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The scariest things your business isn’t monitoring — Counterfeiting and diversion

November 1, 2019 |

Picture this: You’re traveling in a foreign country and you stop at a street vendor to look at what they’re selling. You notice some high-end Prada bags at an unreasonably low price, but on closer inspection you notice the shoddy workmanship and incredibly subtle difference in the logo. It’s obviously a fake.

Now imagine this: You’re in the market for a new phone, so you’re doing some online shopping to see what’s out there. You follow a few too many links and all of a sudden you find yourself on a site you’ve never heard of before, and they’re offering brand new iPhones for a fraction of the cost of anywhere else. It appears to be a legit product, but you know there has to be a catch.

As a consumer, we’ve probably all been in at least one of these scenarios before. You may have even been pretty tempted to make the purchase (despite the red flags) and save yourself a ton of money. But as a business owner or employee who works for one of the companies that makes the real versions of these products, this can be one of the most terrifying things to discover.

It’s easy to think, “Prada and Apple are doing just fine. My company isn’t nearly that large, so why would any scammers target us?” That’s just the thing—it can happen to anyone. Almost any product is susceptible to these scams, from clothing and beauty products to electronics and pharmaceuticals.

No doubt your company has spent many years and pumped countless dollars into the R&D and marketing of your unique line of popular products. A business’ brand is one of its most valuable assets, which is why it can be so devastating to find out that someone has been leeching off your hard work.

You have patents, trademarks, and other securities in place, but none of it seems to be working. So, what can you do to stop these heinous acts of counterfeiting and diversion? Quite a lot, actually. But before we dive into how to combat these issues, it’s important that we fully understand them first.

What are counterfeiting and diversion?

Counterfeiting is a lot like identity theft. Commercial counterfeiting is when a good is made or sold using another company’s brand name without permission. These “knockoff” goods are made to seem identical to the real product for the sole purpose of tricking consumers into buying the fake product, which is usually of a lesser quality compared to their legitimately trademarked counterparts.

Diversion refers to the act of selling goods through a distribution channel or in an area of the world that was not intended or authorized by the brand owner. Diverted goods are genuine products, only pirated. Diversion often occurs when a contract manufacturer produces more than the customer ordered and then sells off the excess goods through other channels. It can also occur when a distributor buys a large amount of merchandise and then sells the surplus products elsewhere.

How might they be affecting your business?

On average, counterfeiting and diversion cost U.S. businesses billions of dollars each year. Counterfeit merchandise and product diversion pose significant risks to businesses (and their consumers) in several ways:

  • Product safety: Your potential customers are being tricked into spending their money on low-quality, poor-functioning knockoffs that can result in dissatisfaction or, depending on the industry, bodily harm, illness or even death.
  • Reduced revenue: Counterfeit and diverted products introduce more competition which can lower both your sales and market share.
  • Brand erosion: Consumers that are dissatisfied with the counterfeit items may eventually stop purchasing your products entirely and/or complain to others about it.
  • Warranty and legal liability: Counterfeit products often result in a greater number of warranty claims since consumers feel that it’s still your company’s responsibility to service the knockoff item.
  • Supply chain confusion: Diverted or fake goods can interfere with a brand’s distribution channel, undermining the trust between suppliers and buyers.

What steps can you take to stop it?

Unfortunately, there are always going to be consumers who might be interested in buying a cheaper version of your popular product. Fortunately, there are also several ways companies can combat these counterfeit and diverted goods. These strategies fall into three distinct categories: detection, prevention, and deterrence.

  1. Detection
  • Implement authentication and tracking technologies: Building anti-counterfeit and brand protection into your product packaging allows for traceability and monitoring throughout the supply chain. The gold standard for authentication and tracking technology is GPAS, which we’ll cover in more detail in a little bit.
  • Develop a question tree for consumer call centers: Your consumer call center is the front line of detection for counterfeit products. An experienced customer service agent can use a series of questions to identify knockoff products and where they originated.
  • Conduct audits and inspections throughout your supply chain: To make sure the source of your goods is clean, scrutinize outlets that specialize in discounted goods, conduct regular surprise audits, or do some “mystery shopping” to gather samples of products in different markets to test for authenticity.
  1. Prevention
  • 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: 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: These are two of the strongest steps to prevent counterfeiting, as the more closely controlled your network is the better. Brand owners should audit their packaging solutions and security providers at least twice a year and institute a strict vetting process if manufacturing is outsourced.
  1. Deterrence
  • Include right-to-audit clauses in contracting processes: Establishing that you may conduct unannounced audits at any time will help to deter contractors from conducting illicit product diversions.
  • Take legal action: Legal expertise may be needed to prosecute offenders or seek damages. A legal route will often be a drawn out process but may prove to be successful in the end.

GPAS—What is it, and how does it work?

So, how do you check the authenticity of a product, particularly one sold online? That was the problem that technology giant Hewlett-Packard aimed to solve with GPAS. The Global Product Authentication Service (GPAS) is an innovative and comprehensive cloud-based brand protection, track-and-trace consumer engagement service that addresses challenges relating to product counterfeiting and diversion.

GPAS integrates digital authentication and tracking technologies into product packaging using cryptographically secure codes such as QR Codes and Data Matrix Codes. With its numeric code encryption engine, GPAS creates huge batches of numeric codes that gives businesses the ability to uniquely identify and track individual products. Moreover, customers can scan a product’s code using their smartphone to report and gain instant verification of a product’s authenticity. Sounds pretty great, right?

Protect your brand with GPAS from Lofton

Now that you’re aware of the rampant issues with commercial counterfeiting and diversion, you’ll want to begin to implement a comprehensive strategy that incorporates detection, prevention, and deterrence measures to limit any fraudulent activity throughout your supply chain.

Are you worried that your company may be losing money due to counterfeiting and diversion of your products? Lofton Label is proud to be the only label and packaging provider in the Upper Midwest to offer GPAS. 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.


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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.

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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.

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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.

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3TG-Conflict Minerals

Supplier Requirement: Please complete the most recent Conflict minerals Reporting Template found at:

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.

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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.

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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.

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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.

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