Monday, November 1, 2010

DTN News: China’s Booming Bogus Business

Defense News: DTN News: China’s Booming Bogus Business
* Product fakery employs millions of people, but the government is starting to crack down
Source: By Doug Palmer and Melanie Lee, Reuters October 31, 2010 9:03 PM
(NSI News Source Info) WASHINGTON/GUANGZHOU China - November 1, 2010: Anybody could tell right away that the Louis Vuitton shoulder bag was fake because it was delivered in a recycled box that once shipped batteries.

Warnings printed on the inside of the box read: “Danger Contains Sulfuric Acid” and “Poison — Causes Severe Burns” — not the sort of messages that would normally accompany a product from one of the world’s most iconic luxury brands.

But it sure looked real. It was dark brown, sported a braided strap with brass fittings and the Louis Vuitton monogram stamped all over the bag.

I had ordered the bag from a website called for this special report, which explores the growing problem of counterfeit merchandise sold over the Internet.

Reuters wanted to trace the problem from a consumer in Washington D.C. to the shadowy producers based in Guangzhou, China, where my colleague Melanie Lee found the illicit workshops and markets.

Ericwhy, based in Guangzhou, calls its stuff “designer-inspired alternative to actual Louis Vuitton” in a disclaimer on its website.

“We assume no civil or criminal liability for the actions of those who buy our products.”

Yet, U.S. law enforcement officials say this website and many others that offer a dazzling array of goods online — clothes, electronics, footwear, watches, medicines — are outlaws, and they plan to go after them hard.

Counterfeit commerce over the Internet has soared in the past couple of years, turning what had been an irritant to businesses into a serious competitive threat, the officials say.

The Organization for Economic Cooperation and Development estimates the amount of counterfeit goods and pirated copyrights in world trade grew from about $100 billion in 2001 to about $250 billion in 2007, the last year for which they have made an estimate. While there are no separate estimates for how much of that is sold on the Internet, authorities say it is considerable.

“The Internet has just completely changed the face of the problem, made it more complicated and more pervasive,” says John Morton, assistant secretary in charge of U.S. Immigration and Customs Enforcement (ICE). “Whole industries now have been attacked, not from the street, but from the Internet.”

He works the detective gumshoe routine, spending hours trailing trucks carrying suspected cargo in and out of Shiling, conducting camera surveillance and interviews.

A former People’s Liberation Army intelligence officer, Zhou, who has been in the industry for 12 years, has the tanned, leathery skin and sharp crew cut of a military man.

His austere presence is betrayed only by a brown, expensive-looking leather purse, which he showed off proudly — a gift from an Italian client after he found a counterfeit workshop for them.

Luxury brands hire him to gather information on the location of warehouses and factories, who then use that evidence to persuade Chinese police to conduct a raid.

The workshops take real luxury handbags and reverse engineer them. Everything from the metal fittings to the monogrammed leather of a Louis Vuitton bag is produced in China.

After it is put together at one of the workshops in Shiling, the bag usually winds up in nearby Baiyun, by the old airport in northern Guangzhou.

Spilling out of stores

The Guangzhou Baiyun World Leather market is the epicentre of the world’s counterfeit trade when it comes to wholesaling fake leather goods and apparel, experts say.

Counterfeit Louis Vuitton, Gucci, Prada, and Hermes handbags literally spill out of shops that occupy commercial space the size of five football fields. Smaller stores provide auxiliary products, such as counterfeit paper bags, receipts and catalogues for wholesalers.

Gina, who declined to give her surname, is one such wholesaler from Colonia, Uruguay. Tugging a large, grey Louis Vuitton suitcase through the narrow paths of the leather market with her 66-year-old mother in tow, she is looking for a shop that can make Louis Vuitton satchels out of “pleather” (synthetic leather).

“Don’t worry, she can manage, we are very used to this,” Gina says as her arthritic mother slowly shuffles forward, carrying bags laden with fake scarves and leather goods, before they stop at a bag shop.

“I don’t need real leather, just pleather. No need to be 5-As, just double A enough,” Gina told the shopkeeper in heavily accented English.

She has travelled halfway around the world to Baiyun to make a personal connection in the world’s largest market for counterfeit leather goods. “I used to buy online from China, but after one bad experience, I said never again!”

She said she wound up taking delivery of 800 bags in red instead of the black she ordered.

Gina was looking for a factory that can make 500 satchels, which she planned to ship to Argentina before bringing them into Uruguay where she has a beachfront store.

It’s less suspicious to bring it over the border than have it come directly from China. Clutching sheets of paper with information about the bags she wants made, Gina, with her streaked blond hair, tanned skin and branded accessories, looked more like a Hollywood fashionista than somebody’s idea of a pirate.

“I’ve been in this business for eight years now,” she said. “It’s a good business.”

Indeed, while criminal syndicates are getting increasingly involved in the counterfeit trade, both in the United States and China, authorities say, it is ordinary folks like Gina and the shopkeepers she deals with who are the face of the counterfeit business in China.

Half-hearted enforcement

Guangzhou authorities occasionally raid the Baiyun market, including the day Reuters journalists visited there. Shops, tipped to the impending raid, dutifully closed their doors, though customers only had to knock to be let in surreptitiously.

“They are raiding now. I don’t know when it will end. It’s because of the Asian Games,” said one shopkeeper. Guangzhou is hosting the games in November.

After a few minutes, the raid apparently ends with no arrests made. Shop owners slide off their stools, fling open their glass doors and stand outside beaming and beckoning at customers again. They don’t cater to tourists, but sell in bulk to wholesalers such as Gina. Each shop claimed to have a factory backing it. In the basement of the stores are the shippers, who expertly pack and label the items so they sail through customs.

“If you want to send to France, it is a bit hard, because they check thoroughly. But sending via UPS has an 80-per-cent success rate,” said one such shipper named Chen, who like the others interviewed in China for this story, declined to give his full name to avoid getting in trouble.

They will also route shipments through ports in the Middle East or Africa to avoid detection by customs in the European Union and the United States, he said.

Sitting on a small stool in a Baiyun shop, Gary, a 30-year-old Congolese, represents another branch of the industry — the intermediary. Speaking Mandarin to a shopkeeper and switching to French for his three African clients, he was trying to put together a deal on counterfeit Italian Miu Miu bags. He came to China two years ago to study, but has made helping European and African clients buy fakes a thriving side business.

“I buy a lot and pack them in boxes of 10. Then I ship them to England and then I drive (them) into France and they get picked up,” Gary whispered in Mandarin. “It’s a sensitive business,” he said with his baseball cap shoved low on his head.

Similarly, Nana, 30, a native of Moscow, has lived in Guangzhou for four years. She was buying fake Tommy Hilfiger and Gucci clothes in Baiyun, which she planned to supply to 20 websites in Russia.

Few if any foreigners are ever caught or prosecuted, and not many locals, either. China’s counterfeit industry employs millions of workers, distributors and shop clerks across the nation, one reason why authorities have often been half-hearted in their enforcement measures.

But last week, the government said it would soon launch a six-month crackdown on piracy and trademark infringement. The illicit traders “upset the market’s normal order, impair the competitive strength and innovation of businesses, and hurt China’s image abroad,” the State Council, or Cabinet, said in a statement.

In the second half of last year, China’s customs department seized 2.6 million counterfeit items from the country’s postal and express consignments, Meng Yang, a director general in the customs department, said in a speech in Shanghai last month.

That’s probably just a small fraction of the total trade in China, experts say, given the amount of fake merchandise from China seized abroad.

New weapons against pirates

Back in Washington, I handed over the fake Louis Vuitton bag to the National Intellectual Property Rights Coordination Center.

Federal agents, standing in front of a display case of counterfeit shampoo, condoms, medicine and other products seized over the years, good-naturedly accept the bag.

They said it was much better quality than the ones they had brought in to show me.

The new centre is a partnership among a dozen federal law enforcement agencies and the Mexican government. Richard Halverson, its chief for outreach and training, said U.S. customs officials and postal inspectors have been on the lookout for counterfeit goods from China, but can’t catch every one.

The money to be made selling counterfeit goods is so good “we have seen organized crime groups, what you would consider drug trafficking groups, actually move away from some of those other crimes into the counterfeit goods trade because it is a high-profit, low-risk cash business — the prime things that criminals are looking for,” Halverson said.

It may seem harmless enough, but a consumer surfing the web looking for a good deal on prescription drugs, for example, needs to beware. “You may be looking at what you believe to be a Canadian pharmacy, when in fact the drugs are being manufactured in India, the site is being run out of China, and your payment is going to another group in Russia,” Halverson said.

In the 2009 budget year, U.S. Customs agents and other officials made 14,481 seizures valued at $260.7 million dollars.

When the final tally for the 2010 budget year is in, the figures will be much higher, Halverson said, noting that in just one operation U.S. agents in Baltimore working with London police seized eight containers of counterfeit shoes and handbags.


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