In the first six months of last year, Adidas Lebanon’s general manager, Zeina Hallak, noticed that sales of the famous sports clothing had dropped by 20%. What she discovered was disturbing. Not only were illicit dealers selling faked Adidas products, but also official Adidas outlets had replaced authentic goods with fake ones. Their excuse? “They said they had to protect their revenues as customers were buying fakes elsewhere. Adidas was potentially losing millions of dollars,” Hallak said. Fearful that the local company would be downsized or restructured by Adidas worldwide, Hallak began implementing a tough anti-counterfeiting plan that cost hundreds of thousands of dollars. Lawyers were hired, dozens of raids carried out, and over 50 law suits filed. Although 10,000 items have so far been confiscated, Hallak said there are tens of thousands more hidden away. Adidas has also launched a PR campaign warning retailers that it would be fighting counterfeiters tooth and nail and that they had two months to clear their shelves of fake merchandise or lose their contract with Adidas. And they had to commit, on paper, to steering clear of fakes. Only those who signed appeared on a list of authentic Adidas dealers printed in a newspaper ad taken out by the company.
What happened to Adidas is the tip of a very costly iceberg. From car parts, CDs and handbags to painkillers and sports clothing, the trade in counterfeit goods is costing the Lebanese government and private sector roughly $500 million each year (a spokesperson for high-end clothing retailers Aïshti estimated the cost of counterfeiting to the fashion retail sector alone – including watches and jewelry – at over $100 million a year). When the bill gets that high, it’s time to fight back. In recent months, brand distributors have launched their counter attack: they have hired lawyers, adopted controversial marketing tactics, clamped down on rogue retail outlets, and are hiring informants to lead them to warehouses, dodgy dealers, and containers full of fakes hidden among toys from East Asia. The government says that, with meager resources, it is trying to help and although some industry executives laud what they call a positive official attitude, others say the fight against counterfeiting is in fact being hindered by powerful politicians whose private interests are too close to their public ones.
The counterfeiting scourge is also frightening off foreign investors and seriously damaging the country’s international image as it strives for World Trade Organization (WTO) membership. In fact, the quest for WTO accession may explain the government’s recent efforts to at least appear involved in the anti-counterfeiting fight. Lebanon is already bound under an agreement it has signed with the European Union to combat counterfeiting after the EU expressed concern that Lebanon could become a regional counterfeit hub. Most of the imitation merchandise on sale in Lebanon comes from East Asia, Turkey and Syria. Observers agree that the process is facilitated by corruption – which the ministry of economy and trade insists is being tackled. The permeability of Lebanon’s borders is taken full advantage of by smugglers, bringing in easy-to-smuggle watches and jewelry. Once the fake goods arrive in Lebanon, they find their way to stores across Beirut, from Bourj Hammoud, Hamra and Dahia to the downtown district. A number of shops in the downtown area offer fake luxury handbags. Other districts, throughout Beirut, are full of imitation Nike, Adidas and Puma sportswear, as well as fake designer clothes, shawls, watches, bags, perfumes and footwear. Retail outlets only hold a fraction of the imported imitation merchandise, though. The bulk is stashed in warehouses that, despite the financial incentives for informants, are notoriously difficult to locate. Thus, when those inspectors motivated enough to raid an outlet do spring into action, they confiscate only a handful of items.
Counterfeiters pay minimal import duties. Although fake brands are often sold for significantly less than genuine ones, a bogus pair of Nike sneakers sold for $12 by someone who paid only a dollar in import duties and has almost no overhead costs, represents, across tens of thousands of pairs, a significant profit – which infuriates authentic brand agents, who pay around $13, or 1,300%, more in duties to import a pair of sneakers.
“We have a lot of employees. We pay at least 10 times more duty than they do. They bribe to get their merchandise into Lebanon. They don’t pay VAT. We are fighting a big mafia,” stormed Robert Elias, manager of Puma Lebanon. He said he had invested around $3 million in the company. “This is very dangerous. What will happen to all our investments if this is not fought in the proper way?” he asked. He said that between 10,000 and 50,000 fake shoes or garments are confiscated at Beirut Port alone every month. If that wasn’t enough, Elias is currently suing the former Puma agent after it was discovered that he had been selling certificates of authenticity to counterfeiters. Abdo Kassir, general manager for Nike Lebanon, said the counterfeit trade eats away an annual 30% to 35% chunk – nearly $1 million – of his revenues. According to his estimates, clothing and footwear counterfeiting is costing the private sector “tenfold that amount.” And, he complained, it takes a year to a year-and-a-half to plow through a court case against a counterfeiter, who is then ultimately slapped with a token fine. Nike, alone, does not have the funds to take on counterfeiting. That is why it has banded together with other brands to stem the flow of imitation goods at the primary source, East Asia. Fighting the fakers at home however is equally serious business. Brand agents employ undercover spies, paid informants, hush-hush telephone calls, and cash rewards in secret locations. “We have five or six people doing nothing but going around giving us information, giving us the names and addresses of shops. We have people down at the port, at the airport, at the border,” acknowledged Elias. “All information is paid for.” For his part, Kassir said that Nike has “dedicated persons within the company” who follow the counterfeit mafia on a daily basis. “Normally, we shouldn’t have to have these kinds of persons,” he sighed. Other companies operate a “reward scheme” under which informants who lead them to warehouses or containers are given $2 for each item (mainly shoes) confiscated. Some warehouses and containers hold tens of thousands of items. The scheme has led to four raids at the Port of Beirut and four on warehouses, the manager added. Asked if they were concerned that they might be putting informants’ lives at risk, especially since they lack police training on how to handle informants, one manager admitted that he was worried. “One informant has been promising us information since last August. So far he has given us nothing, even though he knows everything and could make a fortune. He says he is afraid of the counterfeit dealers. They can hurt him.” “All the big brands have this system,” said GS Chairman Samir Rayess, one of Lebanon’s most respected clothing retailers and whose brands include Timberland, Springfield, Bossini, and Polo jeans among others. Rayess had another concern: the possible abolition of exclusive dealerships, without concomitant progress on the anti-counterfeiting front. “If something is not done to fight the counterfeiting trade, we will be very negatively affected,” he warned. “It would be very bad if exclusive dealerships are abolished while at the same time the brands are not protected against counterfeiting.” Rayess, and other agents, fear that a multitude of dealers would be less likely to present a united front against brand imitators. And in a retail sector with multiple agents, the opportunity for retail fraud would probably multiply, because it would become more difficult to keep track of legitimate importers and to identify the fraudsters. The incidence of corrupt practices would, in all likelihood, also rise. Overall, it would become much more difficult for already overburdened governmental anti-corruption staff to respond to complaints and to enforce the law. In another effort to combat the counterfeiters, some brand distributors are adopting controversial marketing tactics. Nike has discount stores selling previous years’ lines of clothing and footwear at prices comparable to those of the fake Nike products, while Adidas has told its retailers who were peddling fake products to replace them with authentic reductions. “We dumped the prices of certain products,” conceded Hallak, “to ‘kill’ the counterfeiters.” Although such outlets and sales strategies are part of everyday retail life in the West, not all brand agents applaud the tactic. Detractors say its proponents are giving in to counterfeiters and doing immeasurable damage to their brand image and to the country. “This is very, very wrong,” warned Elias. “They should fight counterfeiting in the way we are.” But so far, he noted, very few brands have committed to the effort. Kassir defended his strategy as a justifiable way of countering counterfeiters by offering authentic goods at realistic prices to people who cannot afford the higher ones. Nike has three or four discount stores selling past years’ goods at up to 50% less, he said. “If I try to sell something at $80 and the counterfeiters are selling it at $20, then I end up with a huge stock that cannot be sold. We propose the product at much lower prices, to give a message to the counterfeiters. It’s fighting them on their own ground, not giving in to them. Resorting to bribery would be giving in.”
Although a decades-old Lebanese law clearly prohibits the trade in counterfeit goods, almost no perpetrators are sent to jail and only pay puny fines. However, the sad reality, according to observers and industry insiders, is that the counterfeiting business is propped up by corruption, operating at the highest political level.
Francisco Acosta, first secretary for political and economic affairs at the European Commission’s Beirut office, who recognized the steps taken by the ministry of economy and the customs department to combat counterfeiting, said: “The problem with Lebanon is the economy is so interlinked you don’t know who is managing what. Some of the people importing counterfeit products are linked to the government. Others have links to Syria. You cannot have a policy on counterfeiting as long as private and public policy are so close.” He added that there was a, “reluctance in some parts of the government” to commit to anti-counterfeiting moves. Hallak of Adidas said: “Even when sports goods shipments were all passing through the Red (Customs) Zone, other containers were still coming in unchecked. We knew that this was because a senior politician had given instructions. A lot of people have an interest in maintaining the status quo. As long as this remains the case it will be very difficult to control counterfeiting.” Asked if Syrian interests were involved, she answered: “I am sure.”
An official at the ministry of economy and trade, who spoke on condition of anonymity, acknowledged that some members of parliament with “narrow interests” protected counterfeiters from their constituencies, while Kamal Abi Merched, of the ministry’s Intellectual Property Department, identified what he called “the great negative impact of political parties that benefit from this corruption.”
But the ministry itself has not been without blemish. According to ministry of economy and trade director-general, Fadi Makki. Up until the end of 2003, seized imitation brands were routinely allowed into the country if importers removed the labels and pledged to desist from ever importing fake goods again. One brand executive, who said that the law was clear in its prohibition of the practice, described the policy as “absurd.” Makki conceded that counterfeiters were not abiding by the gentlemen’s agreement and in theory made the ministry an accomplice to the crime. “Somebody is trying to be lenient with the smugglers,” Elias said. “Everybody has his own way of making his earnings.”
Hallak was more straightforward: “We identified a container with 3,400 pairs of fake Adidas shoes. Because the importer had an inside connection, he asked to be allowed to import the shoes if he removes the logos. I think we will lose the case. Imagine that. The law is clear. We paid thousands of dollars for the information. Yet a law will be invented to allow them to import the shoes. We were told it was a decision taken by the ministry of economy. They told us it was customs and customs told us it was nothing to do with them. And there is no paper with this decision on it.” Hallak also pointed to the revocation, in January, of a recent agreement with customs, under which all sports goods entering Lebanon had to go through the Red Zone, where there was greater scrutiny, as further evidence of double standards. The ministry, which said it could not give a figure for the revenue it has lost because of counterfeiting, says it does not have the manpower to launch a comprehensive crackdown. Anything short of all-encompassing raids would create political problems: “If we crack down in one area, I will be asked, ‘why didn’t you start with another region?’” said Makki. “It would be politically unsustainable. Therefore, I am not going to go out of my way to combat counterfeiting in the market. I’ll try to handle it at the source and wait for complaints.” Perhaps this might explain why Beirut is still awash with counterfeit products, many on open display, even in the downtown district. Makki also stressed that brand distributors have an obligation to share the burden of the anti-counterfeiting battle, in conjunction with NGOs, by raising awareness among consumers. This obligation is enshrined in a new consumer law that has to be ratified by Parliament and which should be in force by the end of the year. Makki said that the partial delegation of responsibility to the private sector was a reflection of the ministry’s dire financial condition. “We’re not allowed to recruit. I know that next year I am losing about 10 or 12 inspectors. Every year I lose three or four,” he lamented. The problem of understaffing at the ministry is so acute that 10 already-overburdened anti-counterfeit inspectors from the Consumer Complaints Department are also working for the Intellectual Property Department. Some observers have suggested that Makki’s emphasis on the ministry’s lack of resources and the shifting of the anti-counterfeiting burden to the shoulders of the private sector reflects, in an indirect manner, an unwillingness to take on the powerful political interests embedded in the counterfeit trade.
If passed, the new law should provide for stiffer penalties for counterfeiters. They can theoretically expect fines of up to LL150 million ($100,000). But without enforcement it will be toothless. “We lack effective enforcement by the judiciary,” said Ghaleb Mahmassani, of Lebanon’s Intellectual Property Commission. “A law by itself does not take you far.” According to Francisco Acosta, “Lebanon has to make an effort to properly apply and enforce the law. The laws are being modernized but the application is still lacking. You have to have political willingness to apply the law.” Judges lacking in counterfeiting expertise merely aggravate the issue. Adidas manager Hallak said the company has to send lawyers along on police raids to make sure the officers do their job. “This doesn’t happen in Europe. Here, the government announces one thing but what happens on the ground is completely different,” she said. Managers like Elias want laws that are effective. “The government is not helping us,” he said. “It is impossible to hurt the counterfeiters.” And the counterfeiters do not appear particularly concerned. They seem confident that their business will continue to thrive – fueled by image-conscious Lebanese with limited buying power and coddled by a judiciary unwilling or unable to implement the law. “Yes, the inspectors came to my shop,” said one counterfeit retailer. “They were responding to a complaint but didn’t take away all my fake stuff.” Would the inspectors win at the end of the day? He shrugged. “There are thousands of shops like mine. They can’t close them all so why should they pick on me and not the rest?” Despite the words of defiance, Samir Rayess chairman of GS expressed a cautious optimism. “Yes there are major problems that need to be addressed, but positive aspects of our growing retail sector must not be overlooked. However, if we are to capitalize on our reputation as a retail hub and encourage regional shoppers to visit Lebanon, then our reputation must be whiter than white and that means stamping out those that sell fake goods.