says. “And if you ask me for my personal opinion, why not [fine the customer too]? If they are buying a good and they know this is a counterfeit product, why not [punish them] similar to copyright law?”

But in the absence of such a law, Obaidli says Dubai Police is focused on persuading the public not to buy fake goods, rather than raiding the suppliers.

“If there is supply of counterfeit products [but] there is no customer that [industry] will be destroyed, that is the only way we are talking about [dealing with the issue],” he says.

But when the average person cannot afford the latest Gucci watch or Prada handbag how do you convince them they also should not have the copycat version?

Anderson says there has been a backlash against intellectual property rights, particularly in the advent of the internet, which makes information widely available and often for free. As citizens in the developing world increase their wealth they also become more interested in brands.

“There’s an interesting growing phenomenon in the public saying why shouldn’t we use fake clothes, download free music from the internet, have access to all these wonderful things but not pay the full price?” Anderson says.

It is a reversal on several decades of work towards recognising the value of intellectual property.

A pioneer of IP rights in the Arab world, 75-year-old Jordanian Talal Abu Ghazaleh says when he first raised the idea with Gulf rulers in the 1960s he was laughed at. Few people could comprehend the notion of owning an idea.

“‘This man is crazy, he talked to me about mental ownership’,” Ghazaleh said at the first intellectual property rights conference in Dubai earlier this month, recalling a conversation between the heads of the Bahrain and Qatar chambers of commerce more than 40 years ago.

“It wasn’t crazy at all; it was something we should have considered.”

In 2013, Ghazaleh is still pushing for greater protection of intellectual property in various forms, particularly on the internet. The Arab Society for Intellectual Property, of which Ghazaleh is chairman, was recently accredited as only the fifth internet dispute resolution forum in the world.

“The World Trade Organisation is all about trade across borders in goods and services but there are no borders on the internet and therefore when we trade knowledge products,” he explains. “A lot of knowledge products today are the leading products of the world and they’re going to be the lost products of the world if we do not realise that we need to adapt our IP laws to cope with this development. We need to remember that... future wealth will come through further education, [which fosters] creation, which helps innovators.”

The Arab Society for Intellectual Property also is creating a database of Arab brand names to help calculate their value and protect them. It is likely to be an increasingly important tool as the region moves towards diversifying its economy and encouraging entrepreneurship.

Qatar and Saudi Arabia also are particularly strengthening their IP legislation as they boost their knowledge-based economies. Saudi Arabia is investing more than $2.4bn in harvesting innovative ideas in targeted industries and has moved up 12 places on the Global Innovation Index since 2011, according to the Saudi Patent Office.

It’s in this environment that the executive director for IP and technology transfer at Qatar Foundation, Erik Stenehjem, whose role is to build a portfolio of intellectual property patents within the oil-state, says there is some room to utilise others’ intellectual property to aid further innovation.

“You have to have very strict enforcement of IP laws, that’s essential; it is the foundation for innovation, but you need to have liberal conveyance laws,” Stenehjem says. “You need to be able to give innovators the opportunity to take technology, perhaps innovated by somebody else, and use it, try it, test it, and see what they can do with it to create real value.

“So... the conveyance of intellectual property through option agreements, no-fee licensing and other mechanisms that promote innovation and start-ups is just as important, I think.”

It’s finding that balance — and to convince the public to respect others’ ideas — that Gulf states are facing as they enter the knowledge era.