Driving Innovation to Enhance Greater Enforcement against the Wicked Harms Posed by Illicit Markets and Threat Networks Across Borders
In recent years, numerous organizations such as the Organization for Economic Cooperation and Development (OECD), World Customs Organization (WCO), INTERPOL, United Nations Office on Drugs and Crime (UNODC), International Monetary Fund (IMF), and the World Economic Forum (WEF) have informed the international community on the multi-dimensional harms of today’s global illicit markets and how they generate trillions of US dollars every year for transnational criminal organizations, complicit corrupt officials, terrorists, and other bad actors and threat networks.
Such criminality includes the trafficking of narcotics, weapons, and people; fake medicines; counterfeit and pirated goods; illegal tobacco and alcohol; illegally-harvested timber, endangered wildlife, and fish; pillaged oil, diamonds, gold, natural resources and precious minerals; stolen antiquities; and other contraband or commodities.
Illicit trade is a global phenomenon that impacts all regions and communities but some markets more than others. Recent evidence-based research conducted by the OECD and European Union Intellectual Property Office (EUIPO) estimated the value of imported fakes worldwide at $509 billion in 2016, or up to 3.3% of world trade. It is expected that these estimates will double in five years’ time alone.
The alarming rise in fake products are found in a range of industries, from luxury items (e.g. fashion apparel, handbags, footwear or deluxe watches), to intermediary products (such as machines, spare parts, or chemicals), to consumer goods that have an impact on personal health and safety such as pharmaceuticals, food and drink, alcohol and tobacco, medical equipment, electronics or toys.
The joint analyses by the OECD and EUIPO showed that China is the top producer of counterfeit goods in nine out of ten product categories, while Hong Kong (China), Singapore, and the United Arab Emirates are global transit hubs for the trade in counterfeit goods.
Brands suffering the most from counterfeiting were largely from OECD and EU member countries with American companies at the top of the list (24%), followed by France at 17%, Italy (15%), Switzerland (11%) and Germany (9%).
The expansion of internet shopping and cybercrime presents a growing threat to companies and consumers alike. E-commerce sales of an array of counterfeit products and contraband are distributed through internet, social media websites, and search engines, where there can be hundreds of millions of counterfeit listings online on a daily basis.
In addition to the economic harms related to counterfeit and pirated goods, the Global Financial Integrity in one of their reports, “Transnational Crime and the Developing World,” estimated that the global business of transnational crime was valued at $1.6 trillion to $2.2 trillion annually, resulting in crime, violence, terrorism, instability, corruption, and lost tax revenues worldwide. The International Monetary Fund (IMF) has estimated that money laundering and illicit finance constitute approximately 2 to 5 percent of the world’s gross domestic product (GDP) each year, or approximately US$1.5 trillion to US$3.7 trillion in 2015. According to UNODC and WEF, the global cost of corruption is at least $2.6 trillion, or 5 per cent of the global gross domestic product (GDP); the World Bank has stated that businesses and individuals pay more than $1 trillion in bribes every year.
Illicit Trade Harms Governments, Businesses, and Societies
The harms of the illegal trade to governments and businesses are both existential and exponential – the negative externalities of the illicit economy are very real.
· loss of revenue;
· fewer investments to fund physical infrastructure and social services such as roads, hospitals, schools, hospitals, housing, social programming: nutrition, education, healthcare, clean water and sanitation;
· upends the rule of law, transparency, and democratic values;
· leads to weaker law enforcement for investigations and prosecutions;
· creates greater insecurity and instability: more difficult to fight corruption, organized crime, terrorism, and other global threats;
· hampers trade, investment, job growth, economic and sustainable development national strategies and tourism efforts; and
· erodes public trust in government: a less optimistic future; less confidence in national markets.
For the private sector and businesses, illicit trade is similarly harmful and results in:
· loss of revenue and market share;
· intellectual property theft, stolen data, and dis-incentivizes innovation;
· job displacement for workers and business closures;
· increased costs of doing business overseas;
· heightened violence and insecurity in some markets; and
· diminished brand integrity and market reputational value.
Illicit trade also goes beyond the economic impacts and financial costs one typically hears or reads about in the news.
Illicit trade and illicit networks are a growing security concern globally, and their convergence presents great harms and “wicked” threats to communities and societies as a whole including impacts to social, environmental, and human security:
· threatening the health and safety of our people with deadly narcotics and opioids or harming consumers with substandard products and counterfeits such as fake medicines, food, illegal alcohol and tobacco, toys, electronics, and defective automotive and aircraft parts;
· bringing endangered wildlife closer to the brink of extinction;
· endangering our rainforests and planet through illegal logging, illicit fishing, e-waste pollution, and other environmental crimes;
· exploiting our most vulnerable and desperate into forced labor or trafficking humans across borders into slavery; and
· enabling lucrative illicit empires that finance acts of criminality and terrorism and create greater instability and violence around the world.
Transformative Technologies: Blockchain, AI, IoT
In effectively fighting illicit trade and related convergence crime, there is no single law enforcement or technological elixir. Rather, a holistic, integrated approach is important – from tackling corruption and organized crime to targeting trafficking, smuggling, diversion threats and challenges.
Leveraging pioneering technologies is similarly critical including employing an array innovative tools that help brand holders and law enforcement alike in combating the pernicious effects of illicit trade across supply chain ecosystems including track and trace, block chain, artificial intelligence (AI), 3D printing, predictive analytics software, and other dynamic digital and Information Technology (IT) tracking, tracing, and authentication applications.
Useful technologies to police, security, and intelligence agencies include agile security measures and capabilities such as facial recognition and biometrics, algorithm-driven policing, social media tracking, camera analytics, and an array of cybersecurity tools that can detect suspicious activities and anomalies, monitor and track criminals, terrorists, and other bad actors on the streets and online before they commit further criminality or terrorist attacks.
So while there is no single solution, harnessing an integrated ecosystem across points in global supply chains by both sectors can be decisive in fighting illicit trade especially as smart technologies and trusted Internet of Things (IoT) systems begin to communicate with one another across end-to-end supply chains and effectively track and authenticate in a cryptographically-verifiable manner a specific commodity from manufacturing (or farm) to the hands of a consumer (or table).
In recent years, I have worked and partnered with Sam Radocchia on a series of articles published in Forbes on how Blockchain technology and unique digital IDs are incredibly useful in fighting illicit trade. They work by helping to identify and register goods across supply chains and retail and on-line markets alike because of their ability to create unique identities for individual items. By using barcodes, serial numbers, or cryptographic seals, companies can create a link between the physical object (e.g., consumer goods) and its digital life on the blockchain for all market players to observe all transactional activities.
This one-to-one link results in greater transparency and trust in the authenticity of goods. When an authentic product is first manufactured, it can be registered on the blockchain. That item now has an identity attached to it, and the blockchain is updated every time the item changes hands—from a manufacturer to a distributor or from a wholesaler to a retailer and consumer.
A verifiable chain of custody makes it much easier to detect where the gaps in the supply chain occur. If diversion is happening because a certain distributor is selling products to an unauthorized dealer, the disappearance of those items from the supply chain can be detected and traced back to the last party to have custody of the products. Counterfeit goods will also be easier to identify because they’ll lack a registered blockchain identity. Many will offer visible clues if they’re missing the cryptographic seal that appears on authentic goods.
Blockchain technology also has numerous other applications across sectors that can help to target the webs of corruption and criminality and provide greater trust and assurance to all market stakeholders.
Internet on-line shopping and cybercrime also present a threat to companies and consumers alike, especially as more shopping has moved to cyber marketplaces, where criminals are profiting immensely from peddling their fake and dangerous goods and other illicit commodities, and committing numerous fraudulent and criminal activities.
Smart technologies must also be employed to address counterfeit and pirated good across the internet especially related to online shopping and marketplaces. Online sales of counterfeit goods are projected to reach $1.8 trillion in 2020, presenting numerous monitoring, compliance, and enforcement challenges for third-party marketplaces including payments-related fraud. In 2018, in a report to Congress, the General Accounting Office (GAO) found through one of its investigations that 40 percent of sampled goods purchased on online platforms were fake counterfeits or otherwise fraudulent.
As ecommerce and online marketplaces have made it easier to sell counterfeit and pirated goods, the critical issue is enforcement and encouraging markets – including on-line marketplaces – to fight illicit trade.
Collective action is needed to prosecute the criminals and complicit corrupt officials behind these illegal activities, and to shutdown websites and their operators that illegally distribute counterfeit and pirated goods over the internet. Transformative technologies can also help to address illicit trade in the virtual, digital world.
Data Analytics, Trade-Based Money Laundering, and Trade Transparency Units
The Financial Action Task Force, an intergovernmental body that sets internationally recognized standards for developing regimes to counter money laundering and the financing of terrorism, identifies trade-based money laundering (TBML) as one of the primary means that criminal organizations use to launder illicit proceeds.
Another key technological countermeasure for illicit trade and TBML are trade-transparency units (TTUs) that John Cassara has been advocating in his recent Congressional testimonies, especially when trading partners agree to exchange transaction-level trade data between individuals or trading companies of the two countries in order to identify irregularities and detect and combat wrongdoing. Criminals exploit situations where government authorities are only able to see one side of cross-border trade transactions (e.g., exports), and not both sides of a cross-border transaction (to include importing data). TTUs help bring government authorities access to information reported on both sides of a trade transaction so that anomalies can be spotted including mis-invoicing of price, value, quantity, or quality of goods, which can all be indicative of customs fraud, TBML, or even underground financial systems. When layered with law enforcement, financial intelligence, and other intelligence, the TTUs can be a very powerful tool to track illicit trade and dirty money flows.
According to recent GAO report, U.S. Government agencies and private sector entities are exploring new tools and technologies to address TBML-related vulnerabilities.
Additionally, transformative technologies such as advanced analytics, network mapping, and data visualization are very powerful tools that can also help law enforcement communities and industries to identify emerging trends and patterns to anticipate threats, to target specific illicit hubs, and to investigate bad actors engaged in various cross-border trafficking crimes.
By smartly leveraging data, one can more strategically target the cross-border illicit activities of criminal and threat networks, and help to curtail the financing that enables these criminal regimes to exist.
Trade transparency and TTUs can be also be effective in fighting illicit trade in Free Trade Zones (FTZs). FTZs can have a catalytic effect on economies, including attracting Foreign Direct Investment and helping to expand economic growth. But in too many parts of the world, FTZs are also exploited on a daily basis by some to facilitate illicit activities that produce broader market reputational harm and put the physical security of many communities in danger. Illicit trade and associated criminality in one FTZ can have serious security ripple effects in other FTZs and strategic markets all around the world. Technologies can help to fight illicit trade in FTZs including to improve governance, transparency, oversight and enforcement as underscored in the OECD Recommendation to Countering Illicit Trade: Enhancing Transparency in FTZs.
C4ISR, Drones, and Geo-Spatial Intelligence
I believe that military technologies and security approaches such as C4ISR (command, control, communications, surveillance and reconnaissance) and intelligence fusion centers can help the international community to “fight networks with networks” to track illicit networks with federated networks and information ecosystems in real-time to empower law enforcement and security agencies with actionable intelligence to combat these criminal adversaries and threat networks around the world.
In recent years, for example, innovative technologies, drones, geo-spatial mapping, thermal imaging, and DNA testing have helped to fight the poaching and trafficking of endangered wildlife in Africa, Asia, and other regions. We must employ these technologies and other good innovative practices to fight other illicit threats across borders.
Financial Intelligence and Financial Technology
Financial Intelligence and financial technologies can also help to track illicit financial flows and the dirty money of counterfeiters, smugglers, and other criminals and corrupt facilitators involved in global illicit trade. This is particularly true as bad actors and threat networks are exploiting innovative technology tools and digital assets such as cryptocurrencies to finance their criminality and terror, launder their dirty money, remain anonymous, and evade law enforcement.
Financial Intelligence Units (FIUs) – such as the Financial Crimes Enforcement Network (FinCEN) – can be effective to protect to international financial system from illicit abuse and money laundering through the collection, analysis, and dissemination of financial intelligence and strategic use of financial tools and authorities. Information-sharing between sectors is important in investigations and prosecutions that help to disrupt and dismantle bad actors and criminal networks involved in illicit trade, and to help freeze and confiscate their dirty money including digital currencies and darknet markets.
The Dangers of Anonymous Shell Companies and Beneficial Ownership
Anonymous shell companies provide an accessible and licit vehicle to finance greater illicit threats and enable criminals to hide behind a veil of secrecy. Bad actors and threat networks continue to exploit anonymity afforded through anonymous shell companies without disclosing who the beneficial owners are in these corporate structures. Anonymous shell companies created by kleptocrats, narco-traffickers, counterfeiters, terrorists, money launderers and other criminals help to finance the distribution of illegal goods and contraband that seriously harm the health and safety of consumer — from illicit opioids and fake medicines, food, and illegal alcohol and tobacco to fake parts in cars and airplanes to counterfeited apparel and toys that are sometimes made with deadly chemicals and toxic materials.
Important legislative bills currently in the U.S. Congress – such as the Corporate Transparency Act and the Illicit Cash Act – if passed, and signed into law, can help to end the abuse of anonymous shell companies by requiring the collection of beneficial ownership information at the point of corporate formation. Doing so will enable law enforcement agencies at the international, federal, state, and local levels to more effectively target and disrupt corrupt financial practices and transnational criminal activities, including the trafficking of counterfeit and pirated goods.
Collective Action and Public-Private Partnerships
Criminals, terrorists, and other bad actors and threat networks will continue to use all available technological innovations to remain anonymous, grow their illicit empires, and to finance and launch their violence and terror around the world. From ransomware attacks and cybercrimes across the internet, social media, computers and iphones to UAV delivery systems to the co-option of other sophisticated anti-crime technologies that police and security agencies use to fight transnational threats, nefarious bad actors who are well-financed will always be able to have access and buy the latest technologies to obtain situational intelligence that is advantageous, advances their criminal activities, and enables them to stay ahead.
We too must use transformative technologies to fight illicit economies and bad actors.
International cooperation and responsibility-focused public-private partnerships are indispensable.
While many impacted markets have sophisticated technologies and make substantial national investments to counter transnational crime and cybercrime, the challenges posed by illicit trade remain quite significant. This is why cross-border cooperation and joint enforcement coordination remain critical to disrupt such criminality, as well as putting diplomatic pressure on governments to crack down on counterfeiting, cybercrime, and digital piracy and enforce their laws.
I am a firm believer of net-centric synergies: a network of networks where dynamic collaborations, strategic alliances, and collective action can, and are, making a difference as partners work with each other across regions to tackle many of today’s transnational threats.
For the reality is that no one economy or community is immune from these threats, such as corruption or cross-border illicit trade.
This is why we must also continue to be vigilant and recognize as well that the most effective methods remain low-tech as demonstrated by the fact that criminals and terrorists continue to resort to corruption, extortion, and deadly violence to achieve their intended wicked objectives and illegal trade goals, and to expand illicit markets and illicit economies globally.
Harnessing innovation and leveraging transformative technologies can safeguard our communities and help to make progress in the global fight against illicit trade, and help put criminal entrepreneurs and their corrupt enablers behind bars.
Luna Global Networks is a globally-recognized leader in developing dynamic strategic alliances, fostering public-private partnerships, and promoting innovative Anti-Illicit Trade (AIT) and Brand Protection solutions and supply chain security strategies on an array of convergence crime issues around the world.
Learn more at Luna Global Networks: https://lunaglobalnetworks.com/
A Strategic Advantage: Helping Companies and Businesses to Protect their Brands: Safeguard Market Reputational Value: Secure Supply Chains: Harness Sustainability for Good.
David Luna is President and CEO of Luna Global Networks & Convergence Strategies LLC.
A former US diplomat and national security official, Mr. Luna is a frequent speaker on transnational security threats, international affairs, geopolitical risks, illicit trade and the global illegal economy. Mr. Luna held numerous senior positions with the U.S. Department of State, Bureau of International Narcotics and Law Enforcement (INL), including directorships for national security, transnational crime and illicit networks, and anti-corruption and good governance; and was an advisor to the Secretary’s Coordinator for the Rule of Law. Mr. Luna also served as an Assistant Counsel to the President, Office of the Counsel to the President, The White House; and other positions with the U.S. Department of Labor and U.S. Senate.
Mr. Luna is the new Chair of the Business at OECD Anti-Illicit Trade Expert Group, and former President of the OECD Task Force on Countering Illicit Trade; Vice Chair of the World Economic Forum’s Global Agenda Council on Illicit Trade and Organized Crime, Chair, APEC Anti-Corruption and Transparency (ACT) Working Group, and other leadership positions in numerous diplomatic fora. He is also the Director for the Anti-Illicit Trade Institute at the Terrorism, Transnational Crime, and Corruption Center (TraCCC), George Mason University. Mr. Luna is a graduate of the U.S. Army War College and received his B.A. from the University of Pennsylvania and his J.D. from The Columbus School of Law, The Catholic University of America.