Counterfeiting and Organized Crime II International Forum on Combating Counterfeiting and Piracy April 19, 2017

IPR Center: 23 U.S. Federal and International Agencies The IPR Center Mission: To promote national security by protecting the public’s health and safety, U.S. economy, military, and to stop predatory and unfair trade practices that threaten the U.S. and global economy. The IPR Center Agencies Include: Immigration and Customs Enforcement U.S. Customs & Border Protection Federal Bureau of Investigation U.S. Postal Inspection Service U.S. Food & Drug Administration Department of Commerce Naval Criminal Investigative Service Defense Criminal Investigative Service Army Criminal Investigation Command, Major Procurement Fraud Unit Defense Logistics Agency, Office of the Inspector General Air Force Office of Special Investigations U.S. Patent & Trademark Office U.S. General Services Administration Consumer Product Safety Commission National Aeronautics and Space Administration, Office of Inspector General Nuclear Regulatory Commission Department of State, Office of International IP Enforcement Federal Maritime Commission (FMC) The U.S. Postal Service Office of Inspector General (USPS OIG) Interpol Europol Royal Canadian Mounted Police Mexican Revenue Service For prosecution, investigations are coordinated with the U.S. Department of Justice Computer Crimes & Intellectual Property Section.

Challenges: Increasing Counterfeits Global counterfeits trade surpassed $461 billion In 2013, international trade in counterfeit and pirated products represented 2.5% of world trade, totaling $461 billion USD. This represents a significant potential economic loss for rights holders, governments, and the global economy. Criminal networks behind the illicit trade derive significant revenues from their activities. Since the early 1990s, trade in counterfeits has grown at 8 times the rate of legitimate trade. Sources- The Organisation for Economic Co-operation and Development (OECD) and European Union Intellectual Property Office (EUIPO).  (April 18, 2016), Trade in Counterfeit and Pirated Goods: Mapping the Economic Impact, OECD Publishing, Paris. U.N. Office on Drugs and Crime. International Monetary Fund.

Challenges: Online Sales Increasing In 2016, 1 in 12 retail dollars was spent online in the U.S. In 2020, 1 in 8 retail dollars is projected In 2020, it is projected that 1 in 8 retail dollars spent in the U.S. will be online. In 2016, 1 in 12 retail dollars was spent online in the U.S. Source- U.S. Census Bureau *Excludes gas/fuel sales

“Traditional” Organized Criminal Enterprises Organized Crime’s Transformation “Traditional” Organized Criminal Enterprises Based on ethnicity or families Geographic or community territories Physical, real-world presence Hierarchical leadership Established social norms New Threat Actors Loosely affiliated networks Face-to-face interaction less common Varying forms of leadership and hierarchy Not bound by geography

Traditional vs. Non-Traditional Organized Criminal Enterprises Leader Enforcer $$$ Seller Counsel $$$ Spammer Carder Site Admin Product Coder Organized crime groups exist on a spectrum, dependent upon their level of organization. Criminal enterprises vary in whether their activity is purely aimed at online targets, how they use online tools to enable crimes in the “real” world, and how they mix online and offline targets. There are three types of more organized crime groups today—traditional, hybrid, and new. The traditional, or offline, organized criminal enterprise is hierarchal, demonstrated by the organized crime model on the left. This traditional structure is often thought of in relation to crime families or ethnicity, and members often follow clear-cut social norms. The operational advantage of this type of structure is that grey areas exist in defining some activities as crimes. Nation states or established crime families may be viewed as “above the law.” This structure’s operational weakness is that there is usually a high level of police knowledge or awareness about these groups. Many face reputational damage if their activities are exposed. There are two types of organized criminal groups operating online—the extended hybrid and the hub. For law-enforcement agencies, some of the more concerning developments are the evidence of the hybrid organizations, which combine on and offline offenses, and where new and old forms of criminality converge. This is seen when the traditional organized crime groups move into the online world, creating the extended hybrid organization. New and unpredictable opportunities for crime are opening up as a result. The hybrid model is less defined than the centralized/organized groups. They tend to lack obvious central focus but still associate with multifarious and highly-complex flows of criminal activity. An operational disadvantage is the hybrid’s activities appear disassociated; however, a degree of coordination is necessary for the offending to succeed. For law enforcement to disrupt them, interventions must be directed at the hybrid’s sub-groups (affiliate network). On the right we see an example of a non-traditional, or online, organized crime network, or the new threat actors as we might refer to them. These groups conduct directed, purposeful criminal online criminal activity, and involve core groups of members linked to a wider periphery of criminal associates. Central hubs can be difficult to penetrate and they use codes and symbols to avoid detection; however they have a clear command structure and key individuals for law enforcement to focus on. Traditional Non-Traditional

Organized Crime’s Involvement in Counterfeit Pharmaceutical Trade Traditional Organized Criminal Enterprises Heavily involved in street sales of counterfeit pharmaceuticals One part of larger smuggling operations and black-market activity for many groups worldwide Asian Organized Crime Middle-Eastern Criminal Enterprises African Organized Crime La Cosa Nostra For organized criminal groups, the counterfeit trade is all about “low risk, high reward.” For actors engaged in traditional organized crime, selling a counterfeit pill (depending on the type of drug) is far more lucrative and far less risky (in terms of fines, jail time and occupational hazards) than selling “real” illicit narcotics.

Organized Crime’s Involvement in Counterfeit Pharmaceutical Trade Non-Traditional Organized Crime Loosely inter-related affiliates Varying specialties Limited knowledge of full scope of operation Frequently global in scope of operation Dominate online counterfeit pharmaceutical sales Organized criminal enterprises, with varying roles in the manufacture, advertising, transaction handling and financial processing all play a large part in dominating the online sales of counterfeit pharmaceuticals. One part of this affiliate model involved in counterfeit pharmaceuticals sales—spam-based advertisers—by one measure, accounted for over 80 percent of all spam messages sent in 2010.

Trends and Characteristics Organized Criminal Enterprises often involved in many criminal activities to manufacture, advertise and sell counterfeit pharmaceuticals Money laundering Human trafficking Identity theft / financial institution fraud Computer intrusions Threat finance Extortion Public corruption Counterfeiting is not just about trafficking in infringing product. In order to facilitate this trade, organized crime typically engages in a number of other criminal activities.

Trends and Characteristics Rapid adaptation to enforcement efforts Dark search engine optimization Rapid domain name switching Rapid financial flows Bulletproof hosting services Rogue payment service providers Instead of “giving up” due to enforcement efforts, traffickers try to out-maneuver law enforcement. Groups that advertise their illicit goods through search engine terms (think of the ads section that appears on Google, Yahoo! or Bing search results) are frequently shut down through rights-holder notification. As a result, these groups have adapted by compromising legitimate web pages to re-index their sites in search engine results, a process known as Dark Search Engine Optimization or Dark SEO. Groups engage in creating hundreds of new domain names, new payment service provider accounts, new credit card accounts; all in an effort to rapidly shift from a site or account taken down through law enforcement, to a new site advertising the same counterfeit product. To prevent law enforcement from unraveling networks trafficking counterfeits through the issue of legal process, such as subpoenas or search warrants, organized criminal enterprises have turned to internet service providers (ISPs) who specialize in not responding to law enforcement requests. These ISP’s, referred to as “bulletproof” for their contempt of enforcement efforts, typically reside in places beyond the jurisdictional and diplomatic reach of investigators. Organized criminals have also begun to cut out “legitimate” services in favor of illicit service providers who cater specifically to criminal clientele—in the last several years, there has been the emergence of rogue payment service providers, who almost exclusively move money for criminal actors engaged in illicit online trade.

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