COMBATTING ILLICIT TRADE CONSUMER MOTIVATIONS AND STAKEHOLDER PERSPECTIVES

Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

TABLE OF CONTENTS

Executive summary 4

Introduction: The challenges of combatting illicit trade 6

Trends in illicit trade: Dispelling 4 misperceptions 8

A new way of looking at consumer motivation 20

Stakeholder strategies to combat illicit trade 24

Closing the gap: Recommendations for stakeholders 36

Annex A: Regional analysis 42

Annex B: Survey demographics 48

Annex C: Glossary 51

JUNE 2018 3 Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

EXECUTIVE SUMMARY

Illicit trade is a persistent and growing threat, Our analysis of more than 37,000 consumer as technology, the global economy and survey respondents fielded across 37 European e-commerce open new opportunities for countries provides a comprehensive picture counterfeit products to infiltrate supply chains of how consumer attitudes and behaviours and provide consumers with illicit products. regarding illicit trade are changing: Many understand the risks—that illicit trade can “Possibly illicit” purchases, where consumers cause serious public health issues, and that the • lack full confidence in the legitimacy of proceeds from illicit sales fund other criminal products, comprise 27% of total purchases activities. Others view some form of illicit trade across Europe, much larger than the as the soft underbelly of the global economy— estimated figure for known illicit purchases the price to be paid for frictionless trade. of 11%. This figure excludes the illicit goods that consumers may be buying unknowingly. Our research study seeks to understand this evolving issue better—specifically, the attitudes • Illicit purchases are increasingly bought and behaviours of those that influence the through official retail channels. Consumers lack demand and the supply for illicit goods, so confidence in the legitimacy of goods sold that illicit trade can be contained. Often, online, particularly via online marketplaces. when considering how best to reduce illicit Many consumers also distrust the legitimacy trade, the focus has centred on enforcement of goods sold in official physical retail outlets, actions to curb supply without looking also at as leaks in extended supply chains and the how to reduce the demand for illicit products proliferation of high-quality copies undermine through a better understanding of consumer consumer confidence. behaviours. We look at five representative Illicit trade impacts the whole of society. product categories with high levels of illicit • Our survey reveals high levels of illicit trade; cigarettes and tobacco, alcoholic trade among the highly paid and those in drinks, films, music and games, clothing and managerial jobs. All countries in Europe have accessories, and medicines. high levels of illicit trade, with some of the fastest growth reported in advanced Western countries, such as Germany and the UK. • Consumers’ reasons for buying illicit goods are highly nuanced. Though many seek out illicit trade to get a better deal, it’s not just about the price—consumers can be influenced to buy legitimate goods through improvements in quality, reliability, and availability. Our data also suggest that many consumers are aware and concerned about the implications of illicit trade, on themselves and broader society.

4 Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

In this report we introduce a new way of Our analysis of over 8,000 stakeholder connecting specific consumer attitudes— survey respondents highlights some areas which vary by product use, country, and other where stakeholders’ perspectives appear not demographic factors—with effective countering fully aligned with consumers. This points to strategies among policy-makers, law- specific policy and strategic responses, such enforcement officials, and business executives, as more attractive business models, improved collectively referred to as stakeholders. product authentication, and public awareness Specifically, we divided responses from our campaigns. consumer survey on the reasons for purchasing illicit goods to create four distinct segments— Stakeholders seem aware of the shifting Bargain Hunters, Opportunists, Critics, and nature of illicit trade and are refocusing their Activists—based on their behaviours and beliefs priorities. Implementation, however, is patchy, about illicit trade. From these profiles we can with many businesses, policy-makers, and law provide specific guidance to stakeholders enforcement agencies recognising that there is across countries and product segments on how much more to be done. It’s difficult to secure best to target these groups with actions that resources, particularly when competing against might influence their decision-making. other initiatives and priorities.

To combat the changing patterns of illicit trade, There are plenty of reasons to be optimistic, stakeholders need to update their approaches however. Our study reveals a strong preference on several fronts. Policy, regulatory, and legal among consumers for the security of frameworks need to keep pace by, for example, legitimate goods and authorised channels, and responding to the growth of e-commerce. concern about the implications and victims of Supply chains need to be secured from end illicit trade that could be reinforced through to end, recognising the new roles of many public awareness campaigns. Our research intermediaries. Law enforcement at the border aims to provide detailed information, by and in-country needs to be strengthened, product, country, and several demographic making best use of the latest technologies. The factors, to help guide efforts to both improve cross-border nature of illicit trading presents enforcement actions and steer consumers particular challenges in Europe, with a need away from buying illicit goods. to co-ordinate national approaches across the European Union as well as securing borders with the wider world.

5 Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

INTRODUCTION: THE CHALLENGES OF COMBATTING ILLICIT TRADE In 2015, Operation Volcano only motivation, or do other working domestically and led to the arrest of 60 people factors come into play? While internationally. The latest across Europe and the seizure many studies attempt to size technologies can also help of 150,000 packets of stolen the market and approximate their efforts. and adulterated Herceptin, the volume of illegal trade, our a breast cancer treatment. research takes a purposely We looked at 37 different The drug was stolen from different angle: to understand actions that have proved Italian hospitals, diluted and and quantify consumers’ effective in combatting illicit repackaged via operators behaviours—their attitudes trade. By comparing the extent in Cyprus, Hungary, Latvia, and inclinations toward illicit they have been implemented, Romania, Slovakia, and Slovenia, purchases—and how they their effectiveness and and was discovered in hospitals might be influenced. Our prioritisation, we have and pharmacies in Germany, research challenges four developed a comprehensive Finland, and the UK.1 It was longstanding myths about why view of the progress being an elaborate, pan-European consumers buy illicit products made by stakeholders, and can scheme that challenges the and introduces a new way make recommendations for popular perceptions of illicit to understand consumers’ future actions. trade—the rebellious teenager nuanced perspectives. downloading a newly released This report, and accompanying film, or the thrifty suburban detailed materials on our Illicit trade has grown in housewife on a big-city holiday website, can be used to inform pervasiveness across Europe in haggling for a knock-off a broad audience about shifting recent years, even infiltrating designer handbag. Yet it is attitudes and behaviours legitimate supply chains. indicative of the pervasiveness regarding illicit trade. We of illegal goods infiltrating hope that the research is used legitimate supply chains— We sought insight that would by others and built upon as and indeed the increasing help identify the actions that patterns of illicit trade continue complexity and breadth of illicit can be taken to combat illicit to shift. Understanding illicit trade happening across Europe. trade. Are businesses, policy- trade and identifying the makers, and law enforcement best ways to reduce it is a Our research indicates that officials (collectively referred continuous endeavour. “The only 11% of illicit trade is seized, to as stakeholders) aligned interconnectedness through on average, across Europe. with the reasons consumers global trade and the internet is Even the most effective border give for buying illicit goods? unlikely to change,” says Karl enforcement authorities Are their approaches Lallerstedt of the Confederation cannot seize more than a adaptable to the shifting of Swedish Enterprise. “So small share, perhaps a quarter patterns of illicit activity? we need to be smarter and at most, of the illicit goods Work is needed to update anticipate that there will be crossing their borders. So policy and legal frameworks, new technical capabilities and curbing supply needs to be secure supply chains, and new types of illicit trade that complemented with reducing enhance enforcement on the can have significant impact consumer demand. In order ground. Stakeholders are very quickly. We need to look ahead to influence demand, we aware that it’s a collective of the curve and address these need to know more about effort, requiring effective issues before they become consumer motivation. What collaboration between the big problems.” drives consumers to buy illicitly public and private sectors traded goods? Is cost their and multiple agencies

1 AIFA, ‘Operation Volcano: The Herceptin Case. Story, Lessons Learnt, Proposals,’ 2015. Cited in RUSI’s On Tap Europe, Series no.5, Italy 6 report, December 2017, at https://rusi.org/sites/default/files/201712_rusi_on_tap_italy_ganz_haenlein_web.pdf ABOUT OUR RESEARCH

Combatting Illicit Trade: Consumer • The stakeholder survey interviewed 150 Motivations and Stakeholder Perspectives is business executives and approximately 75 an independent research study financed by PMI public-sector officials (comprising policy IMPACT, a global grant initiative by Philip Morris officials and law enforcement officers) International to support projects dedicated to working to combat illicit trade in each fighting illegal trade and related crimes. It aims country. We asked about their perspectives to address three distinct questions: and priorities toward tackling illicit trade in their country and analysed 37 different What drives consumers to buy illicit goods, • actions to evaluate how many they have and how are these motivations different by implemented, their effectiveness, and product and country? prioritisation over the next three years. • How aware are policy-makers, law enforcement officers, and business We supplemented this quantitative analysis executives of these motivations? with thorough desk research of recent studies on illicit trade and guidance from an advisory What changes in policy, law enforcement, • panel of four independent experts to provide and company practices might change feedback at key stages of the research: behaviours? • Liz Allen, former HMRC Excise Divisional Head To answer these questions, Oxford Economics Allen Bruford, former WCO Deputy Director embarked on a year-long study spanning • 37 European countries (listed in the Annex) • Stefano Betti, Senior Criminal Justice Expert and five product groupings: cigarettes and and Deputy Director, Transnational Alliance tobacco; alcoholic beverages; films, music, to Combat Illicit Trade (TRACIT) and games; clothing and accessories; and Dr. Peggy Chaudhry, Associate Professor, medicines and pharmaceutical products (we • Villanova University, Author and Editor shorten the descriptions of these categories of “The Handbook of Research on throughout this report). Counterfeiting and Illicit Trade” (2017) We carried out two concurrent surveys We also carried out in-depth interviews with between November 2017 and February 2018: an additional 12 experts working in their own • The consumer survey asked 1,000 ways to combat illicit trade. They comment in purchasers in each country for their a personal capacity, rather than representing motivations for buying illicit goods and how the views of their organisations. Their insights their behaviours are influenced by different and contrasting perspectives into the trends interventions to combat it. From their in illicit trade, consumer motivations, and responses we generated more than 85,000 effective strategies are added throughout as product purchase profiles (describing how commentary on the research findings. individual consumers typically buy one of the five products), of which over 32,000 were potentially illicit purchases. Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

TRENDS IN ILLICIT TRADE: DISPELLING 4 MISPERCEPTIONS

According to our survey Fig. 1: Stakeholders estimated Illicit trade by region analysis of stakeholders, roughly 13% of purchases Eastern borders (non-EU) across the five product Nordics Growth: 4.8% categories under study are Growth: 1.6% Consumption: 14.7% Consumption: 12.8% illicit, with similar levels across all categories. These estimates are in a comparable Western Europe range to other thorough Growth: 1.4% 2 quantitative studies. Consumption: 12.4%

“To think that developed Southern Europe countries are immune from Growth: 2.6% Central/Eastern Europe Consumption: 12.8% Growth: 2.2% illicit trade is nonsense. Consumption: 12.8% It’s a global problem.” Dr. Peggy Chaudhry, Villanova University

Estimated Estimated Rank Country illicit trade Rank Country illicit trade 1 Ukraine 16.2% 20 Portugal 13.0% Illicit trade is an issue for 2 Turkey 15.2% 21 Sweden 12.8% all countries across Europe 3 Belarus 15.0% 22 Slovakia 12.8% (see Fig. 1), with no obvious 4 Russia 14.9% 23 Austria 12.7% distinction between the 5 Azerbaijan 14.6% 24 Cyprus 12.7% regions we studied. In fact, 6 Hungary 14.2% 25 France 12.5% 7 Lithuania 13.6% 26 Switzerland 12.5% stakeholders report fast 8 Germany 13.5% 27 Finland 12.5% growth in the overall level 9 Italy 13.5% 28 Norway 12.5% of illicit trade over the 10 Czech Republic 13.5% 29 United Kingdom 12.4% last three years in several 11 Serbia 13.5% 30 Latvia 12.2% countries considered to 12 Denmark 13.3% 31 Romania 12.2% 13 Spain 13.3% 32 Belgium 11.9% have deployed sophisticated 14 Slovenia 13.2% 33 Luxembourg 11.4% approaches to resist it, such 15 Netherlands 13.1% 34 Malta 11.4% as Spain (5.5%), Germany 16 Croatia 13.1% 35 Bulgaria 11.3% (3.6%), and the UK (3.2%). 17 Poland 13.1% 36 Estonia 11.2% As Dr. Peggy Chaudhry of 18 Kazakhstan 13.1% 37 Ireland 10.9% Villanova University notes, 19 Greece 13.0% “The stereotype has been Source: Oxford Economics, stakeholder survey; n=8,121 that illicit trade happens most often in undeveloped or illicit trade by product). decline for all products, from corrupt countries, but to think 2.7% of cigarettes to 6.7% for that developed countries are Yet when we asked consumers medicines and 6.8% for films. immune from illicit trade is to forecast their future illicit Declines are forecast in all nonsense. It’s a regional and purchases, they estimated a countries, with the largest in global problem.” (See Annex 2 decline over the next three Estonia (9.5%), Portugal (7.6%), for region and country analysis years of almost 5%. Illicit Turkey (7.3%), Hungary (7.1%), of the extent and growth of purchases are estimated to Azerbaijan (7.0%), Romania

2 For example, see the Project Sun 2016 report; OECD/EUIPO 2016 Trade in Counterfeit and Pirated Goods: Mapping the Economic Impact; June 2016 Eurobarometer report on public perceptions of Illicit Tobacco trade; Transcrime 2015 report, “Estimating the 8 counterfeit markets in Europe.” Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

(6.8%), and Italy (6.5%). of illicit goods they will buy as attitudes and buying decisions supply chains are increasingly are changing as a result of How can we explain these compromised. Alternatively, it these developments. Our conflicting views? The rapid is possible that stakeholders findings challenge four widely evolution of technology, are unaware that consumers held perceptions about globalisation, and the are changing their behaviours consumers’ illicit trading development of e-commerce in response to improved behaviour, spanning what and frictionless supply chains legitimate product offerings, consumers understand to be have shifted the traditional or have developed greater illicit goods, where they buy patterns of illicit trade awareness of the risks and them, who participates in illicit on both the demand and costs of illicit trade. trade and, most importantly, supply sides (see sidebar). why they buy illicit goods. Perhaps consumers may be Our research sought to underestimating the amount understand how consumer

THE SHIFTING NATURE OF ILLICIT TRADE

Michael Ellis, a consultant on illicit trade, has Globalisation has led to extended and tracked the increase in counterfeiting over the complex product supply chains spanning last 20 years, during which he served as the many suppliers, intermediaries, and countries, head of Interpol’s illicit crime unit. “It started which introduces vulnerabilities. Goods are with music and films, but we are now seeing increasingly delivered in small consignments, technology being used in more sophisticated which can more easily slip past border controls ways,” he says. “We are now seeing the internet and customs checks. Some countries are used to quickly transfer design patterns for known to be prolific producers of illicit goods, clothing and accessories, and the availability and often goods pass through free-trade zones, of machinery and materials has produced very where there is limited scrutiny. high-standard copies.” Piotr Stryszowski, the OECD’s lead economist on illicit trade, agrees: Patterns of illicit trade shift constantly as “Counterfeiting is changing and becoming criminals react to countering measures and more democratic. Now any product with IP seek new opportunities. If agreements are becomes a target.” signed with governments to tackle known routes of illicit trade, operators can shift E-commerce has made it easy for consumers activity to neighbouring countries. As one to buy illicit goods. As the number of products route closes, criminals look for other routes to available online proliferate, consumers use exploit. “It’s a cat-and-mouse game,” explains price-comparison sites and user reviews to Hugo Bonar, enforcement manager for the Irish ensure they are getting a good deal rather than Health Products Regulatory Authority (HPRA). relying on trusted brands. “The vast majority “We have success closing down one area, like of online shoppers don’t really understand the steroid abuse, and the criminals then come degree of fraud on the internet, nor do they down another stream.” have the tools to avoid it. Most still just think they’re getting a deal,” says TRACIT Director General Jeff Hardy. “With so many product choices available, it’s almost impossible to separate the fakes from genuine products.”

9 Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

MYTH 1: CONSUMERS KNOW THAT THEY ARE BUYING ILLICIT GOODS

Most illicit goods are usually clearly signalled by their price, whether it’s a free film or a designer handbag at a fraction of the retail price. Consumers know when buying under the counter, in a back alley, or on the dark web that they are buying illicit goods.

Reality: Consumers increasingly find it difficult to confirm their purchases are genuine even when they buy through trusted sources.

In a rapidly globalising out illicit goods, for example, Consumers estimate economy where more buying medicine through goods are available over the an unofficial source to avoid internet—from official online visiting a doctor. For some, stores to online marketplaces returning home with fake 27% and auction sites, then branded shirts or a designer of their purchases are delivered through extended, handbag has become part possibly illicit. low-cost supply chains—it’s of the holiday experience. getting harder and harder Dr. Chaudhry’s research into for consumers to tell when a customer complicity suggests product is genuine. that some consumers buy illicit goods simply for the “hedonic We asked consumers to rank experience,” the thrill and the confidence they had adventure of buying from illicit that their purchases were channels.4 legitimate.3 They estimated 11% of purchases as illicit, but But many illicit purchases are a far greater number, 27%, had not deliberate. Consumers a degree of uncertainty—what may buy cheaper goods we define as “possibly illicit” online or from an independent purchases (see Fig. 2). For retailer and not realise they some countries and products could be illicit. There are also this uncertainty is even more many blurred areas between widespread. For example, in legitimate and illicit trade— Slovakia, 54% of all purchases such as crossing the border and 61% of films are reported to load up a van of goods as possibly illicit. for personal consumption, receiving a link to a film or Undoubtedly some purchases song from a friend, buying are known by the buyer to a locally produced alcoholic be illicit—usually signalled by drink or buying a “grey” import an unrealistically cheap price of a branded fashion product. (the Rolex for $10), or the source (a film downloaded from a file-sharing site). Some consumers deliberately seek

3 We worked out the purchase profile for each product that a consumer bought regularly (at least monthly). See the Annex for more information. 10 4 Dr. Peggy E Chaudhry, Ronald Paul Hill, Stephen A Stumpf, Goksel Yalcinkaya: “Consumer complicity across emerging markets” (2011). Advances in International Marketing, Volume 22, 223–239. Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

Fig. 2: Consumer estimates of illicit trade by product How likely are some of the products that you've purchased been illicit? 60% Possibly illicit Illicit 50% 19% 40% 11%

30% 11% 13% 9% 8% 20% 35% 34% 27% 10% 21% 24% 23%

0% All products Cigarettes Alcohol Films Clothing Medicines

Source: Oxford Economics, consumer survey. Cigarettes n=12,988; alcohol n=18,966; films n=8,611; clothing n=23,194; medicines n=22,448

There are also cases where infrastructure service providers produced in another country, consumers think they are (ISPs), freight forwarders, and then find they receive buying legitimate goods but distribution and postal depots, a container of fake goods. are in fact being duped with and payment providers—on “Confusion between grey and illicit goods. Says the OECD’s supply chain security: “It is counterfeit does happen—it’s a Mr. Stryszowski: “Many illicit much more difficult for rights real problem,” he says. traders have fantastic web holders to know, manage, and sites that look much better control every intermediary This combination of deliberate, than the genuine web pages involved in their supply suspected (what we describe of legitimate sellers.” Copies chains and to see their every as “possibly illicit”), and of clothing, accessories, and transaction. Intermediaries unaware illicit purchases DVD box sets, for example, face similar challenges with causes added difficulties in are increasingly high quality their sub-intermediaries, understanding the true extent and hard to distinguish from suppliers, and customers.”5 of illicit trade. It also leads to legitimate goods. widespread confusion among These intermediaries, consumers. In many cases, Counterfeiting is often making decisions on behalf they don’t know if they are invisible to consumers, as of consumers, also have buying legitimate goods, or if it occurs further down the incentives to use fake what they are doing is wrong. supply chain, in business- products. Michael Ellis It undermines consumer to-business products. The describes how some large confidence in brands and International Chamber of wholesalers in the UK buy authorised sources, and may Commerce BASCAP’s 2015 products sourced from Eastern increase the likelihood that report highlighted the growing Europe that they believe they stray to more deliberate importance of intermediaries— are “grey” imports, meaning illicit activity. such as wholesalers, legitimate branded goods

5 BASCAP, March 2015, “Roles and responsibilities of Intermediaries: fighting counterfeiting and piracy in the supply chain.” 11 Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

MYTH 2: ILLICIT GOODS ARE MAINLY BOUGHT THROUGH ILLICIT CHANNELS

Illicit goods are mostly bought through unofficial retail outlets—markets, from strangers in the street, under the counter at small shops, pubs, and restaurants, or through unofficial websites.

Reality: Illicit trade passes through many retail channels and undermines consumer confidence in legitimate goods. Official online channels, with high volumes and easy access to illicit goods, may pose a bigger long-term risk than criminal sites on the dark net.

It’s far more likely that Only 56% of consumers In some countries where consumers today buy illicit have complete confidence illicit trade is high for some goods through an online that purchases they have products, faith in retail outlets marketplace than a stranger’s made from official physical may be particularly low. rucksack. As the dividing line stores were legitimate, with Marjana Martinic, Deputy CEO between legitimate and illicit 36% expressing uncertainty and SVP, Science & Policy at goods grows hazier, consumer and 8% actively distrusting the International Alliance for confidence in all retail outlets purchases (see Fig. 3). Almost Responsible Drinking (IARD) has plummeted. Our research half (47%) say it’s difficult to explains that in such countries, indicates this is leading to a tell if goods sold in physical consumers can only be sure shift in consumers’ attitudes stores are legitimate. “The they are buying the genuine and shopping behaviours. old, traditional high street product if someone trusted retailer is also moving online,” brings it in from another says Allen Bruford, former country. “If you are buying, say, Confidence in official retail Deputy Director at the WCO, a premium brand whisky from stores is low and considerably “so goods may no longer the shelf in Russia, you may worse online, particularly for be sourced in the ways not know if it’s the real thing. online marketplaces. consumers expect.” Liz Allen, This can be a huge challenge former HMRC Excise division to legitimate producers head, notes an increase in because it shakes consumer Confidence levels are under-the-counter sales confidence in their ability to understandably low for following the introduction of ensure the quality of brand.” “unofficial sources” of goods, tobacco display bans in many both offline and online, such as European countries. “Some buying from a market, a friend formerly compliant retailers or stranger, or an unofficial are now selling licit and illicit website. But unofficial sources goods together,” she says. make up a small share of total purchases. Of greater concern are the low levels of confidence in official outlets—both physical stores and online retailers— such as retailers’ websites, apps, auction sites, and popular online marketplaces.

12 Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

Fig. 3: Consumer confidence by retail channel For each of the different ways you may have bought goods, please rate your confidence that you were buying authentic and legitimate products. Offline retail chanels* Online retail chanels* 8% 8% Unofficial 23% website 22% 30% 71% Unofficial Official Official offline online store 14% 56% physical 36% or app store 19% Online 44% marketplace42% 47% 37% 44%

Confident Uncertain Distrust

*Size of chart approximates to volume of purchases using the channel. Source: Oxford Economics, consumer survey. Official physical store, n=85,895; unofficial offline, n=167,995; official online store or app, n=84,615; online marketplace, n=83,984; unofficial website, n=82,995

Confidence is even worse online, compared with 25% legitimate products. Unofficial on the internet, with 63% in a physical store. And websites (including file-sharing of consumers agreeing it’s only 30% of purchases are sites and the dark web) difficult to tell if a product completely trusted by users appear mostly to be for illicit bought online is legitimate. of official online stores or purchases, though transaction Forty-four percent of apps (see Fig. 3). For online volumes are much smaller than consumers overall say illicit marketplaces, only 14% of other channels. goods are easy to source purchases are fully trusted as

Fig. 4: Consumer estimates of past and future purchasing behaviour Please tell us how your shopping attitudes and behaviours have changed over the last three years, and how you expect them to change over the next three years. (Mean %) Last three years Next three years

5.1% Online purchases 6.2% Unofficial -5.9% Online (including dark websites) -4.4%

0.5% Established retail outlets 1.1% -2.2% Offline Unofficial retail outlets -1.0% Source: Oxford Economics, consumer survey; n=37,370

13 Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

Our research shows a sophisticated “omnichannel” may be starting to influence continuing shift to online strategies, combining the consumers’ shopping habits. retail channels (see Fig. 4). best of offline and online Consumers generally prefer Consumers also report they are channels to deliver improved • to buy from authorised moving away from unofficial availability, convenience, sources of legitimate outlets, particularly online, a and an improved customer goods. Quality assurance trend they expect to continue experience. All these is reported as the most over the next three years. initiatives could push important reason for buying consumers back to from official sources. There are several possible official outlets. Consumers are generally reasons to explain why Businesses, often working becoming more demanding consumers are moving away • with public officials, are of products’ authenticity from unofficial outlets: adapting to the threat and the traceability of • Many businesses are and introducing ways to ingredients. Some who have improving their product authenticate products, bought illicit goods report offerings, introducing new verify official websites, bad experiences, with 38% business models like online introduce Codes of Practice reporting inferior quality, 15% subscription services and with digital retailers, and a dangerous or unhealthy in-app purchases. Retailers close down unofficial product, and 11% a computer are developing more websites. These initiatives virus (see Fig. 5).6

Fig. 5: Consumers’ reasons for buying legitimate; experiences with illicit Rate the importance of each of the following Have you ever experienced any of the following factors in buying from authorised sources. as a result of buying potentially illicit goods? “Important” and “Very important” responses Faulty or inferior- Assurance of quality 80% quality product 38%

Lifetime guarantee of service 70% No warranty coverage or after-sales service 32% Abiding by the law 69%

Participating fairly in the Dangerous or economy (e.g., fair wages) 65% unhealthy product 15%

Supporting a local legitimate business 64% Had computer infected with a virus/malware Paying fair share of from downloading 11% government taxes 58% illicit software

Prestige Have been caught and 46% penalised for buying 3% illicit products

Source: Oxford Economics, consumer survey; n=32,023 (purchases with some distrust of legitimacy).

6 See, for example, Oxford Economics’ report on the growth of socially responsible consumers in “SME Pulse: Strategies for 14 sustainable growth”: at https://www.oxfordeconomics.com/recent-releases/SME-pulse-2018 Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

MYTH 3: ILLICIT TRADE IS MOSTLY CARRIED OUT BY PEOPLE ON LOW INCOMES

Most illicit trade is carried out by people on lower incomes, who can’t afford to pay for legitimate goods and have easier access to illicit sources in their communities.

Reality: Illicit trade occurs across all levels of society. As illicit trade expands to more products and is increasingly online, it becomes easily accessible to a wider population. There are many reasons why people buy illicit that aren’t related to income level.

While our research shows that household incomes greater illicit trade is highest among than €150,000, those with a the lowest-income bands and university degree, and among with students, it is surprisingly those working in managerial and high among those with annual professional roles (all at 42%).

Fig. 6: Illicit trade by income level and occupational group Percentage of respondents by income range who have purchased “illicit” or “possibly illicit” goods Total gross household income <€25,000 Total gross household income €25,000–€150,000 59% 57% Total gross household income >€150,000 53% 51% 47% 43% 42% 44% 38% 40% 39% 39% 37% 35% 36% 35% 32% 32%

Total Cigarettes Alcohol Films Clothing Medicines Source: Oxford Economics, consumer survey. Cigarettes, n=2,940; alcohol, n=4,128; films, n=3,272; clothing, n=6,768; medicines, n=4,432 Note: Many respondents preferred not to reveal their incomes.

Percentage of illicit and possibly illicit purchases by working role

38% 48% 37% 40% 22% Total Full-time Unemployed Full-time Retired student employee

Source: Oxford Economics, consumer survey. Total, n=32,738; full-time student, n=2,932; unemployed, n=2,682; full-time employee, n=19,034; retired, n=2,253

15 Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

Consumers may be increasingly Yet our data shows an even tempted to purchase illicit closer correlation to age than There is a closer correlation goods as the opportunities to any other factor (see Fig. 7). of consumer illicit purchases do so become more frequent Younger people are more with age than any other factor. and more convenient. Many likely to be consumers of calculate that there are few films, music and games, where downsides from buying illicit high levels of illicit trade are goods. Our survey shows almost accepted norms. Older that consumers think that people are more likely to be for some products, there concerned about the impact is little difference in quality of illicit trade on wider society. between legitimate and illicit For example, those over 55 goods (35% agree vs. 21% years old agree that illicit trade disagree). Very few expect to is harmful to businesses (80% be prosecuted, particularly as vs. 66% in the youngest group) they may not even think they and that it funds criminals and are doing anything illegal (for terrorists (60% vs. 42%). example buying grey imports, or keenly priced products on Fig. 7: Illicit trade by age group an online marketplace). As Percentage of total illicit purchases by consumer age Europol’s Chris Vansteenkiste explains, “in former days, people had to go to physical 50% markets or outside the country 46% to buy counterfeited goods. 41% But now these goods are brought into your living room.” 34% In fact, consumers from the 27% highest income band are more likely than those in the lowest band to say that it is easy to 17% source illicit goods online (52% vs. 47%). The UK IPO’s 2017 13% study into online trade and use of social media surveyed over 3,000 UK consumers and 18-24 25-34 35-44 45-54 55-64 65-74 75+ reported that social groups AB Source: Oxford Economics, consumer survey. 18-24, n=4,197; 25-34, n=9,199; 35-44, n=8,845; (upper middle class and middle 45-54, n=6,146; 55-64, n=3,467; 65-74, n=791; 75+, n=93 class) acknowledged complicit behaviour at almost double the level of social grades C (skilled class) (24.5% vs. 12.7).7

7 July 2017, UK IPO, “Share and Share Alike,” at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/ 16 attachment_data/file/641461/Share_and_share_alike_report.pdf Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

MYTH 4: CONSUMERS BUY ILLICIT GOODS BECAUSE THEY ARE CHEAPER

For both smuggling and counterfeiting of goods, the motivation of consumers and incentive for criminals is the significant price differential between legitimate and illicit goods. Consumers see illicit trade as essentially victimless—they are buying a cheaper product and no one gets hurt, unlike more serious crimes like drug- or people-trafficking.

Reality: Consumers buy illicit goods for many reasons. Though price is clearly a key factor, there are several other strong influences relating to both the product offering and the implications of illicit trade on society.

To identify why consumers buy blue)—that there is nothing illicit goods, we asked them to wrong with doing it, others While most consumers rate the importance of eight do it, there is little chance of prioritise price, other factors different motivations. Four are sanction, or that they prefer to significantly contribute to related to the attractiveness buy from unofficial channels. their decision to purchase of the product—price, quality, illicit goods. availability, and convenience Though the aggregate (highlighted in light blue responses show that most below). The other four are more consumers prioritise price, concerned with attitudes about other factors are close behind illicit trade (highlighted in dark (see Fig. 8).

Fig. 8: Reasons for buying from illicit sources Please rate the importance of each of the following factors in buying potentially illicit goods from unauthorised sources. “Important” and “Very important” responses Social factors Product factors I prefer to buy from unofficial channels 15% Lots of people do it 23% There is very little penalty even if I was caught 23% There is nothing wrong with buying from this source 26% There is no noticeable difference in quality or service 38% It was quicker and/or easier to buy it 38% It was the only available source 42% It was cheaper 49% Source: Oxford Economics, consumer survey; n=32,023

17 Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

Stakeholders tend to Our research shows that most Liz Allen says we need a more underestimate consumers’ consumers are aware of some sophisticated understanding awareness of the implications of the implications of illicit of what drives consumer of illicit trade. Just over half trade and that this impacts decision-making to arrive at of stakeholders (52%) say their buying decisions. For better strategies to tackle illicit consumers see illicit trade as example, more than 60% trade. “We’ve always considered victimless, compared with agree that supporting local consumers as one mass, mainly 34% of consumers (see Fig. 9). businesses, participating in in the lower socio-economic the economy, and abiding by groups, who like cheap the law are reasons to buy products. Whereas what is legitimate goods (see Fig. 5). needed is to better understand motivations to arrive at a range of targeted initiatives.”

Fig. 9: Consumer awareness of the impact of illicit trade Please rate your level of agreement with the following statements about consumer attitudes toward illicit trade in your country. “Agree” and “Strongly agree” responses

Stakeholders Consumers

58% 44% 55% 61%

Consumers I’m not aware of Consumers are I’m not aware of the underestimate the the health risks of unaware of the penalties for buying personal risks of buying illicit goods penalties for buying counterfeit products engaging in illicit trade counterfeit products

54% 50% 52% 34%

Consumers are Buying goods illicitly Consumers see illicit trade unaware that buying funds criminals and as a victimless crime illicit goods funds terrorists criminals and terrorists

Source: Oxford Economics, stakeholder survey; n=8,121 Source: Oxford Economics, consumer survey; n=37,370

18

Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

A NEW WAY OF LOOKING AT CONSUMER MOTIVATION Effective strategies need to be equal or higher on social factors. the top three strategies in based on a solid understanding The matrix creates four separate deterring illicit purchases. of why people are buying groups that share certain The percentage scores reflect illicit goods and the factors characteristics (see Fig. 10). the likely effectiveness of the that would be most effective strategy, so one rating 70% at influencing them. We have The matrix helps to would be far more effective developed an illicit trade matrix identify the distribution of than one scoring 40%.9 that identifies consumers’ consumers across the four potentially illicit purchases8 quadrants, capturing the Looking at the data this and segments them based on percentage spread across all way, we can see a range of two dimensions: (1) their level potentially illicit European strategies stakeholders can use of complicity (either possibly purchases, with Opportunists across countries and product illicit or illicit purchases) and representing the largest categories to influence specific (2) the motivations for the illicit group, at 40%. This spread types of consumers. Below purchase (either mostly product varies significantly by country we present the matrices for related or socially motivated). and by product—providing the five separate products, Mostly product-related insight into which groups are highlighting the three most purchases score higher on the most important to prioritise. effective strategies for each total of product-related factors consumer quadrant. A full (highlighted in light blue in The matrix also allows us to segment breakdown by Fig. 9) than the total of societal highlight strategies that most country and product can be ones (dark blue). The remaining effectively steer consumers found by using the interactive illicit purchases are classified as away from illicit trade. For dashboard on our research socially motivated, as they score each quadrant, we identify webpage (see Annex A).

Fig. 10: Illicit trade consumer matrix, European total averages Critics (32%) Activists (14%) Critics buy goods illicitly because of societal Activists are strongly opinionated about factors such as believing there is nothing social factors. They perceive illicit trade as wrong with illicit sources, no chance of being a victimless crime, so decisively choose to caught, and that others do it. They have purchase illegitimately. The low chance of

Social experienced faulty and inferior illicit products detection and view that lots of people engage more than any other group, perhaps explaining with illicit across society may embolden why they don’t actively seek to purchase Activists to pursue illicit avenues. through illicit channels.

Opportunists (40%) Bargain Hunters (14%) Opportunists are motivated by product factors Bargain Hunters prioritise pursuing better such as price, quality, and accessibility. They deals, resulting in their engagement with illicit may buy illicit goods as opportunities present products. Quality, availability, and price are

Motivation / outlook Motivation themselves, rather than actively seeking them their main drivers, which Bargain Hunters state out. This group, more than any other, finds that are just as accessible in illegitimate markets.

Product illicit goods are available at lower prices than In fact, more than any other group, they insist legitimate alternatives. that illicit markets offer identical products and significantly lower costs.

Possibly illicit Illicit Complicity to buy illicit

Source: Oxford Economics, consumer survey; n=32,430

8 We selected consumers that were regular buyers of one or more of the five product categories, defined as buying at least monthly. We then asked them to assess whether some of those purchases, for each product, could have been illicit. This allowed us to create 20 a profile for their potentially illicit purchases by product. An individual consumer could have up to five illicit purchase profiles, depending on how many of the products they buy could be illicit. 9 Respondents were asked for each of their potentially illicit purchases, the effectiveness of ten different strategies in deterring them from buying illicit goods. A score of 70%, means that for 70% of all the illicit purchases in that segment, respondents said that the strategy would be effective or very effective. Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

Deterring illicit trade in cigarettes

For cigarettes, there are more Bargain Fig. 11: Illicit trade consumer matrix—Cigarettes Hunters and Activists and fewer Strategies to reduce illicit trade in cigarettes Opportunists than the overall population. Top 3 responses by consumer segment

Those buying illicit cigarettes are more Critics (31%) Activists (18%) likely than respondents overall to have Assure quality 44% Reduce cost 64% suffered from faulty or inferior products Communicate 42% Assure quality 63% (52% vs. 38%) and dangerous or Social wider implications Clarify goods are legit 62% unhealthy products (30% vs. 15%). Clarify goods are legit 41%

Reducing cost appears to be the most Opportunists (31%) Bargain Hunters (20%) effective strategy for all quadrants but Reduce cost 75% Reduce cost 78% Critics, though high levels of excise Motivation / outlook Motivation Assure quality 71% Assure quality 73% Product rates that vary across countries make Increase availability 70% Increase availability 69% price particularly difficult to influence. Providing quality assurance comes a Possibly illicit Illicit close second for many consumers, and is Complicity to buy illicit the most effective influencer for Critics. Source: Oxford Economics, consumer survey; n=4,448

Efforts to assure quality include tax stamps and track-and-tracing systems. At an international level, progress is being made in adding signatories to the FCTC protocol,10 extending use of security features and track-and-tracing systems, with implementation anticipated across Europe from next year.

Deterring illicit trade in alcohol

The spread of illicit purchases of alcoholic Fig. 12: Illicit trade consumer matrix—Alcohol drinks has more Critics and Opportunists Strategies to reduce illicit trade in alcohol than cigarettes, similar to the European Top 3 responses by consumer segment population as a whole. Strategies directed at these groups should deter them from Critics (33%) Activists (14%) progressing to more deliberate illicit Assure quality 46% Assure quality 64% purchasing. Clarify goods are legit 44% Clarify goods are legit 60% Social Communicate 42% Increase availability 59% Improving quality assurance of alcoholic wider implications products is seen as a top influencing strategy for all consumer segments. Opportunists (39%) Bargain Hunters (14%) Authentication initiatives to clarify goods Reduce cost 75% Reduce cost 78%

are legitimate could deter the 47% of / outlook Motivation Assure quality 72% Assure quality 75% Product Critics and Activists. Increase availability 71% Increase availability 73%

The industry is introducing QR codes Possibly illicit Illicit on bottles so that consumers can verify Complicity to buy illicit authenticity by using an app on their Source: Oxford Economics, consumer survey; n=6,146 smartphones. They are also aiming to improve supply-chain security through introducing seals and tamper-proof caps, and using track-and-trace technologies.

10 For a summary of the 2016 update to the EC Tobacco Directive and the World Health Organization’s FCTC protocol, see http://europa.eu/rapid/press-release_IP-16-1762_en.htm 21 Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

Deterring illicit trade in films The films category has the highest level Fig. 13: Illicit trade consumer matrix—Films of illicit activity over an extended period, Strategies to reduce illicit trade in films given the widespread use of file sharing. Top 3 responses by consumer segment Perhaps unsurprisingly, buyers of illicit Critics (31%) Activists (18%) films are more likely to have experienced Assure quality 43% Assure quality 64% computer viruses or malware (22% vs. Clarify goods are legit 42% Clarify goods are legit 63% 11% for all respondents) and be caught or Social Communicate prosecuted (13% vs. 3%) than the general 42% Raise fines wider implications and penalties 60% population. Opportunists (34%) Bargain Hunters (17%) Increasing consumers’ awareness of these Reduce cost 74% Reduce cost 73% real risks could be effective, combined Increase availability 73% Assure quality 72% with positive actions to improve the / outlook Motivation Product quality of legitimate products. Fines could Assure quality 72% Increase availability 69% be increased for persistent offenders. Possibly illicit Illicit Increasing the availability of genuine Complicity to buy illicit products is almost as important as reducing Source: Oxford Economics, consumer survey; n=4,544 costs for Opportunists and Bargain Hunters. The industry is targeting awareness campaigns at younger consumers, who have less experience with downloading free content. Subscription services for films and music, with comprehensive catalogues of content available online, show how consumer behaviour can be shifted by providing superior, more accessible, and reliable products. The UK IPO’s copyright tracker demonstrates the positive impact subscription services may have on volumes of illicit films and music, with 7-percentage-point growth in the number of Spotify subscriptions between 2016 and 2017—from 19% to 26% of consumer respondents—while the levels of consumers downloading free content remains at its lowest level.11

Deterring illicit trade in clothing

Clothing has a very high share of Fig. 14: Illicit trade consumer matrix—Clothing Opportunists (45%). Reducing costs ranks Strategies to reduce illicit trade in clothing as the most effective strategy for this Top 3 responses by consumer segment group (and Bargain Hunters), but quality assurance and increasing availability are Critics (31%) Activists (11%) almost as important. Assure quality 51% Assure quality 64% Clarify goods are legit 48% Clarify goods are legit 63%

For the 31% of Critics and 11% of Activists, Social Communicate 46% Communicate 58% quality assurance and clarifying that goods wider implications wider implications are legitimate are most important. Increasing awareness of the risks of illicit trade is Opportunists (45%) Bargain Hunters (13%) considered more effective than increasing Assure quality 75% Reduce cost 75% penalties, or reducing cost for these groups. / outlook Motivation Reduce cost 74% Assure quality 75% Product Increase availability 74% Increase availability 70%

The clothing sector has had considerable Possibly illicit Illicit success using technologies to secure Complicity to buy illicit supply chains, including inserting tracking Source: Oxford Economics, consumer survey; n=10,394 technology in leather bags, providing assurance to consumers. Many businesses and retailers are investing in improving the quality of the customer experience both online and offline, and making clearer the benefits of authentic clothing.

22 11 See IPO’s copyright tracker here: https://www.gov.uk/government/news/illegal-streaming-threatens-copyright-progress Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

Deterring illicit trade in medicines

Opportunists (41%) are the largest group Fig. 15: Illicit trade consumer matrix—Medicines in this product category. Cost is what most motivates this group, but they Strategies to reduce illicit trade in medicines (and Bargain Hunters) also highlight Top 3 responses by consumer segment that quality assurance is an important influencer. Critics (33%) Activists (14%) Assure quality 48% Assure quality 64% For Critics and Activists, cost does Clarify goods are legit 46% Clarify goods are legit 62% Social Communicate not feature among the top influencing 44% Communicate 57% motivations. wider implications wider implications

Opportunists (41%) Bargain Hunters (12%) Quality assurance and authentication are Reduce cost 77% Assure quality 75% particularly important drivers, considering

Motivation / outlook Motivation Assure quality 75% Reduce cost 71% the reported incidents of illicit goods Product entering official supply chains and the Increase availability 74% Increase availability 70% health risks of illicit medicines. One- Possibly illicit Illicit quarter of illicit purchasers of medicines Complicity to buy illicit report experiencing a dangerous or Source: Oxford Economics, consumer survey; n=6,898 unhealthy product.

New initiatives, such as the use of authentication identifiers on packets, will make it harder to infiltrate supply chains. Adopting technologies like blockchain and other authentication techniques could help build more confidence in legitimate products. Operation Pangea, co- ordinated by Interpol, has helped raise awareness of the risks of buying medicines over the internet as well as cracking down on illicit suppliers, intermediaries, and retailers.12

12 More information about operation Pangea is available at https://www.interpol.int/Crime-areas/Pharmaceutical-crime/Operations/ Operation-Pangea 23 Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

STAKEHOLDER STRATEGIES TO COMBAT ILLICIT TRADE

We interviewed over 8,000 Fig. 16: Stakeholders’ reasons for illicit trade’s increase Europeans working in a variety What is the main driver for the increase in illicit trade? of roles to combat illicit Top-ranked responses trade to discover how they 3% are adapting to its shifting Changing customer attitudes patterns. We also explored 3% 4% Changes to product their views of consumers’ 7% motivations and purchasing 30% Changing sales and distribution channels behaviours, to see if they Increasing attractiveness of illicit goods are aligned with those of 14% Increasing sophistication or reach of consumers. organised crime Increasing corruption As parts of a much larger 16% Declining resources for law enforcement ecosystem, business 23% Declining protection and deterrence executives, policy-makers, and law enforcement officials Source: Oxford Economics, stakeholder survey; n=8,121 naturally have distinct goals and initiatives available to Where stakeholders ultimately the incidence of illicit trade, combat illicit trade. But at a put their focus naturally such as influencing consumers, broad level there is agreement is influenced by cost and designing regulatory about the drivers of illicit trade implementation challenges. frameworks, and enhancing and where actions are most This may explain the apparent supply-chain security, rather needed. These stakeholders preference for proactive and than investing in strengthening highlight changing customer preventive strategies to reduce enforcement. attitudes as the most important driver of illicit trade Fig. 17: Stakeholder strategies to combat illicit trade growth, followed by changes Which of the following actions would be most effective in in products (of both legitimate combatting illicit trade? Top-three ranked responses and illicit goods) and sales and distribution channels. Develop legal frameworks, policies, procedures, regulations 64% Stakeholders know there is no simple solution and that illicit trade must be targeted from Improve supply chain security 63% multiple angles. These include developing better legal and policy frameworks, tightening Improve law enforcement supply chains, improving 56% enforcement at the border and inland, and influencing Influence consumers customer behaviour. Effective 56% collaboration between the multiple agencies involved in combatting illicit trade and Improve collaboration 35% deployment of technologies will be needed to support initiatives in all these areas. Invest in latest technologies 26%

Source: Oxford Economics, stakeholder survey; n=8,121

24 Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

INFLUENCING CONSUMERS—STICK OR CARROT?

Stakeholders believe that market, or where different rates reducing the price difference of excise duty create large between legitimate and illicit cross-border price differences. goods is by far the most This finding contrasts with the effective action to influence views of consumers, who attach consumers. Significant price similar importance to quality changes may be difficult assurance and confidence that to execute in a competitive products are legitimate.

Fig. 18: Stakeholder strategies to influence consumers vs. consumers’ effective strategies to deter illicit purchases Which of the following In your view, how effective would the following actions be in actions would be most discouraging you from buying from sources that may not be effective in discouraging legitimate? “Effective” and “Very effective” responses consumers from illicit trading? Top-ranked choices Assure quality Reduce costs Increase availability 7% Clarify goods are legit 8% Communicate wider implications Track illicit goods 14% Raise fines and penalties 50% Increase chance of prosecution Publish names involved in illicit Remind illicit harms legit firms 21%

Reduce the price difference between licit and illicit goods 46% Provide other incentives to 46% buy licit goods 52% 67% 66% 52% Explain the potential risks 63% 59% of illicit trading 60% 52%

Explain the wider implications of illicit trade

Increase the penalties for consumers

Source: Oxford Economics, stakeholder survey; Source: Oxford Economics, consumer survey; n=32,023 n=8,121

25 Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

This comparison highlights • Explaining the potential risks Stakeholders are more aligned several areas where and wider implications of with consumers when it comes stakeholders’ and consumers’ illicit trade is top priority for to not prioritising penalties for perspectives are not aligned: 14% and 8% of stakeholders, buying illicit goods. Only 7% respectively. Consumers, of stakeholders highlighted Providing positive incentives • however, appear receptive increasing the chances of to buy licit goods is seen as to being made aware of prosecution and penalties as most effective by only 21% of the implications of illicit their top priority. More than stakeholders, yet initiatives trade. Karl Lallerstedt half of business executives to assure quality and thinks campaigns can (55%) fear that overzealous increase availability are seen have an impact if they efforts to combat illicit trade by consumers as among focus on plausible risks to would generate negative the most effective. Mary- individuals, such as with publicity. Liz Allen notes that Anne Venables, economic medicines or computer making penalties harsher advisor at the UK’s ransomware: “I think we’ll see won’t be useful without Intellectual Property Office some consumer segments effective enforcement. “When (IPO), notes that “people becoming more aware of the you are prosecuting so few, are willing to pay for legal risks and many thinking it’s people are going to still access to films and music worthwhile paying for peace think it won’t happen to me, if they can. Accessibility is of mind.” regardless of the penalty.” very important. Access to legal alternatives has had positive effects.”

Positive incentives to buy legitimate goods and awareness campaigns score very low among stakeholders compared with what consumers say would most influence them.

SECURING THE FULL SUPPLY CHAIN

Approaches to secure the form. It has become almost Fraud Office (OLAF)’s strategy supply chain need to adapt impossible for customs or to combat the illicit tobacco to the rapid changes in the parcel couriers to stop and trade includes controlling increasingly global, digital check the enormous floods inputs to the manufacturing economy. As more products of small packages,” says process, such as the acetate include digital elements with Europol’s Chris Vansteenkiste. tow used in filters.13 There are designs that can be easily ongoing efforts by alcohol copied, and as manufacturing Stakeholders identified actions producers to deter the use of becomes more fragmented, in product design, manufacture, industrial alcohol in illicit drinks outsourced, and extended and distribution as key to by adding a chemical, (brand across continents, supply reducing illicit trade (see Fig. name Bitrex), which has an chains become far more 19). There are many strong unattractive taste. Customs difficult to control and secure. examples of such initiatives. departments, meanwhile, are E-commerce has transformed At the design stage, cigarettes collaborating increasingly traditional distribution and medicines suppliers are with courier companies and networks. “Nowadays, goods putting identification markers freight forwarders to tackle the are entering in small-parcel on packets. The European Anti- problem of small packages.

13 May 2017, European Anti-Fraud Office (OLAF), Progress report on the implementation of the Commission Communication, “Stepping up the fight against cigarette smuggling and other forms of illicit trade in tobacco products—a comprehensive EU 26 strategy (Com (2013) 324 final of 6.6.2013).” Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

Fig. 19: Strategies to secure the supply chain Where would action be most effective in improving products, the supply chain, and retailing? Top-three ranked choices

Product distribution 59%

Product manufacture 58%

Product design 54%

Product marketing and advertising 49%

Product physical retailers 37%

Product online retailers 30%

Industry bodies and trade associations 14%

Source: Oxford Economics, stakeholder survey; n=8,121

However, others suggest that to analyse, use, share and act more urgent action may be on this information. Leading Stakeholders’ actions needed to tackle the reality of companies will be those that to secure retailers rank modern supply chains. Piotr recognise that profitability and surprisingly low (with online Stryszowski thinks that while responsibility go hand in hand.” even lower than offline) there is lots of emphasis on despite consumers’ lack of voluntary agreements with Our research shows confidence in the legitimacy intermediaries, a stronger stakeholders’ actions to secure of goods sold through official legal framework could retailers rank surprisingly retail channels. actually be very effective. Jeff low (with online even Hardy notes that some are lower than offline) despite adapting more quickly than consumers’ lack of confidence others: “In the transportation in the legitimacy of goods supply chain, the express sold through official retail carriers have been among the channels. “The reality is that intermediaries that have taken most shoppers—online and early, pre-emptive steps to offline—depend on the retailer guard against exploitation of to ensure a safe and secure their infrastructures. Part of shopping experience. So we this advantage has to do with need online platforms to take the availability of information any and all steps possible to on shippers, but more responsibly deliver on this importantly their willingness expectation,” says Mr. Hardy.

27 Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

At the European level, trade and work with policy- Only 14% of stakeholders Europol’s Mr. Vesteenkiste makers to combat it, but overall prioritise industry reports his organisation has these agreements tend to be bodies and trade associations made rapid progress closing voluntary. “Online retailers to play a leading role in down the domain names of should demonstrate that they combatting illicit trade, despite known online illicit traders— are respected retailers and not the potentially positive role from just 100 domain names just in it for the money,” says they could play. taken down in 2013 to 21,000 Mr. Vansteenkiste. There is also in 2017. But his unit doesn’t the wider digital ecosystem of look at the widely used search engines, social media, legitimate websites, like online and payment providers. Policy- marketplaces and auction makers at the national level are sites, where large amounts of starting to look at how to deal illicit trade take place. Several with the problem, but much online retailers have stepped remains to be done (see UK up efforts to combat illicit IPO case study below).

THE UK IPO’s multi-pronged approach to the digital supply chain

The UK’s Intellectual Property Office (IPO) has But Enforcement Director Ros Lynch been tracking the evolution of online copyright doesn’t think enforcement action alone will infringement for several years. Its online contain illicit trade. A lot of the IPO’s work copyright tracker14 is now in its eighth wave. is awareness-raising and influencing the The IPO’s latest report (Wave 7) showed IP behaviour of the accidental infringer. The IPO infringement levels stabilising while consumers has worked with the major search engines adopt subscription services like Netflix and and rights holders in the creative industries Spotify, but that new threats are emerging, to develop a Code of Practice, taking illicit including stream-ripping of music and new suppliers off the first page of search results, set-top boxes allowing free access to films and and are extending its work to look at online subscription TV channels. marketplaces, digital advertising, and social media and user-upload platforms. “The aim is The IPO is funded by its receipts from granting to make sure that consumers who innocently patents, trademarks, and design rights. This go to search for something do not get diverted gives it independence from government funding from the legitimate site to those offering constraints and has helped support research illegal downloads,” she says. The agencies’ and a number of enforcement initiatives. In responses must touch all parts of the supply October 2017 the UK updated the penalties chain internationally: “We need to work with for online infringement from two to 10 years, industry, different intermediaries, the shipping in line with penalties for physical goods. It is and logistics companies, the warehouse people, also undertaking a thorough review of its legal and with the government,” she says. framework to see if updates are needed. The IPO’s funding has also led to the establishment of the Police Intellectual Property Crime Unit (PIPCU), an operational team that can carry out investigations and arrest wrong-doers.

14 “Online-copyright infringement tracker—7th wave” IPO (UK), July 2017 available at https://www.gov.uk/government/publications/ 28 online-copyright-infringement-tracker-survey-7th-wave Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

UPDATING AND HARMONISING LEGAL AND POLICY FRAMEWORKS

Legal and policy frameworks and revenue, followed by be in charge of tax policy. need to keep up with the health, the environment, Differences in legislation changing nature of illicit trade. and consumer protection. across so many countries can Work is ongoing at the EU These scored higher than inhibit information exchange. and national levels on IP and judiciary, law enforcement, Mr. Stryszowski points to the copyright reform, e.g., working and prosecution enforcement. US, where an appointed IP with YouTube and other This demonstrates the breadth Enforcement Co-ordinator platforms to tackle copyright of policy work needed and (IPEC) has direct access to infringement. Harmonising indicates that updating the president. “It’s a relatively legal and regulatory policy is sanctions for illicit trade is a small office with decisive important at an international lower priority for stakeholders. powers; he can tell different level to reduce asymmetries agencies what to do. This is (such as those created by There are ongoing efforts to naturally much more difficult varying excise rates, for harmonise standards across to achieve in Europe.” example) that can encourage the EU and internationally, illicit trade. such as the Tobacco Directive and the World Health When asked where work was Organisation’s FCTC Protocol. most needed in policy design, However, it’s particularly stakeholders highlight trade difficult to co-ordinate tax (e.g., tracking and reporting), policies, as ministers in each borders and customs, tax country want and expect to

Fig. 20: Strategies to improve design of policy, legal, or regulatory frameworks Where would action be most effective in improving the design of frameworks, policies, regulations, and procedures? Top-three ranked choices

Trade 55%

Borders and customs officials 54%

Tax and Revenue 54%

Health, environment, and consumer protection 53%

Judiciary and law enforcement 43%

Judiciary and prosection service 27%

Top-level policy-makers, such as ministers and members of parliament 15%

Source: Oxford Economics, stakeholder survey; n=8,121

29 Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

Penalties for IP crime IMPROVING ENFORCEMENT judicial process are consistently and counterfeiting vary considered far less important, considerably across Europe. Law enforcement agencies despite the inconsistencies In many places it’s not recognise that there is room and known difficulties securing considered a serious crime, for improvement. Less than convictions for illicit trading. and prosecution rates are low. 60% of law enforcement Bernard Leroy, director of the respondents said they had There are significant differences medicines research agency access to good information, in resources and capabilities IRACM, thinks policy-makers effective systems, policies, between countries. The EU need to urgently update and procedures. As a result, has invested in improving penalties, to reflect the threat just over half (56%) report the external border, largely in that fake medicines present they have difficulty ensuring response to the immigration to public health. “Intellectual compliance with systems, crisis. Many customs officers property crime is considered policies, and procedures. are collaborating with freight more of a misdemeanour than forwarders, parcel delivery a crime, like parking your car When asked to prioritise companies and distribution incorrectly. Prosecutors don’t improvements in law depots to deal with the large take action because they see enforcement, borders and volume of small packages. they can have no impact. This customs came first, followed by Some border forces are is a strong incitement of the police (see Fig. 21). This applies investing in scanning criminal network because it is in almost all countries except equipment or collecting better a lot of money and no danger for some non-EU countries information and sharing it of prosecution.” such as Belarus, Russia, and with others to strengthen Ukraine, where improvements intelligence. However, it’s a for police and trade officials challenge to keep up with “Intellectual property are seen as more important. changing routes and cunning crime is considered more Improving prosecution and the disguises of illicit supplies. of a misdemeanour than a crime, like parking your car incorrectly.” Fig. 21: Improving enforcement Bernard Leroy, IRACM Where would action be most effective in improving enforcement? Top-three ranked choices

Border and customs officials 65%

Police 57%

Trade officials 51%

Revenue authority officials 39%

Prosecutors and judges 22%

Source: Oxford Economics, stakeholder survey; n=8,121

30 Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

Corruption remains a problem enforcement resources have not with public sector officials in kept pace with shifts in global It’s a long-term process: some countries. According to trade, both at the international “You need a big technological Karl Lallerstedt, “for countries border and in-country. evolution and a couple of with resource shortages generations to educate and serious corruption Professor Ernesto Savona people in new ways to tackle problems, creating an effective of Transcrime believes it’s a illicit trade.” enforcement environment may long-term process, involving Professor Savona, Transcrime be a long way off. Providing culture change and new consumers with authentication ways of working. “Things are solutions to check the product changing quickly, and you is legitimate themselves might need to change your cultural be a more effective alternative.” paradigm of investigation from the typical investigation As the patterns of international routine using tactical data to trade and illicit activity evolve, risk assessment using strategic it’s difficult to keep up, intelligence. You need a big particularly with public sector technological evolution and budget constraints and more a couple of generations to urgent priorities. Nearly 60% educate people in new ways to of stakeholders agree that law tackle illicit trade.”

MAKING COLLABORATION WORK

As Michael Ellis says, “Illicit Fig. 22: Stakeholder actions to improve collaboration trade and counterfeit crime Which actions would be most effective in improving collaboration doesn’t belong to any one among different parties involved in combatting illicit trade? country, any one enforcement Top-ranked choices agency, any one brand holder. It has to be shared in partnership Sharing data generated by between the private and public 4% modern trade networks 7% sectors.” So it’s crucial that Sharing information across stakeholders work effectively 8% national enforcement agencies together on policy design and 36% Sharing information across implementation. international enforcement agencies 16% Coordinating policies between We asked stakeholders national and regional departments to identify the most Coordinating policies effective actions to improve internationally collaboration (Fig. 22). These 29% responses clearly show a Establishing public and private sector forums preference for collaborating on data and intelligence rather than policies and procedures. Source: Oxford Economics, stakeholder survey; n=8,121

31 Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

Other interesting findings • There are many successful “Agencies work in silos for include the following: examples of effective their own targets…there has international collaboration, Collaborating by sharing often been mistrust between • in information sharing, or data to build intelligence the public and private sectors, joint investigations, co- on the patterns of trade is particularly where there are ordinated by pan-national clearly the most important high levels of corruption.” organisations like Interpol, sphere of cooperation, Europol, the WCO, OLAF, Liz Allen, former HMRC Excise and cited by over 50% EUIPO, the OECD Taskforce Divisional Head of stakeholders in some on Illicit Trade, and others. counties, like Luxembourg But challenges still exist (53%) and Malta (51%). in harmonising standards • Sharing data among with significant differences national agencies, though remaining between member second overall, is the states, for example in highest priority for several customs procedures. countries, including Austria, Establishing public and Belgium, Belarus, Germany, • private sector forums is Greece, the Netherlands, the least popular, the top Portugal, and Spain. priority for only 4% of • Collaboration among national respondents. agencies scores higher than international collaboration, Improving collaboration is a for both data-sharing and long-term endeavour, needing co-ordination of policies and incremental improvements operations. Ms. Martinic of (see case study below). Liz IARD asks for a “whole-of- Allen identifies structural government” approach, with barriers that often need to be all departments working overcome: “Agencies work in together to consider the silos for their own targets, and wider implications for people are reluctant to share society. “It is critical that findings and credit if it affects governments create an their bonus at the end of the environment where legal year. And there has often been businesses can thrive and a lack of public trust between collaboration to stamp out the public and private sectors, illicit alcohol is encouraged,” particularly where there are she says. high levels of corruption.”

32 Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

Making the most of limited resources at the Irish HPRA

“All agencies have limited powers; we can’t As Ireland is a large exporter of pharmaceutical do this job on our own,” says Hugo Bonar, medicines, medical devices and other health Enforcement manager of Ireland’s Health products, the HPRA works closely with Products Regulatory Authority (HPRA). Though international partners in the regulation of the his mandate is specifically to contain the illicit legitimate market. The organisation is also an supply of medicines and other health products active participant in international initiatives to protect public health, he has developed a to combat illicit trade in medicines in Europe. wider, more holistic approach, co-operating with These include the Heads of Medicines Agencies several different agencies to share intelligence, Working Group of Enforcement Officers and resources, and equipment. The HPRA has the Council of Europe (COE). The COE has arrangements with the Irish Police, including developed the Medicrime Convention, the the drugs and organised crime bureau, the only international legal instrument addressing Irish customs service and a number of separate counterfeit and falsified medicines and medical government departments, including Sport devices. Participation in other initiatives Ireland, to share intelligence on products, includes the UNODC, the WHO’s Member trades, behaviours, or potential criminals. When State Mechanism on substandard and falsified a search warrant is executed, people from medical products and the industry research different agencies come together to support body IRACM. It also works with the private whoever has the lead. The HPRA, police and sector through Operation Pangea, an Interpol customs support each other with the provision co-ordinated operation to thwart illegal online of evidence to aid prosecutions. Mr. Bonar trade, and involving regulators, the WCO, describes a recent investigation, on both sides of Europol, social media platforms, e-payments the border with Northern Ireland, of a supplier of providers, auction houses, and corporations. anabolic steroids that involved the co-operation of customs, police, and revenue departments Mr. Bonar has built important relationships over deploying armed response units and a cash the 18 years he has worked at the Authority. detector dog. None of the agencies involved “It’s a slow build, but we’re getting there,” he would have had the resources on their own, and says. The key to successful collaboration, he all benefited from the joint operation. “In one site adds, is creating a situation where everyone we detained over €2 million in anabolic steroids, can win. “If you can develop a situation where we caught the suspected largest supplier in the there’s no competition everybody gets the country. We wouldn’t have had the resources to credit and above all the public is protected— do that on our own,” he says. that works.”

33 Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

TECHNOLOGY IS NOT A QUICK FIX

Modern technologies at the WCO, says while Only 48% of business promise significant advances technology is advancing executives say they have in fighting illicit trade, but rapidly, and millions are being access to good information they can be expensive to spent, past investments in on the extent and changing implement and upgrade. authentication technologies patterns of illicit trade We asked stakeholders like security bar codes (compared with 56% of policy to assess the value of five and holograms have had officials and 58% of law technologies in combatting limited results: “We found enforcement officers). The illicit trade, and none were counterfeiters were copying cigarette industry has invested particularly enthusiastically them and law enforcers heavily in collecting data endorsed. The most popular— were struggling to tell the through empty pack surveys, surveillance and identification difference.” Lack of standards but other products still lack technologies—are seen as between technologies also sufficient data to analyse effective by only 61% of proves challenging: “A customs patterns of illicit trade. stakeholders. officer would need to wear 15 different devices on his belt There are several reasons to to scan or check labels and explain this underwhelming holograms because everyone response. Allen Bruford, who is using different systems,” says worked as Deputy Director Europol’s Chris Vansteenkiste.

Fig. 23: Effectiveness of technologies to combat illicit trade Please rate the effectiveness of the following technologies in tackling illicit trade. “Effective” and “Very effective” responses

61% 60% 57% 53% 50%

Surveilance and Data analytics Track and trace Authentication Process- identification technologies technologies technologies automation technologies technologies

Source: Oxford Economics, stakeholder survey; n=8,121

34 Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

Still, our research suggests • Data collection and that technology will provide analysis, using Big Data better results at lowered cost, and analytical tools to in several areas: recommend actions based on risk assessments. Scanning equipment is • Modern trade networks and expected to improve rapidly. supply chains often leave According to Transcrime’s an extensive digital trail Professor Savona, “A that can help to highlight scanner can only be used patterns in illicit trade. Our today on about 5% of survey shows stakeholders cross-border shipments. are shifting their focus The people developing this from collecting data to technology tell me scanning data analysis. The OECD’s will become much cheaper Mr. Stryszowski sees big and more powerful, which opportunities to provide means it could be 50% in a better information for very short time.” customs and enforcement • Authentication technologies agencies. “It’s not rocket such as blockchain can science,” he says. “It’s about have a material impact on digitising information, illicit trade. Mr. Lallerstedt especially in the context of sees potential in this new small parcels, and creating technology but recognises a secure, pan-European that implementation could information-sharing centre.” be expensive for the early movers.

35 Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

CLOSING THE GAP: RECOMMENDATIONS FOR STAKEHOLDERS

To reach conclusions about BUSINESSES’ IMPLEMENTATION CHALLENGES AND PRIORITIES effective actions to combat illicit trade, we considered Consumers have a more Businesses could improve each stakeholder group in positive outlook on the their effectiveness by aligning turn. We first compared their effectiveness of a range their strategies closer to the view of the effectiveness of business strategies (see motivations of consumers, by: of different initiatives with Fig. 24), with particularly large • Collating better intelligence those of consumers. We then gaps in providing positive on consumer motivations looked at their track record incentives to buy legitimate and the effectiveness of in implementing a total of 37 goods (57% vs. 49% of business alternative strategies. different initiatives to combat execs) and using materials, illicit trade, covering the packaging, or other features • Considering strategies strategies discussed in the to differentiate legitimate beyond price. Businesses previous section: influencing products (56% vs. 42%). need to develop innovative business models, products, consumers (e.g., through and services to convince awareness campaigns); Consumers have a more consumers to buy changing legal, policy, and positive outlook on business legitimate products. Other regulatory frameworks; actions to reduce illicit trade effective strategies that securing the supply chain; than businesses themselves. businesses have more improving law enforcement control over include product compliance; collaborating authentication technologies, externally; and using more Business execs appear to be track-and-trace systems, data and technology. We shifting priorities, with the and promotional campaigns asked if they had implemented most implemented product to influence consumer these initiatives in the last enhancements (in Fig. 25) opinion (e.g., of the risks three years, how successful in reverse priority over the inherent in illicit trade). they had been in reducing next three years. Consumer illicit trade, and their priorities awareness campaigns (in • Responding to the growing over the next three years. purple), only implemented mistrust in online transactions by working with online by 27% to date—the least retailers and intermediaries to implemented of all actions—is develop effective actions to the second-highest priority influence consumers, including for the next three years, while awareness campaigns, and promoting the benefits of authentication and loyalty legitimate products moves schemes. in the opposite direction. Collaborative actions (in • Collaborating more actively green) are becoming a higher with trade bodies, policy priority; actions to collect officials, and law enforcement information (in blue) are officers in joint initiatives to shifting. Collecting intelligence combat illicit trade. on illicit trade is becoming a • Investing more in the fight higher priority, but collecting against illicit trade. Business intelligence on consumer executives in our study motivations is the second least recognise they will need to popular initiative over the next prioritise illicit trade more three years. actively to make progress.

36 Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

Fig. 24: Effectiveness of strategies to combat illicit trade How effective are the following business strategies and actions for combatting illicit trade in your country? “Effective” and “Very effective” responses Business executives Consumers

Using techniques to help authenticate 57% products (e.g., holograms, digital identifiers, tax stamps, labels) 59%

Improving the product quality or service 54% to distinguish from illicit alternatives 56%

Providing incentives for consumers to 49% buy through official channels (rewards, warranty, after-sales service) 57%

Using materials, features, or packaging 42% to help differentiate the product 56%

Source: Oxford Economics, stakeholder survey; n=5,562 Source: Oxford Economics, consumer survey; n=37,370

Fig. 25: Business priorities to combat illicit trade

Rank Strategy implemented last three years Effective reducing illicit trade Priority next three years 1 Change product design (51%) Product authentication technology Product authentication technology (48%) 2 Promote benefits of legit products Supply-chain contractual controls Consumer awareness campaign 3 Improve supply chain tracking & Collaborate with retailers, police, Collaborate with retailers, police reporting etc. etc. 4 Change manufacture or packaging Change price, quality, or service Collect intelligence on illicit trade patterns 5 Change price, quality, or service Improve supply chain tracking & Change price, quality, or service reporting 6 Supply-chain contractual controls Collect intelligence on illicit trade Share information with others patterns 7 Collect intelligence on consumer Consumer awareness campaign Improve supply chain tracking & motivations reporting 8 Share information with others Share information with others Supply-chain contractual controls 9 Collaborate with retailers, police, etc. Collect intelligence on consumer Change manufacture or motivations packaging 10 Product authentication technology Promote benefits of legit products Promote benefits of legit products 11 Collect intelligence on illicit trade Change manufacture or packaging Collect intelligence on consumer patterns motivations 12 Consumer awareness campaign (27%) Change product design Change product design (39%)

Secure supply chain Collaborating externally Information and intelligence Influence consumers

37 Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

There are encouraging POLICY OFFICIALS’ IMPLEMENTATION CHALLENGES signs from our research AND PRIORITIES that consumers prefer to buy legitimate products Generally, policy officials and For policy officials, changing and are moving away from law enforcement officers penalties (in yellow in Fig. 27) unofficial retail outlets, both are more positive about the for retailers, criminals and online and offline. Businesses impact of their strategies public awareness campaigns have an opportunity to re- than consumers (see Fig. 26). (in purple) are priorities. establish themselves as Significant gaps where policy Penalties for consumers are trusted suppliers of authentic officials are out of line with a low priority, despite being products. As Jeff Hardy, DG consumer sentiment include assessed as the most effective of TRACIT says, “Twenty years increased penalties for in combatting illicit trade. ago, most corporations didn’t consumers (55% vs. 33%) and have a vice president for increased security at postal and Collecting information (in climate change or corporate parcel depots (51% vs. 42%). blue) shifts from the most social responsibility. But implemented over the last times have changed and three years to the lowest companies are getting ahead priority for the next three. of the problem, investing Public officials are more more at the corporate level confident in the effectiveness to bring in smart people, new of their anti-illicit trade technologies, and programs to initiatives than consumers. tackle illicit trade head on.”

Fig. 26: Existing capabilities to combat illicit trade How effective are the following policy and law enforcement strategies and actions for combatting illicit trade in your country? “Effective” and “Very effective” responses

Public sector officials Consumers

Punishment for consumers caught buying 55% or trading illicit goods 33%

Monitoring and auditing transactions 54% through the supply chain to identify distributors and consumers of illicit products 49% 51% Increased scrutiny 42%

Punishment for distributors or sellers of 50% illicit goods 46%

Using special technologies to identify if a 49% product is being sold illicitly 51%

46% Efforts to fight bribery and corruption 48%

Source: Oxford Economics, stakeholder survey; n=1,146 Source: Oxford Economics, consumer survey; n=32,023

38 Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

Fig. 27: Policy officials’ priorities to combat illicit trade

Rank Strategy implemented last three years Effective reducing illicit trade Priority next three years 1 Collect information (51%) Change penalties for consumers Change penalties for retailers (50%) 2 Coordinate with other departments Change penalties for criminals Public awareness campaigns 3 Collaborate internationally Public awareness campaigns Provide business guidance/forums 4 Update legislation Update legislation Change penalties for criminals 5 Change penalties for businesses Change penalties for businesses Update legislation 6 Public awareness campaigns Collaborate internationally Coordinate with other departments 7 Provide business guidance/forums Change penalties for retailers Change penalties for businesses 8 Change penalties for criminals Coordinate with other departments Collaborate internationally 9 Change penalties for consumers Provide business guidance/forums Change penalties for consumers 10 Change penalties for retailers (27% Collect information Collect information (39%)

Changes to legal & policy Collaborating externally Information and intelligence Promotion and awareness raising

Policy officials could improve • Co-ordinating policies and their effectiveness by aligning procedures more effectively their strategies closer to the across departments motivations of consumers, by: and stakeholders, both domestically and Investing in awareness • internationally. This is campaigns. Many undoubtedly difficult to consumers would be achieve, but policy officials receptive to targeted should learn from those campaigns that highlight who have been more the genuine risks of illicit successful, for example by trade and the benefits of aligning incentives across buying legitimate products. departments and agencies. Responding to the growing • Developing joined- distrust of online purchases • up business cases that by upgrading policy, legal, demonstrate the full economic and regulatory frameworks. benefits of combatting Penalties can be increased illicit trade (e.g., increased for criminals and retailers tax, improved health, and that trade illicitly, as well crime reduction). There as intermediaries in the are many effective policies supporting ecosystems that countries have still to that benefit from illicit implement, but they are held trade. Targeted penalties back because of resource for consumers (e.g., for shortfalls and competing particularly heavy and/ priorities. Often the difficulty or repeat offenders) may is presenting business cases also be effective with some when the economic benefits segments, but this may meet go to other departments. resistance from businesses.

39 Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

LAW ENFORCEMENT OFFICERS’ IMPLEMENTATION PRIORITIES

For law enforcement Actions to collect information Various enhancements officers, actions to improve and intelligence (blue), though to searching and seizing collaboration (green) with a among the most implemented, capabilities and technologies wide range of domestic and are generally not assessed have been implemented international partners are as highly effective and are (e.g., track and trace, RFID recognised as effective and becoming less popular for law technology), with mixed results. will take priority over the enforcement investment, with Training law enforcement next three years, particularly the exception of data analytics officers in new patterns and collaboration with e-commerce and risk assessments, the approaches to illicit trade is suppliers, couriers, and second-highest priority over viewed as the second most distribution depots. the next three years. effective and is a high priority for the next three years.

Fig. 28: Law enforcement priorities to combat illicit trade

Rank Strategy implemented last three years Effective reducing illicit trade Priority next three years 1 Collect information (54%) Collaborate with distribution cos. Collaborate with e-commerce (5.8%) suppliers 2 Monitor & track shipments with Train law enforcement officers Data analytics and risk technology assessments 3 Random searches at new locations Collaborate with industry partners Improve compliance with existing policies 4 Product authentication Collaborate with policy officials Collaborate with international organizations 5 Collaborate with distribution cos. Monitor & track shipments with Train law enforcement officers technology 6 Collaborate with policy officials Collaborate with international Collaborate with distribution cos. organizations 7 Measure & report enforcement Collaborate with e-commerce Product authentication effectiveness suppliers 8 Collaborate with industry partners Random searches at new locations Collaborate with policy officials 9 Automate manual customs procedures Product authentication Monitor & track shipments with technology 10 Train law enforcement officers Measure & report enforcement Collaborate with industry partners effectiveness 11 Anti corruption initiatives Automate manual customs Anti corruption initiatives procedures 12 Data analytics and risk assessments Data analytics and risk assessments Measure & report enforcement effectiveness 13 Improve compliance with existing Improve compliance with existing Automate manual customs policies policies procedures 14 Collaborate with international Anti corruption initiatives Random searches at new organizations locations 15 Collaborate with e-commerce suppliers Collect information (4.7%) Collect information (54%)

Technology solutions Collaborating externally Information and intelligence Process compliance and improvement

40 Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

Law enforcement officers • Enforcing compliance with For law enforcers, fighting could improve their policies and procedures. illicit trade is a never-ending effectiveness by aligning This is a persistent challenge struggle. Our research their strategies closer to the for many departments and suggests that many of the motivations of consumers by: countries. Training of law preventive measures listed enforcement officers, anti- here, with political will and Aligning actions with the • corruption initiatives and investment, can result in shifting nature of trade, use of technologies (for substantial progress. for example by working example automation of with online retailers and manual procedures) have all their distribution networks proved effective. to tackle supply chain vulnerabilities. • Focusing investment on effective actions. Develop Collaborating effectively • data analytics and use with others, nationally risk assessments to direct and internationally, and resources to those areas across public and private with most impact. Business sectors. The danger is cases need to highlight that this willingness is not those initiatives that will reciprocated. Incentives have the greatest impact need to be aligned to on combatting illicit trade. encourage effective For example, using data collaboration. analysis for risk assessments may be a higher priority than investing in some technologies that risk becoming outdated or countered by criminals.

41 Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

ANNEX A: REGIONAL ANALYSIS OF ILLICIT TRADE Illicit trade will vary significantly Stakeholder estimates of the The regional analysis on the by country, as a result of extent of illicit trade range following pages is calculated different approaches adopted from 12% in Western Europe from stakeholders’ estimates. to combat it (e.g., the policies, and 15% in the Eastern borders Survey respondents provided regulations, legal environment, (Fig. 29), though there estimates in broad bands. and effectiveness of border are significant differences We used the mid points to controls). It will also be within regions, as set out in calculate averages for the influenced by cultural factors the tables below. There is extent and growth in illicit that influence consumer greater regional variation in trade over the last three years. attitudes and behaviours. consumers’ estimates. For Our surveys produced a rich illicit purchases, they range data set explaining these from 7% in the Nordics to 15% differences. The data, together in the EU borders. For possibly with country spotlight reports illicit purchases, there appear and an interactive dashboard to be a group with relatively that presents consumer lower levels (18% in the segments by country and Nordics and 22% in Western product, can be accessed via Europe) with other regions all the research project’s website estimating much higher levels, (https://www.oxfordeconomics. around 30% of all purchases as com/thought-leadership/ possibly illicit. combatting-illicit-trade).

Fig 29. Overview of estimates of illicit trade—Stakeholders vs. Consumers

Stakeholders Consumers Consumption Illicit Possibly illicit

50%

45%

40%

35% 30% 31% 29% 25% 30% 20% 22%

15% 18%

10% 13% 15% 15% 13% 13% 13% 5% 12% 10% 9% 7% 0% Central/ Eastern borders Nordics Southern Western Eastern Europe (non-EU) Europe Europe

42 Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

WESTERN EUROPE

Illicit consumption Country / Product Cigarettes Alcohol Films Clothing Medicines Total Products Austria 12.5% 12.7% 12.8% 12.0% 13.5% 12.7% Belgium 11.9% 10.4% 13.0% 12.9% 11.5% 11.9% France 12.3% 11.3% 13.2% 13.2% 12.3% 12.5% Germany 12.9% 12.2% 14.9% 13.4% 13.9% 13.5% Ireland 9.1% 10.8% 13.3% 12.1% 9.3% 10.9% Luxembourg 10.0% 10.7% 13.6% 12.0% 10.9% 11.4% Netherlands 11.6% 11.9% 14.3% 14.5% 13.4% 13.1% Switzerland 12.2% 11.2% 12.2% 13.3% 13.5% 12.5% United Kingdom 12.9% 11.9% 13.6% 13.0% 12.3% 12.7% Western Europe 11.7% 11.5% 13.4% 12.9% 12.3% 12.4%

Growth Country / Product Cigarettes Alcohol Films Clothing Medicines Total Products Austria 2.5% 0.6% 2.8% 3.1% 5.5% 2.9% Belgium 1.1% 2.2% 2.5% 2.0% 4.7% 2.5% France 1.6% -0.9% 2.6% 1.7% 4.2% 1.8% Germany 3.9% 1.4% 7.4% 6.8% 6.4% 5.2% Ireland -8.7% -4.9% 0.6% -1.7% -10.8% -5.1% Luxembourg -7.6% -3.1% 0.3% -3.0% -4.1% -3.5% Netherlands -0.5% -1.2% 0.8% 4.5% 3.4% 1.4% Switzerland 1.8% 0.1% 1.2% 2.5% 8.7% 2.9% United Kingdom 2.4% 3.1% 3.3% 6.1% 8.5% 4.7% Western Europe -0.4% -0.3% 2.4% 2.4% 2.9% 1.4%

• Western Europe’s estimated illicit trade • Illicit trade growth over the last 3 years averages 12.4% for all products, only averages 1.4% for all products, far below just below the whole of Europe (by 0.6 the 2.5% observed for the whole of Europe. percentage points). Ireland reports the lowest The trade in illicit cigarettes has seen a 0.4% level in the region with 10.9% and Germany decline over the last three years. Ireland the highest with 13.5%. Alcohol’s illicit trade has estimated an impressive 8.7% decrease is evaluated at 11.5% in the region compared whereas Germany reports a 3.9% increase. with 12.7% for the whole of Europe, with all countries except Austria being below average.

43 Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

NORDICS

Illicit consumption

Country / Product Cigarettes Alcohol Films Clothing Medicines Total Products Denmark 13.8% 12.9% 13.3% 12.3% 14.1% 13.3% Finland 13.9% 12.4% 12.6% 10.7% 12.9% 12.5% Norway 11.9% 14.1% 14.1% 11.7% 10.9% 12.5% Sweden 12.3% 12.6% 14.7% 12.4% 12.0% 12.8% Nordics 13.0% 13.0% 13.7% 11.8% 12.5% 12.8%

Growth

Country / Product Cigarettes Alcohol Films Clothing Medicines Total Products Denmark 0.3% 0.7% 2.2% -1.7% 6.0% 1.5% Finland 1.7% 2.1% -0.9% 2.0% 3.2% 1.6% Norway 3.6% 5.1% 2.6% 3.1% -2.6% 2.4% Sweden -1.4% 3.0% 1.5% 1.3% 0.8% 1.0% Nordics 1.1% 2.7% 1.4% 1.2% 1.9% 1.6%

• The Nordics’ estimates illicit trade at 12.8% • Illicit trade growth over the last 3 years for all products, very close to the Europe averages 1.6% for all products, far below average. Denmark reports the highest the 2.5% observed in the whole of Europe. with 13.3%, with above average illicit trade Medicines has seen a 1.9% increase over in cigarettes and medicines. Finland and the last three years. Denmark reports a Norway report the lowest level in the region 6% increase, whereas Norway estimates with 12.5%, despite above average estimated an encouraging 2.6% decrease. Norway consumption of illicit cigarettes and alcohol. estimates above average increases of illicit Clothing’s illicit trade is evaluated at 11.8% cigarettes and alcohol. in the region compared with 13.2% for the whole of Europe with all countries below average.

44 Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

SOUTHERN EUROPE

Illicit consumption

Country / Product Cigarettes Alcohol Films Clothing Medicines Total Products Cyprus 11.4% 11.8% 14.2% 14.1% 12.1% 12.7% Greece 13.1% 12.5% 12.2% 13.2% 14.1% 13.0% Italy 12.9% 11.5% 15.1% 14.7% 13.3% 13.5% Malta 9.9% 11.2% 13.8% 12.5% 9.8% 11.4% Portugal 13.7% 12.5% 13.5% 12.1% 13.4% 13.0% Spain 13.3% 12.3% 15.6% 13.2% 12.1% 13.3% Southern Europe 12.4% 12.0% 14.1% 13.3% 12.5% 12.8%

Growth

Country / Product Cigarettes Alcohol Films Clothing Medicines Total Products Cyprus 1.5% 1.5% 3.0% 6.8% 1.1% 2.8% Greece 0.2% 2.0% 2.0% 4.1% 8.0% 3.3% Italy 2.7% 2.5% 5.3% 7.8% 6.8% 5.0% Malta -6.2% -4.2% 0.0% 0.3% -3.7% -2.8% Portugal 4.1% 2.3% 1.7% 1.8% 2.7% 2.5% Spain 4.7% 3.1% 3.3% 6.0% 7.0% 4.8% Southern Europe 1.2% 1.2% 2.6% 4.5% 3.7% 2.6%

• Southern Europe’s estimated illicit trade • Illicit trade growth over the last 3 years averages 12.8% for all products, close to the averages 2.6% for all products, in line European average. Italy reports the highest with the 2.5% observed in the whole of in the region, with 13.5%; Malta reports Europe. But there are significant variations the lowest level, with 11.4%. Illicit alcohol is between countries in the region. Italy has below the European average of 12.6% for all seen the largest increase, at 5%, with the countries in the region. largest increase in clothing (7.8%). Spain also estimates a large increase over the last 3 years of 4.8%. Malta has seen a 2.8% decline in illicit trade, with large decreases in cigarettes (6.2%) and alcohol (4.2%). Illicit medicines are estimated to have increased 3.7% across southern Europe, with particularly large increases in Greece (8%) and Spain (7%).

45 Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

EASTERN/CENTRAL EUROPE

Illicit consumption Country / Product Cigarettes Alcohol Films Clothing Medicines Total Products Bulgaria 10.5% 11.6% 13.1% 11.0% 10.1% 11.3% Croatia 13.2% 12.2% 14.6% 12.9% 12.6% 13.1% Czech Republic 12.8% 12.9% 14.7% 14.1% 13.0% 13.5% Estonia 11.3% 12.3% 12.1% 10.4% 9.7% 11.2% Latvia 11.9% 11.7% 13.5% 11.5% 12.2% 12.2% Lithuania 12.3% 13.6% 13.3% 14.4% 14.2% 13.6% Slovakia 12.7% 12.3% 14.9% 13.7% 10.5% 12.8% Slovenia 10.9% 13.4% 14.6% 14.3% 13.0% 13.2% Hungary 14.9% 13.4% 16.0% 14.5% 12.2% 14.2% Poland 13.0% 14.3% 13.6% 11.8% 12.7% 13.1% Romania 13.7% 11.8% 13.6% 11.1% 10.7% 12.2% Central/Eastern Europe 12.5% 12.7% 14.0% 12.7% 11.9% 12.8%

Growth Country / Product Cigarettes Alcohol Films Clothing Medicines Total Products Bulgaria -2.0% 0.1% 2.1% 0.2% -3.4% -0.6% Croatia 3.1% 3.9% 7.4% 5.3% 4.4% 4.8% Czech Republic -0.6% -2.1% -0.2% 0.3% 0.0% -0.5% Estonia -3.2% -2.2% -1.2% -2.6% -1.6% -2.2% Latvia 1.4% 2.7% 0.6% 2.8% 3.4% 2.2% Lithuania -1.9% 0.7% -0.7% 0.2% 3.9% 0.4% Slovakia 2.8% 2.1% 4.6% 8.0% -5.0% 2.5% Slovenia -2.5% 1.4% 3.0% 4.7% 5.6% 2.4% Hungary 10.1% 9.0% 8.1% 9.8% 6.8% 8.8% Poland 2.1% 4.7% 2.9% 1.9% 8.7% 4.1% Romania 2.6% -2.2% 6.2% 4.1% 2.9% 2.7% Central/Eastern Europe 1.1% 1.6% 3.0% 3.2% 2.3% 2.2%

• Eastern/Central Europe’s estimated illicit trade • Illicit trade growth over the last 3 years averages 12.8% for all products, only just below averages 2.2% for all products, in line with the whole of Europe (by 0.2 percentage points). the 2.5% observed in the whole of Europe. Hungary estimates the highest with 14.2%, with However, there are large differences between above average illicit levels in cigarettes, films countries. Hungary reports a large increase and clothing. Estonia reports the lowest level of 8.8%, with large increases across all in the region with 11.2%, with estimated illicit products. In contrast, Estonia estimates a trade below European averages for all products. 2.1% decrease over the last three years, with Medicines’ illicit trade is estimated at 11.9% in declines across all products. the region compared with 12.5% for the whole of Europe, with disparities between countries, from 9.7% in Estonia to 14.2% in Lithuania.

46 Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

EASTERN BORDERS (NON-EU)

Illicit consumption

Country / Product Cigarettes Alcohol Films Clothing Medicines Total Products Azerbaijan 14.9% 14.2% 16.8% 15.0% 11.9% 14.6% Belarus 14.2% 16.0% 15.3% 14.9% 14.8% 15.0% Kazakhstan 14.8% 13.3% 12.5% 12.4% 12.6% 13.1% Russia 14.0% 15.7% 16.1% 15.4% 13.4% 14.9% Serbia 12.7% 12.4% 15.1% 15.3% 11.9% 13.5% Turkey 14.3% 13.1% 18.2% 16.5% 13.9% 15.2% Ukraine 16.4% 17.0% 17.5% 14.2% 16.1% 16.2% Eastern borders 14.5% 14.5% 15.9% 14.8% 13.5% 14.7% (non EU)

Growth

Country / Product Cigarettes Alcohol Films Clothing Medicines Total Products Azerbaijan 9.2% 7.8% 9.9% 10.9% 6.3% 8.8% Belarus 3.6% 5.9% -4.2% 1.3% 4.0% 2.1% Kazakhstan 2.6% 2.2% 1.2% 2.8% 4.7% 2.7% Russia -1.9% 0.8% -3.9% 3.2% 0.6% -0.2% Serbia 4.1% -0.6% 6.6% 8.5% 4.6% 4.6% Turkey 6.6% 8.3% 10.3% 10.4% 6.5% 8.4% Ukraine 9.0% 9.9% 4.0% 4.8% 8.3% 7.2% Eastern borders 4.7% 4.9% 3.4% 6.0% 5.0% 4.8% (non EU)

• In the Eastern borders, estimated illicit trade • Illicit trade growth over the last 3 years averages 14.7% for all products, significantly averages 4.8% for all products, far above higher than the whole of Europe average (by the 2.5% observed in the whole of Europe. 1.7 percentage points). Ukraine reports the There are big differences in growth estimates highest in the region with 16.2%, Kazakhstan across the region. Azerbaijan estimates the the lowest with 13.1%. Illicit trade is above largest increase of 8.8%, with Turkey and the European average for all products at Ukraine close behind. Russian stakeholders the regional level, though some countries report a small decrease and growth below do report better than average figures the European average across all products. for individual products, such as Serbia, Kazakhstan, and Azerbaijan.

47 Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

ANNEX B: SURVEY DEMOGRAPHICS SURVEY DEMOGRAPHICS

Trade Survey Demographics Number of Number of Number of Number of law Geography consumers executives policy-makers enforcement (Survey 1) (Survey 2) (Survey 2) officials (Survey 2) Austria, Azerbaijan, Belarus, Belgium, 150 in each Bulgaria, Croatia, country, with Cyprus, Czech 30 respondents Republic, each in the Denmark, Estonia, following five Finland, France, industries: Germany, Greece, Hungary, Ireland, 1,000 Clothing/ 30 in each 35 or 40 in each Italy, Kazakhstan, in each footwear and country country Latvia, Lithuania, country accessories; Luxembourg, pharmaceuticals; Malta, Netherlands, Norway, Poland, tobacco; Portugal, Romania, alcoholic Russia, Serbia, beverages; Slovakia, Slovenia, films, music and Spain, Sweden, games Switzerland, Turkey, UK, Ukraine 37,370 5,550 1140 1,410 Total respondents respondents respondents respondents

SURVEY DEMOGRAPHICS: CONSUMER SURVEY

What is your age? Describe your working role

75+ 18-24 Full-time employee 51% 1% 10% 65-74 Retired 15% 7% Part-time or freelance 55-64 employee 14% 17% 25-34 21% Unemployed 9%

Full-time Student 7%

Full-time parent 4% or caregiver 45-54 35-44 21% 23% 0% 20% 40% 60% Source: Oxford Economics, consumer survey; n=37,370 Source: Oxford Economics, consumer survey; n=37,370

48 Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

Describe your occupation Technical, administrative, or clerical 35% (e.g., service, sales worker, nurse) Manager or professional 26% Skilled worker (e.g., builder, 14% electrician, food-processing worker) Other 11%

Small business owner 8% Routine or semi-routine occupation 5% (e.g., plant and machine operator, driver) Armed forces occupations 1%

0% 10% 20% 30% 40% Source: Oxford Economics, consumer survey; n=24,354

Highest level of education attained Not completed secondary school 6% Post-graduate or professional qualification Secondary-school 9% graduate, vocational, or technical 43%

University degree 42%

Source: Oxford Economics, consumer survey; n=37,370

Approximate total yearly gross household income (local currency equivalents) 30%

25% 26% 26% 20%

15% 13% 10% 11% 11% 5% 5% 2% 3% 3% 0% Under €10,000– €25,000– €50,000– €75,000– €100,000– €150,000– Over Prefer not €10,000 €24,999 €49,999 €74,999 €99,999 €149,999 €250,000 €250,000 to say Source: Oxford Economics, consumer survey; n=24,354

49 Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

SURVEY DEMOGRAPHICS: STAKEHOLDER SURVEY

Primary role (law enforcement ocers) Police ocer 20% Defense or security ocer 15% Employee of a regulatory body 14% Customs ocial 13% Trade compliance ocer 9% Consumer protection ocial 7% Border ocial 6% Legal advisor 6% Tax compliance ocer 4% Prosecutor 3% Judge 3% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% Source: Oxford Economics, stakeholder survey; n=1,413

Primary agency/department (policy o cials)

Trade 23% Finance or Economy 17% Tax and revenue 13% Regulatory body 12% Customs and Excise 10% Consumer protection 6% Defense and security services 4% Border and immigration 3% Legislative body 3% Lobby group, prof. body or trade assoc. 3% Home and justice ministers 2% Prosecution/judiciary 2% Other agency/department 2% 0% 5% 10% 15% 20% 25% Source: Oxford Economics, stakeholder survey; n=1,146

Industry (business executives) Manufacturing 32% Retail and wholesale 27% Transport and logistics 12% Media and entertainment 11% Consumer packaged goods 8% Pharma/Life sciences 5% Accommodation and food 4% Hospitality and leisure 3% 0% 5% 10% 15% 20% 25% 30% 35% Source: Oxford Economics, stakeholder survey; n=5,562

50 Combatting Illicit Trade: Consumer Motivations and Stakeholder Perspectives

ANNEX C: GLOSSARY OF TERMS

Term Definition Activists Consumer illicit purchases segment. Strongly opinionated about social factors, they tend to view illicit trade as a victimless crime, and see low risk of prosecution, so decisively choose to buy illicit goods. Bargain Consumer illicit purchases segment. Deliberately buy illicit goods, mostly to get Hunters a better deal (e.g., cheaper, available, better quality). BASCAP Business Action to Stop Counterfeiting and Piracy COE Council of Europe Critics Consumer illicit purchases segment. Buy “possibly illicit” goods. They don’t have strong reasons for seeking out illicit goods, and are concerned about the implications of illicit trade, that they may get caught, or receive an inferior product. EUIPO European Intellectual Property office Europol The European Union’s law enforcement agency FCTC Framework Convention on Tobacco Control HMRC Her Majesty’s Revenue and Customs HPRA Health Products Regulatory Authority IARD International Association for Responsible Drinking IPEC Intellectual Property Enforcement Co-ordinator Interpol International police organisation, with 192 member countries IRACM Institut du Rescherche Anti-Contrefacon de Medicaments MEDICRIME A Council of Europe-sponsored convention to harmonise an international legal approach to tackling fake medicines. OECD Organization for Economic Cooperation and Development OLAF European Commission Anti Fraud Office Opportunists Consumer illicit purchases segment. Buy “possibly illicit” goods, mostly to get a better deal (e.g., cheaper, available, better quality). They don’t actively seek out illicit goods but may buy as opportunities present themselves. TF-CIT OECD Task Force on Countering Illicit Trade TRACIT Transnational Alliance to Combat Illicit Trade UK IPO UK Intellectual Property Office UNODC United Nations Office on Drugs and Crime WCO World Customs Organization

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