Session 7: Anti-illicit trade

Tax avoidance and evasion is a simple market response to increased costs imposed by tax increases or high taxes, and it may occur in many forms, such as counterfeiting, theft and resale of not-yet-taxed products, or smuggling products from lower tax areas to higher tax areas. According to Americans for Tax Reform, annual lost tax revenue due to tax avoidance is estimated to reach $40 billion. Illicit retail trade of cigarettes accounts for approximately 10 percent of the global retail market, and in the U.S. causes a loss of $3 billion to $7 billion in tax revenue each year.

However, counterfeiters don’t stick to producing fake cigarettes; they also imitate smoking accessories, as the U.S. manufacturer of an iconic rolling papers brand learned. The manufacturer’s strategy to tackle the problem may serve as a case study. The company decided to take a multifaceted approach: It educated customs officials on how to distinguish between legitimate and counterfeit products; recorded all trademarks and established “narrow” ports of entry for legitimate products.

On the investigative side, the manufacturer used an investigative service to scour the internet for counterfeit products. Furthermore, it created “choke points” at ports of entry and developed or strengthened relationships with law enforcement and regulators at all levels. Staying on top of counterfeiting requires, as the company found out, constant communication between legal, business and investigative teams, as well as constant awareness of how enforcement tools and technology are changing the market for counterfeit goods. Targeting sellers of illicit goods has become more difficult.

Once it had uncovered the counterfeiters, the company then sued them and froze their accounts at payment platforms, such as PayPal.

In a Chinese anti-counterfeiting investigation, the company said it had used third-party providers to get shipping records and private account information, which it provided to Chinese investigators and its local counsel. Both liaised with Chinese police, who then raided and shut down the counterfeiters’ factories.

Apart from the financial loss, counterfeiting may also bring about considerable damage to brand image. So, the company also took measures at the marketing level. The aim was to carefully address the problem through strategic communication without amplifying product concerns. The company’s two-tier strategy involved the alert of retailers and distributors through print and online publication advertising, press releases and direct mail about its anti-counterfeit measures to discourage those that were knowingly participating in illicit trade and to reward those who weren’t. The company also created a microsite that allows consumers to identify authentic products and report counterfeit ones.

Despite such measures, the fight against counterfeiting remains an uphill battle. One of the reasons for this, according to a panelist, is that online marketplaces refuse to take responsibility, even with known counterfeiters. It is still up to the brand owner to take action.