It's Gotten Really Real with Fakes

Okay, so I thought it would be fun to do a little research into counterfeit and the wild world of fakes, because fakes are casual cousin to fraud and scams and a place where a number of folks who are not criminals might recognize themselves of their friends - for example, your aunt who has a rack of fake designer purses, or a buddy with an outspoken willingness to buy knockoff workout wear that fits and feels like the real thing. What I was not prepared for, really, was the breadth of the problem. Luxury brands are on one end of the spectrum, but then Faux-Zempic (“fake” drugs) and counterfeit foods (“fake” food) and down the rabbit hole of counterfeits just like deep fakes and identity theft, just in a different direction. A proper overview or deep dive would take a series of articles, so let’s maybe consider this an imperfect intro.

Bills & Cards & Txns, Y’all

In the payments world “counterfeit” is a fraud problem when we’re referring to a card (or currency itself) that has been copied or counterfeited. It’s a classic fraud problem in the world of unauthorized payments, i.e. “someone stole my card” or “someone stole my account which had financial instruments attached to it”.

But when we start describing counterfeit goods (like fake designer purses) the payments world doesn’t “see” the issue as it isn’t a problem with the money movement (it’s not an unauthorized transaction) so much as a problem with the exchange of goods: i.e. the funds are (usually) good, but the goods are bad. In that way, counterfeit is a problem a lot like money laundering: many of the transactions associated with the problem are never disputed, and it’s those disputes that give us a thread to pull to systematically understand bad actor patterns. 

Everything is Fake

Regardless of how the problem is classified, it’s definitely impactful - and growing. In their State of the Fake Report (2023), product verification firm Entrupy shared that there’s ~$2.8T confiscated annually in counterfeited goods (that’s Trillion with a “T”), and that US consumers are spending $100B per year on IP-infringing goods. Certainly not a US-only problem, spend on fake products is estimated at $600B/year. An earlier report from the OECD suggests even with all of those confiscations, international trade of counterfeit/pirated goods might be as much as 2.5% of world trade ($464B). 

But a lot of us have encountered counterfeit, either on purpose or by accident. An estimated 80% of us have handled fake or falsified goods, actually. Probably the first “fake” I bought was so laughably bad it had gone around the corner to “ironic”, and irony in one’s early 20’s is the epitome of cool. I was living in Manhattan and often walked from midtown, where I was living, through the garment district, Times Square and further on uptown to get to work. Along the way I passed all kinds of shops and department stores, as well as cut through smaller streets where, often, street corners would be set up makeshift vending areas - either card tables or simply laid out on cardboard or blankets. I think the army green and bright purple “Calvin Klein” t-shirt I ended up taking home was created in the era of counterfeit just before Prad-o handbags were everywhere, and if I recall correctly the fake designer t-shirt still had its Hanes Beefy-T tag. I told you: such a poor attempt at counterfeiting a designer that it was ironic.

Marketplaces and Knockoffs

Later in life, I would regularly scan eBay looking for deals, and now looking back and my finds - the Tiffany business card case, the vintage Pucci scarf, a couple of Kate Spade handbags - I do wonder, was the deal too good to be true? Did I accidentally buy a knockoff? And the internet itself, and marketplaces in particular (both resellers and original sellers) have created some unique conditions that bring us to where we are now: where there is consumer demand, and any kind of exclusivity or scarcity, we are seeing fakes pop-up at multiple places in the supply chain. And while sales of luxury goods are up in the past few decades, “fakes have grown even faster: one estimate suggests that counterfeits have increased by 10,000% in two decades”. 

Emergence of Rep Culture

And while “exclusivity” and “scarcity” used to be kind of a luxury brand issue, now we see mid-market fakes simply undercutting the pricing of the original designer/brand, or capitalizing on an ability to cut corners in the supply chain. And it’s exactly in this mid-market that we’re seeing an explosion of growth.

Further, it used to be a social faux-pas to show-off a luxe item that is later discovered to be a dupe, but these days we are seeing people proudly go full force into “reps” (i.e. r/RepLadies). It’s creating demand not just for “cheap places to get Brand X’s item” but for fake items on their own. Some of this might also be generational - when surveyed in 2019 by the International Trademark Association, 71% of GenZers had purchased a counterfeit good in the previous year. A later study showed that 52% of Gen Zers admitted to buying a fake product online in the last 12 months, and did so intentionally.

Who takes the hit for counterfeit culture?

It’s complicated. Brands, consumers, and retailers are all affected, and all fighting back in different ways. Brands and retailers experience costs and losses associated with their “real” goods competing with a sea of “fakes”. It turns out consumers are affected, too – while some folks might love their “reps”, others are getting nasty surprises. It’s not all just fake purses and pirated video games, there are health and safety implications of counterfeit pharmaceuticals, automotive/aerospace, food, and even consumer electronics. According to the US Customs & Border Patrol,  the MSRP of “health and safety” counterfeit seizures in FY2022 was $165,205,890, with almost 70% of the “health & safety category” products seized being pharmaceutical in nature. 

Avoiding counterfeit surprises is turning consumers and businesses alike to sources like The Counterfeit Report, a website promoting worldwide consumer awareness of counterfeit products. The site takes reports, and calls-out instances and sources of counterfeit products (Amazon, eBay, Alibaba, Newegg, Wish, DHgate, Walmart, Sears, Facebook, Craigs's List, Twitter and Instagram, and the internet are all called out). Another resource that has popped up is STOPfakes.gov (affiliated with the U.S. Department of Commerce) for consumers, and also businesses and brands that want to protect their IP. 

What’s been done in the past?

Brands fight to protect their IP on a couple of different dimensions, including tech centric solutions like Product Tagging (Smart packaging (embedded signatures) and on-product tagging (NFC tags) and also Lifecycle Tracking (a combination of in-store expert product verification, item inventory tracking (across owners), and “certified” resale programs including brand authenticity guarantees.) 

In addition to technology, IP protection lawsuits are fairly typical, which augment or inspire policy interventions. For example, in 2016 Gizmodo reported that Amazon Is Finally Doing Something About Fake Products (as Amazon rolled out their Brand Central program), and a year later was able to report that 2017 Ebay Is Finally Doing Something About Counterfeit Goods (as eBay launched their new program called eBay Authenticate.

Of course that’s almost 20 years after eBay launched their initial brand protection program, Verified Rights Owner (VeRO), to allow brand owners expedited processing of their counterfeit reports. Roughly, these programs follow a program framework, of creating brand registries, reporting criteria, and expedited report handling. 

Consumer awareness is another plank in the fight against counterfeit: In the vein of “Reps are bad – don’t do reps”, we have seen brands and industry groups work with the government to set up awareness campaigns (for example, this 2012 advertising campaign in French airports that referenced French luxury brands, reminding consumers that purchasing fakes is considered criminal). 

Fakes become a Social Phenomenon

That said, consumers ARE aware of counterfeits to some level, as reps are not just under the radar, but being actively promoted. In 2014, Google and LVMH came to an agreement (ending a lawsuit, naturally) and a partnership to keep counterfeit goods out of Google ads.

It is interesting to see the problems (and solutions) that were scaled up by platforms like eBay and Amazon migrate to social media giants like Meta and TikTok. We get influence via shady reviews (Amazon has banned paid reviews that can accompany fake products). We also see influence from…well…influencers. So it follows that TikTok’s “TikTok Shop” (recently launched) will require potential sellers to comply with a bunch of policies, and to go through an audit before they go live as a seller. (Maybe you didn’t know that TikTok had ambitions in retail, but actually they are hoping to increase the size of their American e-commerce business 10x, to get to $17.5B in 2024.) 

We are also seeing social tags being leveraged to promote fakes, a WEF research piece showed around 20% of items tagged as luxury goods (on Instagram) are actually fakes, and further, the 20,000 accounts that posted the fakes (mostly from China, Russia, and Malaysia) had posted more than 140,000 images within a three-day span. And who’s getting the spammy, taggy love? Money.co.uk commissioned and released a report in 2021 showing that Gucci wins as most counterfeited luxury brand on TikTok with tags like #fakegucci, #guccifake, and #fauxgucci drawing 13.6M+ views within a 24-hour period. 

Another interesting dynamic here is that while 73% of GenZ-ers said the reason they bought the counterfeit items was because they could not afford the authentic items, we are also seeing the growth of “reps” as an alternative to the luxe item, as with the (purportedly wealthy) couture connoisseurs of  r/RepLadies), but also as a reaction to limited launches. Meaning, it’s not the cost of the item, but the scarcity of the item, that is driving folks towards fakes.

In Why do so many sneakerheads buy fakes? we see that cost difference between RRPs and rep prices are minimal (the average difference for the top 25 most repped sneakers was 16% or $37), and “lack of availability” was the top reason for buying reps (48%). (I’m a fan of the 6% of sneakerheads polled who said they bought reps bc they didn’t want to ruin their original). BTW this article has great data, but for those who don’t want to click through, the Air Jordan 1 Retro High OG Dark Mocha is the most counterfeited sneaker  – launched in 2020, Mocha’s currently retail at $170, resell at $531, and replica at $128. FOMO works!

Luxe Leads the Pack

I think where I want to bring this back around and wrap things up is that counterfeit has always been a problem for luxury brands, and it’s companies like LVMH that have been the most dogged and determined in their fight to protect their brand equity and reputation. In 2019, HBR reported that LVMH employed at least 60 lawyers and spends $17M annually on legal action aiming to tackle counterfeiters (I bet it’s more now).

LVMH has been at the forefront of this for quite a while, so it’s not surprising to see them spearheading innovation (as well as legal pursuit of IP protection). Blockchain fans know there are a ton of solid use cases for blockchain in shipping and logistics, as we track the movement of goods through space and exchanges on a ledger — this framework is now being leveraged by LVMH, Cartier And Prada as they collaborate and expand their product tracking and verification capabilities. The luxury brands Aura Blockchain Consortium’s system gives consumers the ability to access a product’s history and proof of authenticity, based upon a digital certificate they will receive at time of purchase, that ties to a physical identifier (e.g. an NFC chip or serial number) on the item to a cert on the blockchain. Note: It seems fitting that although we didn’t get into fakes + AI in this article (deep fakes, I’ll handle it next time), we can at least mention blockchain and crypto.

Getting Real at Mid-Market

It makes sense to me that luxury products will come up with innovative, cool, high-end solutions to some of the problems around product verification and authenticity. What is happening in the mid-market where we are seeing an explosion in growth of fakes? If I shell out money for a designer bag purchased at an upscale retailer or directly from the brand, I’ll be pretty upset to later learn that it’s actually a fake (this happens, we’ll talk more about it when we talk about return fraud, or dig further into supply chains). But that’s still not a big deal if we’re going to compare it to folks who have a bad experience with faux-zempic or counterfeit food - the product may be fake, but the health and safety implications are real. 

For cyber and fraud folk, I think it’s helpful to realize that e-commerce - which has accelerated movement of fakes at a unit level and in the mid-market - is both a driver of the problem and a place to look for its solution. Fakes aren’t just competing with the brands they approximate, they’re competing with each other. That level of competition means that the successful counterfeiter needs to be a successful promoter - and/or have a great distribution method. This is why we see both social networks/online ads, and marketplaces being a lynchpin in the counterfeiter strategy. 

A Detection Problem By Any Other Name…

Happily, while an e-commerce transaction for a counterfeit item doesn’t necessarily look like fraud to a fraud detection system, the methods of the sellers and their marketing campaigns look…a lot like spam. They look a lot like collusion. They look a lot like dirty SEO tactics. Happily, although the monetary transaction looks “normal”, the metadata on the seller accounts, their item descriptions, their hashtags and pictures - these are all things that can be fed into a detection system. Which is exactly what teams are doing - depending on your organization this work might live in a team called Ads Integrity, Product Quality. Trust and Safety, or Brand Protection, or Compliance.

And what role can Cyber or Fraud management play to help out? Counterfeit prevention on a consumer-facing platform can benefit from solid threat intel (identifying bad actors coordinating within the counterfeit supply chain further upstream), detection tech (i.e. modelers who can turn trends into signals and rules), and tightening investigative playbooks. And don’t skimp on working with product managers, who can build stronger identity verification and reporting features into the platform itself - people want scammers out of their social networks, too.

Brands and retailers work to reinforce the integrity of their supply chain, and law enforcement keeps tabs on shipping containers and freight coming over borders. And large social and marketplace platforms turn their detection apparatus to what’s going on in the networks they’re hosting. What about us as consumers, do we need to put on our supply chain risk hats every time we shop someplace new?

Or maybe it’s time for a good rule of thumb – here are two from the The Counterfeit Report:  “If you have to ask; ‘is this authentic?’ shop elsewhere.” and "If it's too good to be true, it's probably fake."