LPRC - CrimeScience Episode 48 – Product Counterfeiting and Corporate Crime ft. Dr. Jay Kennedy (Michigan State University)

Episode Date: May 18, 2020

In this episode, we talk with Dr. Jay Kennedy, Assistant Professor jointly appointed to the School of Criminal Justice and the Center for Anti-Counterfeiting and Product Protection. Dr. Kennedy’s work has been published in a number of outlets, including American Behavioral Scientist, Criminal Justice Review, Journal of Crime and Justice, Journal of Financial Crime, Security Journal, and Victims and Offenders. Tune in to listen to our discussion on what product is counterfeited and why, brand protection, employee theft, corporate crime, and supply chain issues. The post CrimeScience Episode 48 – Product Counterfeiting and Corporate Crime ft. Dr. Jay Kennedy (Michigan State University) appeared first on Loss Prevention Research Council.

Hi, everyone. Welcome to Crime Science. In this podcast, we aim to explore the science of crime and the practical application of the science for loss prevention and asset protection practitioners, as well as other professionals. Co-host Dr. Reid Hayes of the Loss Prevention Research Council and Tom Meehan of ControlTech discuss a wide range of topics with industry experts, thought leaders, solution providers, and many more. We would like to thank Bosch for making this episode possible. Use Bosch Camera's onboard intelligent video analytics to quickly locate important recorded incidents or events. Bosch's forensic search saves you time and money by searching through hours or days of video within minutes to find and collect video evidence. Learn more about intelligent video analytics from Bosch in zones one through four of LPRC's zones of influence by visiting Bosch online at boschsecurity.com. Welcome everybody to another episode of Crime Science, the podcast.

Today we're going to be spending some quality time with Dr. Jay Kennedy, the School of Criminal Justice, as well as ACAP, which we're going to hear a little bit more about at Michigan State University. And we'll tie in a little bit and spend the next few minutes talking about brand protection, anti-counterfeiting, risk management, and what's going on around that. And Jay, just so you know, or if you don't, we work with somewhere between 68 and 70 major retail chains in the United States and many around the world, and working on their theft and their fraud and their violence issues. And many carry brand name logo apparel or other fine handbags and jewelry, but all types of branded items.

and jewelry, but all types of branded items. And some of our stellar members include Procter & Gamble and Mead Johnson, RB, for example, Cody and Bacardi. So we're used to dealing with a lot of branded merchandise. But I can imagine now, here we are in the midst of this crisis, this pandemic that looks to be genetically have arisen from Asia, from China specifically. And we know that a lot of things that swirl around brands and brand protection, but certainly around the supply chains that many or most of our retailers are at least partly or significantly relying on come out of there. So, Jay, if we could go over and kind of walk through. You gave us a little bit of your background. Kevin got a little bit ago. So we'll talk a little bit about brand protection within the supply chain.

And again, the supply chains are partially open, partially crippled. Some are dark. Some are just starting to grind to open up. But what's your perspective on what's going on with supply chain and what should retailers in this case and law enforcement practitioners that are our partners know and think about brand protection? So that's an excellent question. The supply chain, as you mentioned, has been ground to a halt. If we start from the source economy perspective, and you mentioned China, which is obviously very apt, both from the perspective of legitimate products as well as counterfeit products,

the shutdown of their economy, as we spoke with some of our partners at the center, some of the major brands. They mentioned that they had seen a dramatic reduction in counterfeit goods as well as an impact to their supply of legitimate goods. And so their ability to meet consumer demand was reduced, but at the same time, the threat that was posed to them from counterfeit products was also reduced. And so it was a nice balance, I guess. As that begins to restart, we're going to see this sort of lag where counterfeit goods may not come back on pace with legitimate goods. I think given some of the guardianship that's been put in place in some

of the supply chains, if your readers and your listeners are familiar, a couple of weeks ago, Customs and Border Protection made some major seizures of counterfeit COVID-19 test kits. And the government in general has taken a very strong stance on issues of fraud in this current environment. And so I think they're going to be much more responsive to these issues. But at the same time, consumer demand for goods has not waned, right? People still want the same things. And as disposable incomes may be there, sometimes they might not be there. But for those who do have disposable income, they're going to seek alternatives to traditional

physical stores to get their products. And so in every respect, the supply chain needs to be responsive and attentive to the risks that are there from counterfeit products. Now, the best ways to do that obviously are to practice KYC, know your customer best practices, which we espouse quite a bit, but also just to be very vigilant about the source of the goods that are coming into the supply chain, particularly when we're talking about retail, I'm sorry, intermediary and distributors of goods. But it's also a great time to look at your return to goods process, which is a weakness that we see in a lot of brands and

retail establishments when it comes to counterfeit goods. I thought it was a big point you made there, Jay, talking about that differential, particularly in the interim period between supply and demand. It's everything. That's what economics is all about at the micro and macro level. But the idea that people want or maybe even think they need some of these, particularly luxury, but I understand goes to other brands, which we'll talk about in a minute, or items beyond luxury goods.

But so who's going to fill those demands? And what's that look like as the supply chain of legitimate goods gets geared back up, but the demand for those goods hasn't reached that level, that capacity yet. And let's talk a little bit about counterfeiting, if we could. We'll move around the map a little bit. I apologize up front, but many of us, I can remember originally thinking

when we talked about counterfeiting and brand protection was around luxury goods. My eyes were opened several years ago at a Retail Council of Canada loss prevention conference I was speaking at, and I listened to some attorneys speak that specialized in counterfeiting. Can you tell us a little bit about what kinds of goods are counterfeited and why? Sure. So the going adage that we use is that if you have a product, if you're a brand owner or a company and you have a product that is in demand or it's a good product,

it is at risk for being counterfeited. The only way you can ensure you will not be counterfeited is to have a product that nobody wants. And the best example of this is to say, to ask, you know, when's the last time we saw a counterfeit of the Microsoft Zune, right? We don't see it because no one's looking for it. And so that really gets to the point that every product has the risk of being counterfeited. We have seen half-ton bearings that go into underground mining equipment be counterfeited. Obviously, the luxury handbags, purses, athletic wear, shoes, all that stuff that we know about has been counterfeited. Medication and pharmaceuticals, which people should be very aware of, have been counterfeited. Things that are two-cent item Sharpies have been counterfeited.

If there's an opportunity to make money off of an illicit good, counterfeiters are going to take advantage of it. And it's a very easy economic equation for them to do. Can I produce a product at a cheap enough price that looks good enough to fool that first level, that first buyer into buying this product that will give me a substantial return. And they have an immediate peg in terms of the market price for the item regarding what that cap kind of needs to be. So if the product is selling for $1.50 on the market, it may cost the manufacturer $0.35 to make that item. But if a counterfeiter can make it for, you know, $0.25 and sell it for $1, their margins are much greater, right? And they realize profit and that's all they really care

about. And so we need to be vigilant about every product that's out there. Luxury goods, yes, we typically think of, but in this environment, hand sanitizers, soaps, masks, all those goods that are in high demand right now in short supply create a natural gap into which counterfeiters are going to love to step into. And for retailers and retail organizations who want to be responsive to consumers, it can be very difficult to sort of walk that line and be extra vigilant to take the extra steps while at the same time being responsive and wanting to take advantage of some of the natural opportunities that have developed in terms of new markets or maybe new markets opening up or existing markets expanding. Tell us a little bit about, Jay, if you will, and I dealt with this years ago with a couple of name brand apparel manufacturers, but where there's counterfeiting

and there's counterfeiting or there's illicit production or diversion and things like that where there are items that are actually made at the correct factory. They're made the right way. They're made under license even, but they are an overrun or some other things. Can you tell us a little bit about the dynamics of counterfeiting and other diversion activity, if you would? Sure. and other diversion activity, if you would? Sure. So one of the first things that's really important to remember is that counterfeiting is legally a violation of trademark rights.

So if a company, an individual uses a legitimate registered trademark in a way that the rights holder, the brand owner, that's in violation of their rights on use, if someone uses that mark inappropriately, that's technically counterfeiting. And so the example that you give is spot on. We see this quite a bit, that you've got a legitimate contract manufacturer or contract packager that runs a ghost shift on of a third shift or a fourth shift. And they move product that's in the exact same packaging that looks exactly like the legitimate product, but it's considered counterfeit.

That is a very large problem. It's a problem that GM dealt with a couple of decades ago regarding spark plugs. And one of the most difficult issues that brand owners deal with is that it's so tough to tell the difference between the illicit and the legitimate product. And you usually only notice it when it starts failing. Now that creates burdens throughout the supply chain because if the manufacturer can't tell that it's illicit, then how do other people who are less well-informed of what those cues are on legitimacy and whether products are legitimate or counterfeit, how do those people further down the supply chain

accurately assess whether or not it's counterfeit so that they can pull it off the shelves and be responsive? This is a similar issue that we see with diversion, right? So with diversion, we've got legitimate product that's supposed to go to one market and it gets shifted to another market. And so, you know, brand owners, corporations will, you know, there's different pricing strategies, different things are approved for different markets, given their ingredients or the way they're manufactured, whatever. Country laws will dictate what types of products can be sold in an area. But consumer demand for a product will drive that diversion market. And we see a lot of overlap with counterfeits and diversion regarding the supply chain and how products move.

So while the two things are distinct criminal operations, the avenues through which the products move are pretty much the same. The avenues through which the products move are pretty much the same because both counterfeiters and those who do diversion look to take advantage of weaknesses that exist in the supply chain where they can move products irrespective of what that product is. They're going to lie on the packaging and say it is whatever it is. Nobody's putting counterfeit Nikes on a box and shipping them through airmail. They're putting on whatever they want. And so that label doesn't really matter. The supply chain is victimized at the same time as a brand owner, whether it's diversion or counterfeiting. And to be honest, the harm to the company can be, you know, it can be very similar for either type of good, particularly when it comes down to the financial harm of disrupting a market, disrupting pricing in a market, illicit goods displacing legitimate goods, but also the criminal enterprises that take advantage of counterfeit goods also take

advantage of diversion. And they look to make illicit income through either of those channels because they're both very profitable exercises. Yeah, it's absolutely fascinating. I remember we were on a project years ago with Blades and Razors and literally traveled around the world. I don't remember how many countries I went to. It's a major, major manufacturer, 14 maybe countries in one year. But part of our tour was throughout the U.S. and we were in a major chain that sells blades and razors in one of their distribution centers. I'm there with the manufacturer executives. I'm there with asset protection and loss pension executives from

the big retailer. And the manufacturer experts are saying, okay, here we go. All right. Now this package, this group here, this is legitimate product in counterfeit packaging. Okay. This one here, now this has counterfeit product in counterfeit packaging. So they were going through and identifying in the distribution center, product that was getting ready to be shipped and distributed to the stores, that this is authentic, this is authentic, okay, here. They're pointing this out. And the AP, the asset protection professionals, were not happy, but they weren't surprised. And part of it is the buyers, the merchants get on the wire.

They go to the gray market. They are making deals, mostly licit merchandise. That's where it can is allowed to be, but other times it's not. Any thoughts around some of that, that that happens? Yeah. So that's a, that's a very, very interesting, interesting case. It's great that you got the opportunity to witness that because you see some of the challenges that both sides, the retailer and the manufacturers deal with, right? So finding counterfeit product in legitimate packaging. And you say, why would somebody do that? Why would somebody put counterfeit product in legitimate packaging? Well, because the legitimate stuff

probably got diverted somewhere else, right? Into different packaging. And so you're able to double dip in essence and multiply your illicit revenue. But that's a huge challenge for organizations to detect that. It's great that the loss prevention people from the retail side were there. The loss prevention people from the retail side were there. The question then is, you know, how much learning or how much of a takeaway happened on those visits that would be able to be translated into some type of training opportunity for the retailers? And I think that the example that you gave is a great example of the collaboration that needs to happen between all parties that are involved. And you mentioned earlier your law enforcement partners. And this is something that we really stress at the center is that this is not just a brand owner problem. Yes, product counterfeiting is technically a violation of the brand owner's rights. They're

the ones who are the ultimate victims that have legal standing to bring action in the courts. But this is a problem that involves brand owners, it involves retailers, it involves supply chain intermediaries, law enforcement, it involves consumers as well. And the best way to address that problem is to do exactly what you talked about, which is to share knowledge and information. And that's the real hurdle that we see to having substantial movement and getting guardianship, what we call guardianship, pushed down throughout the supply chain is that collaborative information sharing process. Knowledge is truly power, right? In this case in particular. And I love the use of guardianship and the way you're portraying it. Probably not a lot of our podcasts go by without us discussing what guardianship is and where it is. And in fact, just so you know, one or two episodes ahead of this one, Jay Marcus Felsen's on there and we're

talking about guardianship. And two episodes ahead of that, we've got Ron Clark on there. So we've got two, I'm a criminologist and we're all talking about guardianship and we continue today with you. So that's... Well, I got to say, if you're putting me up against Marcus Felsen and Ron Clark when it comes to guardianship, I have to defer to those experts and say that I am standing very much in the shadow of greatness when it comes to those two gentlemen. And I would add that it's to the contrary. I mean, I think that would warm their hearts, and it will when they dial in and tune in here that you are properly and appropriately extending the use of the guardianship concept. And I think that in the case that we just talked about, the LP executives go back, they're trying to work on a model program and ethics and things like that with the buying team. The buying team's under pressure to get the product that's in high demand and need

and at the best margin so the retailer can stay in business. And so there's that kind of pressure, if you will, or priority to do that. And then they have to weigh and balance that against paying more per unit, but knowing its first quality, it's legitimate, and that there's no license violations going on here. But I had another opportunity I was going to run by you where we were working with a company out of Iceland, a major retailer, if you will, out of Iceland. And they had purchased a name brand Blue Jean. Okay. And so that denim and I guess a representative of that international company

happened to visit the store, saw it and realized that this product had not come through legitimate distributor in Europe, which is where it should have come. And so there was this long drawn out year long, you know, situation where they were trying to figure out, well, you know, you must've got that. That must be counterfeit. Well, they couldn't identify, but they looked at the grommets and the label and the thread and the material

and the dye and everything. Well, there there's components in there they weren't sure of their origin it was it was a wild situation did it come out of mexico no we don't make anything in mexico and then later another example well actually we do sometimes assemble components there uh no we don't yes we do sometimes we actually fully you know produce so it's not always as clear as it maybe could or should be, but a very interesting world you're in. Yeah, there is never a dull moment. And it never ceases to amaze us, the ingenuity and the entrepreneurial mindset of product counterfeiters. mindset of product counterfeiters. Many of them take their jobs very seriously,

and they will go to extreme lengths to fool consumers, brand owners, retailers, law enforcement. They put effort into what they do, and they innovate. They're responsive and they innovate. That's interesting. We worked with a team out of the Walt Disney World Company looking at counterfeit product that was in flea markets and venues like that, some legitimate, some not. And I learned quite a bit as I watched how they worked and what they looked for and what products were counterfeit or not. And we had undercover teams go in selling another type of product. It was not Disney. And offering it as such, hey, I ripped this out of X store. And some of these flea market, particularly booth operator anyway, oh, I don't care where it came from. Now I where it came from.

Now I know it's legitimate. So they would put that product in front in case they had counterfeit. Now they, hey, I have stolen product, which I know is authentic. I'm okay with that. I don't like the counterfeit. So, but I've seen cases you have too, maybe where the counterfeit packaging of an item is better than the real thing because it's not using recycled materials and things like that. It's just amazing, mind-boggling.

Yeah. I think about the example of – I can't remember the exact name of the company, but it was a couple decades ago. It shows how old this is. But it was an electronics company out of Japan, NEC, N-E-C, I believe it was. And the counterfeiters counterfeited the entire company. And they made products under the company's name that the company itself did not make. And once the whole scheme came down, the company was doing an investigation. make. And once the whole scheme came down, the company was doing an investigation and they found that many of the products that the counterfeiters were manufacturing were really high quality

products. They were really well made. And one of the reasons the scheme was able to persist so long was because the counterfeit company used, basically lifted all of the product warranty and customer service information from the legitimate firm so they could look as much like the legitimate firm as possible. And the legitimate firm didn't get a ton of consumer complaints. The products worked well. So it is really interesting when you see counterfeiters do things that are of very high quality, sometimes of higher quality than the legitimate product. And let's be honest, as consumers, when we look at things, we assume that the company that's making the legitimate product is going to have the best of everything. The packaging is going to be very slick. It's all going to be the highest quality. You know, it's not going to be recycled, you know, content in the fiberboard and the corrugated containers, right? It's going to be really high quality pop, you know, graphics that pop. And

that may not be the case. And that's a big, you know, it's a big disadvantage for us as consumers in that we don't know the ins and out of the covert product protection features that exist on packaging that's used by brand owners. And it's a disincentive for brand owners to make us aware of that because then counterfeiters have that same level of knowledge. Good stuff. So let's kind of, as we walk out of here now, you mentioned the gaps and the opportunities. That's what we see with individuals or crews that are working the angles. And in this case, in the middle of this pandemic, the need for gowns and masks and eyewear and gloves, the PPE, if you will, as well as pharmaceuticals and so forth, and what a dangerous situation this can be.

If it's not, and I'm sure this is pretty rare, we just got through talking about that it's as good or better quality than the original. In fact, I just saw a news story this week where they got a shipment, this hospital got a shipment, and they're putting their gowns on, and they're just shredding. They just come apart. They're obviously very, they're counterfeit, it turns out, and they're very poor quality and dangerous and would have exposed them if they weren't so poorly made. They discovered it right off. But what are things that supply chain managers, purchasing agents, that the loss prevention or asset protection executives,

and of course, law enforcement should know. What are special steps? And they may not be special. It's the same thing that we should be doing. What are ways to guard, to verify the providence and so forth right now? So, you know, one of the best things is to be vigilant. I'm going to go back to your earlier example with the purchasing company, you know, the purchasing arm of the best things is to be vigilant. I'm going to go back to your earlier example with the purchasing company, the purchasing arm of the company, where they've got a mandate to obtain products at a lower price, and they've got certain metrics that they need to meet. Having that conversation internally about the risks that exist and how those may create tension between the metrics that exist in the company. So purchasing, we want you to get these products. We need them

in just a time or a very quick fashion. We need to be cost sensitive, but be on the lookout for these particular things, right? So obtaining products from a supplier or a source, while the deal may look great, but we don't have background knowledge or information on that product or source, right? Understanding the manufacturer, do they sell through distribution and what does their distribution chain look like, right? So certain pharmaceutical companies sell almost exclusively through distribution. And if you talk to the individuals who work in that brand protection function, they may be willing to open up who their distributors are, right? To give you a list or at least to verify if you say, hey, I'm looking to buy from this company. Are they an authorized distributor of yours? Not to say that the product that's coming from someone who's

not an authorized distributor is illegitimate, but the likelihood is greater. So again, that coordination. Looking for signs or cues in payment processes that may be a bit off, right? So are the terms that someone is asking for, if you're not paying through credit card or something like that, if they're paying on terms or on credit, are they normal terms or credit terms that you would expect to see? Looking for other signs that someone, you know, may be operating illicitly. What's the physical address? You know, is it an actual warehouse that it's coming from? Are they the ones who are shipping it or is it coming through another party? Clear signs that on normal

circumstances we tend to look for, but given the current crisis, we're seeing this on the consumer side. I haven't studied it or really investigated on the purchasing side for organizations, but on the consumer side, we tend to satisfy us, right? Well, you know, I normally wouldn't buy from here, but I really, really need that bottle of hand sanitizer, or I really, really need these masks because, you know, my grandma's sick or whatever. And we're willing to make concessions because we want to get access to something that we believe we need. There's nothing wrong with taking a bit more time to make a decision when that decision will ultimately save you time and money on the back end. Or as you mentioned with your example, the protection of people who are on the front

lines. If that hospital had spent another two hours finding a supplier, if they had obviously seen cues that something was illegitimate, they may not have. But if they had taken a little bit more time to be a little bit more proactive in using some of those guardianship techniques, they may have saved themselves a lot of time and money on the back end. And so it's about being rational from that perspective. Fantastic, fantastic. I guess really actually one last question. Law enforcement's having to prioritize, so it's probably difficult to work with some agencies, particularly around the United States, at different levels, the city, county, state, and federal level, depending on how busy they are or the size of their organization, if they have the resources that can work on counterfeiting and diversion. they have the resources that can work on counterfeiting and diversion. But what's it look like right now in the pandemic? Are retailers, or in this case, probably most likely the manufacturers, able to get some attention from law enforcement at the levels? So that's a good question. It's one that we are asking internally here at the center. We have several law enforcement partners, one of them being the National Intellectual Property Rights Coordination Center.

My anecdotal response is going to be that, yes, law enforcement is going to be responsive to this. But as the director of our center mentioned, as we were talking about this before, you know, this is crisis mode for them as well. And as they look to manage their own resource constraints, they're going to have issues. So you think about large departments like Detroit or New York that have seen, you know, the virus spread throughout their departments. That creates resource issues, personnel issues, where individuals who may be dedicated to issues of fraud are pulled off of those cases and put on to more other areas of need within the department. One example to look to and one place to maybe investigate, I think,

would be North Carolina. And if your partners aren't familiar with this, North Carolina has a statewide task force that deals with counterfeit goods and illicit trade. The Secretary of State of North Carolina was actually our brand protection hero last year, and they do a wonderful job coordinating with brand owners, other local agencies, federal agencies. They have prosecutors dedicated specifically to this. I think looking at their workload and the way their mission may have shifted will be a good sign for what's happened, at least at the local level with other departments that are very active, such as Houston, San Antonio, Los Angeles County, those places. But from a federal perspective, I think the mandate around dealing with fraud related to this issue, I think that mandate is going to cause some resources to be put behind these issues. Resources of brand owners, retailers, others who are looking to combat this problem can tap. Excellent. One last thing. How can our listeners learn more about your work, Jay, and ACAP? Sure. So we are always looking to engage

with partners. It's part of our mission at Michigan State University, being that we're a land-grant institution, working to translate our research into practice, finding good partners, the best way to reach us is to go on our website. And it's very simple. It's a-capp.msu.edu. You will find access to a lot of our products. So the research reports that we produce, the white papers, the technical reports, you'll find links to connect to myself and Dr. Jeff Rojack, who's also a criminologist, who's a director of the center, our assistant director for education and outreach, Ms. Carrie Camel, who is an attorney and has practiced in this area. You'll find links to our educational products, which are not only courses, academic courses, but we also have a suite of products that are aimed at brand protection professionals, that are aimed at corporations, that are aimed at individuals

who are in industry, on the ground, who want to learn more about these issues. And they range from very basic courses to advanced courses. You'll also get an opportunity to get access to our journal called the Brand Protection Professional. It's a free online journal that we produce monthly, although we may be moving to a quarterly model, but it is basically voices from the field that address important and relevant topics with regard to brand protection. And again, it's a free resource that anyone can access. So we really welcome engagement. Take a look at the website. If there's something on there that you don't see that you would like more information about, reach out and we'd be

more than happy to answer any questions that any of your partners have. Fantastic. Thank you so much for that. I had the opportunity to speak to you years ago, a beautiful campus and a fantastic university, MSU. So thank you, Dr. Jay Kennedy Day, for your insights and keep you and your family safe. And we look forward to talking and working with you and the team again. And for everybody out there,

thank you for tuning in to another episode of Crime Science, the podcast. Stay safe. And thank you to Kevin Tran, our producer. Thanks for listening to the Crime Science podcast presented by the Law Prevention Research Council Stay safe. And thank you to Kevin Tran, our producer. Thank you.