Counterfeit goods, mainly from China, have become as profitable for Asia’s criminal gangs as illegal drug trafficking, the United Nations said

April 16, 2013, 1:58 a.m. ET

Fake Goods Rival Drug Profits for Asia’s Criminals

By CAROLINE HENSHAW

SYDNEY—Counterfeit goods, mainly from China, have become as profitable for Asia’s criminal gangs as illegal drug trafficking, the United Nations said in a report published Tuesday.

The U.N.’s Office on Drugs and Crime, or UNODC, looked into international organized crime across much of the Asia-Pacific region. Its report, the first ever published by the agency on the topic, catalogues how rapid economic growth has led to the proliferation of criminal networks profiting from illegal trade in goods and people.

A surge in Asia’s exports, which have nearly quadrupled in the past decade or so to $5 trillion, according to the World Trade Organization, has been accompanied by a rise in the trafficking of fake-branded products including handbags and medicines, the U.N. report found.Counterfeit goods accounted for about a third of illicit tradeflows in what the report, based on data in the years between 2008-2010, defines as the East Asia and the Pacific region. The $24.4 billion earned from fake goods, combined with the estimated $5 billion of annual profits the U.N. estimates the region makes from trafficking fake pharmaceutical products to South East Asia and Africa, is close to what the international body estimates criminals made from illegal narcotics.

Overall, the U.N. agency estimates that the smuggling of drugs, people, counterfeit goods and wildlife was worth around $90 billion a year on average during the period—more than eight times the economic output of Cambodia.

“Illicit trade is growing rapidly,” said Jeremy Douglas, UNODC’s Regional Representative for Southeast Asia and the Pacific, in an interview. “As globalization occurs and you have the integration of economies, you also have the integration of criminal economies.”

Much of the trade in counterfeit goods can be traced back to China, which is the direct source of about two-thirds of the world’s counterfeit goods, the UNODC report said. Customs data from its largest trading partners, the U.S. and Europe, put the figure even higher, at more than 75%, the report said.

China’s growing role has irked both the U.S. and Europe, which say that failure to rein in the country’s counterfeit-goods trade has undermined the intellectual property of companies and poses dangers to consumers. Last year, U.S. health authorities warned that several fake batches of the cancer drug Avastin had made their way into the country’s medical system.

Stopping the flow of fake goods is also proving difficult. The U.S. and Europe seized only about $161 million worth of counterfeit goods from East Asia in 2010—equivalent to around 1.25% of the estimated illegal trade between Asia and its largest trading partners.

Mr. Douglas said Asia’s criminal gangs were aping their legal counterparts by broadening their geographic reach and pushing into new markets. Last week, officials seized a shipment of fake cigarettes from China in the Panama Canal, showing how far such groups were able to move their products, he added.

“These groups are looking to expand, just like any legitimate business, and they don’t have to deal with any regulatory red tape,” Mr. Douglas said.

China has responded by cracking down on the producers of fake goods and giving harsher sentences to people convicted of breaking the law. Still, catching offenders has become more difficult because of the increasingly complex nature of the supply chains used by manufacturers, the U.N. report said.

Since many counterfeit products are made in exactly the same factories as genuine items before the branding occurs in different countries, many companies involved in the process may be unaware they are breaking the law, it added.