Problem Could Be Widespread

The case unfolded after fake Unilever products were discovered in a Shanghai wholesale market and the source was traced with the help of local security officials. Mr. Neely said Unilever’s anticounterfeit team “had suspicions” more former employees have been engaged by local counterfeiters, but it has been unable to prove any wrongdoing. Many counterfeiters mask their operations by making legitimate products. Mr. Neely said it is hard to know whether a former employee is aware of the new employer’s counterfeiting business or is simply involved in the firm’s legitimate activities. He said neither Unilever nor other multinationals with similar problems feel the involvement of former employees in counterfeit activity is widespread. However, Unilever’s experience has “caused us and other multinationals to take a keener interest where the companies’ former employees move to or associate with,” Mr. Neely said.

Joseph Johnson, chairman of a group of more than 60 foreign companies that have come together to fight fakes, said he hadn’t heard of many cases where employees have become involved in counterfeiting. “Like most areas of counterfeiting [in China] it is probably a bigger issue than we initially realize,” Mr. Johnson said. But an expert on white collar crime in China, who spoke on condition of anonymity, said multinationals are ignoring the scale of complicity by their employees.

“Most of the major counterfeiting cases in China involve a scenario where members of staff are colluding with people outside the company,” the expert said. “This is the root of the problem.”

“I think what companies have been doing in their anticounterfeiting efforts is completely misdirected,” he said. “They are putting out fires one by one when they appear, and they never tackle the source of the disease — which is inside their own company.”

The expert declined to identify which companies are most at risk. But he said he has had personal experience of instances where employees inside a company have colluded with criminals “to the point where they can even use the company’s own supply lines, the same packaging company, and then inject the counterfeit product back into the distribution channels of the victim company.”

In some cases the real and fake products could well end up in the same packaging, he said.

An anticounterfeiting agent for a risk management firm in Beijing said some multinational companies have almost reached the stage where they “can’t trust any of their employees.”

In China, low wages make employees particularly vulnerable to the lure of the quick gains to be made from involvement in counterfeiting schemes, he said. And more local staff hired by multinationals during the past five years could well be exacerbating the problem. Many multinationals have cut down on their expatriate staff to reduce costs and have instead appointed native Chinese speakers to key positions. “All these companies are going to have major problems in the next few years,” the anticounterfeiting agent warned. Foreign executives at Unilever are adamant, however, that they have had the opposite experience. Having more savvy local staff in top positions is precisely what is making the fight against counterfeiting more effective, they said.

In November, U.S. consumer products giant Procter & Gamble Co. terminated contracts with two companies on fears of bogus products. The companies had previously supplied P&G with more than 50% of the packaging for its shampoo sachet products in China.

“We don’t have direct evidence that they were involved in this [counterfeiting] business,” Liang Yun, a P&G spokeswoman, said. “But the fact is that we seized a lot of real packaging that was produced by these companies in the counterfeiters’ warehouse.”

In a statement issued at the time, P&G said such fake products were having a serious impact on the company’s shampoo business. “Over the past three years P&G estimates that counterfeits have caused a dramatic decline in its sachet business, with sales losses of more than $50 million a year,” the statement said.