Friday, 3 March 2017

There is no "walk away" option

Counterfeit goods, be they cosmetics or fake medicines eat away at legitimate trade, costing money and jobs. Furthermore, if it's your goods being copied, it's a major dent in your brand prestige and your reputation. It is also a trespass on your intellectual property rights.

This kind of activity is what spawns much of the red tape business has to content with and makes up many of the systems necessary for the functioning of a single market. Regardless of our relationship with the EU, it is this "red tape" we must contend with.

We must be under no illusions. Counterfeiting and fraud is big money. According to recent findings, the increase of counterfeit mobile devices in the global market resulted in 184 million fewer smartphones sales (12.9% of legitimate sales) by the legitimate industry in 2015. The financial impact is equivalent to €45.3 billion.

Card fraud is also a major issue. Just recently, 193 individuals suspected of travelling with airline tickets bought using stolen, compromised or fake credit card details were detained in a major operation targeting airline fraudsters. 43 countries, 75 airlines and 8 online travel agencies were involved in this global operation which took place at 189 airports across the world.

The airline industry is estimated to lose over one billion dollars per year as a result of the fraudulent online purchases of flight tickets. Fraudulent online transactions are highly lucrative for organised crime and are often purchased to facilitate more serious criminal activities including illegal immigration, trafficking in human beings, drug smuggling and terrorism.

According to the most recent (2013) data, card-not-present fraud accounts for 66 % of the EUR 1.44 billion in fraudulent card transactions in the 35 countries of the Single Euro Payments Area (SEPA).

Tackling this can only come through major international cooperation comprising of multiple government agencies. When we have a global marketplace like the internet it requires multilateral cooperation to build up a herd immunity. Recent efforts to torpedo online fraud have been successful by way of a cooperation agreement between Europol and Nominet, the domain registrar. Once a website is traced and identified, all it takes is a phone call to take that operation off-line.

We take for granted the fact that we can buy with confidence online and trust is a major part of the system. Without trust there is no online economy. The problem though is that this has externalities and considerations for lawmakers.

As much as we seek to eliminate dangerous and bogus goods we must also preserve a free market whereby small business can compete. There is also a large and very necessary trade in after market spares of just about everything. With auto-makers seeking to gouge customers on repairs, many now take to ebay to find spares and simply take them to fitters who can do a car repair at a fraction of the cost.

This is the weak link in the chain where unofficial and dangerous parts can creep into the system. An arrest was made this week of a man who put more than a hundred fake airbags onto the market.

This is where it gets difficult for policy-makers. As much as increasing market controls adds complexity and expense for business, it adds yet more enforcement burden. That means government must look at ways to further streamline legitimate trade and look at ways of regulating business to stop price gouging on legitimate parts. We are then locked into a series of government interventions which can have unforeseen consequences. Before you know it you're drowning in red tape and fighting an uphill battle. The game never ends. There are always new threats.

It is interesting in recent years that politicians have boasted that crime is going down but in fact, it has just changed. There's not much to be had by breaking into a house unless you know what you're looking for. Similarly if you mug someone for their wallet, cards are very rapidly cancelled and there is nothing to be gained. Cyber crime carries far less risk and higher rewards. The crime has moved off the streets and on to the web.

This dynamic also extends into the basic principles of the single market. Free movement of capital is a major pillar of free trade, but this is where we see massive money laundering efforts that require a number of bureaucratic controls. This is why it is notoriously difficult to withdraw your own money from PayPal. We then get into a game of regulatory whack-a-mole as criminals become ever more inventive.

Critics would say that this is the business red tape that is strangling trade in the West and diverting it elsewhere. That maybe so but the proof of the pudding is there for all to see. For the most part we enjoy safe and trustworthy trade online and in the shops where consumers are confident that their rights will be upheld. We need these such systems. We are better off because of it. The libertarian "caveat emptor" approach underestimates the inventiveness and indeed the wickedness of fraudsters who would happily add floor cleaner to baby formula.

The biggest threat to regulated trade is unregulated trade in lesser developed countries which is why the global aid effort is centred around improving governance and improving trade systems in order to eliminate fraud. Failed and failing states account for the bulk of counterfeit trade.

The World Customs Organization (WCO) and the International Institute for Research Against Counterfeit Medicines (IRACM) announced recently the results of their fourth common initiative in the fight against fake medicines on the African continent. There were record seizures of 113 million illicit and potentially dangerous pharmaceutical products, which took place in the context of Operation ACIM (Action against Counterfeit and Illicit Medicines) in September 2016.

The number of seizures made in joint IRACM-WCO operations has now reached dramatic proportions, with almost 900 million counterfeit and illicit medicines seized at the borders of the continent. “Of the 243 maritime containers inspected, 150 contained illicit or counterfeit products". Staggering. And that's without looking at food fraud.

It is said that if we ended the war on drugs we would take the profitability away from the trade and if we properly regulated it we could minimise the harm. That is a view I have always subscribed to but controlling contraband will still be an element of any such market control and if you can smuggle narcotics over borders then you can smuggle anything by the same routes. This necessarily requires big government and there will be egregious failings such as the horse meat scandal where weaknesses in the system have been exploited. This is more an argument for continued improvement.

As to the ramifications of Brexit, it is important that the UK retains a high degree of integration and cooperation in order to ensure the system still works. Should we walk away from the EU without an agreement then we are no longer part of the many early warning systems that facilitate free and fair trade. We can expect port inspections, testing and delays.

We all like to complain about red tape and "crazy" regulations but they exist for good reason and we would miss them were they gone. Personally I welcome the repatriation of certain powers as Britain has always been a global leader in preventing this kind of crime and the further centralisation of market surveillance systems leads to their ossification and reduces their ability to adapt to new threats.

As ever though, the question is how we get from where we are to where we want to be without weakening the system and causing economic harm. In this the cavalier approach of our government stands to damage trade immeasurably. Those salivating at the prospect of deregulation have not given sufficient thought to why this regulation exists to begin with or what they will do when they "take back control". They are about to find out that those "meddling Brussels bureaucrats" do actually serve a function. We may be happy to replace the bureaucrats, but we will also have to replace the function.

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