Counterfeiting and Piracy: Economic and Policy Perspectives Athens – 4 April 2009 Danny Scorpecci Principal Economist, Structural Policy Division Directorate for Science, Technology and Industry The views expressed are those of the author in his private capacity and do not necessarily represent those of the OECD or its Member governments.

The OECD Project Economic Impact of Counterfeiting and Piracy Phase 1: Counterfeit and pirated products Tangible products that infringe trademarks, copyrights, patents or design rights, report published in May 2008 Phase 2: Digital piracy Approved by Governments, will be published shortly. Phase 3: Other IPR infringements To be scoped and funded.

Why have different Phases to the study? This reflects very different markets for products covered Phase I: addressed physical/tangible goods, hence: –fabrication facilities (hence investment), physical transportation/distribution, targeted markets, products attacked often mature Phase II: addressed digital material, hence: –virtually zero marginal cost of reproduction, no physical goods, digital delivery; broad markets, products attacked at point of greatest intrinsic value These differences could be important for prosecutors

Phase I counterfeit and pirated products Sectors studied in depth automotive products food/drink products pharmaceuticals tobacco products music recordings motion pictures and other video content electrical components (including batteries) Other sectors considered luxury goods, perfumes and fashion clothes chemicals and pesticides sportswear and other branded clothing personal care, toiletry and household products books industrial and consumer motor lubricants aircraft components toys computer software Sectoral case studies

Measurement needs rigorous methodology, but data is hard to find activities are illicit and clandestine enforcement and customs data are sparse, incomplete and inconsistent enterprises may be reluctant to divulge data Analysis showed that international trade in counterfeit or pirated products could have been up to US$ 200 billion in 2005 The figure does not include –domestically produced and consumed products –non-tangible pirated digital products If added, the figure could be several hundred billion dollars higher Magnitude of the problem

Extent of the problem Virtually everything can (and probably has) been counterfeited, and is taking place in virtually every economy Analysis confirms counterfeiting of increasingly complex products sophisticated packaging security items (i.e. holograms) Growing trend towards everyday products intended to deceive consumers, many of which may affect public health and safety, eg car parts Pharmaceuticals food/drink Evidence of growing infiltration of legitimate supply chains – an area of interest to organised crime

What drives the demand/supply of tangible C&P,?

Digital piracy Selected market drivers Supply drivers Attitude towards piracy Reciprocity mechanism Ease of distribution Profitability (or alternatively lack of cost) Legal and regulatory framework Demand drivers Attitude towards piracy Availability Technical quality Low security awareness Ineffective enforcement

Counterfeiting and piracy… Main Effects can impact negatively on innovation and growth may reduce employment where originals are produced can reduce foreign direct investment (FDI) where C&P takes place damages sales volume, profits, brand value and capitalisation of rights’ owners, and can lead to unwarranted potential legal liability can negatively affect consumer confidence can seriously affect health and safety of users evidence that legitimate supply lines are being infiltrated reduces tax revenues to governments induces high costs on governments and industry to combat C&P encourages corruption and participation by organised crime

Why is organised crime interested in C&P? Profitability is high Market is large Demand is heavy Risk of detection and prosecution is relatively low Even if successfully prosecuted penalties low, especially when compared to other illicit activities such as drugs Can use bribery, corruption and coercion to facilitate business and reduce risks

Attributes of organised crime suitable for C&P Resources to invest in production facilities Can obtain templates, plans and originals for copying Can create and maintain complex supply chains Experience in smuggling Can establish effective distribution/sales networks Can infiltrate legitimate supply chains Can protect operatives at all levels Can use bribery/corruption/coercion

Distribution channels While many counterfeited goods are smuggled, most are transported using normal commercial transport services often with appropriate documentation (such as Bills of Lading) products are accurately described so it is not always clear when these may be counterfeited this places considerable onus on customs officials to determine provenance, as many counterfeits can only be identified by rigorous testing (eg car parts, pharmaceuticals) extensive use of Free-Trade Zones

Laws & regulations often ineffective Not properly enforced Insufficient public enforcement resources Low priority in courts Protection of locals Courts often lenient because counterfeiting and piracy are not always considered to be serious crimes Penalties don’t always deter

Importance vs. Priority Most governments have labelled counterfeiting and piracy as important problems. However, not always matched by priority. Other illicit activities given first call on resources (drugs, people smuggling, gun running) Governments may better respond to these problems if they appreciate the corrosive effects of C&P. – especially if full account taken of role of organised crime, the effects on health and safety, foregone tax revenue and weakened incentive to innovate

For the attention of policymakers Improve co-ordination amongst domestic agencies Consider having a clear C&P policy Have a clear and enforceable legal and regulatory framework Ensure effective enforcement International co-operation, especially with respect to cross- border transactions involving digital products Increase awareness amongst government officials and education of consumers Enhance co-operation with industry

Danny Scorpecci Directorate for Science, Technology and Industry Further information available >>> Contact us OECD 2, rue André-Pascal Paris CEDEX 16 France Phone: (+33) Fax: (+33) Website: