IPR crimes in the EU¹

¹

How can we define the concept of the intellectual property? Intellectual property refers to creations of the mind: inventions; literary and artistic works; and symbols, names and images used in commerce. Intellectual property is divided into two categories:

Industrial property includes patents for inventions, trademarks, industrial designs and geographical indications.²

Copyright covers literary works (such as novels, poems and plays), films, music, artistic works (e.g., drawings, paintings, photographs and sculptures) and architectural design. Rights related to copyright include those of performing artists in their performances, producers of phonograms in their recordings, and broadcasters in their radio and television programs.³

Intellectual property rights (hereinafter: IPRs) protect intangible assets, allowing creators, inventors and artists to profit from their creative and innovative activities.⁴  IPRs are a form of personal moveable property that are often described as being “incorporal” as they cannot be seen or touched. Intangible assets account for more than half the value of companies, and their importance is growing. In a world where EU companies are increasingly competing on innovation, creativity and quality, intellectual property (‘IP’) is a powerful tool for growing the competitiveness of all companies, including small- and medium-sized enterprises (hereinafter: SMEs).

IPRs are today the most valuable assets of modern businesses, especially in developed economies such as the EU. These rights, principally trade marks, designs, patents, and copyrights, but also IP related instruments such as company names and domain names, are vital to the development of SMEs as well as to big companies. However, the important economic role of IP rights is being undermined by counterfeit goods and illegal downloads of music, videos, games and computer programs. This illegal activity is growing and is enriching international criminal organisations who are also involved in the drugs trade, modern slavery and other crimes. In spite of the gravity of this issue and its importance to the economic wellbeing, and health and safety of citizens, seizures of IP infringing goods both at the EU border and in Member States have dropped. At the same time counterfeiting and piracy has grown. This is an international problem requiring close coordination between EU agencies and authorities, international organisations and national enforcement officials in the EU and beyond. Even though progress has been made in this respect, IP crime has a low priority for enforcement authorities and there are also legislative obstacles and issues with data sharing.

Counterfeiting is a global phenomenon

Counterfeiting and piracy are terms used to describe a wide range of illicit activities related to intellectual property rights infringement. As the value and the usage of intellectual property rights continue to expand, the incentives for economic agents, other than the original innovators, to infringe these rights has increased hand-in hand.

Counterfeiting and piracy are lucrative criminal activities, while at the same time generating relatively low detection risks. Criminal sentences for counterfeiting are also considerably lower than for many other criminal activities, such as drug trafficking. Moreover, several EU Member States have in recent years decreased their focus on fighting IP crime, in favour of other criminal activities that are deemed more serious and harmful, such as drug trafficking, migrant smuggling, trafficking in human beings, and terrorism.⁵  Often perceived as a victimless crime, for many law enforcement authorities in the EU, IPR crimes are not among their top priorities.

Terrorism, cybercrime, migrant smuggling, drug trafficking, and other areas of criminal activity have all moved centre stage in the global law enforcement environment and IPR crimes have become less of a priority, as evidenced by the absence of IPR crime among the priorities in EU’s 2017 Serious and Organised Crime Threat Assessment (SOCTA). However, IPR crime is still one of the most lucrative criminal enterprises, and it continues to be closely linked to other criminal activities.⁶

The role of organised criminal groups

Low penalties render IPR crime attractive to criminals with the prospect of punishing a defendant with an extremely low penalty. Abundant value, lenient sentences and high returns on investment, define the incentives for organised criminal groups (OCGs) to engage in counterfeiting activities.⁷  The production and distribution of counterfeit products are alleged to be associated with wider criminal acts, including fraud, tax fraud and trafficking in human beings.

There are a number of distinct incentives for OCGs to engage in counterfeiting activity. First and foremost is the potential return on investment, which, as has been suggested, can be greater than those returns gained on any other illegal activity, including the sale of illicit drugs. OCGs linked to IPR crime are often poly-criminal, and are also engaged in other crimes, such as drug trafficking, excise fraud, human trafficking and money laundering. Document fraud and corruption continue to greatly facilitate criminal activities in this area.⁸

Counterfeiters are no longer only involved in producing fake luxury items. Instead, driven by cheaper production methods and improved technology, a wide range of everyday goods are counterfeited nowadays. With cheaper production methods and improved technology, counterfeiters have moved into the production of everyday goods, including for example medicines, shampoo, toothpaste, cosmetics and batteries for laptops and mobile phones, car parts, food and drinks, pesticides, pharmaceuticals and toys. Any product with a brand that has value can be, and is, targeted for counterfeiting. This increasingly wide range of counterfeit goods not only has significant negative economic consequences, but also impacts on the health and safety of consumers and can damage the environment.

Provenance economies

A provenance economy is an economy detected and registered by a reporting customs agency as a source of an item that has been intercepted in violation of an IP right, whatever the amount or value concerned.⁹  Put differently, a provenance economy refers to both those economies of origin where the actual production of infringing goods is taking place, as well as those economies that function as ports of transit through which infringing goods pass on route to the destination economy.

Customs seizures statistics indicate that some provenance economies tend to dominate global trade in counterfeiting and piracy. On average, most interceptions originated from a small group of economies. These include China, Hong Kong (China), the United Arab Emirates, Turkey, Singapore, Thailand, India and Malaysia.¹⁰

The third highest country of provenance from the EU aspects is Turkey according to the external border seizure statistics. Ready-to-wear clothing constantly topped seizures of Turkish provenance by unit volumes, but the country also shipped large volumes of counterfeit labels, tags and stickers, frequently to the same EU Member State to which the clothing was sent.

Seizures of Turkish provenance are increasingly likely to be lower unit volume consignments, intercepted in higher frequency, most probably sent as small packages. Small shipments are clearly a way to avoid detection and minimise the risk of sanctions. Checking and detaining them raises costs for customs and, consequently, introduces additional significant challenges for enforcement authorities. For enforcement authorities, postal and express shipments containing counterfeit products tend to be more difficult to detect and to detain. Consequently, the use of e-commerce for facilitating counterfeit commerce imposes an additional significant burden on enforcement authorities.

Trade routes of counterfeit goods

Counterfeiters often use complex trade routes to transport their goods from the country of provenance to the destination markets. Albania, Morocco and Ukraine are key transit points for the large number of counterfeit goods coming from Asia into the EU.¹¹  Free Trade Zones have in recent years been identified as key locations for criminals engaged in counterfeiting. They provide exemptions from duty and taxes, simpler administrative procedures and the duty-free import of raw materials, machinery, parts and equipment.

In terms of number of seizures, postal transport remains the most common, although this has been decreasing significantly since 2014. In recent years there has been a strong increase in express transport, both in terms of number of seizures and number of seized articles. Customs seizures at EU borders illustrate the growth in small parcels as a means of distributing counterfeit items directly to consumers, mimicking developments in the legitimate economy. This is directly related to the growth in online marketplaces selling counterfeit items directly to the customer.

Shipment of counterfeit goods to the EU still occurs largely by commercial movement of goods in bulk. Bulk shipments of counterfeit goods continue to remain the most significant delivery mode for counterfeiters from third countries. Nevertheless counterfeiters employ a range of practices to evade capture of their goods. Fake goods arrive in large quantities in containers and are sent further in small parcels by post or courier services. By using high volumes of small packages instead of shipments in bulk, they try to evade the interception of a large number of their goods.

Small shipments are clearly a way to avoid detection and minimise the risk of sanctions. Checking and detaining them raises costs for customs and, consequently, introduces additional significant challenges for enforcement authorities.¹²  Another common modus operandi to avoid the detection of counterfeit items is to label the goods as being ‘in transit’ instead of labelling their destination, as this decreases the likelihood of an inspection by customs authorities.

Conclusions

The protection of Intellectual Property Rights is crucial for an economy as it is essential to establish an investment-friendly environment that allows innovations and promotes the growth of an economy. Besides, investors, manufacturers and traders need a reliable system of intellectual property rights.

Trade in counterfeit and pirated goods is a very dynamic and constantly changing phenomenon. The risk/benefit relationship is heavily weighted in favour of counterfeiting. The incentives to counterfeit are favourable (high profits, relatively light punishment). Lenient sentences and high potential returns on investment render IPR crime attractive to criminals with the prospect of punishing a defendant with an extremely low penalty. Terrorism, cybercrime, immigrant smuggling, drug trafficking, and other areas of criminal activity have all moved centre stage in the global law enforcement environment and IPR crimes have become less of a priority.

Counterfeiters are no longer only involved in producing fake luxury items. Instead, driven by cheaper production methods and improved technology, a wide range of everyday goods are counterfeited nowadays (for example medicines, food and drinks, shampoo, toothpaste, cosmetics, toys, car parts and batteries for laptops and mobile phones).

Regarding the economies of origin of fake goods in world trade, experiences of the practitioners show that trade routes of counterfeit goods are very complex. Parties that engage in the trade of counterfeit and pirated products tend to ship infringing products via complex routes, with many intermediary points. The transit points are used to facilitate falsification of documents in ways that camouflage the original point of departure, establish distribution centres for counterfeit and pirated goods, and repackage or re-label goods. In addition, while imports of counterfeit goods are, in most cases, targeted by local enforcement authorities, goods in transit are often not within their scope, which means they are less likely to be intercepted.

The use of small shipments (small consignments) for trade in fakes keeps growing. Small parcels can be transported cross-border via sea, road, rail and/or air. These movements can be carried out by individuals. Small shipments, sent mostly by post or express services, are an example of greater trade facilitation; on the other hand, they are also a way for criminals to reduce the chance of detection and minimise the risk of sanctions. The proliferation of small shipments raises the cost of checks and detention for customs and introduces additional significant challenges for enforcement authorities. There is thus a need for co-ordinated examination of law en-forcement authorities in this area.

Jávorszki Tamás, főügyész helyettes, Somogy Megyei Főügyészség