Methods of Verifying and Tracing the Authenticity of Goods

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Traditional Methods of Protecting Goods Against Counterfeiting

As noted in the earlier articles, when introducing excise taxes, the state wants to distinguish between legitimate commodities—for which it levies taxes—and illicit goods. Product authenticity verification technologies and solution can help in this situation. A business invests in research, development, and marketing of products, and wants protection from counterfeiters.

Counterfeiting or smuggling lets criminals capitalize on someone else’s brand and intellectual property and may also damage the manufacturer’s reputation if they sell low-quality substitutes.

Since governments safeguard banknotes from counterfeiting, the world has spent a long-time developing protection technology.

As a result, most countries use tax or excise stamps to protect legal goods from counterfeiting and collect excise and other taxes. They are like mini banknotes attached to the product packaging to confirm its genuineness. Companies with experience in making banknotes also produce stamps or supply technologies and solutions for producing excise stamps.

Excise stamps may have the following anti-counterfeiting features:

• Visible – Stamp elements, such as text or holograms, which are visible to the human eye.
• Semi-visible – Elements that an eye can see only from a certain angle, such as threads inside the excise stamp or watermarks.
• Invisible – Elements such as magnetic ink that only special equipment can read.

Different manufacturers create competing anti-copying and anti-counterfeiting elements. As the most obvious solution, they commonly use secure excise stamps around the world, but they also have some disadvantages:

• To verify the authenticity of an excise stamp, you must have special knowledge and special equipment. Unlike banknotes that circulate through banks, which they constantly check using special equipment, excise stamps travel along with the goods from the manufacturer to the consumer through wholesale and retail companies that rarely have such equipment. The retail buyer has neither the knowledge nor the equipment to verify the authenticity of the excise stamp.
• The excise stamp itself is expensive because manufacturing and protection require a special equipment and materials.
• Applying an excise stamp to a product requires a change in production processes and special equipment.
• The logistics of ordering, receiving, storing, accounting for, and screening products with excise stamps incur additional costs for the product’s manufacturer and sellers.

New Methods for Checking the Authenticity of Goods

When product packaging adopted digital machine-readable codes, many vendors created new product authentication systems. Consumers can verify those codes by using a mobile application on an ordinary smartphone. Adding the codes does not change the production process and leads to a decrease in the cost of logistics and accounting. Development is moving in the following directions:

• Generate a unique code based on GS1 standards (Serialized GTIN) and apply it to the product packaging as a two-dimensional barcode (QR or DataMatrix). This is efficient and inexpensive since the centralized online system issues digital codes that do not require special physical media.
• For copy protection, we propose to use traceability technology: it records each change of the product’s ownership and verifies each “owner’s ID—digital code” pairs for uniqueness, to make sure that the goods remain genuine at each stage.
• The marking code’s life is over when the retailer sales the product to a consumer. At this moment, retailer should remove the digital code from taxable circulation and the issuer cannot use it again.
• Generate a unique product “signature” based on the unique features of the code imprint, roughness at the microscopic level or fibers on the product’s paper packaging. A central database securely stores this “signature”. If someone copies the code to a different product package, the “signature” of the copy will differ from the signature of the original.

There are several problems with this approach.

• First, introducing traceability technologies throughout the supply chain increases costs for participants. In some industries, costs rise by orders of magnitude, which naturally leads to participants’ dissatisfaction. Human errors lead to misclassification and unreliable data when shipping and receiving goods. We should use this approach with caution, while considering the risks of inaccuracy.
• Second, few people will put illegal goods into a legal commodity distribution chain. Illegal goods usually exist where no one will ever use traceability technology and share data with the state.

Because product authenticity is essential to fully collect excise taxes, tax administration should approach the choice of technology systematically, evaluating both the potential effectiveness and the costs to taxpayers to support the process.