Counterfeiters Innovate Too
As Cisco’s Global Threat Analyst, my job is to look for what is changing around the world, and to explain why my colleagues in the Information Communications Technology (ICT) industry should care. Recently, I sat down with brand protection and anti-counterfeiting specialists to hear about what is changing in their line of work. They gave me a lot to think about.
Why Counterfeiters Are Changing
As losses from high-tech counterfeiting have climbed in recent years, companies have made anti-counterfeiting technologies an integral part of the design process. Many of these technologies have been effective, forcing counterfeiters to develop creative new ways to stay in business. In fact, the sheer level of sophistication in high-end ICT equipment has pushed it beyond the level of garage tinkerers and mere label-changers.
Another factor changing the counterfeiting business is the state of the global economy. Difficult economic times are forcing technology buyers to prioritize price, and in some cases this unknowingly leads them to the counterfeit market.
In addition, tech companies are expanding cooperation with global law enforcement agencies. These agencies—sometimes located in markets where intellectual property laws are less developed—are continuing to acquire the technical capabilities they need to more effectively combat this type of crime.
Some countries are also beefing up anti-counterfeiting laws. As an example, in the United States, the National Defense Authorization Act (HR1540) was signed into law on 31 December 2011. This act contains a provision requiring defense contractors to actively monitor their supply chains for counterfeit components. It also increases penalties for vendors of counterfeit parts destined for military use, and requires the Department of Homeland Security to conduct stepped-up inspections of parts imported from countries previously found to have been the source of counterfeit parts.
How Counterfeiters Are Changing
Here are some trends that brand protection and anti-counterfeiting specialists are seeing in response to this tougher environment:
• Sophistication: Because of the expertise required to thwart anti-counterfeiting measures—and the large-scale profit potential—the high-tech counterfeit market is becoming the domain of organized criminal groups over individual profiteers.
• Warranty abuse: Counterfeiters “wash” counterfeit equipment through abuse of a manufacturer’s return and warranty programs by sending a counterfeit piece of equipment back to the manufacturer in exchange for genuine equipment, which can then be sold at a profit.
• Counterfeit upgrades: A genuine item may have new software loaded onto it to make it appear to be an enhanced version. Similarly, hardware may be modified to give units the look of higher priced products.
• Hiding in plain sight: Traditionally, counterfeit products have been marketed at large discounts relative to genuine devices. Some criminal organizations are now trying to hide by selling at average market prices. They may also group lower-end counterfeit items with genuine, high-end products.
• Moving up the product value chain: In the past, criminals often focused on older or even end-of-life product lines that were lower cost and less aggressively monitored. As anti-counterfeiting efforts begin protecting those product lines better, criminals are moving up the product value chain.
Why You Should Care
Industry estimates of counterfeit losses vary wildly. However, most estimates put industry losses in the tens of billions of US dollars annually. That’s a staggering amount.
Reasons to care are not only quantifiable in monetary terms. Counterfeit components can create safety hazards and increase downtime and servicing requests, particularly if used in critical networks. These problems increase legal and brand risk as well. For technology companies with customers operating critical infrastructure, staying ahead of counterfeiters requires experts to innovate, and innovate again.