East African Business Week

The recent stern decision by the East African Legislative Council and the East African Business Council to strengthening individual state legal regimes to address the burgeoning illicit trade and the resolve to draft a punitive legislation to deal with those involved in sale of contraband goods scaled the gravity of the counterfeit trade in the region and how much it is costing government and companies.
Official figures from the Kenya Bureau of statistics show that counterfeits constitute 39% of all imported products, with the Government losing Sh19b in taxes as the production and sale of illegally produced goods spread across the country unchecked in a trade that is now being blamed on porous border controls which contribute to smuggling, inadequate sanctions, which if implemented act as deterrent to the trade, and corruption which weakens enforcement of existing regulations and undermines any controls put in place.
The report, however, doesn't mention smuggling through the internet as internet smuggling has  proved hard to address due to its ubiquity.
For example, counterfeiters and pirates sell their products through auction sites, stand alone e commerce sites and email solicitations, and this is proving a lucrative conduit to counterfeiters due to the relative ease of deceiving consumers and the internet's unrivaled potential to provide a wide market reach.
The channels of distribution for counterfeits have mutated from the traditional informal markets, to legitimate supply chains with fake products now appearing on the shelves of established shops.
Of increased concern are the internationally, free trade zones, which are areas where international traders can store, assemble and manufacture products that are moving across borders with minimal regulation, are of increasing concern.
Passing merchandise through such zones provides opportunities for parties to "sanitize" shipping documents in ways that disguise their original point of manufacture. They also allow parties to essentially establish distribution centers for counterfeit and pirated goods, with little or no enforcement actions being taken.
Within the zones, goods can be repackaged with counterfeit trademarks, prior to being exported to other economies, and place of origin can be falsified to reduce enforcement scrutiny at their destination.
According to a report by the Ministry of Industrialization in Kenya, the fast growing small and medium Businesses (SMEs) have been a target of this illicit trade due to lack of stringent measures and authentication procedures.
Counterfeiters will approach the small companies and in the shortest time manage to convince the companies of the authenticity of their products or claims. The SMEs appetite for risk drives them into trying these products which have had huge negative effects on
the companies.
Many SMEs have claimed receiving fake bills and products. SMEs are largely into innovations that propel the growth of these companies. This innovation has been recognized as the main driver of economic growth through development and exploitation of ideas for new products and processes.
Innovators protect these ideas through patents, copyrights, design rights and trademarks. Without adequate protection of these intellectual property rights, the incentive to develop new ideas and products would be reduced, thereby weakening the innovation process.
The risks have been high especially for SME in which the research and development costs associated with the development of new products are high compared to the cost of producing the resulting products.
What has emerged in this frontier is that the more valuable the intellectual property assets of an SME are, the higher the possibility that others would want to make use of them, if possible, without having to pay for them.
The quagmire has been that most SMEs have been caught off guard since they lack the strategies to prevent an eventuality of that kind. SMEs therefore continue losing to counterfeiters even as the weak legislation exacerbates the situation.
However SMEs themselves cannot claim sainthood in the counterfeits battle; they are equally to blame for the booming contraband business.
Local manufacturers and researchers have been apportioning blame to the small and medium enterprises arguing that Kenya's small and medium enterprises are the main reason for the increasing flow of contraband goods into the local market and that most of those SMEs are running illegally as they are not registered.
"Most of these outfits that counterfeit goods are small operations mostly found at the backyards of homes of some people" says Mr William Maema, a partner at Iseme, Kamau and Maema Advocates, an agency that has been carrying out market research on counterfeits in East Africa. "We also came across situations where people manufactured revenue stamps to give impression that duty has been paid," he added.
A sizeable number of the SMEs specialize in the production of smaller packaged products which target low income earners, a group that rushes to purchase cheaply priced and readily available contraband goods.
Most firms manufacturing contraband products are run exclusively as family businesses and could be operating from the backyards of most residential homes such as Buru Buru, Donholm and Kariobangi estates, according to an official at the Ministry of Industrialisation.
Most manufacturers are now blaming local SMEs for the decline in Kenya's manufacturing sector which has been wobbling in the last three years.
According to the Economic Survey 2009, the sector recorded negative growth as it suffered under the weight of counterfeits that trade freely in the local market. In the same survey, Kenya's manufacturing sector registered a 3.8% growth in 2008, the lowest in the last five years, compared to a 6.5% growth registered in 2007 due to challenges such as counterfeits, taxation and high cost of input.