Killer Counterfeits

‘If I were a criminal, I wouldn’t worry about dealing in drugs. I’d get involved in counterfeit products. The rewards are huge and there isn’t much chance of getting caught.’

“These were the words of one of the speakers at ‘Counterfeiting — the Price We Pay,’ a forum held in Toronto recently by Electro-Federation Canada (EFC), the industry association of some 275 companies in the electrical, electronics and telecommunications industries. The speaker might have added with justification that the penalties for those few individuals who do get caught are often laughably light anyway.

The scale of the international trade in counterfeit products is huge. EFC reports that it costs North American businesses $200-billion a year, with as much as $1-billion in lost revenue to Canada’s electrical products industry.

“Many of the roads in counterfeit trade lead to China but when it comes to counterfeit industrial products, all roads lead to China,” Kevin Harris, international sales manager for Eaton Electrical Ltd., based in Birmingham, England, told the forum.

Harris, who also heads up the anti-counterfeiting committee of BEAMAInstallation, the U.K.’s trade body for manufacturers of electrical installation and cable management products, said that when a company’s products or brand name are being counterfeited, then the company is being cheated of revenue and its reputation is being tarnished. ‘Substantial loss to reputation’ was noted by a Texas court in the recent conviction of a U.S.-based Chinese national for trafficking in counterfeit versions of products by such companies as Gillette, Nike and Marvel Entertainment.

As for those individuals who use or specify counterfeit products, they or their customers face safety hazards and other risks. As well, unwitting users who have a bad experience with a counterfeit product may very well be deterred from using the affected manufacturer’s genuine products out of fear or uncertainty.

“Counterfeit goods are becoming harder to detect and it is up to all suppliers and users to protect themselves by guarding against the problem,” Harris said. “If your company is famous, it is going to be copied and become victim of its own success. You have to be vigilant.”

Harris said that ways to protect products include the use of holograms with overt and hidden codes, stamping in identification, and registering brands and designs to afford a measure of protection. Authentication software is another option. “Don’t use sticky labels and do emboss your brand name and country of origin into the product if possible. Also, use printed cartons and security inks.”

Clearly, if you do not take reasonable steps to identify your products and deter counterfeiters, you could be deemed negligent. Counterfeiting is very much a public safety issue that is full of implications with regard to corporate liability. Besides, it makes it harder for you, the genuine manufacturer, to tell your products apart from counterfeit versions should liability issues need to be resolved and you have to prove the difference to investigators.

“Companies should register their trademarks and logos, particularly in China, even if they have no market there,” Harris said. “Registration won’t likely prevent counterfeiting but it will provide a measure of legal support should it take place.”

Trademarks are granted in China on a first-come, first-serve basis through the State Administration of Industry and Commerce (SAIC) trademark office. Patents are registered at a separate office, the State Intellectual Property Office. Potential exporters are advised to contact an intellectual property lawyer for assistance.

Harris’s presentation explained how BEAMAInstallation works with other groups to deal with the counterfeiting issue, particularly in Africa and the Middle East, where the scope of the problem is huge. The group has produced the CD, Counterfeit Kills, and information is available from www.eiema.org.uk.

“In the electrical industry, the products most commonly counterfeited are load centres, fuses, circuit breakers, lighting, wiring accessories, cable, motor control gear and batteries,” Harris said. Even certification stamps such as ‘UL approved’ or ‘CSA approved’ are being faked on products that have actually undergone little or no testing at any level — certainly by either of the two named groups.

Recently in the U.S., Verizon Wireless had to recall 50,000 cell phone batteries carrying the LG Mobile Phones brand after reports of minor fires and injuries. The batteries, which were not manufactured by LG, have no circuitry to prevent overcharging and thus pose fire and burn hazards. Some 18 incidents have been reported in the U.S., all involving batteries purchased as spares or replacements.

Counterfeiting can also present itself in the form of refurbished items that have been improperly modified or updated with inferior materials. There have been reports of brake pads made of sawdust and of a fatal air crash in Norway caused by counterfeit shear bolts that failed. To users the lesson is clear, Harris said: Deal with authorized dealers and distributors only.

Harris said that counterfeiting is one area where competitors should be working together and pooling information. “Direct group action is less expensive and more effective, and you must take action at the source and in affected countries. No action is not an option.”

BEAMAInstallation is active and moves swiftly to shut down any counterfeiters it detects in the electrical industry, Harris said. “We employ hands-on investigators who target factories and distributors. With local police assistance, we confirm and raid the targets, and seize and destroy products and tools. Factories do get closed, even in China, and owners are arrested.” Nevertheless, he added, the suspicion is that shortly afterward they set up shop again, “a few streets away.”

Harris said that the electrical counterfeiting centre of China is Wenzhou, a coastal city of four million people about 450 km south of Shanghai that is now known in the industry as ‘Bakelite City.’ “There are as many as 1,500 factories operating there, many of them unlicensed. In the latest raids, 350,000 accessories were seized from three factories and two warehouses.”

Harris recommended several ways to stay alert to the possibility of your company’s products being counterfeited:

Ask your overseas office/distributors to report any suspicions

Analyze trends in markets. Are there any unexplained declines?

Do you have as much market share as you think you have? Know the overall size of the market and compare your share.

Are you being asked to compete with ridiculously low prices?

Visit the website www.alibaba.com. It is an online supplier database with at least 80% of the goods originating in China. Many may be legitimate, but the company that runs the operation disclaims all responsibility for what suppliers say or offer, and you may be surprised at what a site search will turn up there.

Canadian coalition

Active steps are being taken by Canadians to combat counterfeiting. In May, participants of an Intellectual Property Crime meeting at the Microsoft Canada offices in Mississauga, Ont., spearheaded by the Canadian Standards Association and the RCMP, founded a ‘Canadian Coalition.’ More than 40 participants attended the meeting, including Joseph Neu on behalf of EFC and Brian Savaria representing the Electrical Equipment Manufacturers Association of Canada (EEMAC). Plans are for the coalition to be driven by private industry with the support of law enforcement.

There are international groups too, including the International Anti-Counterfeiting Coalition (IACC), of which Toronto lawyer Lorne Lipkus is a member.

“In 1985, the problem of counterfeiting was restricted to T-shirts and flea markets. Now it is big time,” Lipkus, a founding partner of Kestenberg Siegal Lipkus, told the forum.

“It is estimated that 18-20 air crashes in one year were due to counterfeit parts,” Lipkus said. “There is speculation tha
t the Concorde that crashed in France (in 2000) did so because it encountered a counterfeit part which had fallen off a (Continental Airlines) plane. Six hundred helicopters sold to U.S. civilians and NATO members contained counterfeit parts. Other affected products have included heart pumps and baby formula.”

Lipkus cited statistics to show that if counterfeit auto parts were eliminated, the industry could hire 200,000 additional workers. “As much as 7% of world trade is in counterfeit goods,” he added. As well, the practice of counterfeiting offers a powerful argument for not outsourcing to countries like China, since one’s intellectual and physical products will likely be duplicated in no time at all.

Brian Monks with the Global Trademark Enforcement sector of Underwriters’ Laboratories Inc. in Melville, N.Y., said progress is being made in the U.S. “Working with U.S. Customs, we have made more than 1,000 seizures worth over $120 million. However, U.S. Customs examines just 1.8% to 2% of products entering the country, which means a lot (of counterfeit goods) must be slipping through.”

Monks said that 12 arrests were made in the U.S. in 2003. One felon in Texas received a seven-year sentence for counterfeiting UL marks on extension cord sleeves, while a $9.7-million seizure of counterfeit power tools in Los Angeles resulted in just a $30,000 fine. Other recent seizures include 15 tons of ‘Duracell’ batteries.

“Counterfeits are everywhere,” Monks said. “UL cannot solve the problem itself …. The more people we bring in to fight the battle the better.

“Warning signs to watch for include any product that references UL on either the carton or product but has no company name and address, or any product that references UL on the packaging but not the product.” Monks also noted that some counterfeit products are being made overseas while the artwork or sleeve is being turned out locally.

Misrepresentation is another form of counterfeiting. Monks cited the case of electrical wire being sold as 16 gauge when it was actually 24 gauge. “We put a 15-amp load on it (16 gauge is rated at around 22 amps for chassis wiring) and within 10 minutes it was sparking and arcing and it finally melted.”

Ken Hansen, a superintendent with the RCMP, said links have been identified between intellectual property crime and organized crime. “We have had difficulties in obtaining intelligence, particularly tactical intelligence, due to no specific databank and the lack of international follow-up, which is alarming, since 80% of activity comes from outside the country.”

Hansen’s recommendations include enhanced border enforcement, training, legislation, working with industry and establishing a databank with international links. He added that Canada needs tougher civil rules whereby holders of a copyright can launch an action against suspected counterfeiters in the same way as they can in the U.S., instead of having to go the criminal route.

He also said that current penalties do not provide a stiff enough deterrent. “Penalties covering Criminal Code sections 406 to 410 — offences committed with intent to deceive or defraud with wares that are not genuine — draw a penalty of $2,000 or six months on summary conviction, or, under indictment, of up to two years. The RCMP lays an average of 400 charges a year and most result in fines only.”

Richard Rix is a Toronto-based writer and regular contributor to Machinery & Equipment MRO. Please send your comments on this article or about your experiences with industrial counterfeiting to letters@mromagazine.com, and we’ll include them in an upcoming issue.