Trade in counterfeit and contraband goods is becoming a major global challenge. A report on Economic Impacts of Counterfeiting and Piracy indicates that the total value of counterfeit and pirated goods stood at US$ 2.3 trillion in 2017, which was greater than the gross domestic product of 178 countries in the world. The report also shows that these values are likely to rise further to US$ 2.81 trillion by the year 2022.
The tax loss associated with counterfeits and piracy is around US$ 96 billion and is estimated to increase to US$ 199 billion–US$ 270 billion by 2022. Beside tax losses to governments, counterfeits and piracy will contribute to an estimated net employment loss of between 4.2 million to 5.4 million legitimate jobs in 2022 compared to between 2.6 million jobs lost in 2013.
Counterfeits in the Kenyan market
Kenya’s first experience with counterfeit was during the ‘great Kenyan coffee crop disaster’ recorded in 1979-1980 when a fake insecticide used by farmers to control a coffee disease in central Kenya wiped out the entire crop. Since then, cases of counterfeit goods within the Kenyan market have continued to be recorded across a wide range of products such as medicine, food stuffs, electronic goods, clothes, and fertilizers. Counterfeit goods with an approximate value of Ksh 1.1 billion have accessed the Kenyan market since 2014 as reported by the Anti-Counterfeit Agency (ACA). Out of this, Ksh 880 million worth of counterfeit goods have been seized and destroyed but fears of proliferation of counterfeit goods remain if the situation is not controlled.
The International Peace Institute estimates that counterfeit trading in the East African Community has an annual market share of Ksh 180 billion as at 2017. In Kenya, counterfeit trading was worth Ksh 70 billion (US$ 913.8 million) by 2017, rivaling tourism, tea and coffee, the top exchange earners for the country. It is estimated that the country loses between Ksh 6 billion (US$ 84 million) to Ksh 40 billion (US$ 490 million) annually as potential revenue. The Kenya Association of Manufacturers (KAM) estimates that 40% of their market share is lost annually due to counterfeits, with estimates of Ksh 30 billion (US$ 42 million) per year. Approximately 25% of the cigarettes sold in East African markets are smuggled, causing governments to lose close to US$ 100 million in taxes.
A recent study conducted between May 2017 and 2018 by a digital technology researchers company, Startcounter, revealed that there were 24.6% (10.4 million) fake phones in the Kenyan market that carry the brand names of popular phone brands. Fake products are prone to low life span and may cause damage to the user. A crackdown on counterfeit phones by the Communication Authority of Kenya in 2017 yielded more than 5,000 phones in Mombasa County.
In March 2011, the Kenya Association of Pharmaceutical Industry estimated that counterfeit medicines accounted for approximately Ksh 9 billion in sales annually. This represents 20-25% of the total legal commercial pharmaceutical market. Thishas forced local manufacturers, especially those in pharmaceutical and agricultural sectors, to devise anti-counterfeiting measures such as putting codes on their products and asking users to send short text messages (SMS) to those codes to identify the genuineness of the products. This, though, is an additional cost to the manufactures and consumers. Further, this initiative may not adequately protect the manufacturers given the dynamic and innovative approaches that counterfeits manufacturers use, and low uptake by customers of these anti-counterfeiting measures.
Why Kenya is Vulnerable to Counterfeits
Counterfeit trade thrives in an environment with weak law enforcement, loopholes, and corruption. A report by International Peace Institute indicates that smuggling of counterfeit goods is undertaken by established criminal networks powerful enough to compromise senior government officials, police, judiciary and custom officials. The study noted that inadequate legal enforcement mechanisms and low purchasing power due to poverty levels and consumer ignorance are also among key contributors to the counterfeit business.
Kenya remains vulnerable to counterfeits. This is mainly because it has a long porous border with Somalia, Uganda and Tanzania (across Lake Victoria), which reduces the ability to detect counterfeits smugglers. The United Nations Security Council report in 2013 indicated that organized criminal networks in Somalia with links to Al-Shabaab were taking advantage of the porous border to smuggle people, commercial goods and weapons to Kenya.
The port of Mombasa is heavily relied on for importation of goods by other East African countries; it is a gateway to the region. Sometimes, these counterfeit imports pass off as genuine products often destined for Uganda, Democratic Republic of Congo, Rwanda, Burundi but sometimes end up being diverted to the Kenya market. High poverty levels and rapidly growing middle class makes Kenya attractive to counterfeits.
Dangers of Counterfeits and Contrabands
The Anti-counterfeit Agency (ACA) estimates that 1 in every 5 products sold in the Kenyan market is counterfeit and that close to 4 million Kenyans are currently using counterfeit products, posing a serious threat to their health, security and the economy of the country.
Counterfeits deny consumers the opportunity to to enjoy benefits that come with genuine products; they lead to unfair business competition, deny government revenues in unpaid taxes, and expose consumers to dangers, which sometimes lead to fatalities. In the long-run, counterfeits undermine intellectual property rights, and hurt innovations as well as development of skills. This in turn deters creation of new industries and creation of new products. As such, counterfeits can derail the “Big Four” agenda on manufacturing where the existing and potential manufacturers may shy away from setting up manufacturing establishments in the country due to unfair competition from counterfeits. The net effect will be loss of jobs, loss of revenue, increased poverty levels and increased criminal activities.
Trade in counterfeits denies government revenues through loss of taxes and custom duty; there is also loss of corporate tax and VAT to the government. According to the Kenya Association of Manufacturers, it is estimated that the Kenyan government loses close to Ksh 200 billion annually due to counterfeits. This loss of revenue has the potential of affecting the government development agenda due to finance constrains. Customs operation costs also rise due to additional law enforcement and policing expenses Consumption of counterfeits also leads to increased medical and social security costs due to injuries and sicknesses.
Counterfeits in agricultural inputs such as seeds, fertilizers and pesticides can result into crop failure. This will lead to decreased harvest, food shortage, and reduced income as well as loss of jobs. Kenya’s agricultural exports would drop, thus affecting the country’s GDP, which relies heavily on agriculture. There is also evidence that proceeds from counterfeits end up furthering organized criminal activities such as terrorism and money laundering, which compromise the security a country.
Performance by Key Institutions in Protecting Kenyans
Top institutions charged with safeguarding the interest of consumers from harmful goods have been ineffective in controlling the production and entry of counterfeits into the Kenyan market. The top leadership of some of these institutions has been accused of corruption allegations that undermine their credibility in the war on counterfeits. This has forced the government to come up with an inter-agency anti-illicit working group launched in May 2018 to strengthen coordination among different agencies in curbing all forms of illicit trade.
The group comprises the Kenya Revenue Authority (KRA), Kenya Bureau of Standards (Kebs), Anti-Counterfeit Agency (ACA), National Police Service, Immigration Department, Public Health, National Environment Management Authority (NEMA), Office of the President, and the National Intelligence Service.
The role of the inter-agency anti-illicit working group is to monitor the development in illicit trade, and strengthen coordination of agencies mandated to fight illicit trade for better intervention and enforcement outcome. Among some of the measures being undertaken by the team include launch of several crackdowns on counterfeits in the country, increased surveillance at entry and exit points by mounting multi-agency strategic mobile road blocks at the Mombasa port, Shimoni, Moyale, Lunga Lunga, Isebania, Busia and Malaba, and a 100% inspection and verification of the cargo moving at all points of entry without a certificate of conformity. Since the formation of the inter-agency working group, the team has seized contraband and counterfeit goods worth Ksh 76.5 billion.
The Kenya Bureau of Standards is mandated to control counterfeits by inspecting quality of goods produced and imported into the country by issuance of standard stamps. KRA is responsible for tax collection and ensuring that all goods produced locally or imported are compliant with tax regulations. ACA is responsible for prohibiting counterfeits by promoting and enforcing intellectual property. Kenya Ports Authority is responsible for clearance of goods entering the country through the port of Mombasa. These institutions work in conjunction with other government agencies such as National Police Service in the fight against illicit trade, but the levels of counterfeits are still on the rise.
Kenya has elaborate policies and laws to safeguard intellectual property and institutions to support enforcement of laws, but trade in counterfeits is still in place. Infiltration of corruption in some of the institutions undermines their credibility in service delivery and erodes public trust in the effectiveness of these institutions. There is need to control corruption perceptions that manifest in these institutions. There is also need to seal loopholes that facilitate production and entry of counterfeits into the Kenyan market. This may call for long term effective collaboration among these institutions in areas of data and intelligence sharing, joint enforcement and joint prosecutions.
Author: Paul Lutta, Governance Department
Photo: Kenya Broadcasting Corporation