Buyer Beware: Intellectual Property Theft Can Lead to Counterfeiting

Today, just about anything can be counterfeited – and just about everything is. Most counterfeit goods are made from stolen intellectual property.

By Misty Carter, CFE, CIA

September 2014

A Texas emergency room doctor nearly died after having purchased weight loss pills online that looked like the real thing. As reported by USA TODAY, the fake pills, fraudulently sold as the weight-loss drug Alli, had also been linked to injuries suffered by others. This is just one example of many of an ongoing issue that is part of the global trade in counterfeit products.

Today, just about anything can be counterfeited – and just about everything is. Most counterfeit goods are made from stolen intellectual property. Intellectual property (IP) is any product or idea that is protected by the law from unauthorized use by others. IP can be comprised of patents, copyrights, trademarks or trade secrets. Counterfeiting of goods involves the manufacture and distribution of an inferior good using stolen IP with the intent to sell a cheaper version of the brand name product without the owner’s permission.

How Does Theft of Intellectual Property Lead to Counterfeiting?

Stealing intellectual property differs from traditional crimes, such as robbing banks or pickpocketing. It involves stealing someone’s ideas or inventions, things that are often intangible. Theft of intellectual property can occur in many forms. For example, domestic or foreign companies might attempt to illegally acquire a company’s information through computer hacking. Or an IP thief might connect a device to a computer system internally and download proprietary information. Others might attempt network intrusion, while some might just access information from an unsecured laptop or workstation.

Once the intellectual property is obtained, its usage for fraudulent means can be endless. However, a common use for stolen intellectual property is counterfeiting. A rise in overseas outsourcing of the manufacturing of brand name goods has resulted in a number of intellectual property thefts. Individuals in foreign countries who gain access to the blueprints or designs of such goods can use it to their advantage. In addition to manufacturing legitimate goods for the company who owns the IP rights, they might also mass-produce similar goods or counterfeits, usually with the only difference being in the quality of the product.

How Prevalent is Counterfeiting?

Even though numerous government agencies, such as the FBI and Department of Justice in the U.S., are on the lookout for counterfeiting operations, they fight an ongoing battle due to the sheer volume of fake goods being produced and sold, especially since the majority of these products come from overseas.

In 2009, the Customs and Border Protection Agency of Immigration and Customs Enforcement of the Department of Homeland Security made 14,841 seizures of counterfeit goods. As part of this action, the following was seized:

Footwear valued at $100 million

Electronic products (cell phones, cameras, computers, etc.) valued at more than $38 million

Accessories (handbags, wallets, etc.) valued at more than $21.5 million

 

In 2013, counterfeit goods valued at more than $1.7 billion were seized by the Department of Homeland Security at U.S. borders. This growth in the trafficking of counterfeit goods can be largely contributed to increased consumer demand.

What are the Impacts on Consumers and the Economy?

With the sale of fake consumer products on the rise, consumers and business owners should understand the impact this type of fraudulent activity can have on them as individuals — as well as on the economy — so they can take appropriate action. Some impacts to consumers and the economy include the following:

 

The buying and selling of counterfeit goods breeds crime. Since fake goods can be produced cheaply, criminals and organized crime groups are able to purchase them at a discount and sell them at a profit to vendors and other sellers who then peddle them to the public. The criminals then use this money to fund other illegal activities.

 

A real danger lies in certain types of products that are commonly counterfeited and sold to unassuming buyers. Examples include baby formula, skin and body products, auto parts, electrical goods and even pharmaceutical drugs. It has been estimated that the products that have been identified as fakes only account for 4 percent of all counterfeited goods. This means the other 96 percent could be comprised of products that are believed to be real, but could contain dangerous components harmful to our health and safety. According to one manufacturing company executive, fake car parts cost the auto industry in the U.S. close to $12 billion a year.

 

The buying and selling of counterfeit merchandise hurts real companies. Legitimate manufacturers invest large sums of money in researching and developing products and building a reputation with consumers — a reputation that counterfeiters seek to profit from unfairly. This results in lost sales to companies, which eventually leads to lower wages, loss of employment and higher prices for consumers. In fact, the U.S. Chamber of Commerce estimates that the value of counterfeit goods is close to $650 billion a year, resulting in a loss of more than 75,000 jobs.

 

What Steps Can Be Taken to Protect Against Intellectual Property Theft?

Companies can take several proactive measures to guard against having their proprietary information stolen, including the following:

Look for red flags that an employee might be gathering proprietary information and passing it to outside parties.

Perform an assessment of the company’s potential information security vulnerabilities, and fix or mitigate the risks associated with those vulnerabilities.

Use up-to-date software security. Many firewalls stop incoming threats, but allow outbound data.

Educate employees on phishing email tactics, and establish protocols for reporting suspicious emails.

Ensure employees are aware of what information is considered proprietary and should not be disclosed to third parties.

Remind employees of information security policies on a regular basis through active training and seminars.

Document employee training and any other measures taken to protect company intellectual property.

Ensure human resource policies specifically outline the consequences of violating information security policies.

Create clear and defined incentives for adhering to company information security policies.

Intellectual property theft is an ongoing problem that can lead to serious consequences including substandard or unsafe counterfeit products – such as the nearly-deadly fake diet pills in the Texas case. For fraud examiners, the best way to counter the threat of this type of fraud is through being informed and knowing the red flags of potential counterfeit items. To test your knowledge about faked products, visit www.iacc.org/how-to-spot-a-fake.html.