ORGANISED CRIME

Study report « Counterfeit medicines and Organized crime »
Conterfeit medicines: the new face of organized crime
25-sept.2013 – A new study of IRACM analyzes new criminal
strategies in connection with counterfeit medicines trafficking.

The link between fake drugs and organized crime is well established: the large scale traffic of falsified medicines is a financial bonanza for the mafia and terrorist networks around the world. It’s a health scourge and constitutes an indirect and more violent threat to the physical integrity of millions of people and to national security around the world.

Moreover, the impact of such trafficking is considerable for the economy. It contributes strongly to curbing the development of emerging countries.

There are two major international definitions of organized crime:

• In 1998, the Council of the European Union defined a criminal organization as a “structured association, established over a period of time, of more than two persons, acting in a concerted manner, with a view to committing offences which are punishable by deprivation of liberty or a detention order of a maximum of at least four years or a more serious penalty, whether such offences are an end in themselves or a means of obtaining material benefits and where appropriate, of improperly influencing the operation of public authorities”.
• The UN Convention of 15 November 2000, otherwise known as the “Palermo Convention” on organized transnational crime, sets the “organized criminal group” as “a structured group of three or more persons existing for a period of time and acting in concert with the aim of committing one or more serious crimes or offences […] in order to obtain, directly or indirectly, a financial or other material benefit”.

Whatever the definition, most often false drug trafficking meets point by point with their common criteria:

• involvement of several persons.
• existence of a real structure in the group,
• seriousness of the offences committed or planned,
• stability in time of the criminal activity.

1. Organization and methods of traffickers

While small isolated traffickers engaged in highly localized illicit sales do exist, large scale fake drugs trafficking as it is observed today requires considerable financial and human means.

So much so that only structured networks can have access to them.

Many official reports issued by police, intelligence or justice services in different countries have established this connection between all forms of counterfeiting and organized criminal groups.

“All these techniques and the indirect routes taken by many shipments are similar to methods used by drug traffickers, which clearly indicates the type of organizations with whom we are confronted”. Laszlo Kovacs, European Commissioner responsible for taxation and Union Customs (2005)

“All these techniques and the indirect routes taken by many shipments are similar to methods used by drug traffickers, which clearly indicates the type of organizations with whom we are confronted”. Laszlo Kovacs, European Commissioner responsible for taxation and Union Customs (2005)

These links are supported by the following observations:

The quality of fake drugs and their packaging is now such that it is almost impossible for a specialist to identify them with certainty without a precise laboratory analysis.

The obtaining of such quality assumes the existence of an industrial production tool of very high level using recent technologies.

The recent police operations carried out in newly industrialized countries confirm this observation.

1.2 A professionalized organization

The choice of the copied drugs, of the countries and populations for which they are intended, the complexity of the transportation circuits, the speed and modes of distribution of fake medicines … many indicators show that the criminals engaged in the trafficking of fake medicines are organized like real companies.

Thus traffickers are very efficient in hierarchically organizing their operations, they reason in terms of markets and demonstrate their capacity to develop a sense of tactics and even sophisticated strategies.

Moreover, the exploitation of the weaknesses (legal, logistical, administrative) of national systems requires solid knowledge and an elaborate information network (including methods of industrial espionage).

Even the fraudulent sales techniques used are inspired by the techniques of big companies.

• Some counterfeit medicines actually arrive on the market before the real ones.
• Some websites exclusively selling counterfeit drugs or illegal copies easily pass for legal business sites (legal notice, terms and conditions, logos, phone numbers, etc.).
• Distribution channels change regularly to avoid arousing suspicions at customs.

1.3 Considerable quantities produced

The considerable production capacity of these criminal organizations is demonstrated by the growing importance of the batches seized on a daily basis by customs services and during specifically targeted law enforcement operations.

1.4 International distribution channels

Customs seizures sometimes allow to trace the routes followed by the counterfeit goods. Therefore, it is not uncommon that a drug undergo several manufacturing steps in several different countries before be marketed.

The choice of these countries is streamlined according to criteria such as the economic costs of production, criminal risks, control probability, judicial loopholes, and opportunities for corruption, etc.

The internationalization of the traffic is also the fruit of a calculated risk analysis strategy. Indeed, crossing borders enables to wipe out footmarks by exploiting some shortfalls in international coordination.

• Counterfeit goods produced in China for the Russian market can transit via Germany and Finland for example.
• The OECD estimates that 75% of global counterfeit drugs come from India, about half of which pass through Dubai to cover their tracks.

1.5 Mafia methods and other forms of crime

The links between drug counterfeiting and other forms of crime are proven both by the methods used and the nature of the products that are regularly seized.

Methods: Blackmail, violence, death threats, intimidation, corruption and murder go too often hand in hand with false drug trafficking.

Products: Frequently the hiding places in which fake medicine seizures are carried out also house narcotics, weapons or counterfeit money, etc.

Prof Dora Akunyili, who was responsible for organizing efforts to combat counterfeiting in Nigeria, has been subjected to intimidation and death threats. Shots were fired at her convoy on one route and the NAFDAC laboratories burned down.

1.6 A source of financing for international terrorism

Among all forms of clandestine activities, terrorism is the most disturbing and the most violent.

However, specialists have established that counterfeiting in general and the highly lucrative business of drugs infringement in particular, play a direct role in the financing of terrorist activities.

Since the early 2000s, various sources or statements from Interpol, from the International Anti-Counterfeiting Coalition (IAAC), from the former French Directorate of Territorial Surveillance (DST) or from experts from the European Commission established the link between counterfeit goods and terrorism.

• Thus on 16/07/2003, speaking before the International Relations Committee of the House of Representatives of the American Congress, the Secretary General of Interpol stated that intellectual property-related crimes were becoming “the preferred method of funding of a number of terrorist groups”. To support his assertions, Ronald Noble cited not less than 6 examples of terrorist organizations who received money directly or indirectly from counterfeiting activities.

• “Organized crime networks which are responsible for pirated goods use profits from piracy and counterfeiting to finance drug trafficking and terrorism”. Extract from a written declaration on the fight against piracy and counterfeiting in the enlarged European Union, June 26, 2003,” quoted in the report “Counterfeiting and organized crime” by the Union of Manufacturers.

• In an interview he accorded on 31 January 2003 to the WNBC radio station, the IACC (International Anti-Counterfeiting Coalition) President, Tim Trainer, said that the US Government suspected the existence of links between counterfeiting activities and terrorism since the first attack against the World Trade Center in 1993, the former partially funding the latter.

• In an interview published in the daily newspaper Le Monde on 12 September 2002, Pierre de Bousquet de Florian, Director of the DST (Directorate of Territorial Surveillance), said that Afghan terrorist channels survived thanks to ”delinquency, hold-ups, the reproduction of credit cards, or even […] the counterfeiting of branded clothing».

1.7 Corruption

“Behind the lucrative trade of pharmaceutical counterfeiting is corruption”. According to a 2006 report by the German NGO, Transparency International, there is a very important correlation between falsified drug trafficking and the corruption of the health systems of the countries in which it takes place.

Mafia organizations very largely revert to corrupting medical personnel and State agents in charge of regulating health systems or of controlling supply lines in order to penetrate the legal market and sell their goods.

2. A single motivation: the extreme profitability of trafficking

Whatever their sources, most of the figures advanced attest to the extreme profitability of fake drugs trafficking.

To give an example: for $1000 invested, the trafficking of counterfeit currency or of heroin would bring a return of $20,000, of counterfeit cigarettes, $43,000, and counterfeit drugs, between $200,000 and $450,000.

Counterfeit drugs would therefore be 10 to 25 times more profitable than the trafficking of narcotics.

Such figures associated with the weakness of the penalties incurred enable to understand why international traffickers prefer to forgo other forms of fraudulent activities to concentrate on counterfeit drugs.

3. The destabilization of national economies in the medium and long term

Some estimates have established that in 2010 the world market for fake drugs had reached $75 billion.

Proven or not, this figure shows that the economic shortfall is huge for all stakeholders.

3.1 Cheated and economically fragile patients:

The first victims of false drug traffickers, from not only a health viewpoint but also from an economic viewpoint, are the patients themselves .

In most emerging countries the costs of access to medical care and the purchase of drugs represent considerable sums in comparison with the average level of life of the country.
When the medical service rendered is null or even harmful for the patient, entire populations are not only deprived of their right to medical care, but also dispossessed of sums of money that can be indispensable to their survival.

“In developing countries, medicines represent 50 to 90% of exceptional household costs”. Transparency International

3.2 Despoiled pharmaceutical companies.

Dispossessed of 10-15% of their turnover figures, the private sector companies are the next to suffer economically from the traffic of fake drugs, after the cheated and/or empoisoned patients.

Whether if be in terms of image, of investment capacity or employment in emerging countries or elsewhere, the counterfeiting of their products has a direct impact on their activity.

The greater the scale of the traffic, the more the margins of manoeuvre for pharmaceutical companies and their subcontractors are restricted.

3.3 States

Emerging countries, in which false drug trafficking represents a thriving activity, have sometimes had the temptation to underestimate the extent of the phenomenon.

This attitude was most often motivated by a lack of information and knowledge or a poor short-term economic calculation.

Caught up by the extreme damage caused to public health and the economic consequences of this traffic, many of these countries have now changed course and are adopting a much more responsible policy.

3.4 Loss of tax revenue

In fact, as with any parallel or black market economy, false drug trafficking has a direct impact on the revenues of the States in which it takes place.

The absence of collected taxes (customs taxes, VAT, etc.) represents a major deficit in terms of tax revenues.

False drug trafficking contributes to depleting all the Member States. Proportionally, the poorest countries thus pay the heaviest price to organized crime.

In 2003, official Chinese State services estimated that counterfeiting as a whole caused a total loss of $3 billion in annual tax revenue. The same year, British Revenue and Customs estimated VAT-related tax evasions as totalling $2.4 billion.

3.5 Other economic consequences

Like narcotics and other types of large-scale illicit trafficking, trade in fake medicines contributes to more or less directly destabilizing the economies of countries in which it is rooted.

It has the following consequences:

• It compromises macroeconomic decisions aimed to stem the flow of illicit profits, resulting in high interest rates and a decline in legitimate investment;
• It over valuates currency exchange rates due to the influx of illicit profits, hence resulting in the decline of legitimate exports;
• It favors illegal trade and unfair competition, including obstacles to legitimate economic activities;
• It encourages conspicuous consumption to the detriment of long term investment;
• It encourages investment in non-productive sectors;
• It accentuates inequalities in the distribution of income.

4. A Serious Impact on Health

Indirectly, the States are also victims of this traffic when they have to palliate the public health problems caused by false drug trafficking: direct poisoning, rise in the mortality rate due to non-treated diseases, spread of diseases resistant to treatments, etc.

• Counterfeit versions of medicines for malaria and TB alone are estimated to cause 700,000 deaths every year (2009 – International Policy Network).
• “The hardest of all is remembering the past. In the 1970s in Nigeria, you could cure malaria as easily as a cold. You just took your child to the doctor, left with the treatment and after a few days’ rest the child was all better! Back to school even! But from the 1970s to the 1990s the pharmaceutical companies gradually left because of competition from counterfeit drugs. And so people started dying. We have built up resistance and now malaria is more deadly than it was thirty years ago”. Dora Akunyili, former Director of the Nigerian Food and Drug Administration NAFDAC (2007).

Weakening health systems

When developed on a large scale as in Africa or South East Asia, false drug trafficking and all of the behaviors it induces (diversion, corruption, etc.) can completely undermine a country’s health system. And yet, the strength of that health system largely determines the chances of economic development in emerging countries.

• In Cambodia, certain health indicators have deteriorated, due in part to the direct diversion of funds from public health and despite the increase in foreign assistance to the health budget (Transparency international).
• In Costa Rica, about 20% of a $40 million international credit to finance sanitation equipment disappeared into private coffers (Transparency international).
• In the early 2000’s, the border countries of Nigeria refused to import drugs manufactured in the country. The implementation by Nigeria of a policy against trade in fake medicines helped lift this ban and revive the country’s pharmaceutical industry.