An original equipment manufacturer (OEM) is a company that manufactures products or parts that are then used in the final product of another company. This also includes companies which design and produce electronic items based on a buyer’s specifications to sell a completed, final product – with their company name or logo placed on the product by the OEM.
In this way, companies often look to overseas OEMs to save costs on product development, labor, or other production expenses, while still benefiting from the product expertise and warranty offered by the OEM. This is a common and legal practice across various industries.
That said, counterfeiters and other bad actors often manipulate this business model and falsely label counterfeit or substandard items as genuine OEM products. When they sell these items online, this poses significant risks not only to consumers but to the marketplaces and payment providers enabling the sale of these products.
Products using non-OEM parts can be dangerous
As reflected by the U.S. Trade Representative’s most recent report, automotive parts and electronics are highly prone to counterfeiting. Such counterfeits pose serious risks to consumer safety and harm the reputation of legitimate manufacturers.
Counterfeit electronics are at risk of overheating, self-igniting, or shorting-out, and could cause burns or electrical shocks. In 2022, for example, the FBI in partnership with the IPR Center issued a warning about the safety and health risks counterfeit batteries pose to consumers.
Non-OEM car parts are typically produced with dangerous or inferior materials that are prone to wear or failure, and again, they often do not have to meet safety standards or undergo testing. This can result in severe malfunctions, such as brakes failing, or airbags over-inflating or even exploding metal shrapnel during deployment in a crash.
“Consumers in need of auto repairs should be wary of unscrupulous repair shops and greedy internet vendors that prioritize profits over the safety of their consumers,” Joseph Martella, a U.S. Customs and Border Patrol official, said after a major seizure of counterfeit parts from China last year in Philadelphia.
According to the CBP, The People’s Republic of China remained the primary source economy for counterfeit and pirated goods seized in the U.S. in 2023, accounting for a total estimated MSRP value of over $1.48 billion (USD) or approximately 61% of the total MSRP value of all IPR seizures.
More types of OEM fraud
OEM fraud isn’t limited to the production, sale, and distribution of counterfeit or substandard products. Here are other activities that fall under the umbrella of OEM fraud.
- Internet piracy
This occurs when software is downloaded from the Internet. The same purchasing rules apply to online software purchases as for those bought in compact disc format. Common internet piracy techniques include:- Websites that make software available for free download or in exchange for others
- Internet auction sites that offer counterfeit or out-of-channel software
- Peer-to-peer networks that enable unauthorized transfer of copyrighted programs
- End-user piracy
This occurs when an individual reproduces copies of software without authorization. These include:- Using one licensed copy to install a program on multiple computers
- Copying discs for installation or distribution
- Taking advantage of upgrade offers without having a legal copy of the version to be upgraded
- Acquiring academic or other restricted or non-retail software without a proper license
- Swapping discs in or outside the workplace
- Client-server overuse
This type of piracy occurs when too many users on a network are using a central copy of a program at the same time. If you have a local-area network and install programs on the server for several people to use, you have to be sure your license entitles you to do so. If you have more users than allowed by the license, that's "overuse." - Hard-disk loading
This occurs when a business sells new computers with illegal copies of software loaded onto the hard disks to make the purchase of the machines more attractive. - Distribution of gray market goods
Unauthorized sellers procure OEM products from one market (often at a lower cost) and sell them in another market at higher prices, without the consent of the OEM. This can disrupt pricing strategies and customer trust.
Risks to financial institutions and online marketplaces
When consumers lose faith in the authenticity of the products they purchase, the financial institutions and online marketplaces facilitating those sales may incur substantial damage to both reputation and revenue. When something goes awry with a product, in the consumer’s mind, the platform is to blame, even if the product was sold to them by a third-party seller.
When financial institutions and online marketplaces facilitate transactions online, they may also face action by regulators for not doing their due diligence to vet the merchants committing OEM fraud.
OEM fraud in the news
In the U.S., many different government agencies work to prevent counterfeiting. These include the Food and Drug Administration (FDA), Office of Intellectual Property Rights, International Trade Commission, Federal Bureau of Investigation (FBI), Customs and Border Protection (CBP), and the National Intellectual Property Rights Coordination Center. Some of these same agencies focus on OEM fraud.
Here are several recent examples of enforcement action taken in the U.S. and elsewhere to stem OEM fraud:
- A computer system administrator and former Avaya employee, along with his wife, pleaded guilty in September 2023 to running a massive international scheme to make millions of dollars selling pirated business telephone system software. The Oklahoma couple faces a maximum penalty of 20 years in prison and a judgment of $4 million.
- Last year, the CBP seized close to $200,000 in counterfeit auto parts in Philadelphia that had been shipped from China. The parts, which didn’t comply with National Highway Traffic Safety Administration (NHTSA) safety standards, included airbag cover, hoods, fenders, bumpers, and badges bearing trademarked logos for Chevrolet, Buick, and Dodge. The CBP also seized counterfeit car parts including headlamps and brake hoses in Los Angeles that had been imported from Taiwan.
- Last July, Panasonic worked with authorities in Thailand to apprehend a major seller of counterfeit batteries that were doing business on online platforms. More than 400,000 batteries illegally using the Panasonic name were seized in a raid. Those selling the batteries face criminal charges of trademark infringement under the Thai Trademark Act.
Mitigating risks associated with OEM
To reduce regulatory and reputational risk, and to reduce harm to consumers, online marketplaces and payment providers need solutions for quick detection and assessment when onboarding merchants. They also need ongoing monitoring to detect suspicious activity throughout the relationship with the merchant.
EverC can help to identify merchants that are potentially involved in suspicious or criminal activity, even when their activity is purposely hidden. Our technology leverages AI for increased speed and precision in detection rates, enhancements to features and tools, and unmatched customization capability, for solutions that allow you to meet your business goals while aligning with your RBA and industry priorities.
