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The 3 Strategies Brands Need to Combat Product Counterfeiting and Diversion

April 30, 2019 |

The fraudulent practices of commercial counterfeiting and diversion cost U.S. companies billions of dollars each year. Fake and diverted goods harm legitimate manufacturers, causing them to lose revenue as well as consumer trust and goodwill. They also pose risks to public safety. Superficial products made with cheap materials and shoddy workmanship may break, fail, or in the case of counterfeit pharmaceutical products, even cause illness or death.

There’s no shortage of consumers who might be interested in buying a cheaper version of a popular product, but there are also several ways manufacturers can limit their exposure to knock-off and diverted goods. These approaches fall into three categories: detection, prevention, and deterrence.

1. Detection: Discovery and Authentication

Develop a question tree for consumer call centers

Your customer call center is the front line of detection for counterfeit products. An experienced customer service agent can use a question tree to identify counterfeit products and where they came from. Ask targeting questions such as:

  • Where did you buy the product?
  • Did you normally buy your product there?
  • How much did you pay for it?
  • Was the price lower than what you would expect to pay for it?
  • Was the packaging different from what you would normally purchase?
  • Was there anything different about the size, color, text, or condition?

Conduct audits and inspections throughout your supply chain

To protect your supply chain, make sure the source of your goods is clean. Scrutinize outlets that specialize in discounted goods and ensure distributor compliance. Conduct regular surprise audits or inspections on members of the distribution chain and even foreign manufacturers to ensure that no “ghost shift” manufacturing is taking place. Brands may also do some “mystery shopping” to gather samples of products in different markets to test for authenticity, and to determine the source of any counterfeit goods.

Implement authentication and tracking technologies

Building anti-counterfeit and brand protection into your product packaging and design allows for traceability and monitoring throughout the supply chain. These technologies might come in the form of scannable codes, radio-frequency identification (RFID), or ID numbers built into the product design.

The gold standard for authentication and tracking technology is GPAS, the Global Product Authentication Service, developed by HP. GPAS initially protected HP’s supply chain, the 9th largest in the world, and has since been extended to the external market. Capabilities of a system like GPAS include:

  • Unique identification of products with cryptographically secure codes
  • Full supply chain traceability and visibility
  • Automatic alerts to monitor and prevent grey market activity
  • Validation of products during movement of goods
  • Information about the factory of manufacture, date of manufacture, batch, etc.
  • Advanced consumer engagement and business analytics

In a 2014 best practices and industry benchmarking survey, researchers found that “73 percent [of responding manufacturers] continually review technologies for authentication / tracking applications.” Most of these manufacturers see a benefit from implementing these technologies, with “77 percent stating that customer trust had increased through better brand integrity and 69 percent acknowledging customer safety as a benefit.”

2. Prevention: Education and Obstruction

Make your product difficult to replicate

Unique product attributes in packaging, design, or customer experience can make it difficult for counterfeiters to copy your product. Consider using a unique finishing effect, ink, labeling system, or material to make it easy for consumers to detect fraudulent goods.

Educate retailers and consumers

Education can go a long way toward assuring consumers are aware of counterfeit markets and the consequences of ignoring them. A product awareness program can help educate retailers and consumers on products that are susceptible to counterfeit. For example, luxury good and pharmaceutical manufacturers have posted tips and visual aids on their websites to help consumers distinguish between real and fake products.

Contract with a single solution provider for security and/or packaging

“Contracting with a single security solution provider and purchasing from a single packaging and components supplier are two of the strongest steps to prevent counterfeiting,” according to the FMI / GMA Trading Partner Alliance survey. “A closely controlled network of people that maintains confidentiality, security that understands a product, brand, and company’s overall anti-counterfeit policies is critical.” Brand owners should audit their packaging solutions and security providers twice a year and institute a strict vetting process if manufacturing is outsourced.

3. Deterrence: Punishment and Threat of Punishment

Include right-to-audit clauses in contracting processes

Establishing that you may conduct unannounced audits at any time will deter contractors from conducting illicit product diversions. These audits could include compliance with supply and distribution agreements, security camera footage around warehouses and shipping areas, and processes for handling returned, damaged, or expired merchandise.

Take legal action

Legal expertise may be needed to prosecute offenders or seek damages. A legal route will often be drawn out but may prove successful in the end. For example, in 2001, the clothing maker Levi Strauss won a three-year court battle against Tesco, preventing the British supermarket chain from selling the brand-name jeans unless they were purchased from authorized distributors from inside the European Union. The High Court banned Tesco from importing low-cost, diverted jeans from America. In cases of illicit criminal counterfeiting, law enforcement agencies such as the Department of Homeland Security (DHS), Federal Bureau of Investigations (FBI), or Immigrations and Customs Enforcement (ICE) may need to be contacted.

Protect your brand with GPAS from Lofton

In order to deal with issues relating to commercial counterfeiting and diversion, you want a comprehensive strategy with detection, prevention, and deterrence measures to limit any fraudulent activity throughout your supply chain. Here, we’ve listed some initial actions you can take to begin to understand and combat the problem.

Are you worried that you may be losing money due to counterfeiting and diversion of your product? Lofton Label is proud to be the only label and packaging provider in the Upper Midwest to offer GPAS – a cloud-based brand protection, track-and-trace, and consumer engagement service aimed at ensuring that each of your products is traceable and authenticated. Contact us today to start developing your custom security solution.


Registration, Evaluation, Authorization, and Restriction of Chemicals (REACH)

Supplier Requirement: Provide a statement of compliance to current REACH regulations. If there are items provided that are out of compliance please list the item number, the substance, and the concentration (w/total w)%. REACH is a regulation of the European Union that addresses the production and use of chemical substances and their potential impacts on both human health and the environment by requiring companies to communicate information on chemicals up and down the supply chain. All companies manufacturing or importing chemical substances in the European Union in quantities of one metric ton or more per year are required to register these substances with a European Chemicals Agency to ensure that manufacturers, importers, and customers are aware of information on the health and safety of the products supplied. Under REACH, no item may exceed 0.1% by weight threshold of any chemical substances listed on REACH’s SVHC (substances of very high concern) (this list is accessible at the link below). Products exported to the EU must be in full compliance with REACH. However, items defined as “articles” (objects that during production are given a special shape, surface or design that determines its function to a greater degree than does its chemical composition) in REACH are exempt from registration.


For more information on REACH, visit https://www.hse.gov.uk/reach/about.htm


Restriction of Hazardous Substances (RoHS) Directive

Supplier Requirement Please provide a declaration stating compliance to current RoHS directive standards. If necessary list the nonconforming item numbers, the chemical, and its concentrations.

The Restriction of Hazardous Substances (RoHS) directive aims to restrict certain hazardous substances commonly used in the manufacture of various types of electronic and electrical equipment, which links it with the Waste Electrical and Electronic Equipment Directive (WEEE) 2002/96/EC. The hazardous substances under RoHS, which any RoHS-compliant component is tested for, are lead (Pb), mercury (Hg), cadmium (Cd), hexavalent chromium (Cr^8+), polybrominated biphenyls (PBB), polybrominated diphenyl ether (PBDE), bis(2-ethylhexyl) phthalate (DEHP), butyl benzyl phthalate (BBP) dibutyl phthalate (DBP) and diisobutyl phthalate (DIBP). The maximum permitted concentrations of these substances in products subject to RoHS compliance are 0.1% or 1000 parts-per notation (ppm) by weight, besides cadmium, which is 0.01% or 100 ppm. Businesses that sell applicable or electronic products, equipment, sub-assemblies, cables, components or spare parts directly to RoHS-directed countries, or sells to resellers, distributors or integrators that in turn sell products to these countries, are impacted if they utilize any of these (10) restricted substances.

For more information on RoHS, visit https://www.rohsguide.com/


California Proposition 65

Supplier Requirement: Please provide a declaration stating compliance to current Proposition 65 standards. If necessary list the nonconforming item numbers the chemical, and its concentrations.

Proposition 65, officially known as the Safe Drinking Water and Toxic Enforcement Act of 1986, is administered by California/EPA’s Office of Environmental Health Hazard Assessment (OEHHA) to protect California’s drinking water sources from becoming contaminated with toxic chemical substances known to cause cancer and birth defects. An official list of such substances is made publicly available showing regulated substances’ known risk factors, a unique CAS chemical classification number, the date they were listed, and, if so, whether they have been delisted. The first requirement of Proposition 65 prohibits businesses from knowingly discharging listed substances into drinking water sources, or onto land where the substances can pass into drinking water sources. The second requirement prohibits businesses from knowingly exposing individuals to listed substances without providing a clear and reasonable warning. Ultimately, the law requires companies to notify California about significant amounts of chemicals in products they manufacture; not to control what businesses are putting in their products, but to allow Californians to make informed choices about the products they buy and use.

For more information on California Proposition 65, visit https://oehha.ca.gov/proposition-65


North American Free Trade Agreement (NAFTA)

Supplier Requirement: Please provide either a NAFTA Certificate of Origin or a Manufacturer’s Affidavit that declares the HTS designation and the Country of Origin.

The North American Free Trade Agreement (NAFTA) is an agreement signed by Canada, Mexico, and the United States that aims to reduce or eliminate barriers to trade and investment (i.e. non-tariff trade barriers) and to protect the intellectual property rights on traded products. Under NAFTA, producers may export their goods to customers in Canada or Mexico duty-free as long as the goods are comprised of mostly U.S. components. To certify that goods qualify for preferential tariff treatment accorded by NAFTA, a Certificate of Origin must be completed legibly and in full by the exporter and must be in possession of the importer at the time the declaration is made. This document may also be completed voluntarily by the producer for use by the exporter. Exporters who are not producers often request that their producers or distributors provide them with a Certificate of Origin as proof that the final good, or an input used in the manufacture of the final good, meets the rules of origin for exportation to Canada or Mexico. NAFTA does not obligate a producer who is not an exporter to provide the final exporter with a Certificate of Origin. However, if the non-exporting producer does complete the Certificate of Origin, they are subject to the same obligations regarding record.

For more information on NAFTA compliance, visit https://www.cbp.gov/trade/nafta


3TG-Conflict Minerals

Supplier Requirement: Please complete the most recent Conflict minerals Reporting Template found at: http://www.responsiblemineralsinitiative.org/conflict-minerals-reporting-template/?

The term “Conflict Minerals” refers to minerals and other derivatives mined in the Democratic Republic of the Congo (DRC) and in adjoining countries where revenues from mining may directly, or indirectly, finance armed groups engaged in civil war, resulting in serious abuses of human rights. To hold companies accountable for buying raw materials from these areas that aid corrupt militias, and to mitigate the chance that the minerals purchased by companies are funding military conflict, the U.S. Dodd-Frank Financial Reform Law was passed in 2010. The law requires U.S. publicly traded companies to evaluate their product lines to determine whether they contain any “conflict minerals”, and if they do, to disclose any of the minerals necessary to the functionality or production of products they manufacture or contract to the manufacture. The minerals covered by this law (collectively referred to as “3TG”) are tantalum (Ta), tin (Sn), tungsten (W) and gold (Au). Companies using such minerals must also disclose their supply chain inquiries to verify whether these minerals originated in the DRC or adjoining countries.

For more information on 3TG Conflict Minerals, visit http://www.responsiblemineralsinitiative.org/about/faq/general-questions/what-are-conflict-minerals/


CONEG-Toxics in Packaging Legislation

Supplier Requirement: Please certify that materials provided to Lofton Label Inc. comply with the Coalition of Northeastern Governors Toxics in Packaging Legislation.

The Toxics in Packaging Legislation was established by the Coalition of Northeastern Governors (CONEG) to reduce the amount of lead, cadmium, hexavalent chromium and mercury in packaging and to keep packaging components from entering landfills, waste incinerators, recycling streams and ultimately the environment. The law requires manufacturers to certify that none of the regulated metals were intentionally added to any products during the manufacturing process, and that the sum of the incidental concentration levels present in any product does not exceed 100 ppm by weight (CONEG model limit). The law also requires certificates of compliance to be completed by manufacturers and furnished to state agencies (and to the public upon request), but does allow for certain exemptions that must be approved by individual states. This law is desirable because manufacturers that comply with regulation meet the growing consumer demand for eco-friendly products, while minimizing the hazardous impact of products upon the environment and society.

For more information on CONEG Toxics in Packaging Legislation, visit https://www.bureauveritas.com/services+sheet/toxics-in-packaging_14479?presentationtemplate=bv_master_v2/Services_sheet_full_story_presentation_v2


Statement identifying any instances of BPA

Supplier Requirement: Please provide a declaration indicating that products provided to Lofton are BPA-free.

Bisphenol A (BPA), a building block of several important polymers and polymer additives used in the production of polycarbonates, is widely used in manufacturing polycarbonate plastics and epoxy resins used in nearly every industry. BPA is suspected to have adverse health effects as a reproductive, developmental and systemic toxicant that is weakly estrogenic, giving it a potential to impact children’s health. There has also been environmental concern over the risk posed by BPA leaching into landfills and bodies of water, consequently affecting the food chain. Due to the various risks associated with BPA, registrants of BPA must demonstrate the safety of BPA and BPA-based materials for human health and the environment. Downstream users must inform registrants about the way they use BPA, to allow registrants to prepare a realistic exposure scenario for each specific use of BPA. Regulations concerning BPA continue to evolve as governments at every level attempt to address public concern and take varying scientific assessments into account.

For more information on BPA and statements identifying any instances of BPA, visit https://www.epa.gov/assessing-and-imagining-chemicals-under-tsca/risk-management-bisphenol-bpa


Statement identifying any instances of Natural Rubber Latex

Supplier Requirement: Please provide a declaration letter identifying that no natural rubber latex or synthetic rubber latex is found in any of the items provided to Lofton.

According to FDA regulation, labeling statements that include the latex content of the product packaging as well as the product itself are required on products containing latex, since repeated or prolonged exposure to natural rubber latex can result in the development of allergies or sensitivity to natural rubber latex, generally in the form of skin-site reactions. If latex is present in production, the extent to which natural rubber latex is used in the manufacture of the product must be defined. In light of the concerns surrounding latex, some manufacturers have taken to labeling products as “latex-free” or indicating that the product “does not contain natural rubber latex”. However, this labeling suggests that products are completely without natural rubber latex, which is problematic because (1) there is always a chance that products were contaminated with latex allergens during the manufacturing process, and (2) the FDA is unaware of any test method capable of detecting and confirming the complete absence of latex proteins capable of causing allergic reactions. The statement “not made with natural rubber latex” should be used only if neither natural rubber latex nor synthetic natural rubber latex derivatives were used to manufacture a product. Qualifications are necessary if the product, its packaging or its container use natural rubber latex or its derivatives. In such cases, the manufacturer should state which component is not made of natural rubber latex. Products currently labeled with “latex-free” statements should update their labeling to adopt FDA’s recommendations.

For more information on Natural Rubber and Latex and statements identifying any instances of Natural Rubber and Latex, visit https://www.raps.org/regulatory-focus™/news-articles/2014/12/does-this-product-contain-latex-fda-adopts-new-labeling-recommendations