Criminals have become more adept than ever before at exploiting global manufacturing and trade. No brand owner is immune.

A January 2008 report from Kroll, a risk consulting company, cites European Union Customs statistics that show a 1,000 percent increase in counterfeit goods in Europe between 1998 and 2004. The World Customs Organization puts the total figure of counterfeiting and piracy at $650 billion, or about six percent of world trade.

In its annual Special 301 Report on intellectual property (IP) rights protection, the United States Trade Representative's office last month singled out China and Russia for allegedly failing to respect U.S. patents and copyrights. The latest annual report said authorities still sees "serious" concerns with respect to these two countries.

In recent years, the Chinese government has launched a series of campaigns against crimes related to the infringement of patent rights, copyrights and trademarks, taking concrete steps to stop counterfeit goods.

In its annual report, the State Intellectual Property Office said the authorities had shut down 13,170 piracy/counterfeiting-oriented businesses. More than 4,300 people were tried and convicted of IP-rights infringement last year, an official of China's Supreme Court said last month.

A total of 4,322 criminals involved in 2,684 cases concerning IP-rights infringement, rising 23 percent and 18 percent year-on-year respectively, have been fined or sentenced to imprisonment of up to seven years, according to Xiong Xuanguo, vice president of the Supreme People's Court, in a recent report from state news agency Xinhua.

Despite evidence of improvement, however, the country still floods global trade with counterfeit items, of everything from stickers to medical devices.

China is the source of 80 percent of the fake goods in the world and holds the key to stopping trade, European Commission President Jose Barroso said in an Associated Press report in March.

Last month, Yin Xintian, a spokesman for the agency, acknowledged that China faced an uphill struggle against counterfeits: "China is a country which has only had an intellectual property rights protection system for a short period of time, just 20 years or so, and people don't know as much about the matter as in Western nations," Yin told a news conference last month.

In another recent report from Kroll, Stuart Herrington addresses the growing IP theft risks inherent with supply chain operations that are based in China. Those risks include increased information and physical security costs to prevent Chinese suppliers from "going to school" on your products or technology, and using that knowledge to create competing products and services, writes Herrington, director of Global Security and Investigations for the Callaway Golf Company, which manufacturers golf balls and clubs.

Today, any successful China IP protection strategy needs to encompass both offensive and defensive elements, says the U.S.-China Business Council.

Though pro-actively catching and prosecuting IP violators is critical, companies should first focus on preventing IP violations. The following are some tips for protecting proprietary designs and processes.

Have an IP Protection Strategy
Companies should make IP protection a core responsibility of the entire China management team, not merely a function of the legal counsel's office.

According to best-practices tips offered by China Business Review:

An effective IP rights strategy should encompass all company departments, including production, human resources, sales and distribution, finance, and legal. The intensive interdepartmental coordination required for a company-wide IP rights initiative makes leadership from top management and support from headquarters critical.

Companies should control their production process and focus on their human resources. This includes running background checks on key hires, using nondisclosure agreements and enforcing "need-to-know" information access and sharing.

The most effective strategies typically require firms to make internal changes.

Audit Internally and Externally
Companies should also conduct an "IP audit" of internal controls, combined with an "IP survey" of external problems and issues.

"The audit should be a comprehensive, top-to-bottom review of existing company policies and procedures concerning IP rights and the company's current patent and trademark portfolio, writes Godfrey Firth, chief representative, Shanghai, U.S.-China Business Council, at China Business Review. "The survey should include a thorough review of supply chains and distribution channels, visits to points-of-sale and trade fairs, and checks on patent and trademark filings by competitors and infringers."

Educate Employees
"Employees are the source of most IP losses, often unintentionally," according to Dr. David Reid and Simon MacKinnon in a recent article for Sloan Management Review. Dr. Reid is the Thomas F. Gleed chair of business administration at Seattle University's Albers School of Business and Economics, and MacKinnon is president of Corning Greater China in Shanghai.

"Companies need to play a strong educational role in communicating the value of protecting IP to all employees, business partners and customers," the U.S.-China Business Council says. "Especially vital is instilling a sense of 'ownership' of company IP in staff."

Further, companies should educate employees about the firm's confidentiality requirements and track critical-data flows and -file transfers.

Be Quick to Register Works
Companies should register their works in China as early as possible, whether patents, copyrights or trademarks.

In China, patents are awarded to the first to file, not necessarily to the originator of the product or technology. Similar problems exist with trademarks, as locals file trademarks that are the most likely translations of Western names and brands.

Filing these works will not solve all problems, of course, but doing so as early as possible can mitigate the risk.

Be Diligent
"Too many Western companies fail to keep up to date with the latest ideas and practices after entering the Chinese market, to their peril," Reid and MacKinnon write.

Companies must not only keep a close eye on competitors but also keep up with emerging knowledge and best practices.

"The biggest error companies make is that with familiarity comes a false sense of security," David Hale, president of Smart Sourcing, Inc., wrote at IndustryWeek last month.

Go on the Offense
Companies must use China's legal system to enforce their IP rights, including civil, administrative and criminal actions.

"Even after implementing all necessary preventative measures, companies must devote time and resources to detecting violations and taking legal action," Firth writes.

Firth and the U.S.-China Business Council suggest conducting surveillance of suppliers and distributors by sending representatives to industry trade shows and the Chinese Export Commodities Fair to look for counterfeiters. In addition, they recommend engaging IP enforcement bodies by building relationships with officials in IP-specific bodies, ministries, commissions and bureaus under the State Council specific to your industry.

"A company's legal rights mean little in China unless the company chooses to protect them," Firth aptly notes.

And a company's brand means little if a knock-off product or service is damaging the company's reputation.

Resources

Best Practices: Intellectual Property Protection in China
The US-China Business Council

IP Protection Best Practice Tips
by Godfrey Firth
The China Business Review Online, January/February 2006

Protecting Your Intellectual Property in China
by David McHardy Reid and Simon J. MacKinnon
MIT Sloan Management Review, March 10, 2008

USTR Issues 2008 Special 301 Report
Office of the United States Trade Representative, April 25, 2008

Theft: Greater the Reach, Greater the Risk
Global Fraud Report, April 2008

Prevention, Detection & Response
Global Fraud Report, 2007/2008

Intellectual Property Fraud: How Big Is the Problem?
Global Fraud Report, January 2008

4,300 People Convicted of Intellectual Property Right Infringement in 2007
by Song Shutao
Xinhua, April 15, 2008

China Defends Results in Push to Protect Intellectual Property
Reuters - Associated Press (via International Herald Tribune), April 17, 2008

China Is Source of the Most Dangerous Products, EU Report Says
Bloomberg News (via International Herald Tribune), April 17, 2008

How to Work with China and PYA - Protect Your Assets
by David Hale
IndustryWeek, April 2, 2008