Estimates are that at least 5 percent of all products are phony, and in some industries, the percentage runs much higher. Something like 22 percent of all apparel and footwear is estimated to be counterfeit. No brand has been spared: Lacoste, Armani, Calvin Klein, Tommy Hilfiger, Polo, Donna Karan, Nautica, and so on. Counterfeit leather products have long been popular with tourists, who load up on fake Louis Vuitton, Gucci, and Charles Jourdan bags and wallets. The better the brand awareness, the greater the likelihood of counterfeiting. We all love Swiss watches, and so it’s no wonder that an estimated ten million counterfeit Swiss watches are sold each year. More than a quarter of the computer software being run on computers in the United States is said to be fraudulent, and in some countries, 90 percent of it is fake. I’ve heard that the counterfeit golf equipment business is larger than the real golf equipment business. Hours after the Taylor Made Golf Company introduced a new $300 driver at the Professional Golfers’ Merchandise Show in Orlando not long ago, counterfeiters were selling their own fake replicas for half the price—at the same trade show.
Pretty much anything that sells gets counterfeited these days. Counterfeiters deal in mundane items like ball-point pens, correction fluid, socks, perfume, adhesive tape, stereo speakers, as well as more esoteric products like cargo hold covers for ships. I’ve even heard of counterfeit butterscotch candy.
The problem is not merely a cosmetic one, or one of phony denim that doesn’t fit or wear quite as well as the genuine label. Pharmaceuticals consistently lead the list of counterfeited products, because while medicine is expensive to develop, it’s relatively cheap to reproduce. There is also widespread counterfeiting of automotive and aircraft parts—there are actually decent odds that when you board any commercial plane it contains a few counterfeit parts. These can result in lethal consequences. It’s one thing to be stuck with counterfeit shampoo, deodorant, or talcum powder. It’s quite another to be ingesting fake prescription drugs: fake anti-malarial tablets, fake decongestants, fake aspirin. It’s one thing to be fooled into buying fake athletic socks. It’s quite another to have counterfeit brake pads installed in your new car.
There’s a lot of shoddy counterfeiting of products, and simple side-by-side comparisons generally will separate the genuine from the fraudulent. But, as with other areas of fraud, counterfeiting has improved enormously. Again, technology has been a tremendous boon to the scofflaw. With the work of the best counterfeiters, not only are the products perfect replicas, but so are the labels and the packaging. Even people who work in the industry can’t tell that they’re fakes.
A few years ago, Alfred Dunhill, the British luxury goods and tobacco company, was experiencing highly sophisticated counterfeiting of its purses and billfolds. A seizure of the products took place in Oregon, and a chain of counterfeiters was brought to trial. Naturally, the prosecution needed to demonstrate in court that the seized goods were in fact fake, or else there was no case. But the goods were so precisely counterfeited that prosecutors had to trot out an entire team of experts to testify. The fakes, which were being made in Asia, were so good that it took forensic analysis to identify them. Despite this, the result was a hung jury. The jury may have been sending any number of messages, including that it was utterly confused, but I suspect that one of them was that they weren’t entirely convinced that the counterfeits were truly counterfeits.
These days, the counterfeiter often uses the same machinery that the genuine manufacturers do, as well as the same packaging. Unilever came across a group of thieves in Chicago who were counterfeiting brands of their liquid detergent. They were ordering bottles from the same place Unilever got them in Canada. Then they filled them with cheaper soap and sold them to bodegas. Counterfeiting liquid detergent hardly seems worth the effort, but they were doing it with gusto.
Allied Domecq, a big wine and spirits distributor, found that a large proportion of its Fundador Brandy sold in the Philippines was counterfeit. It had been going on for so long, in fact, that local residents had come to believe there was a Philippine version of the product. The counterfeit bottles were perfect imitations, and in fact, were often empty Fundador bottles that were refilled. The only way you could tell the difference was when you tasted the brandy. There were actually different levels of the counterfeit brandy, some better tasting than others. Counterfeiters pretty much put anything in the bottle, as long as it had the same color and general flavor of brandy, but a few were more artful. But none of it truly tasted like brandy, since the thieves used sugar cane and flavors like rum.
Determined to put a stop to the counterfeiting, Allied Domecq changed the look of its bottles. It designed a new, hard-to-counterfeit label and it added a plastic cap and a guala, which is a plastic ball inside the neck that prevents the bottle from being refilled. The counterfeiting declined significantly.
IT’S NOT JUST FAKE FUR
To a large extent, counterfeiting is ruled by organized crime syndicates. Like other forms of fraud, it is growing so rapidly because penalties are inadequate and rarely enforced. There are extremely high profits and low risk, a combination that will always attract criminals. A number of years ago, the former head of the Born to Kill gang in New York said he made $13 million a year selling counterfeit Rolex and Cartier watches. Think about it. Low-grade quartz watches were shipped in from Hong Kong that cost $3.00. Fake trade names and logos were slapped on for an additional 50 cents. Then the watches were sold on the street for thirty dollars.
Dunhill pens sell for one hundred twenty dollars or so. Counterfeiters sell them for half that. And they look great, pretty much indistinguishable from the real thing. How do they do it? Well, they’re selling you virtually the real thing. Counterfeiters go to the same factory in Korea that makes the plastic barrel for Dunhill and buy the same barrel. Then the crooks go to the company that makes the cap for Dunhill and buy that. Well, then isn’t it the same pen? Just about. Dunhill’s clip that allows you to attach the pen to your pocket is 18-karat gold. The counterfeit pen has a gold-plated clip. And since the counterfeiters don’t have anything like the overhead and marketing budget that Dunhill has, they can settle for much less markup.
With organized crime involved, there’s enough money available that counterfeiters establish factories that rival those of legitimate manufacturers. I heard about a counterfeit coffee facility in Dagestan, a Russian republic, that can churn out 1.2 million units of coffee a month. An Asian facility making counterfeit athletic shoes is said to employ more than a thousand workers.
Counterfeiting often plays a significant role in money laundering, because laundering always works best when there’s a product involved. Authorities believe that the reason inexpensive items like correction fluid and trash bags are counterfeited is to wash money from other criminal activities like weapons smuggling and loan-sharking. Police using trained drug dogs have found heroin stuffed inside counterfeit Chanel and Louis Vuitton handbags. Criminals were doubling up, importing counterfeit products and drugs all at once. You have to realize, crime syndicates are business operations, and their executives sit around and make strategic decisions just like executives in Fortune 500 companies. One day, at the weekly marketing meeting, some guy probably spoke up and said, “Look, we’re bringing in these counterfeit purses and we’re bringing in drugs, why not combine the two? It’ll be more cost-effective.” The idea probably got him employee of the month.
The money is so good in counterfeit products, that terrorists are believed to often fund their activities by trafficking in fake goods. Terrorists in Northern Ireland are thought to have supported their violence by selling counterfeit veterinary products, perfume, video games, and computer software. The FBI believes the bombing of the World Trade Center was financed by the sale of counterfeit T-shirts and sportswear.
“MADE IN CHINA” MORE THAN YOU KNOW
Counterfeiters live all over, but a great deal of the merchandise originates in places like China, Korea, and Vietnam. China may well be the leading supp
lier of counterfeit products to the world, and just about anything the Chinese consumer buys is quite likely not real. You go to the store in China and there’s fake Skippy peanut butter, fake Gillette razor blades, fake Knorr chicken soup, fake Hellmann’s mayonnaise, fake Kellogg’s Corn Flakes, fake Lux soap, fake Rejoice shampoo, fake Huggies diapers, fake fertilizer, fake liquor, fake motor oil, fake chewing gum, fake cell phone batteries, even fake toilet paper. The goods are probably rung up on a counterfeit cash register and packed in counterfeit grocery bags.
Procter & Gamble began selling its products in China in 1991, and that same year counterfeits were already on shelves. The soap company says counterfeiters make fraudulent copies of their shampoo bottles and fill them up with the cheapest blend of raw ingredients. Then they’ll top off the product with a touch of the real shampoo to make it look and smell authentic. Each year, the problem worsens.
Royal Philips Electronics has said 40 percent of counterfeit Philips light bulbs in the Philippines come from China. Volkswagen said two-thirds of the car parts sold in China under its brand name are fakes. Hitachi has the same problem with counterfeit electronic products. The Chinese press wrote up some thieves who put together an entire car from used and counterfeit parts that they tried to sell as a new Audi.
China has begun cracking down on the problem, under pressure from foreign companies. But some pretty major cultural shifts have to take place. Local governments have been famous for protecting factories churning out counterfeit goods. Philips said that the prime counterfeiter in Zhangzhou in the Fujian province was even given an “outstanding youth” award by the local government.
All these cheap Asian fakes serve as fodder for all types of little scams. You know when you take transatlantic flights and the airline crews come around with little trolleys of duty-free items you can buy? Some dishonest crew members on British Airways figured out a way to augment their income. They bought counterfeit products like Raymond Weil watches, Chanel perfume, and Gucci sunglasses while on layovers in Hong Kong and Singapore. Then they substituted the fakes for the genuine products on the trolleys they wheeled around, and passengers unwittingly bought them. The crew members then sold the legitimate goods back in England to stores or on the black market. They would take watches to jewelers and tell them they had gotten them as unwanted gifts, and the jewelers would gladly buy them.
A big part of the problem is that most consumers don’t care if something is fake, as long as it looks like the real thing and it costs less. And it’s not just penny-pinchers who buy phony Gucci and Fendi bags. One counterfeiter said he had a steady client who was a neurosurgeon’s wife. Some rich people, he said, buy fake handbags and luggage from him for trips, so they don’t have to worry if they get stolen in hotels. Then they had the real thing for dinner parties and local use. The business has become very open. Counterfeit items are easily obtained on the streets of all large American cities. In Italy, they’re sold by street peddlers known as “Vu cumpra,” which means “wanna buy.” They even take out ads in the local papers. In Sweden, there was a mail order catalogue that sold all manner of counterfeit merchandise. It was called, “Fake.”
SALTING TALES
In few areas of fraud have technological advances been more welcome than among counterfeiters. “Cyberfakes” is the name that the garment industry has given to computer-generated logos and designs. The counterfeiter scans a real logo into his computer. Then he transfers it to a computerized embroidery machine. Using the image as a master, it recreates the design on just about any garment he chooses. Counterfeiters can buy an embroidery machine small enough to fit inside a suitcase for just three thousand dollars. Label-making machinery can be acquired in the same way, but it is much more expensive. More commonly, counterfeiters will farm out the work of counterfeit labels to factories in developing countries.
As U.S. Customs has gotten sharper at detecting illegal apparel imports, counterfeiters have introduced new tricks. They import what they call “blanks,” perfectly legal unlabeled apparel. The clothes will then be taken to factories, usually around New York or Los Angeles, and low-wage laborers will attach the counterfeit brand-name labels and logos to them.
Another nettlesome issue is what are known as “overmakes,” “backdoor,” or “cabbage.” A factory making legitimate clothing for a brand will deliberately make extra garments and then sell these “overmakes” to criminals.
A related concern is diversion and the gray market. For instance, products merchandised in the United States are also sold in Africa, but at a lower price to meet the local market. So, a legitimate company will ship goods to a wholesaler in Africa, who will divert them to someone in Milwaukee, where he can get a bigger return, because while there might be a 40 percent discount off the list price in Africa, there’s only a 15 percent discount in the United States. This is often a fraud against the sales contract, but it’s difficult to enforce because it’s so hard to trace where shipments wind up. In the 1990s, for instance, Unilever sent a lot of soaps, shampoos, salves, and creams to Russia. Most of it ended up back in Brooklyn.
Like many other companies, Unilever has attacked the diversion problem by conducting a little contest. It’s called “Lucky Bonus.” When it sends out a pallet of goods, it will tuck three $25 coupons inside. When the pallet is unloaded and the product removed to put on store shelves, the handlers will find the coupons. The instructions tell them that if they fill them out with their name and address and return them to Unilever, they’ll get a check for $25. The key is having that name and address. That tells Unilever whether the pallet got to its intended destination. The concept is known as “salting,” and was developed by American Cyanamid for its Old Spice cologne, which was being diverted. It’s neither a high-cost solution nor a high-tech solution, but it works.
BUYER BEWARE
I do occasional work for Microsoft, which, given its dominant market presence, has been a principal target of counterfeiters for years. It’s gotten so bad that Microsoft can barely get a new piece of software out before counterfeit versions make their own debut. In some instances, counterfeit versions of Microsoft products have beaten the real thing to market. You can go to various Internet auction sites and bid on fraudulent Microsoft programs that sell for a fraction of their retail price.
In early 2000, a guy was busted in the state of Washington, Microsoft’s home state, for making counterfeit Microsoft products, including Office 97, Office 2000 Professional, and Office 2000 Premium. He was turning out tens of thousands of copies in his apartment. When they raided it, the FBI found several computers, a sixteen-tray replicator, a color copier, a shrink-wrapping machine, and packaging materials.
A few years ago, an Asian ring was busted in South El Monte, California. The ring had two locations, one to manufacture fake Microsoft CD ROMs and disks, and another to make counterfeit manuals, certificates of authenticity, boxes, and even contest entry forms for free trips. Nothing was omitted. The products seized were estimated to have a market value of more than $10 million.
In Digital Park, a high-tech business center just outside Cambridge, England, a young Texan opened a company several years ago called PolyMould that made counterfeit versions of the most popular software products, including Microsoft Office and Windows NT. Down the road from the facility was one of Microsoft’s own research and development centers.
An Asian gang took a different approach to scamming Microsoft. They established a fake school they called West Hill College. Then they ordered software from Microsoft at the education discount of one-third the retail price. They repackaged the CDs in counterfeit boxes, and sold them at full price through a phony computer wholesaler they created.
Microsoft puts a ton of security features in their products, everything from edge-to-edge holographic images to watermarked security paper with an embedded thread and a heat-sensitive strip that reveals “Genuine” when rubbed for a few seconds, but they face an ongoing struggle. I’ve worked on the Microsoft warranty tha
t’s contained in all of the company’s software. It has to be changed every couple of years because it keeps getting counterfeited. For instance, within days of the Windows 98 OEM security manual cover being introduced, a counterfeit product was already identified and confiscated in several cities. The knock-offs imitated both the manual cover and the security devices.
The problem is that software counterfeiting keeps getting easier. CD recordable drives that allow anyone to make copies of software cost a few hundred dollars. With desktop publishing programs and document scanners, it’s simple to duplicate manuals and warranties. But even though counterfeit software closely resembles the real thing, it doesn’t always work as well. Often, counterfeiters sell untested software. It may have been copied hundreds or thousands of times from a real version and is defective. The result can be viruses that corrupt your hard drive or cause system failure.
KA-CHING!
I’ve always figured that security at casinos is as tight as it gets, and there was no reasonable hope of replicating the chips and tokens in casinos. That was before I spoke to a guy from Rhode Island, who had recently been released from prison for perpetuating a massive slot machine token fraud. He had scammed virtually every major casino in the country with counterfeit five-dollar to hundred-dollar slot machine tokens.
Originally, the man had been a tool and die maker who made custom jewelry for dealers, but he got tired of the business and retired at an early age. He had been a real workaholic, and had too much time on his hands. He broke up with his fiancée. He was at loose ends. The Foxwoods Resort Casino in Connecticut had recently opened, and a friend dragged him there to cheer him up. He wasn’t really into gambling, but he was mesmerized by the hundred-dollar slot machine token. He admired the intricate detail of it. It reminded him of a piece of jewelry that he might manufacture. That set wheels turning in his head, and he found himself drawn to the challenge of making a counterfeit token.
The Art of the Steal Page 18
