The Illicit Global Economy: Counterfeiting and Piracy as Security Challenges

At the Finnish Institute of International Affairs · 03.12.2014 09:30 - 11:00

Illicit trade represents a significant part of the total world trade. Of this, the illicit trade in ”normally legal goods” is the single largest category, bigger than the global trade in narcotics, weapons and human trafficking put together. Its negative impact on multiple levels, with significant humanitarian, economic and national security implications, has been increasingly recognized. Yet despite posing a strategic challenge it remains relatively under-prioritised. Why is that? And what needs to be done to change the global approach to fighting illicit trade?

Karl Lallerstedt, Programme Director, Global Iniative Against Transnational Organised Crime

Karl Lallerstedt is co-founder of Black Market Watch. He leads the Global Initiative Against Transnational Organized Crime programme on illicit trade, financial and economic crime, and is a member of the OECD Task Force on Charting Illicit Trade. Formerly Karl was the anti-illicit trade strategy director at a leading multinational corporation, steering committee member of the International Chamber of Commerce’s Business Action to Stop Counterfeiting and Piracy (BASCAP), and a political and economic analyst for the Department of State, Oxford Analytica and the Economist Intelligence Unit.

Kati Levoranta, Chief Legal Officer, Rovio

Kati Levoranta is the Chief Legal Officer at Rovio Entertainment, responsible for guiding the company’s legal affairs. She previously held several positions at Nokia and Nokia Siemens Networks, the latest being Head of Global Commercial Transactions, Legal and Compliance. Ms Levoranta studied at Turku University and Columbia University and received an MBA from Helsinki School of Economics.

Chair: Mikael Wigell, Senior Research Fellow, the Finnish Institute of International Affairs
Summary of the seminar:
Mikael Wigell, Senior Research Fellow at the Finnish Institute of International Affairs, opened the seminar   by pointing out that the illicit global economy gets increasing attention globally not only due to its scale but also due to its links to issues such as terrorism, radicalism and under-development. The goal of this seminar was to look at the phenomenon and to try to understand some of the reasons for its low political prioritisation.

Karl Lallerstedt, co-founder of Black Market Watch and Programme Director at the Global Initiative Against Transnational Organized Crime, began his presentation by showing some estimates of global illicit trade, demonstrating the scale of the problem. The largest components of transnational illicit trade include narcotics, counterfeiting, human trafficking, contraband trade in excise goods, and different forms of environmental crimes. All of these activities provide significant income for organised crime groups, as well as terrorist organisations. Illicit trade also corrupts border guards, law enforcement officials, military, politicians and civil servants. Border security is undermined with the establishment of smuggling routes and the creation of criminal infrastructures to service large scale illicit flows. Lallerstedt pointed out that counterfeiting is one of the most lucrative illicit markets, and that there are synergistic effects with other illicit activity, including narcotics and human smuggling. The negative effects of illicit trade that displaces normally legal goods include reduction in governmental revenues, negative impact on job creation and economic development, as well as the health risks posed to consumers by counterfeit products as medicine, foodstuffs and unsafe products. Lallerstedt also pointed out that contraband trade in excise goods (such as tobacco, alcohol and petroleum) is a major source of income for criminal groups. He said there are reasons to believe that the profit incentive for illicit trade in excise goods will continue to grow due expected increases in taxation. Counterfeiting and IP crime is a growing concern as well. The increasing importance of IP in the economy, the globalisation of brands, and the increasing role of the internet all contribute to their increasing availability on global markets. Counterfeiting also offers high profits with relatively low risks. Lallerstedt listed some of the numerous negative implications of IP crime for businesses to include sales volumes loss, damage to the trade mark and potential legal liabilities for companies who inadequately protect their customers from the risks posted by counterfeits. In spite of the enormous scale of the problem and synergistic effects with other crime, counterfeiting has been a surprisingly low priority on the global policy agenda. There are several explanations to this, according to Lallerstedt. Counterfeiting is seen as a lesser problem than more high profile illegal activities such as narcotics, human trafficking and weapons trade. Since the various aspects of illicit trade are dealt with by a number of actors, no one assumes overall ownership and effective coordination of the issue. There is also a low level of public awareness of the threat posed by counterfeiting as the concerned parties, including the affected companies, all have reasons for not talking frankly about the problem. Lallerstedt underlined the importance of addressing illicit trade as a whole, interconnected problem and not as several, separate issues. He sees the lack of data as a key challenge, and therefore one solution is to generate new data shedding light on the problem. One way to do that is by assessing the impact of illicit trade on leading companies, obtaining and anonymising information provided by the companies themselves. Black Market Watch is currently conducting such a pilot project on behalf of the Swedish Confederation of Enterprise focusing on the NASDAQ OMX 30 Stockholm Index. The preliminary findings of this project suggest that all manufacturing companies are affected by counterfeiting, that it is generally considered to be of growing concern and most companies feel that authorities need to prioritise the problem more highly. To conclude Lallerstedt also wanted to remind the audience that the use of sanctions in international relations opens the door for illicit trade in new areas, and consequently it would be prudent to assess crime risks associated with such policy options. 

Kati Levoranta, Chief Legal Officer of Rovio, spoke about the challenges of counterfeiting from their company’s point of view. Those challenges are double-fold for Rovio, as their products are both digital and consumer goods. It is also an attractive brand to copy. Rovio’s concerns with counterfeit products consist e.g. of damage to the brand, loss of revenue and protection costs. Safety is one of the key concerns since branded products include also food products. Levoranta said it is challenging for a company to set a senseful threshold and budget for brand protection activities. Rovio has tried to build an understanding of which markets are the most important for them to be cleaned. After the focus areas have been determined, it is necessary to evaluate what kinds of actions need to be taken. Levoranta pointed out that one also needs to consider carefully whom to target in order to maximize the impact of actions. In this regard, Rovio has found it useful and cost-efficient to join forces with other companies facing similar problems of counterfeit products and take joint action. It is also important to establish good working relations with the authorities involved. Rovio for example talks actively to custom officials and offers them training in order to give them an understanding of what their genuine products are like.