The proliferation of illicit economic activity is a key global risk*
Impacts of illicit economic activity
Illicit economic activity:
- undermines excise revenues
- damages businesses
- harms consumers
- benefits criminals, including funding terrorism
- innovation is not rewarded
- goods are produced and supplied without needing to meet the health, safety, legal or environmental requirements of a legitimate supplier
Governments need to minimise the impact of illicit trade and protect tax revenue and identities in order to:
- fulfil a financial and moral duty
- meet legal obligations, such as the WHO Framework Convention on Tobacco Control
- decrease tax leakage and so generate revenue
- provide security for jobs, increase trade and protect the health and wellbeing of their citizens
Countries that fail to build strong tax administrations are missing a ‘tremendous opportunity to improve the quality of life for their citizens. In a rapidly developing economy, a 10 to 15% increase in tax revenues often translates into an ability to double expenditures on, for example, health care or education’ according to McKinsey1.
The size of the problem
- Sale of counterfeit and pirated goods represents somewhere between $1.7trn and $4.5trn per annum according to the US Patent and Trademark Office
- 2.5% of all global trade per OECD
- 5.8% of all goods entering the EU – across all channels – are illicit2
- 25.8% of global alcohol consumption involves illicit products3
- Estimated to cost 2.5m jobs every year
- All industries are impacted
- Rise of e-commerce, social media platforms and cryptocurrencies provide fertile grounds for the sale of counterfeit goods
- Weak and disrupted supply chains also provide avenues for counterfeits to enter legitimate channels
Types of illicit trade
- Smuggling is the movement of products between tax jurisdictions
- Counterfeiting involves the production of fake goods, often at scale
- Tax evasion arises from undeclared goods, overproduction in country or falsification of shipping and taxation documents, allowing criminals to take advantage of different tax levels between territories, without necessarily moving products
Impacts of illicit trade
Risk to life and public health:
- 1 in 10 medical products in low and middle income countries are substandard or counterfeit according to WHO
Risk to livelihood:
- Africa loses up to 70% of food production because of low-quality or counterfeit seeds
- Non-genuine pesticides account for around 30% of the domestic agrochemical market in India
- A threat to international security
- Financing of organised crime and terrorism4
- Economic losses and destabilisation of legitimate industries
- Environmental damage
- Intellectual property infringement
Preventing illicit trade
- Digital traceability is essential to combat smuggling
- Physical tokens, increasingly in combination with digital solutions, help distinguish real products from fake ones
- Volume verification of production, through the use of tax markings and data analytics, ensures that excise revenues are correctly aligned with the actual volume of goods manufactured
- Protection of travel documents to protect supply chains from bad actors and aid law enforcement
De La Rue provides digital and physical end-to-end authentication solutions that are reliable, adaptable, and rapid to implement to protect revenue and reputations.
We offer comprehensive traceability software which, together with physical security token and documents, make our expertise in preventing illicit and counterfeit trade world class.
Notes:
1. McKinsey & Company – Unlocking tax-revenue collection in rapidly growing markets http://www.mckinsey.com/insights/public_sector/ten_quick_steps_to_unlocking_taxrevenue_collection_in_rapidly_growing_markets
2. https://dfworldcouncil.com/wp-content/uploads/2022/09/TTS-Duty-Free-paper-2022_FINAL.pdf
3. “Size and Shape of the Global Illicit Alcohol Market”, Euromonitor International (2018)
4. https://www.un.org/securitycouncil/ctc/sites/www.un.org.securitycouncil.ctc/files/ctc_cted_factsheet_cft_oct_2021.pdf
* according to the World Economic Forum
