Mitigating the Risk of Counterfeit Products The manufacture and sale of counterfeit products is a widespread problem that affects manufacturers, distributors and retailers in virtually every industry. According to the International Anti-Counterfeiting Coalition (IACC), the global trade in counterfeit products has increased from $5.5 billion (USD) in 1982 to approximately $600 billion (USD) annually today. In the United States alone, the economic impact of counterfeit goods on businesses is estimated to be between $200 billion to $250 billion annually. Counterfeit products present a number of potential challenges for legitimate companies all along the distribution channel. Unsafe or unreliable counterfeit products can negatively affect the market perception of the legitimate products that are being copied, thereby reducing potential sales of those products. In some cases, the adverse publicity surrounding unsafe or unreliable counterfeit products can also extend to companies manufacturing or selling legitimate products, damaging an industry’s overall reputation. Finally, unsafe counterfeit products that lead to injuries can ultimately subject legitimate suppliers to increased oversight and inadvertently ensnare them in legal actions targeted against counterfeit producers. Many companies have already taken steps to prevent others from producing and selling counterfeit copies of their legitimate products, and to minimize their exposure to the risks associated with counterfeit products. Such efforts include the use of holographic labels, the application of overt and covert security coding, and employing special color schemes to identify specific product types. A number of companies have also partnered with customs officials in anti-counterfeiting efforts, resulting in the seizure of millions of counterfeit products. But reducing the risk of being targeted by counterfeiters ultimately requires each company to develop and implement a formal brand protection program that addresses its unique requirements and vulnerabilities, and which is subject to rigorous periodic auditing to ensure that a program accounts for unanticipated vulnerabilities. This white paper discusses the key elements of such a program and presents a process for mitigating the risk of counterfeit products, from an initial risk analysis to program implementation.

1. Mitigating the Risk of
Counterfeit Products

2. Mitigating the Risk of Counterfeit Products
Mitigating the Risk of Counterfeit Products
The manufacture and sale of counterfeit products is a widespread problem that affects
manufacturers, distributors and retailers in virtually every industry. According to the
International Anti-Counterfeiting Coalition (IACC), the global trade in counterfeit
products has increased from $5.5 billion (USD) in 1982 to approximately $600 billion
(USD) annually today. In the United States alone, the economic impact of counterfeit
goods on businesses is estimated to be between $200 billion to $250 billion annually1.
Counterfeit products present a number of potential challenges for legitimate
companies all along the distribution channel. Unsafe or unreliable counterfeit products
can negatively affect the market perception of the legitimate products that are being
copied, thereby reducing potential sales of those products. In some cases, the adverse
publicity surrounding unsafe or unreliable counterfeit products can also extend to
companies manufacturing or selling legitimate products, damaging an industry’s
overall reputation. Finally, unsafe counterfeit products that lead to injuries can
ultimately subject legitimate suppliers to increased oversight and inadvertently ensnare
them in legal actions targeted against counterfeit producers.
Many companies have already taken steps to prevent others from producing and selling
counterfeit copies of their legitimate products, and to minimize their exposure to the
risks associated with counterfeit products. Such efforts include the use of holographic
labels, the application of overt and covert security coding, and employing special color
schemes to identify specific product types. A number of companies have also partnered
with customs officials in anti-counterfeiting efforts, resulting in the seizure of millions
of counterfeit products.
But reducing the risk of being targeted by counterfeiters ultimately requires each
company to develop and implement a formal brand protection program that addresses
its unique requirements and vulnerabilities, and which is subject to rigorous periodic
auditing to ensure that a program accounts for unanticipated vulnerabilities. This
white paper discusses the key elements of such a program and presents a process for
mitigating the risk of counterfeit products, from an initial risk analysis to program
implementation.
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3. Mitigating the Risk of Counterfeit Products
Conducting an Initial Counter- Products that lack security features:
feiting Risk Analysis Security features, such as holographic Some of the key factors
Legitimate companies have the most
labels or custom colors, deter leading to the greatest
to lose from counterfeit products. Yet,
counterfeiters since they make counterfeiting risks
despite widespread counterfeiting
counterfeit products difficult to replicate include:
and easier to identify. Legitimate products
activities, many companies are unaware
without such security features are easier
that they have a potential problem.
to counterfeit.
Therefore, it’s important to conduct an • High-volume, low-cost products
initial analysis of potential counterfeiting Complex, loosely controlled supply and • Products in high demand
risks that exist within a given industry, distribution chains:
• Products with large market share
and with certain types of products. Companies with a long and complex
• Luxury products
Here are some of the key product supply or distribution chain present
multiple opportunities for counterfeiting, • Products that lack security features
factors that often lead to the greatest
counterfeiting risks: since there are multiple points at which a • Complex, loosely controlled supply
counterfeiter can enter or manipulate the and distribution chains
High-volume, low-cost products:
chain. • Purchasing components and
Popular, low-cost products that can be
Purchasing components and materials materials based on price alone
easily copied and sold in large numbers
are frequently a target for counterfeiters. based on price alone: • Products sold on the Internet
The high volume of potential sales offsets Often, even product components are
relatively low profit margins. targets for counterfeit producers.
Low-priced components may be attractive
Products in high demand:
to legitimate manufacturers, but
A product that’s in demand, regardless
counterfeit components present the same
of its price, will attract the attention of
risks as counterfeit finished products.
counterfeiters. Counterfeiters can exploit
the marketing and branding efforts of Products sold on the Internet:
legitimate manufacturers by selling Selling products online means a potential
look-alike versions of popular products. loss of control over distribution, making it
easier for counterfeiters to sell counterfeit
Products with large market share:
products without a manufacturer’s
A product or group of products with a
knowledge.
large market share is an ideal target for
counterfeiters. If customers are looking Essential Elements of a Brand
for a top brand name, counterfeiters will Protection Program
see an excellent market for counterfeit
A formal brand protection program is a
versions of these products.
vital component of a company’s overall
Luxury products: effort to protect its products and itself
Often, savvy counterfeiters will focus on from the efforts of counterfeiters.
counterfeiting expensive luxury products. This is certainly true for companies
The higher profit margin potential whose products fall into one of the risk
available with luxury products offsets the categories identified in the previous
smaller number of units available for sale. action of this white paper. However,
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4. Mitigating the Risk of Counterfeit Products
even those companies who products have third-party suppliers. This involves also includes due diligence checks at
not been the target of counterfeiters can identifying and working with reputable every stage of the product manufacturing
greatly reduce their potential future risk suppliers, proactively cultivating strong process, including assembly, packaging
by establishing such a program. working relationships with them, and and distribution. These checks should
implementing reporting systems that also ensure the proper management
The following sections of this white paper
allow suppliers to provide information of excess material and waste produced
discuss essential elements of an effective
through the supply chain whenever during the manufacturing process, since
brand protection program.
they detect suspicious activity2. counterfeiters often re-create products
Product Security Features from scrap materials.
Although switching to suppliers who
A critical element of an effective brand offer lower prices can result in short-term Intellectual Property Rights
protection program is to ensure that cost savings, this activity introduces
anti-counterfeiting security features are There are several logical steps that
unknown vendors into the supply chain,
integrated into product design from the companies can take to protect their
exposing a company to increased security
beginning. Depending on the product, intellectual assets from counterfeiters
risks. Further, the continued practice of
there are a range of product security and to preserve their intellectual property
procuring parts on the basis of price alone
features that can be reasonably and rights. First and foremost, a company’s
can be an unnecessarily risky strategy,
economically implemented, including legal department should take the
and an unusually low price for a
holographic labels, overt and covert component may also be an indication necessary steps to ensure the prompt
security coding, and radio frequency that it is not legitimate. Counterfeit registration of its patents and trademarks
identification (RFID) tracking. In addition, components in an otherwise legitimate in those countries where it intends to
authenticating features such as packaging finished product can expose a company sell its products. A company that fails to
materials, labels and inks can be used in a diligently protect its intellectual property
to the same level of risk as a completely
variety of ways. may be at a significant disadvantage
counterfeit product.
Companies must also ensure that all in subsequent efforts to defend its
A company’s purchasing department
parties involved in the supply chain are rights to that property in its pursuit and
should implement policies and procedures
actively involved in efforts to maintain the prosecution of counterfeiters.
to ensure that the components it procures
integrity of such product security features. In addition to registering intellectual
are not counterfeit. One approach to
A manufacturer of a finished product can
avoiding counterfeit components is to property within the United States, an
implement anti-counterfeiting measures
purchase components through franchised attorney or appointed legal counsel
at the product level, but any benefit can
distributors or the franchised aftermarket3 . should also register the company’s
be reversed through the use of counterfeit
Third-party suppliers should be able to intellectual property according to
components and materials from suppliers.
provide the documentation necessary to the patent and trademark laws in
Manufacturers should maintain security
substantiate the origins of the parts they every jurisdiction in which a company
throughout the supply chain by using
sell. If such documentation is not available, anticipates conducting business, including
appropriate features and methods to
buyers should demand other evidence that product manufacturing, production, and
authenticate products.
can identify the manufacturing source. distribution. Many countries follow the
Security of Product Components A supplier’s inability to provide proof of “first to file” rule, granting intellectual
legitimate component production is a property rights to the first person or
In addition to implementing product
potential indication that the components organization registering a corporate
security features, it is equally
involved are counterfeit4 .
important to ensure the security of name, patent or trademark. In some cases,
product components sourced through An effective anti-counterfeiting effort companies have attempted to register
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5. Mitigating the Risk of Counterfeit Products
their proprietary intellectual property Communications share could be a signal that counterfeit
in a new market, only to discover that a products are penetrating a particular
Continuous communication is essential
counterfeiter has filed a registration first. market. Alternatively, some companies
to any effective brand protection
have found that their products hold
Companies should also consider recording program, and another key element in
leadership positions in markets in which
their registered marks with the U.S. determining whether a company has
they have no presence, due to the sale of
Customs and Border Protection (part a counterfeiting problem. Companies
counterfeit versions of those products.
of the U.S. Department of Homeland concerned about counterfeit products
Security). This step can help enforcement must be continuously aware of potentially Law Enforcement Engagement
officials block the importation of threatening activities in their marketplace
Regardless of the degree of vigilance
counterfeit products at the borders, and ask questions of key people
by a company, a successful brand
before illegal products gain entry to the throughout the entire distribution chain.
protection program cannot function
U.S. marketplace.
A company’s own sales force can be a in a vacuum. Therefore, an essential
Employee-Related Risks valuable resource in detecting suspicious part of an effective anti-counterfeiting
activity. For example, sales people can effort involves working with U.S.
Because intellectual property theft and
pay close attention to marketplace Customs and Border Protection, and
abuse are often due to internal causes,
anomalies, such as selling prices that are with global law enforcement agencies.
a company’s anti-counterfeiting efforts
excessively low, a potential indicator of Providing information and training to
should also cover potential actions by
the presence of counterfeit products. enforcement agencies, including product
its own employees. A company’s human
If a company’s returns department is identification manuals and information
resources department should establish
consistently receiving defective products, on security features, can make it easier
clear policies regarding employee
it may want to evaluate those returns for enforcement officials to distinguish
disclosure of proprietary or confidential
as possible counterfeit products. If a between genuine and counterfeit
information, and any limits to the use
product proves to be counterfeit, there products.
of such knowledge and information
may be an opportunity to gather valuable
during and following the term of their Working with customs and law
information from the party that
employment. In addition, a company enforcement also means committing
returned it.
should evaluate the potential benefit the necessary resources to support
of conducting background checks on Similarly, a company’s engineering these officials at all times. Doing so may
potential hires for key departments, department should regularly involve establishing a dedicated hot line
including engineering, production communicate with sales, marketing or secure website for exclusive access by
and purchasing. and other company departments law enforcement officials so that they
regarding changes in a product’s design can quickly and efficiently access critical
Many companies require employees to
or configuration. Providing the entire product information when necessary.
sign non-disclosure and non-compete
internal distribution network with timely
agreements as a condition of employment. It’s also important to forge strong
access to this information provides all key
Some companies also require vendors, partnerships with other anti-counterfeit-
departments with the tools necessary
independent contractors and other ing resources, especially in those instances
to distinguish between legitimate and
third-parties to execute non-disclosure where products are manufactured outside
counterfeit products.
agreements. However, all such policies of the United States. Increasing awareness
and agreements should receive proper Companies should also consider efforts and legislative activities can help
legal review to ensure that their terms are conducting market surveillance in place the counterfeiting issue in front
enforceable under all applicable laws in geographic areas where there are of those agencies that can take concrete
the areas where a company operates. anomalies in market share. Low market action.
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6. Mitigating the Risk of Counterfeit Products
Other measures companies can take Implementing the Plan UL works with local, national and
include: The implementation of a company-wide international law enforcement agencies
brand protection program must be to identify and seize counterfeit
• Educating distributors and other
products. UL has trained thousands of
stakeholders tailored to an organization’s unique
law enforcement authorities to identify
needs. For example, the number of
• Moving intellectual property and recognize legitimate UL certification
company employees will often dictate the
protection onto the agenda of trade Marks, and works with national and
approach that should be taken regarding
associations international governments, and with
implementation. An organization with
• Joining intellectual property international enforcement agencies,
100 employees will have a different set
protection coalitions and associations including INTERPOL, EUROPOL, the FBI,
of requirements than a company with
Immigrant and Customs Enforcement,
• Sharing best practices with other 20,000 employees. Likewise, a company
Hong Kong Customs, the Royal Canadian
manufacturers to help protect the that produces one or two high-demand
Mounted Police and the World Customs
industry products will have different needs than a
Organization, to thwart counterfeiting
manufacturer producing popular items in
When collaborating with other and to help stop the flow of counterfeit
several different product categories.
manufacturers, it’s important to work goods. Finally, UL’s active participation in
with companies from different industries. Companies must also consider the various U.S. legislative efforts helped to obtain
Typically, counterfeiters don’t observe geographic locations in which they do passage of the “Stop Counterfeiting in
industry boundaries, and today’s purveyor business. The location of suppliers and Manufactured Goods Act,” signed into
of counterfeit pharmaceuticals could be distributors is an important consideration law in 2006.
tomorrow’s dealer of counterfeit printed in determining an approach to anti- Although no single source can provide all
circuit boards. Successful efforts to stem counterfeiting. If the supply chain extends the answers, a knowledgeable third-party
counterfeiting in one industry ultimately across multiple countries, companies resource can help bring clarity to each
work to the benefit of companies in every must also consider applicable laws and specific situation and circumstance.
industry. regulations in those regions.
Commitment from the Top A manufacturer may choose to implement
The most successful anti-counterfeit- a brand protection program on its own,
ing efforts are those that embody a but there is no “off-the-shelf” solution
company-wide commitment to combat that can address each organization’s
product counterfeiting starting at the unique requirements. Because the
top. Leadership by the company’s senior implementation of such a program is
management on the issue of preventing a complex undertaking that involves a
counterfeit products is essential to its significant commitment of resources,
success, since employees will ultimately manufacturers often have difficulty
take their cues from those in charge. knowing where to begin. Guidance from
Without the active engagement and an independent third-party with expertise
support of a company’s senior executives, in developing brand protection programs,
individual departments may find it and with strong relationships with global
difficult to get their anti-counterfeiting law enforcement authorities, can help put
efforts off the ground. manufacturers on the right track.
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7. Mitigating the Risk of Counterfeit Products
Conclusion
Counterfeiting is a serious crime that affects all industries, reduces profitability, and
exposes the public to potential safety hazards and concerns about product reliability.
Companies should actively and aggressively work to combat counterfeiting, but the
benefit that individual companies derive from any brand protection program depends
on how much they are willing to invest in its success. A comprehensive approach and a
zero-tolerance attitude toward counterfeit products can help protect a company from
the risks of counterfeit products, and help to stop their spread.
For more information about the “Mitigating the Risk of Counterfeit Products” white
paper, please contact Brian Monks, vice president of Anti-Counterfeiting Operations,
at Brian.H.Monks@us.ul.com.
References
1. International Anticounterfeiting Coalition (IACC), About Anticounterfeiting, http://www.iacc.org/about-counterfeiting
2. Livingston, Henry, “Avoiding Counterfeit Electronic Components,” IEEE Transactions, Vol. 30, No. 1, March 2007, pp. 187-189
3. Wilson, John P., “Guidelines for Avoiding Counterfeit Components,” L3 Interstate Electronics, 2010, pp. 4
4. Keller, John, “The scourge of high tech,” Military and Aerospace, July 1, 2007
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