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Is it real or is it fake? And if it’s fake, it could be funding terrorism.
These days it’s hard to tell what’s real or fake because counterfeiters are becoming increasingly sophisticated and daring as they have moved their wares from sidewalk pushcarts to shopping malls to prey upon the unsuspecting. If you think you got a “steal” on that Coach purse or Rolex watch, look again. It is you who may have been ripped off.
FBI and customs and border agents estimate sales of counterfeit goods are lining the pockets of criminal organizations to the tune of about $500 billion in sales per year. By midyear for fiscal 2003, the Department of Homeland Security already had reported 3,117 seizures of counterfeit branded goods including cigarettes, books, apparel, handbags, toys and electronic games with an estimated street value of about $38 million – up 42 percent from last year.
For the fiscal 2003 midyear report the top five offending countries of origin are the People’s Republic of China ($26.7 million), Hong Kong ($1.9 million), Mexico ($1.6 million), Korea ($1.4 million) and Malaysia ($1 million).
The International AntiCounterfeiting Coalition, or IACC, estimates that counterfeiting results in more than $200 billion a year in lost jobs, taxes and sales. Fortune 500 companies spend an average of between $2 million and $4 million a year each to fight counterfeiters.
The problem is so bad in Asia that the Bangkok law firm of Tilleke & Gibbins built a museum of counterfeit goods in 1989 in Thailand. Today, it has a collection of more than 20 categories of such goods, including shoes, perfumes, watches, household appliances, stereos, car and machine parts, decorative ornaments, foods, drugs, alcohol, chemical products and stationery.
“We need to keep in mind that counterfeiters are business people,” says IACC president Tim Trainer, whose organization is an association of more than 150 companies fighting product counterfeiting. “Their sole objective is to make money. They don’t care about laws and rules. We are talking about people whose sole mission is to profit off the back of successful companies that have successful products. There is no product exempt from counterfeiting – sunglasses, shirts, purses. But counterfeiting has impacted home appliances, electrical products and [parts] for cars.”
In fact, in a recent U.S. case, a customer who took his car in for a brake job found out the hard way that his brake pads were made of sawdust. And product fraud is spreading worldwide. For example, there was a mass poisoning in Armenia in 2001 when fake Stolichnaya and Kristall vodka poured into the market. Two people were blinded after drinking the poison.
The global counterfeit market accounts for 9 percent of world trade and likely will double in the next two years, according to Carratu International PLC, a leading investigator of abuses of intellectual property. These London-based investigators repeatedly have warned that the innocent purchases from Internet sites and street markets of counterfeit products ranging from knockoffs of Nike and Tommy Hilfiger merchandise to electrical parts are funding terrorist and criminal organizations, including al-Qaida, the Mafia and the Irish Republican Army. In a statement released to the press earlier this year Carratu International also claimed to have unearthed links between counterfeiting and Hezbollah, Basque ETA, Chinese Triad gangs, the Japanese Yakuza crime syndicate, the Russian Mafia and the drug cartels.
“The bogusly branded clothes people are buying off the Internet might be helping to prop up terrorist or criminal gangs,” reports Spencer Burgess, director of Carratu International’s Intellectual Property Investigations division. “Every major terrorist group in the world is into counterfeiting one way or another. It is a fairly straightforward way to raise funds. It does not have to involve the sale of anything sinister. It’s easy to make money from something as bland as a T-shirt. The perception many people have that counterfeiting is run by small groups that are just trying to make a few dollars on the side is completely misplaced. It is very much more organized and malicious.”
Counterfeit products increasingly have moved into discount shops and shopping malls, where overzealous store managers are trying to push for a quick profit, says Peter Leeuwerke, chief executive officer for Sure Trace Security Corp., which manufactures and sells proprietary security products.
“Senior-level management may not be aware, but the local store manager is pushing for profits,” he says. “Sometimes they may get about 200 [boxes] of jeans in and they hold this incredible sale. In some of these cases the store managers know exactly what they are doing.”
In a Greenbelt, Md., shopping mall Insight asked an Asian retail clerk about whether an obviously faked “Prada” purse was indeed authentic. She panicked and ran out of the store. At another shop in the same mall this reporter asked the store manager if the hats made in Vietnam were actual Nikes, and he said with a laugh, “No, they are not.” Asked how he could sell them as Nike hats, he refused to answer.
Those caught selling or manufacturing counterfeit brands can face fines ranging into the millions of dollars and long prison sentences, but neither of these establishments ever has been raided. Arrests are rare because, unless the name-brand companies complain, local police are clueless about the counterfeiting trade.
But victimized companies can do more than press charges. In 2000, Adidas America Inc. and Nike announced that they and Adidas affiliates, Adidas-Salomon AG of Germany and Adidas International BV of the Netherlands, had filed suit against Wal-Mart Stores Inc. of Bentonville, Ark., in federal district court in New York. They alleged Wal-Mart had been selling several styles of counterfeit Adidas and Nike T-shirts at its Sam’s Club stores.
The action followed a series of similar lawsuits against the chain by branded manufacturers including Tommy Hilfiger, Polo by Ralph Lauren and Nautica Enterprises. Tommy Hilfiger settled for $6.4 million, while Ralph Lauren and Nautica settled for undisclosed amounts. Wal-Mart says it is looking into the latest allegations.
Counterfeiters are ingenious about pawning off faked products, notes Sandy Beattie, a member of the U.S. enforcement team for Oakley Inc., a California designer of eyewear.
“When tourists are in town, so are the counterfeit Oakley sunglass vendors,” Beattie says. “These vendors are even on tour buses, trying to convince teen-agers to buy cool Oakley sunglasses for $5 to $20. We have seen vendors actually sell the counterfeit glasses out of confection carts as they sell ice cream.” She says the counterfeits are not safe because they do not offer UV (ultraviolet) protection and shatter when struck.
“The counterfeit glasses not only cheapen but also degrade our name and reputation,” she says.
Sometimes the criminal organizations backing the knockoffs are so sophisticated that they are all but impossible to stop. For example, Calvin Klein’s famous cologne, Obsession, had to be pulled temporarily from the shelves to identify and stop the counterfeits, Leeuwerke notes. Last summer golf clubs appeared to be the big-ticket item for counterfeiting.
“Consumers who never bought a high-end club were easily victimized,” says Leeuwerke, whose company found 35 golf clubs bearing a brand name that were not what they were supposed to be. “All of them fell apart,” he says.
Leeuwerke adds that counterfeit operations started in a garage can be expanded quickly to a factory with hundreds of employees.
“In some situations, manufactured goods are part real, part fake,” he says. “Brand owners use independent manufacturing plants to manufacture component pieces, which are later assembled into the final product. In some cases these independent manufacturers use overruns to create fake goods. The labels or logos may be real, but the material is fake.”
A steady increase in counterfeited brands since Sept. 11, 2001, has created deep concern among intelligence agents who fear many of these criminal organizations are tied directly to al-Qaida. For example, late last year authorities raided a souvenir shop in midtown Manhattan and seized a suitcase of counterfeit watches. The faked timepieces were the least of their concerns because the counterfeiters also possessed copies of flight manuals from Boeing 767s that contained handwritten notes in Arabic.
In a similar raid last year at a handbag shop in New York City, authorities discovered faxes relating to bridge-inspection equipment. Two weeks after that raid, New Jersey police investigated an assault on a Lebanese member of an organized-crime syndicate. While searching his apartment police found fake driver’s licenses and a list of al-Qaida – along with the names of some of those working in the New York handbag shop.
Federal authorities say they have linked sales of counterfeit computer software, T-shirts and handbags to terrorist organizations such as Hezbollah and Hamas and involving worldwide schemes reaching from Paraguay to Pakistan.
Of special concern to authorities is such activity in South America, where counterfeit operations are flourishing along the borders of Paraguay, Brazil and Argentina, which have large and growing Arab populations. While this region long has been associated with arms and drug trafficking, as well as counterfeit documents and money laundering, the State Department now considers this area to be a hotbed for Hezbollah and Hamas counterfeiting operations.
In particular, law-enforcement officials continue to investigate reports that a multimillion-dollar counterfeit-software operation based in Ciudad del Este in Paraguay diverted large sums of money to Middle Eastern terrorist cells. Authorities arrested several Lebanese suspects in connection with the software scams.
Besides concern about counterfeit organizations financially supporting terrorist cells, say authorities, they also are worried about use of counterfeit products as a potential means of attacking the United States. Consider the story of a 35-year-old woman who purchased and consumed a diet drug from Mexico. She suffered multiple organ failure and eventually died. Whether or not this was a terrorist act, the woman is one of several dozen Americans known to have died from taking counterfeit drugs, according to the U.S. Food and Drug Administration.
The World Health Organization, or WHO, estimates that 50 to 60 percent of all drugs sold in parts of Africa and 25 percent or more of drugs sold in Mexico now are counterfeit, which may be due partly to the fact that Mexico allows its pharmacists to work without any formal training and does not require prescriptions. On an average worldwide, WHO estimates, 5 to 7 percent of the medicines currently being sold are fakes.
Other studies have suggested that nearly one-quarter of “e-pharmacies” selling medicines on the Internet are illegal, and many of the medicines they sell are either outright fakes or repackaged products that outlasted their original shelf life. Some of the Internet pharmacies, for example, are selling “sugar pills” as drugs to lower cholesterol. Intelligence experts warn that just because a product is being sold under a brand name does not mean that it is as advertised.
IACC President Trainer points to his organization’s white paper that says counterfeit pharmaceuticals have become a serious health threat as customers have received spam e-mail to sell cheaper drugs online. The Internet and secondary wholesale markets, he says, go unchecked and may be uncheckable.
The report, International/Global Intellectual Property Theft: Links to Terrorism and Terrorist Organizations, suggests that terrorists using counterfeit drugs easily could launch attacks with dire consequences: “In the event of such an attack, it could take days or perhaps weeks for the problem to come to light. Any efforts at containment would be severely complicated if the tainted drugs were distributed and sold over a wide geographic area. The Tylenol deaths from the early 1980s would pale in comparison to the utter devastation that could be wrought with today’s deadliest poisons and toxins.”
What can be done to stop the growing counterfeiting of brand-name products? In October, Rep. Jim DeMint, R-S.C., persuaded Congress to provide $300,000 through the U.S. Department of Agriculture – and expects to get another $1 million from the Department of Commerce – to develop a tagging system to help customs agents identify fakes in the textile industry. The technology is rather new, but more and more companies are entering the field with the idea of embedding “mechanical encrypted DNA” into branded products.
Leeuwerke’s Sure Trace Security recently launched through its subsidiary, I.D. OLOGY Laboratories Inc., a synthetic DNA, taggant, which is embedded in the authentic product and its presence confirmed with a handheld scanner.
Applied DNA Science spokeswoman Julia Hunter says her California company has a mechanically encrypted DNA product on the market and is working with edible inks to authenticate pharmaceuticals. Its products for validating the origin of textiles employ a coding system to assist customs agents with checking the origin of the fabric, down to the mill that produced it.
“We can put it right in the fabric and guarantee that Ralph Lauren is really Ralph Lauren,” Hunter says.
Even if the latest technology fully were in place, the consumer still might be duped this holiday season. The Better Business Bureau says a few telltale signs that a branded product might not be the real thing include missing notice of the country of origin or if the original packaging is unavailable or substandard. And if the price is too low, be wary. Chances are that “going-out-of-business” sale is a phony – and so is the product.
Timothy W. Maier is a writer for Insight.
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