Article

Fake food: The business of fraudulent labeling

"Grub first, then ethics", wrote Bertolt Brecht in 1928 in his famous Threepenny Opera. This quote is also perfectly applicable to the fraudulent labeling of food.

February 14, 2020

Dr. Patrick Kolb

Fund Manager, Credit Suisse Asset Management

Fake food The business of fraudulent labeling

Even before Brecht’s time, people used dandelion roots as a substitute ingredient and to make coffee last longer and even sold it as chicory coffee (also known as "Mocca faux").¹ Today, examples of such instances of food fraud are: Rotten meat in gelatin, fat burners containing DNP, and pesticide apples labeled as organic.² Fraudulent food items are being marketed and sold across Europe. Last year, food valued at several hundred million euros was confiscated in a coordinated action by Europol and Interpol. Customs authorities, police, food inspectors, and veterinarians screened numerous producers and intermediaries in 78 countries. They confiscated over 33 million liters of beverages and 16,000 metric tons of counterfeit food items (including deep frozen, rethawed fish declared as fresh in Italy, on which acids, phosphates, and hydrogen had been used to prevent rotting). A total of 672 people were arrested.³

Of course, the tabloid media in particular is paying rapt attention to sensational food scandals such as the "beef" lasagna made of horse meat from Romania and eggs from Holland contaminated with fipronil. Unfortunately however, most citizens view these cases as isolated incidents. Very few of them associate it with organized criminality. A lot of food is traded, imported – and mixed – on an international scale. Tempted by high profit margins and relatively mild penalties, the fraudsters are very adept at taking advantage of that thanks to industrialized farming, e-commerce, integrated markets, and government authorities operating independently.⁴ The more food items are combined with one another, the higher the likelihood of food fraud being committed. The longer and less transparent the supply chains are, the easier it is for criminals to cover their tracks. Obviously, there is relatively little profit in marketing one package of fake organic strawberries. However, the market for food is huge, and there are countless opportunities to commit fraud. According to data from the EU, food fraud costs EUR 30 billion annually and could even endanger the health of consumers in a worst-case scenario.⁵

According to the EU, the food item with the most common occurrence of fraudulent labeling is organic, extra virgin olive oil

Source: GEO (2016); Diese Lebensmittel werden besonders häufig gefälscht; (These Foods Are Counterfeited Especially Often), GEO 5/16, URL: https://www.geo.de/natur/nachhaltigkeit/66-rtkl-nahrungsmittelbetrug-diese-lebensmittel-werden-besonders-haeufig, retrieved on October 22, 2019.

The European Commission has prepared a list of foodstuffs that are most frequently counterfeited – olive oil is the top offender. Because much more Italian olive oil is available on the market than is truly possible based on the amount of olives harvested in Italy, it must be assumed that a portion of the products being offered is at least incorrectly labeled.⁶ Ranking next on the list are milk, honey, saffron, fish, coffee, orange juice, and cheese.⁷

What is food fraud?

Germany's Federal Office for Consumer Protection and Food Safety defines food fraud as follows⁸:

"Food fraud is generally understood to mean the intentional marketing of foodstuffs with the aim of achieving a financial or economic advantage through deliberate deception. Its purpose is to mislead customers or consumers through the use of prohibited additives that alter the composition of the foodstuff or by willfully declaring incorrect information – that is, intentionally using false or inadequate details on the label."

The questions of authenticity and geographic origin are crucial. Is the food genuine, and are the ingredients correct? Have the products been watered down, or has something been mixed in? At best, the counterfeits are inferior. At worst, they put consumers' health at risk. The list below shows some examples of food fraud:

Mislabeling of inferior foodstuffs as high-quality, brand-name products, such as when cheaper robusta coffee beans are sold as expensive arabica.
The false labeling of protected regional brands – for example, Champagne that does not even originate in the French region of Champagne.
Actual fraud, such as when farmed salmon is passed off as wild.
Finally, the remarketing of inedible food that has experienced interruptions in its refrigeration chain or the eat-by date has passed.⁹

Possible solutions: Quality control and state-of-the-art methods of analysis

On the one hand, consumers are hardly able to estimate the danger of food fraud. On the other, it is extremely difficult for food producers and vendors to track down the deceptive practices. And the phenomenon is not a new one. People have always tried to replace high-value goods with cheaper ones. For instance, bakers in the middle ages mixed sawdust into their bread, and innkeepers watered down their wine and beer.

Counterfeit food items are only "successful" if they remain undiscovered by inspectors. That is why food producers work closely with their suppliers today. Quality control begins before the goods are even shipped. They demand certificates, tests, and inspections to verify, for example, whether the quantities indicated sound plausible. On top of that, government authorities are using cutting-edge methods of analysis to uncover counterfeits. For example, they use nuclear magnetic resonance (NMR) spectroscopy, a technology used on human beings and known as magnetic resonance imaging. This technology records the magnetic properties of water atoms. Depending on their origin and type, they produce a "fingerprint" that enables food items to be broken down into their individual components.

Max Rubner Institut

The Max Rubner Institut (MRI) in Karlsruhe employs roughly 200 scientists. They conduct research in the field of consumer health protection, specializing in nutrition. The researchers are working to make food authentication simpler. The experts can, for instance, prove whether milk is truly organic when it is labeled as such and whether salmon was actually farmed organically as declared. When it comes to salmon, the Institute demonstrated, combining the delta15N value and linoleic acid content of a fish fillet enables a distinction between organic salmon raised conventionally through aquaculture and wild salmon. This allows even individual fish fillets to be clearly identified using state-of-the-art laboratory methods.¹⁰

Conclusion

The heightened focus of government authorities and consumers on food safety is creating opportunities for companies in the life sciences as well as testing, certification, and inspection. In our view, ensuring and improving product quality represents an attractive, long-term growth trend. Stricter regulation and growing safety concerns of the general public are the key drivers in protecting foodstuffs and potable water from being contaminated with microbacteria or chemicals. We assume that producers will be even more heavily forced to make efforts to improve their quality standards in the future. This is not only important for the food producers themselves, but it will also benefit society.

We believe that stricter regulatory requirements will prevail in the future. Therefore, it will become even more important to verify the origin of food items and use trace-and-track methods to locate the original manufacturer. For this reason, we hold equities in leading companies in the areas of sensor technology, diagnostics, certification, and inspection. In addition, manufacturers of scientific instruments and consumer items are in an attractive position.

Fund Risks

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Focus on security and safety companies can lead to significant sector/regional exposures.
Exposure to small and mid caps can result in higher short-term volatility and may carry liquidity risk.
Due to the possibility of increased exposure to the emerging markets the fund may be affected by political and economic risks in these countries.
Equity markets can be volatile, especially in the short term.

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¹ The word "Mocca faux" refers to a coffee substitute (or "ersatz coffee") not brewed from coffee beans. Today, coffee substitute is made not only from chicory but also from malted barley (malt coffee) or roasted rye.

² DNP (2,4 dinitrophenol) is a yellow powder often used by bodybuilders to burn fat. In manufacturing, DNP is often used to synthesize dyes, wood preservatives, insecticides, and explosives. In the 1930s, it was use as a drug for stimulating the metabolism and losing weight. However, because of its severe side effects, medical usage was soon banned (source: Swiss Federal Food Safety and Veterinary Office (2019)), "2.4-Dinitrophenol (DNP)," URL: https://www.blv.admin.ch/blv/de/home/lebensmittel-und-ernaehrung/lebensmittelsicherheit/stoffe-im-fokus/unerlaubte-stoffe/2-4-dinitrophenol-dnp.html, retrieved on October 17, 2019.

³ Source: German Federal Office for Consumer Protection and Food Safety (2019), "OPSON-Operationen" (OPSON Operations), URL: https://www.bvl.bund.de/DE/01_Lebensmittel/03_Verbraucher/16_Food_Fraud/06_OPSON_Operationen/OPSON_Operationen_node.html, retrieved on October 17, 2019.

⁴ For example, please refer to this presentation from the Food Safety Authority of Ireland (2019), "Future Challenges in the Fight against Food Fraud, IE Response," URL: https://ec.europa.eu/food/sites/food/files/safety/docs/food-fraud-reports_20190408_pres03.pdf, retrieved on October 17, 2019.

⁵ Source: European Commission (2019), "Agri-food fraud," URL: https://ec.europa.eu/food/safety/food-fraud_en, retrieved on: October 17, 2019.

⁶ For example, refer to "Neue Zürcher Zeitung" of October 24, 2010: "Italienisches Olivenöl, made in Spain," (Italian Olive Oil Made in Spain) URL: https://www.nzz.ch/italienisches_olivenoel_made_in_spain-1.8120243, retrieved on October 23, 2019. Moreover, genuine olive oil should not contain any harmful substances, according to consumer magazine Öko-Test. Not every olive oil labeled "extra virgin" actually contains the good stuff, however: A test revealed that, of 19 premium-grade olive oils, nearly half were contaminated with mineral oil, and some also tasted rancid (source: Öko-Test (2019), "Olivenöl-Test: Knapp jedes Zweite mit Mineralöl belastet" (Olive Oil Test: Nearly Half Contaminated with Mineral Oil), October 21, 2019, URL: https://www.oekotest.de/essen-trinken/Olivenoel-Test-Knapp-jedes-Zweite-mit-Mineraloel-belastet-_111646_1.html, retrieved on October 22, 2019.

⁷ Source: Schimanski et al. (2019), "Lebensmittelbetrügern auf der Spur: Eine Herausforderung für die Lebensmittelüberwachung" (Tracking Down Food Fraudsters: a Challenge for Food Monitors), July 12, 2019, URL: https://www.git-labor.de/forschung/lebensmittel/lebensmittelbetruegern-auf-der-spur, retrieved on October 17, 2019

⁸ Source: German Federal Office for Consumer Protection and Food Safety (2019), "Was ist Lebensmittelbetrug?" (What is Food Fraud?), URL: https://www.bvl.bund.de/DE/01_Lebensmittel/03_Verbraucher/16_Food_Fraud/02_Was%20ist%20Lebensmittelbetrug/Was%20ist%20Lebensmittelbetrug_node.html, retrieved on October 23, 2019.

⁹ According to business magazine Wirtschaftswoche, criminals in one case took frozen but poorly chilled octopus intended as animal food and processed it with chemicals until it looked good again and sold it as a fresh delicacy on the market (source: Wirtschaftswoche (2019), "Fake Food," July 5, 2019, p. 18).

¹⁰ Source: MRI (2019), "Authentifizierung von Bio-Fisch" (Authenticating Organic Fish), URL: https://www.mri.bund.de/de/nrz/forschung/authentifizierung-von-bio-fisch/, retrieved on October 17, 2019.

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