The business risks of fake products

Counterfeits aren’t just about fake Swiss watches and Italian handbags anymore. Now it’s toothpaste containing antifreeze, batteries that explode and catch fire and medications sans active ingredients.

International counterfeiting and piracy now account for approximately half a trillion dollars, or 2–7 percent of world trade—“a massive number,” notes Joelle Gemayel, Head of Proposition Development at Zurich Insurance Group.

From individual customers to companies, to government agencies, everyone has a stake in the game. Businesses are rightly concerned about lost revenues, brand damage and reputational impact.

“Many senior business leaders significantly underestimate the growing global pervasiveness of counterfeit risk across all industry sectors, and the growing issue of security gaps within increasingly global supply chains,”says Robert Gremli, Global Chief Risk Engineering Officer, Zurich Insurance Group.

Organized crime—drawn by profitability comparable to the narcotics trade, with much lower risks-—has increased the sophistication level of counterfeiting. And the online economy has afforded counterfeiters a new distribution channel and a way to sharpen their management.

“The Internet is heaven to counterfeiters,” says Jürg Schmid, Senior Risk Engineer, Zurich Insurance Group. “You can reach customers anywhere. The only problem is getting past customs, and if you don’t, they’ll never find you anyway.”

Counterfeiters’ manufacturing capabilities have grown increasingly sophisticated, too. Many counterfeit goods are virtually indistinguishable from the originals, and given a whiff of legitimacy by fake guarantee documents, seals of quality and the like.

“Today, it’s touching almost every industry, even highly regulated ones such as aviation and healthcare,” says Gemayel.

While anti-counterfeiting technologies have also advanced, technologies themselves are prone to corruption. New ones such as 3D printing can lower counterfeiters’ production costs—and encourage criminals to produce illicit goods directly in the consumer markets to reduce the risk of importing. Equally troubling, Gremli notes, is the infiltration of fakes into established supply and distribution chains.

These developments pose fresh risks, and society will continue to be affected, as counterfeiting discourages investment in innovation and foreign direct investment; the European economics advisory group Frontier Economics estimates that counterfeiting accounts for 2.5 million job losses in the G20 economies. Tax avoidance, anti-counterfeiting activities and responding to the public safety, health and environmental consequences of counterfeiting has an estimated annual cost to G20 economies of €62 billion.

“Companies need a holistic view of counterfeit risk,” Gemayel says. “This starts with a solid intellectual property culture, a strategic anti-counterfeiting policy built around the core business and the commitment of top management and the board—it’s a topic that needs funds and support from the top down.”

In order to reduce losses and the overall cost of risk, insurance companies such as Zurich can support companies with a wide range of services aimed at helping them to identify, assess and improve their complex risk exposures. “Everyone needs to continue giving this subject the attention it deserves,” says Zurich’s Gremli. “There are huge potential costs involved.”

Published in collaboration with Zurich Knowledge Hub

Author: Evan Rothman write for Zurich Knowledge Hub.

Image: Counterfeit goods seized by the U.S. government are shown on display. REUTERS/Jason Reed