Counterfeit Companies: How Anonymous Companies Facilitate Illicit Trade

By Julia Keem

In 2017, a Colorado court convicted four individuals, including a former police officer, of racketeering, money laundering, and conspiracy for illegally selling counterfeit Denver Broncos merchandise as well as additional sports products from other professional and college teams around the country. A key element of the international counterfeiting scheme was the use of more than 20 anonymous companies.

This is just one of a number of schemes that were highlighted in a FACT Coalition report, titled “Anonymous Companies Help Finance Illicit Commerce and Harm American Businesses and Citizens,” which was published earlier this year. Authored by David M. Luna, a former U.S. national security official and current chair of the Anti-Illicit Trade Committee of the United States Council for International Business, the report reveals the harms imposed upon legitimate businesses, unwitting consumers, and even the United States military by anonymous companies engaging in the trade of counterfeit and pirated goods. Currently, these criminal entities operate with impunity in the United States and are able to circumvent the law with little risk of accountability. The report concludes that enacting legislation requiring the disclosure of beneficial ownership information is an essential measure to combat the increasingly prolific abuses perpetrated by these shadowy networks.

Harms Imposed on Legitimate Businesses

The market for counterfeit goods is largely reliant on the existence of anonymous companies, allowing criminals to conceal dirty money and stymie the attempts of law enforcement to locate and prosecute the individuals involved. By allowing the establishment of these companies, the United States has long served as a safe haven for those seeking to launder illicit proceeds, helping the market for counterfeit goods to thrive. A report by the International Chamber of Commerce’s Business Action to Stop Counterfeiting and Piracy (BASCAP) and the International Trademark Association (INTA) projects that by 2022, the global economic value of counterfeit and pirated goods will reach nearly $3 trillion, costing 5.4 million jobs in the process. Meanwhile, the Global Brand Counterfeiting Report notes that counterfeit sales are growing by a staggering 15% annually.

This is a major concern for legitimate businesses of all sizes, from mom-and-pop establishments to multinational corporations. Beyond the sports merchandise example mentioned above, Luna’s report also explains — among many additional examples — the way in which anonymous companies have helped criminals sell billions in counterfeit luxury goods meant to mimic products from the likes of Burberry, Louis Vuitton, Gucci, etc. Between 2008 and 2012, convicted criminals used shell companies to traffic counterfeit designer items that would have had an estimated retail value in excess of $300 million.

Nevertheless, this problem extends beyond the corporate giants, also striking at those who can afford it the least — the owners of legitimate small and medium-sized businesses. On Amazon alone, there are one million American businesses that use the marketplace to connect with potential buyers. Far too often, these companies invest money into research and development of an innovative product, only to have counterfeits appear just as the product manages to gain some attention. In a 2018 report, the U.S. Government Accountability Office made test buys through five large e-commerce websites, only to find that nearly half of the purchased items were counterfeited. As the market for such goods continues to grow, consumers — both those who are knowing and unwitting — continue to be diverted away from honest businesses towards lower cost alternatives that ultimately perform worse and can, in cases of counterfeit alcohol, food, and medicine, be extremely hazardous to use. This not only robs a business of hard-earned revenue, but also imposes significant reputational costs on a company, whose product can then be reviewed negatively by customers who have been deceived into buying a poorly performing phony. Whereas large corporations often possess the means to strike back against these criminals through legal channels, the same is not necessarily true for a small business whose very existence may be threatened by counterfeiters. Already, these businesses struggle to stay afloat in a competitive environment full of alternatives — when over 4500 online marketplaces saturated with knock-offs are added to the equation, the battle to remain both law-abiding and profitable can seem unwinnable.

Harms Imposed on Consumers

In addition to mere financial consequences, anonymous companies peddling counterfeit goods can greatly endanger the health of consumers. Luna’s report also details the way in which anonymous companies have been used to sell counterfeit medicines to American consumers. This illicit trade generates hundreds of millions of dollars and includes fake versions of Arimidex, a breast cancer treatment, Lipitor, a cholesterol drug, Diovan, a drug for high blood pressure, and medications like OxyContin, Percocet, Ritalin, Xanax, Valium, and NS Ambien. As a result, consumers are unable to get the treatment that they need and may even be further harmed by ingesting products with unknown substances.

Moreover, a 2017 report by the International Organization of Good Templars (IOGT) notes that anonymous shell companies help organized crime groups (OCGs) create the appearance of legitimacy in order to perpetrate a number of crimes, such as the selling of counterfeit alcohol. According to the IOGT, these OCGs produce counterfeit alcohol using industrial ethanol, a type of alcohol that is used in cleaning products and is not safe for human consumption. In order to conceal the use of industrial ethanol and skirt health and safety regulations, bleach is often added to the counterfeit product to mask the coloration. Those who purchase and consume counterfeit alcohol are thus at high risk of chemical poisoning and other health problems.

Anonymous companies facilitate the mass distribution of these counterfeit products and make it difficult for law enforcement to connect the criminal to the crime. As such, one of the many recommendations included in the IOGT report includes reviewing and strengthening requirements for company registration.

Harms Imposed on National Security

The ramifications of illicit counterfeit goods also extend beyond businesses and consumers. Criminals have also used anonymous companies to illegally sell counterfeit goods to the American military, endangering the lives of soldiers. In one case, the United States government awarded 93 contracts worth over $1.6 million to individuals who defrauded the DOD by selling knockoff parts to the Pentagon.

Instances like this, combined with the fact that anonymous companies selling the counterfeits are often tied to organized crime groups, compounds the situation at hand, as the American government essentially engages in paying its enemies to deceive itself.

Recommendations

Luna’s report specifies a number of recommendations geared at tackling the illicit counterfeit market and notes that, first and foremost, legislation requiring beneficial ownership disclosure must be enacted. This would deter criminals who would no longer have the assurance of anonymity, and enable law enforcement to track down and hold accountable those involved with counterfeit networks.

Other recommendations of Luna include requiring beneficial ownership information from government contractors, denying entry into the U.S. to corrupt actors, making all felonies a predicate offense for money laundering, establishing trade transparency units globally so that countries can work together to share data on corrupt individuals and companies, and expanding due diligence obligations to other significant actors in the financial system.

Some of these recommendations are already being tackled by Congress. The U.S. House of Representatives is considering Representatives Carolyn Maloney (D-NY) and Peter King’s (R-NY) Corporate Transparency Act of 2019, which would require U.S. companies to disclose their beneficial owners. The bill passed through the House Financial Services Committee in June by a bipartisan vote of 43-16. Meanwhile a flurry of activity is underway in the Senate, where Senators Ron Wyden (D-OR) and Marco Rubio (R-FL) have introduced a Senate version of the Corporate Transparency Act; Senators Sheldon Whitehouse (D-RI) and Chuck Grassley (R-IA) introduced the TITLE Act; and Senators Mark Warner (D-VA), Tom Cotton (R-AR), Doug Jones (D-AL), and Mike Rounds (R-SD) unveiled a draft ILLICIT CASH Act.

The growing bipartisan support for such legislation signals a widespread belief that there must be a concerted effort on the part of the United States government to finally tackle this problem in order to protect American businesses and consumers while better defending U.S. national security.

Julia Keem is an advocacy intern with the Financial Accountability and Corporate Transparency (FACT) Coalition.