Summary
The Forum seeks to create a fair trade environment in the Gulf by focusing on contraband issues which distort local markets. The Forum will comprise senior figures from the Governments and the private sector in the Gulf. It has been launched in January 2002. The group exists to facilitate Gulf countries in their move towards full membership of the World Trade Organisation. The Forum is acting as a regional sounding board in discussions with international bodies and with other groups concerned with controlling contraband.

Background
Gulf countries and their neighbours are moving towards an open trading bloc within a WTO framework. This involves detailed negotiations with various governments including the USA and the EC. Contraband is threatening such developments as it involves distortion of markets by counterfeit and smuggled goods. The impact of contraband involves:

• Loss of revenues for governments
• Involvement of international organised crime
• Money laundering
• Corrupt practices
• Economic imbalance
• Disadvantage to local private sector

Programme
The inaugural meeting of the Forum reviewed practical measures to help Governments and private sector co-operate in ending contraband. The first meeting therefore:

• Assessed the extent of contraband in the Gulf
• Identified sectors most at risk
• Reviewed the legal framework
• Considered changes in the law to eliminate contraband activity
• Explored how Gulf ministries can develop anti-contraband co-ordination and training
• Suggest additional research
• Involved international groups concerned with contraband
• Agreed a future programme.

Participants
Forum participants are key decision-makers in both the public and private sector in the Gulf. They include:

• Gulf business leaders
• Gulf chambers of commerce
• World Trade Organisation
• Gulf Cooperation Council
• Anti-contraband groups
• European Commission
• Ambassadors to the Gulf
• World Customs Union
• UN Commission on Organised Crime

Sponsors
The Forum seek to engage as sponsors companies and trade organisations which are directly affected by contraband. These include:

• Brand name manufacturers
• Video film manufacturers and distributors
• Music manufacturers distributors
• Software manufacturers and distributors
• Banks and insurance companies
• Tobacco manufacturers and distributors.

In return for a sponsorship fee such companies and organisations have an opportunity to contribute to the debate at the launch and to sit on the executive council as one of the founders of the Forum.

What’s the real price of a contraband product or service? Gulf governments know the price is high in terms of jobs as they seek to diversify their economies for one of the world’s youngest populations. That is one reason they have signed up to the World Trade Organisation. WTO membership is meant to be a signal that the Gulf is open for trade and investment. But membership has a price that includes operating open and transparent economies.

Regional business leaders know the price might be ending an ambition to become global players. They have travelled and spoken internationally of their desire to make the Gulf a good place to do business. Like regional governments they know that the best future is one not directly tied to the energy sector. Recent decades have seen wild swings in oil prices that have made business plans only as good as the latest oil price change.

Governments and business chiefs know that tackling contraband is one of the biggest obstacles to bringing more international partners to the region. Another cost attached to contraband is that it attracts organised crime and gives rise to money laundering so threatening stability and investment. The clock is also ticking on a planned free trade area between the GCC and the European Union. Within a decade both regions should be free to do business without restriction.

The GCC today has put in place more measures to tackle this growing problem. Companies and international agencies know that contraband is a global problem and they are watching what is happening in the Gulf to see if lessons could be learned and applied elsewhere.

The novel approach in the Gulf has been the creation of a regional group comprising public and private sector to review progress across all sectors against an annual benchmark. The Gulf Anti-Contraband Forum will produce an annual assessment across all sectors in the six GCC states of the extent of contraband activity and measures being taken to control it. This study, with an associated assessment of the extent of money-laundering, will become a benchmark against which governments, international agencies, business leaders and trade associations can measure improvement.

Year on year the study of the black and grey economies in the region will become a guide to what is happening. The study itself will be reviewed annually at a meeting of Gulf government advisers, chambers of commerce, business leaders, port and airport operators, regional and international business leaders, their trade associations and international agencies such as the World Customs Organisation, the World Trade Organisation, the World Intellectual Property Organisation and others bodies such as the European Union. The first meeting will be held in Muscat and opened by HE Maqbool Sultan. Future annual meetings will be held in other Gulf States.

Oman will initiate the programme as it has completed more detailed procedures relating to WTO membership than other Gulf countries. The port of Salalah offers a good example of where sophisticated software allows the operators to track closely container movements that are inter-regional. This helps customs control while reducing the amount of direct customs intervention. Examples of best practice will feature in the discussions so that Gulf countries and their international counterparts can share and learn from their experiences.

The Forum is being coordinated by London-based MEC, which has two decades experience of supporting business development in the Arab world. The company comprises those with backgrounds in diplomacy, banking and commerce. MEC’s managing director Ian Walker said: “Tackling contraband will be one of the key signals to the world that the Gulf is ready to do business. The Forum offers the Gulf business community an opportunity to tell a story of how things can change through a public-private partnership.”

“We are keen to hear from companies and organisations able to contribute to the study and who wish to take part in the annual discussions. In the first instance they should contact Ibrahim Ahmed or Nicola Junge on GAF@meconsult.co.uk.”

So what are the facts behind the black economy? Globally contraband is big business. The Gulf contraband market is thought to be substantial. According to the World Bank the total GDP of the GCC was $ 314.2 bn in 2001 of which it is assumed that up to 7% according to the institute of US and Canada studies $ 21.9 bn can be accounted for counterfeits, pirated and smuggled goods. The global figure has been put at $ 2.19 tr in 2001 (applying the 7 % rule to the total world GDP of $ 31.28 tr in 2001 according to the World Bank).

Another question often asked is what is a counterfeit? This is a product that makes unauthorised use of, or imitates, a trademark. Furthermore, it describes a product, which without permission copies the appearance of a product where that appearance is protected by industrial design right. Additionally, it implies a product incorporating a copy of someone else’s work, which is protected by copyright (Intellectual Property Rights). Most companies seek to counter this by using technologies that make it difficult for the counterfeiters. Sometimes this might involve using security ink that glows when checked by customs officers using special torches. Sometimes they include printed holograms on their brands that are difficult to copy. Often the consumer can only tell a real from a fake by the price and quality. For instance, one Gulf businessman took his new Western car to the garage to be serviced for the second time. The mechanic pointed out that non-recommended brake pads had been used. The businessman was puzzled, as the first service had been done by the same garage that had fitted the brake pads.

People are often amazed by how extensive counterfeiting and contraband has become. Those most at risk include:

Video and DVD
IT Software
Recorded music
Branded consumer goods
Luxury goods
Automobile parts
Tobacco products

According to the Business Software Association (BSA) Global Piracy Study for 2001 the software industry experienced an increase in piracy by 3% on the previous year amounting to 40%. Ironically the actual cash loss fell by 6.7% to US$ 10.97 bn in 2000. The explanation for losses falling while piracy increases is that there has been market contraction leading to increased price competition. The BSA said that Qatar, Bahrain, Oman, Saudi Arabia, and Kuwait showed the highest piracy rates in the Middle East region, at 78%, 77%, 77%, and 76% respectively. Retail revenues lost of piracy in the Gulf were put at US$ 40.1m.

Another sector, which is badly affected by counterfeiting, is the music industry. According to the Music Piracy Report 2002, the industry’s worldwide losses amounted to US$ 4.3 bn totalling at 1.9bn pirated units in 2001. This means that more than one in four recordings are pirated or 28% (20% in 2000). No wonder that pop stars make such a racket. Recorded music piracy is a serious problem in the Middle East the record industry highlights Kuwait and Saudi Arabia with piracy levels of up to 50% and nearly 25% in Bahrain, Oman, and Qatar.

As the US is one of the major trade partners of the GCC countries with significant volumes in software, music and film recordings it is no surprise that US companies are hurting.

Saudi Arabia as the largest GCC market accounts for copyright piracy amounting to US$171.7m for US companies last year according to business software alliance. The entertainment software industry has been hard hit with losses from piracy quadrupling from US$28m in 2000 to US$115.7m last year. This represents a piracy level of 83% of the total sold. The recorded music industry had to deal with an big rise in lost sales up by 50% from a loss of US$8m in 2000 to a loss of US$12m says the IIPA International Intellectual Property Alliance Report 2002. The level of pirated music is some 42% of total sales.

Trade associations seeking to tackle contraband have pinpointed Kuwait as the worst abuser of copyright piracy in the Gulf. Retail piracy continues largely unabated according to the business software alliance. As a consequence there is strong reluctance by international companies to expose themselves to losses. The film industry and entertainment software industry report a continuing high level of piracy (85% in 2001) as in previous years. The total US trade losses due to piracy were estimated to be more than US$11.5m in 2001 according to IIPA

How do pirates work? Counterfeit clothing, both fashion and sports wear, is very common. Pirates import plain clothing and attach the labels in one country and then release the product for sale in another country.

Pirates benefit from the free movement of goods across borders. Goods are traded on the grey market, together with over-runs, recycled items, copy parts and stolen goods so making it very difficult to control the market and separate the illegal items from the legal.

Counterfeits tend to come from Eastern Europe, Asia, Africa, and Latin America. Non-drug contraband smuggling across international borders - including illegal import and export of legitimate goods such as cigarettes, textiles, and manufactured products – is a highly profitable criminal activity that typically carries lighter criminal penalties then narcotics trafficking. The World Health Organisation has estimated that at least 7% of the medicines sold world-wide were counterfeits.

It is little consolation to think that other parts of the world also have a big contraband problem. For example, according to a report by EIU Economist Intelligence Unit this year France faces a level of pirated software levels of 39% of the market. Intellectual property theft is increasing in Europe for two reasons. Firstly, due to cheaper, easier technology and secondly, due to open borders and European enlargement. That is why Eurocrats in Brussels want to ensure that the planned free trade agreement with the Gulf does not result in yet another major routing of Asian contraband into Europe via Gulf ports.

Tackling contraband requires a joint approach by governments in enforcing laws and the private sector cooperating in advising and tracking abuse.

Companies are adopting a multi-level strategy by improving their packaging and product authentication system, and lobbying enforcement authorities directly. Additionally, companies should according to Economist intelligence unit magazine think long-term about:

Developing their own tracking and enforcement capabilities and working closely with national enforcement agencies such as customs, trading standards and tax authorities.

Sharing information with other businesses to support national enforcement agencies by keeping
them informed about the actual extent of counterfeiting and piracy.

The reason people buy counterfeits is usually because they are cheaper. But the hidden price tag means:

Higher prices overall and lost jobs as local companies and their international partners lose revenues.

Poor quality costs as customers cannot be sure of the quality standards of the product and have no legal protection

Costs being passed on to other consumers who have to pick up the price of enforcement action by companies

Money laundering makes it more expensive for people to undertake financial transactions as regulation is applied.

Today’s purchase goes to fund the wider activities of organised crime

Piracy leads to corruption, which means that honest citizens suffer.

The biggest price of all is that the Gulf countries will fail to modernise and diversify as international business stays away and trade deals with large economic blocs are cancelled.