Counterfeit Goods: Money Laundering in Plain Sight (Part I — the Risks)

Topics: counterfeit, Financial Crime, Financial Fraud & Anti-Money Laundering, Government


This is the first of a new five-part blog series, “Counterfeit Goods: Money Laundering in Plain Sight”, where we will examine how the production, distribution and sale of counterfeit goods enables bad actors to generate and launder illicit proceeds through front businesses.

Part 1: The Spectrum of Risks

Illicit Gains

Counterfeit goods refer to consumer or commercial goods which are “identical with, or substantially indistinguishable from” any form of intellectual property registered with trademarks or their legal equivalent. This includes the goods themselves, as well as labels, marks, wrappers, boxes, containers, cans, cases, hang-tags, documentation or packaging of any type or nature that is “designed, marketed, or otherwise intended to be used on or in connection with the goods.”

It is vital to understand who produces, distributes and sells counterfeit goods to better understand the broad spectrum of risk that it poses. Organized crime groups, both transnational and localized, are heavily involved in the sale of counterfeit goods.

The following groups have all been specifically identified as counterfeit goods producers and/or sellers:

  •         the Italian-American Mafia
  •         the Camorra (Italian organized crime syndicate)
  •         the Triads (Chinese organized crime syndicate)
  •         the Yakuza (Japanese organized crime syndicate)

While these groups are engaged in the sale of counterfeit goods, there is no evidence that other schemes such as narcotics sales, violent crimes or human trafficking cease. Rather, all evidence suggests that the proceeds of other illicit activity can be utilized to fuel the sale of counterfeit goods, and the sale of counterfeit goods can be utilized to support other ongoing criminal activity.

It is worth noting that due to the same compliance constraints imposed on financial institutions, terrorist groups have relied on criminal activity and alliances with organized crime groups to maintain a steady stream of income. In 2015, the U.S. Treasury released its first ever National Terrorist Financing Risk Assessment, which reported that almost one-in-four cases of terrorist financing were found to be sourced to criminal activity. Authorities globally have confirmed that although not a predominant form of that underlying criminal activity, counterfeit goods have been linked to terror-finance. This is largely due to the ease of their production and sales. For example, in 2015 the Dubai Judicial Institute issued a specific warning citing the sale of counterfeit goods as one such method of terror-finance.

Valuation of Counterfeit Goods

The value of counterfeit goods overall is difficult to strictly quantify, largely because assessments are mostly extrapolated from raids and seizures. The products captured in raids provide only a snapshot of the potential marketplace of counterfeit goods globally. In the U.S. alone, over USD $1 billion worth of goods was seized by Customs and Border Patrol in 2016.   The United Nations Office of Drugs and Crime (UNODC) estimates a much higher number for the global market: USD $250 billion in illicit proceeds from the sale of counterfeit goods annually, which does not include pirated software, movies, music, etc.

As noted, the proceeds from the sale of counterfeit goods can be utilized to perpetuate the same, support other ongoing violent or financial crimes, and/or co-mingle with legitimate assets to be laundered.

Endemic Risks

The profitability of counterfeit goods centers on the utilization of coercive labor tactics as well as poor quality components.  By exploiting labor and utilizing substandard, even toxic materials, the organized criminal groups who sell counterfeit goods are able to eliminate the ordinary overhead that legitimate merchants have to pay. To that end, the manufacturing of counterfeit goods creates two very specific risks: labor exploitation and societal impacts.

The majority of the goods that are counterfeited are consumer goods such as clothing, shoes, accessories, jewelry, electrical products and housewares. The method of manufacture, distribution, and sale of these types of counterfeit goods creates risk at each stage.

In the second part of this series, we will examine how pharmaceutical products and medicines are counterfeited and illegally sold.