Fake goods, counterfeits, pirated materials, genuine items smuggled across borders… sadly, human ingenuity to deceive, defraud and make a fast profit is extensive.
Illicit goods have been with us for centuries. But corporates mustn’t just put up with them as a fact of life. Those that take concerted and deliberate action can make a big difference in protecting their profit margins, brands and reputations.
A time of heightened risk
Indeed, the issue is particularly relevant right now. At a time of high inflation and low affordability, consumers will be more tempted than ever to find a bargain, especially items with a high price tag. Illicit goods are already a significant and invisible competitor to businesses. Some illicit goods can have as much as a 10-20 per cent market share; sometimes even higher. That share could rise if you combine skilful and determined organised criminals with depressed economic times.
It's an important issue for governments and tax authorities too. Illicit trade undermines the rule of law. It also means that billions worldwide in excise, VAT and tax are evaded. In present times, this is lost revenue authorities can ill afford.
This isn’t a minor fringe issue. Consider this selection of quick facts:
- Illicit alcohol accounted for 27 per cent of total consumption in Eastern Europe in 2017 (3)
- In certain countries, particularly in Africa and South America, 50-90 per cent of timber is harvested and traded illegally (4)
- Global trade in counterfeit pharmaceuticals was up to USD 4.4 billion in 2016 (5)
- 47 per cent of the luxury brands are losing sales revenue to counterfeit or pirated goods (6)
- 8 per cent of cigarettes consumed in the EU are illicit (7)
The threat to brands is not just financial, as important as that is. There are also reputational risks if low quality counterfeits damage the brand image. There are very real health risks on some fake products, especially in the pharmaceutical, alcohol and tobacco industries. Criminals could be subverting supply chains with forced and child labour. Needless to say, environmental and societal concerns will not be on their agenda either. Illicit trade in fact represents a significant threat to corporates’ ESG commitments and ambitions.
An industrial problem
The first thing is to realise that this is not an amateur, market stall pastime of little consequence. It is being carried out by organised crime gangs on an industrial scale. Manufacturing sites can be opened up – and shut down if necessary – in a matter of hours, if not days. Criminals have sophisticated distribution networks and entry points into markets. They may be paying bribes and sweeteners to people in order to facilitate the trade. They are also highly responsive and adaptive to market conditions.
For example, with the onset of the COVID-19 pandemic, criminal organisations quickly pivoted towards the trade in fake or smuggled PPE and medications following global shortages and public anxiety. (11) Meanwhile, illegal cigarette manufacturing sites are increasingly moving West in Europe to get closer to higher‐priced end markets and reduce the risk of moving higher value and more easily detectable finished goods to consumers. (12)
Professionalising the response
In response, companies need to similarly professionalise their approach. The first stage in this is to create clear ownership of the problem. It cuts across many functions of a business – brand protection, legal, supply chain, corporate affairs, marketing, ESG, strategy and product innovation. So, who in the organisation is taking primary ownership? Who is making it their business to crack down on the problem, with accountability and KPIs?
This involves ensuring you
- Understand how illicit trade impacts your markets, channels and brands, thereby defining the size and nature of the issue
- Define your strategy and establish senior ownership
- Make the necessary changes to the business and operating model
Once this is in place, it helps to look at the issue across the three key drivers that criminals are motivated by. They are led by the profit opportunity (the price differential between illicit and genuine goods combined with the size of the market); the chances of being caught (professional, well-informed, well-funded and empowered law enforcement); and punishment (subsequent penalties).
Considering the issue across these drivers helps develop a holistic strategy to tackle the issue.
A key overlay is making partnerships that you can leverage in the short and medium term to support your approach. These could include:
- Consumer groups to educate consumers on the risks associated with illicit goods and subsequently reduce demand. In many cases, consumers see illicit trade as a victimless crime, and are unaware of the dangers and damage caused by the trade in illicit products
- Policy makers to ensure appropriate deterrents and punishments are in place for illicit traders and those acting as facilitators as well as empowering the correct actions by law enforcement agencies
- Law enforcement for the sharing of actionable intelligence to increase the likelihood of enforcement
- Data and Technology providers to understand the nature of the problem and design solutions to address it
- Suppliers and distributors to prevent unwanted entry and exit to your supply chain and remove illicit traders’ profit opportunity
Much of your approach will also be determined by whether you look at the issue through a competition lens or an ESG lens. If it’s the former – regarding illicit trade as in fact another competitor to your business – then the focus will rest on making it harder for the criminals to do business, working harder with law enforcement to give them intelligence that enables them to investigate and take action. It can also lead to interesting forms of product innovation that directly compete against illicit goods as well as traditional competitors. If it’s the latter – regarding illicit trade as a threat to your ESG commitments and reputation – then you may focus on tightening up your supply chain, rooting out weak links and making it harder for criminals to source cheap labour or materials or divert products along the way. This is important as new channels open up (e.g. moving goods into countries where there are sanctions, like Russia) which can lead to negative reputational and financial outcomes.
Significant gains to be made
This is not a battle that can’t be won. For example, the tobacco industry has implemented an EU-wide law enforcement accessible track and trace system; pharmaceutical and retail operators are increasingly using technology-enabled tracking and tracing systems to secure their supply chains; luxury goods manufacturers are using AI to help identify IP-infringing products sold across online marketplaces. Meanwhile, local and international law enforcement agencies are sharing more data and intelligence on the movements of precursor materials that may be used in the illicit manufacture of consumer goods.
The organisations that redouble their efforts and regard illicit trade as a threat to be tackled strategically can make significant gains. KPMG’s anti-illicit trade experts can help you address the challenges you face – taking the battle to the criminals and protecting both profit margins and the consumers of your products.
If you are facing these challenges, speak to us today to find out how we can help.
