faked in china - Thomson Reuters

SPECIAL REPORT
FAKED IN CHINA
REUTERS/Jason Reed
Counterfeit commerce on the Internet has soared recently. What
used to be an irritant to businesses has become a competitive threat
that is costing them billions every year. Reuters journalists track the
pirates from their websites to their shady workshops in China.
OCTOBER 2010
FAKED IN CHINA
OCTOBER 2010
INSIDE THE PIRATES’ WEB
Reuters journalist Doug Palmer purchases a Louis Vuitton bag from a China based online website from Reuters office in Washington, September 10, 2010.
REUTERS/Hyungwon Kang
By Doug Palmer and Melanie Lee
WASHINGTON/GUANGZHOU, China, Oct 26
A
nybody 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 monogramme stamped all across the bag.
I had ordered the bag from a website
called www.ericwhy.com for this special report, which explores the growing
problem of counterfeit merchandise
sold over the Internet.
Reuters wanted to trace the problem
from the consumer in Washington D.C.
”The Internet has just completely changed the face of the
problem, made it more complicated and more pervasive”
A fake Louis Vuitton bag purchased and shipped from a China based online website is pictured in front of a
Louis Vuitton store in Chevy Chase, Maryland, October 5, 2010. REUTERS/Hyungwon Kang
2
FAKED IN CHINA
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 law enforcement 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.”
Visitors to www.ericwhy.com can
choose from more than 1,800 imitation Louis Vuitton bags, ranging from a
pink shoulder tote and a tiger-coloured
“Whisper bag” to a simple bright red
clutch.
The one I ordered cost $122 with a $40
shipping fee, so by my definition it was
not exactly cheap. But comparable bags
sold at a local Louis Vuitton retail store
were $1,000 or more.
I entered my Washington D.C. address
and credit card information, and
instantly got an email from my credit
card company warning of possible
fraud on my account. Soon, I received a
second email, this one a receipt with a
Worldwide Express Mail Service (EMS)
tracking number so I could follow my
package.
The bag left Guangzhou, China on
Sept. 14 and arrived on my desk by the
20th. It was wrapped in a yellow sheath
OCTOBER 2010
A fake Louis Vuitton bag purchased and shipped from a China based online website is shown against
products on display at a Louis Vuitton store in Chevy Chase, Maryland, October 5, 2010.
REUTERS/Hyungwon Kang
A workshop where fake foreign brand handbags are made in the southern Chinese city of Guangzhou
September 30, 2010. REUTERS/Tyrone Siu
with the Louis Vuitton logo and smelled
strongly of leather.
But in another sign something was
not quite right, the English instructions
that came with it read: “Louis Vuitton
has created for you prestigious glazed
leather” – the sentence ending abruptly
without the word “bag.”
I took the bag to a Louis Vuitton store
in Chevy Chase, Maryland to see how it
compared with the real article. The store
clerk, a tall man in a stylish suit, was
restrained. “We only talk about our own
products,” he said icily, adding “we don’t
have any bags like that.”
That Louis Vuitton doesn’t want its
store personnel to talk about how easily
their products can be copied is perhaps
understandable. If word got around fake
bags were on the street, then people
might begin to wonder if their own bags
were real.
Part of the brand’s cachet is its exclusivity, which easily available counterfeits
devalue. Last year, U.S. Customs and
other law enforcement agents made
nearly 15,000 seizures of counterfeit
goods, 80 percent of which came from
3
FAKED IN CHINA
SHADY FACTORIES
The grubby town of Shiling, an hour’s
drive from the southern port of
Guangzhou, has the biggest leatherworking industry in China. In the 1980s,
multinationals from various industries
began outsourcing production to factories in the coastal provinces. In this part
of Guangdong province, it was leather.
By the late 1990s, low-budget workshops in inconspicuous neighborhoods near the outsourcing factories
had sprung up making fake versions of
the products. Today, much of Shiling’s
leather goods are destined for the counterfeit trade.
At one such workshop near Shiling
Secondary School, women and their
young daughters could be seen cutting and sewing leather by the windows. Lanky men loitered on the ground
floor by a “help wanted” poster seeking
leather workers, serving as lookouts.
These places are occasionally targeted for police raids.
Zhou She, a private investigator
whose job is to sniff out illicit hives of
counterfeiting operations, told us about
this cluster of workshops, but we must
act discreetly, he says.
Walking gingerly around the threestorey shop-house factories and
watching men and women pound metal
hardware into leather in the back alleys,
U.S. COUNTERFEIT SEIZURES
Where the IPR seizures are from
Intellectual Property
Rights seizures:
Domestic
Value
14,841 (FY 2009)
$260.7 mln
Hong Kong
10%
China 79%
India
1%
Others
10%
9%
co
m Al
m lo
od th
iti er
es
4% 2%
Je
w
el
le
To
ry
ys
/e
le
ct
ga ro
m nic
es
ac
eu
t
M
Source: U.S. Customs and Border Protection, U.S. Immigration and Customs Enforcement
4%
ic
al
s
4%
ed
ia
5%
Ph
ar
m
6%
el
s
W
at
c
pa hes
r ts /
C
om
ha pu
rd te
wa rs
re /
8%
Ap
pa
r
8%
B
wa ags
lle &
ts
12%
C
el on
ec s
tro um
ni er
cs
38%
Fo
ot
w
ea
r
China. Handbags were third on the list,
behind consumer electronics and footwear – the top item for four consecutive
years.
“They aren’t just selling counterfeit
clothing or electronics,” U.S. Attorney
General Eric Holder told an intellectual property conference in Hong Kong
last week. “They’re selling defective and
dangerous imitations of critical components, like brake pads, or everyday consumer goods, like toothpaste. They’re
conducting
corporate
espionage.
They’re pirating music, movies, games,
software and other copyrighted works
– both on our cities’ streets and online.
And the consequences are devastating.”
When it comes to making counterfeit goods and pirating brands, China is
the counterfeit “workshop of the world”.
Along with a relentlessly widening U.S.
trade deficit, which Washington blames
on China’s undervalued currency, rampant piracy is stoking economic tensions between two of the world’s biggest
economies.
OCTOBER 2010
Graphic: Chris Inton
Last year, U.S.Customs and other law enforcement
agents made nearly 15,000 seizures of counterfeit
goods, 80 percent of which came from China.
“We do not intend to replace our French operations with a fully
Chinese operation.”
–Jean Cassegrain, Longchamp chief executive
it feels like we are in a pirates’ lair.
Police officials say organised crime
gangs, sometimes called triads in this
part of China, are deeply involved, given
their extensive underground networks.
“Of course they are involved. It is very
low risk for them,” Zhou said.
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 Peoples’ 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, expensivelooking 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
4
FAKED IN CHINA
OCTOBER 2010
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 Vuttion, 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.
For a blog post on this special
report see the Deep End at:
http://link.reuters.com/jew29p
Shopkeepers selling fake bags wait for customers at a Baiyun leather market in the southern Chinese city of
Guangzhou September 29, 2010. REUTERS/Tyrone Siu
Global counterfeit trade
Counterfeit trade†
Evolution of trade† – $ bln
as a percentage of total global trade, 2007
in counterfeit and pirated products
Counterfeit trade
1.95%, $250 bln*
300
250
200
150
2000 2001 2002 2003 2004 2005 2006 2007
100
22/09/10
Gina, who declined to give her surname, is one such wholesaler from
Colonia, Uruguay. Tugging a large,
gray 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 said 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 fashonista
*Estimate. †Figures do not include domestically produced and consumed products or non-tangible digital products.
Source: OECD
Reuters graphic/Christine Chan
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
5
FAKED IN CHINA
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 percent
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 alot 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
Hilfinger and Gucci clothes in Baiyung,
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
OCTOBER 2010
The route to sell a fake handbag
Scenario based on Reuters’
report, “Faked in China”
1 Uruguay ➝ China
Pirate travels to Baiyun
Leather Market in China
to look for a factory to
produce fake handbags.
2 Guangdong, China
Baiyun Leather Market is
the one-stop-shop for
producing and trading
counterfeit goods.
2
GUANGDONG, CHINA
3 China ➝ Argentina
Finished bags are shipped
to Argentina where customs
regulations allow for easier
imports.
4 Argentina ➝ Uruguay
Bags are smuggled across
the border to Uruguay
where the pirate sells the
fake bags to tourists.
3
1 4
COLONIA, URUGUAY
ARGENTINA
Source: Reuters report.
Reuters graphic/ Christine Chan
25/10/10
“We have seen organised 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”
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 accepted it. They
said the bag was much better quality
than the ones they had brought in to
show me.
The new center 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
organised 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
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.
One recent IPR Center enforcement
action, called “Operation in Our Sites”
seized the domain names of seven websites that allow visitors to stream or illegally download first-run movies, often
just within hours of hitting the theaters.
Halverson took me to the IPR’s operations room, where undercover agents
search out websites and plot ways to disrupt them. The room, with a huge video
monitor on the far wall, also functions as
6
FAKED IN CHINA
a command post to run operations in the
field.
“Our undercover operation here is
just Internet-based. We don’t have any
face-to-face meetings,” one agent said,
explaining they use “undercover computers” that allow them to trawl for
counterfeiters without being identified.
After making a buy and confirming it
is a counterfeit item, ICE agents will get
a court order to seize the site’s domain
name and shut it down. But a longer
criminal investigation is required to
seize assets and put people in jail, the
agent said.
Many owners of the domain names,
such as Ericwhy, are overseas, making
it difficult for U.S. law enforcement to
go after them. So often the most viable
option is to close the site, another agent
said.
“It literally affects every
segment of American
manufacturing and business: Counterfeit aircraft engine parts, counterfeit ball bearings for
machines, counterfeit
pharmaceutical, counterfeit electronics”
ORGANISED CRIME LINKS
While it often seems the counterfeit
industry in China is mostly Mom and
Pop, Washington sees the problems
caused by fake goods as much bigger
and more sinister than many imagine.
“Counterfeiting and piracy is increasingly the focus of organised crime,” said
Morton, who heads ICE, the U.S. government’s second-largest criminal investigation agency after the FBI.
“There’s a lot of money in it and
you need a fairly sophisticated operation to pull it off. You need an ability to
manufacture goods on a grand scale,
you need a shipping network,” Morton
said in an interview in his office at
ICE headquarters with a view of the
Washington Monument and Potomac
River. “It literally affects every segment
of American manufacturing and business,” he continued, ticking off examples: “Counterfeit aircraft engine parts,
counterfeit ball bearings for machines,
counterfeit pharmaceuticals, counterfeit
OCTOBER 2010
A folder containing an ongoing intellectual property rights case is shown on an agent’s desk at the National
Intellectual Property Rights Coordination Center in Crystal City, Northern Virginia, October 7, 2010.
REUTERS/Jason Reed
A customer checks photographs of fake foreign brand handbags at Baiyun leather market in the southern
Chinese city of Guangzhou September 29, 2010. REUTERS/Tyrone Siu
electronics.”
The Internet has made it much easier
for unscrupulous companies to sell fake
or pirated goods. “You don’t have to go
to the corner of Fourth and Main to buy
your fake Gucci handbag. You can order
it over the Internet,” Morton said.
Counterfeit products are also increasingly sophisticated and hard to distinguish from the real thing. In the old
days, Morton said, everyone knew an
item was a knock-off because it looked
like a cheaper version of the original. But
now, counterfeiters want to mimic the
item as closely as possible to get higher
prices and profits.
One new tool Washington hopes
will help in the international fight is a
proposed Anti-Counterfeiting Trade
Agreement. Negotiators from the United
States, the 27 nations of the European
Union, Japan, Australia, Canada, South
7
FAKED IN CHINA
OCTOBER 2010
Korea, Mexico, Morocco, Singapore and
Switzerland reached a tentative agreement in late September on the pact,
which has been years in the making.
With support from groups such as the
U.S. Chamber of Commerce and the
Business Software Alliance, Congress
is preparing legislation giving the U.S.
Justice Department broad new powers
to take down “rogue websites,” both at
home and overseas.
“Sites like this one (ericwhy.com) are
stealing the ideas and designs of legitimate, hardworking manufacturers to
line the pockets of foreign criminal networks,” said Rob Calia, senior director
for counterfeiting and piracy at the U.S.
Chamber. “It’s theft, plain and simple,
and it’s hurting our economy.”
INTERNET CHAT ROOMS
It is on the Internet where counterfeit
traders in China are finding a growing
market, not to mention a safer place
from which to deal. Chat rooms on sites
such as thefashionspot.com are dedicated solely to finding suppliers and
discussing bags. Other sites such as
Replica Underground offer members
direct links to Chinese suppliers.
The consensus in the chat rooms is
that the best quality fakes that can be
bought from websites come from Jacky,
Catty and Joy – all pseudonyms.
Joy, 30, started selling fake Louis
Vuittons as a sideline. Having spent a
couple of years overseas, she banters
with potential customers on her website in flawless English. But behind the
cheery facade is a troubled pirate. “I am
worried every day about being caught,”
Joy told Reuters in an email interview.
“The old Chinese saying goes: It’s a
dagger hanging on top of my heart. I’ve
been trying to get out of the business
since day one. I have tried everything. I
even started my own brand, but nothing
sells like replicas,” she said.
Catty, who has been in the business
of making “mirror-image” Chanel bags
for six years, sells 2,000 to 3,000 bags
a month to customers all over the world,
for about $100 each. Under Chinese
law, that size of operation surpasses the
threshold required to begin a criminal
investigation, as opposed to a civil fine.
“Yes, I am so afraid of getting caught,
but in China many, many people do this
job. You can find many people doing my
job on iOffer, Taobao and Ebay,” Catty
said in an email interview, referring to
A customer checks fake foreign brand shoes inside a store at Baiyun leather market in the southern Chinese
city of Guangzhou September 28, 2010. REUTERS/Melanie Lee
“I am worried every day about being caught. The old
Chinese saying goes: It’s a dagger hanging on top of
my heart. I’ve been trying to get out of the business
since day one. I have tried everything. I even started
my own brand, but nothing sells like replicas.”
online auction sites.
The online merchandising trend, and
shipping via small parcels, has made it
increasingly hard for authorities to track
the extent of the problem.
“Traditionally, we’d find a few containers every year and they’re nice figures to report,” said John Taylor, an
official with the European Union IPR
enforcement unit. “But now there are
less containers identified, and customs
is working almost twice as hard to find as
many products because of the growing
trend for consumers to buy items over
the Internet,” he told Reuters.
Ebay, which has lost lawsuits in France
to Louis Vutton for not policing the site
for fakes actively enough, said the firm
has made an increased effort of late.
“We’re serious about it. We vet Chinese
sellers. If China is going to connect with
the rest of the world, China has to confront piracy and counterfeits themselves,” Ebay’s Chief Executive John
Donahue told Reuters in an interview.
Jack Chang is a veteran campaigner
against counterfeit goods. As chairman
of China’s leading intellectual property
protection group, the Quality Brands
Protection Committee, he has worked
with the Chinese government to make
enforcement a priority. China’s dual
system for counterfeit goods enforcement, with duties shared between
China’s administrative authorities and
its police, provides enforcement options
for brand owners. But it also forms one
of the biggest problems in cracking
down on the illicit industry.
Under Chinese law, a counterfeit case
is not subject to criminal investigation unless it surpasses a certain value
or volume threshold. However, unless
an investigation is made, it is nearly
impossible to know the magnitude of
the counterfeiting. Without evidence
to prove that the threshold is met, the
police cannot start the investigation.
“It’s a which came first situation: the
chicken or the egg,” Chang said.
Adding to the problem are the sheer
numbers of Mom and Pop stores selling
these goods. “It’s a never-ending story.
Every time you hit one, another one pops
up somewhere else, and you have to hit
it again. So it’s tough,” Jean Cassegrain,
8
FAKED IN CHINA
OCTOBER 2010
Fake foreign brand handbags are displayed inside a store at Baiyun leather market in the southern Chinese city of Guangzhou September 28, 2010.
REUTERS/Melanie Lee
chief executive of French luxury house
Longchamp, told Reuters.
FRUSTRATION WITH CHINA
On Capitol Hill, frustration with China’s
pirates is adding to rising tensions with
China over a range of issues, including
the trade deficit and other unfair trade
practices they say are taking away
American jobs.
Sen. Byron Dorgan, Democrat from
North Dakota, was conducting a recent
hearing on pirated movies, as chairman
of a watchdog panel set up after China
and the United States normalised trade
ties in 2000.
Many thought China’s entry into the
World Trade Organization would create
a boom for U.S. exports. Instead, the
trade gap has gotten worse year after
year, with the deficit on track this year to
reach about $250 billion.
Dorgan is grilling Greg Frazier, a
“We know the Chinese government could be doing
far more – far, far more – to protect intellectual
property rights. There’s a widening chasm between
what we hear from the Chinese government about IPR
protection and what we know to be true.”
vice president at the Motion Picture
Association of America, about how
Washington ended up agreeing to limit
the number of foreign films that can be
shown in China to just 20 a year under
the WTO pact.
The U.S. movie industry believes the
quota has fuelled the huge market for
pirated DVDs and illegal Internet downloads. “Here is the paradox: there’s an
abundance of American movies in China
but most of them are pirated,” Frazier
told the hearing.
China’s policing of the Internet for pornography and political content raises
questions why it can’t do the same for
sites that offer pirated or counterfeit
goods, legislators say.
“We know the Chinese government
could be doing far more – far, far more
– to protect intellectual property rights,”
Rep. Sander Levin, a Democrat from
Detroit, tells the hearing. “There’s a
widening chasm between what we hear
from the Chinese government about
IPR protection and what we know to be
true.”
(Editing by Bill Tarrant)
9
FAKED IN CHINA
OCTOBER 2010
Fake chips from China sold to U.S.
defence contractors
By Jeremy Pelofsky
WASHINGTON, Oct 26
S
hannon Wren ran what appeared to be a low-key computer business in Florida but had a
love for fast and fancy cars, spending
hundreds of thousands of dollars on a
Rolls Royce, a Ferrari Spider, a Bentley
Arnage and motorcyles.
He even had a side business featuring couture clothing. However, his real
moneymaker was allegedly selling fake
integrated circuits he imported from
China and Hong Kong to defense contractors and transportation firms, chips
used in virtually every piece of electronics equipment.
Federal agents swooped in last month
on Wren's VisionTech Components' offices in Clearwater, Florida, arresting him
and his associate, Shannon McCloskey,
and seizing his cars as well as his companies' bank accounts.
The pair face 10 counts of trafficking
in counterfeit goods, conspiracy, and
fraud from generating almost $16 million in revenue over three years, supplying chips to companies such as BAE
Systems and Alstom.
While Wren and McCloskey pleaded
not guilty to the charges in a U.S. court
in Washington last month, the case
highlights the growing sophistication of
counterfeiters.
STEALING TRADE SECRETS
The Justice Department launched an intellectual property task force in February
to focus on counterfeiting, trade secret
theft and piracy. They have begun hiring 51 new FBI agents and 15 additional
prosecutors to focus solely on those
cases.
There's big money in counterfeiting as
well as stealing corporate trade secrets,
which can save competitors millions of
research and development dollars by
providing them with shortcuts.
In August a Chinese man with permanent resident status in the United States
was arrested and charged with stealing
trade secrets worth $300 million from a
Dow Chemical Co unit related to insecticides to benefit the Chinese government.
Commercial value of pirated PC software
The total value of unlicensed software sold in China in 2009 is the second highest in the world
UK
$1,581
France
$2,544
U.S.A.
$8,390
Mexico
$1,056
Russia
$2,613
Italy
$1,733
China
$7,583
Spain
$1,014
Commercial value – $ mln
> 5,000
1,000 – 4,999
500 – 999
101 – 499
< 100
Germany
$2,023
Japan
$1,838
India
$2,003
Brazil
$2,254
Data unavailable
Source: Business Software Alliance.
Reuters graphic/Christine Chan
Another couple in Michigan was accused in June of a scheme to steal secrets about General Motors' motor control system for hybrid vehicles and sell
them to a Chinese automaker. GM put
the value of the stolen documents at
more than $40 million.
The concern with counterfeit chips is
that they could be inferior, which could
lead to the device failing or have malicious code embedded that would allow someone to hack into it or intercept
communications.
"Counterfeiting of computer components generally is of significant concern
to the government, even more so when
those counterfeit components are sold
to the military or other government
agencies," Mike Dubose, chief of the
Justice Department's Computer Crime
and Intellectual Property Section, told
Reuters.
In the Florida case, the arrests of Wren
and McCloskey were particularly worrisome because they were selling circuits
to the defense industry that they passed
off as being from firms such as Texas Instruments Inc, National Semiconductor
Corp and Intel Corp.
Military-grade circuits are designed to
work despite extreme hot or cold temperatures, including in space, and to
withstand extreme vibrations like in a
missile or aircraft. As a result, they cost
more than commercial-grade chips.
(Editing by Bill Tarrant.)
29/09/10
“They’re selling defective
and dangerous imitations
of critical components,
like brake pads, or
everyday consumer
goods, like toothpaste.
They’re pirating music,
movies, games, software
and other copyrighted
works – both on our
cities’ streets and online.
And the consequences
are devastating”
10
FAKED IN CHINA
OCTOBER 2010
U.S. bill targets websites of pirates
WASHINGTON, Oct 26
T
he U.S. Congress is preparing legislation that would empower the
Justice Department to shut down
“rogue websites” offering pirated copyrights and counterfeit goods.
But technology firms worry that the
bill could lead down a slippery slope to
breaking up the Internet.
The legislation – which has the support of several Republican senators
– would allow the U.S. Justice Department to take quick action to crack down
on the websites, even if the owner is located outside of the United States.
It would authorize the department to
file what is known as an “in rem” civil
action against the domain name of a
website suspected of selling counterfeit
goods.
The U.S. Attorney General, upon receiving a court order, would be able to
require the domain name be suspended
from any U.S.-based registry or registrar.
“This bill targets the most egregious
actors, and is an important first step to
putting a stop to online piracy and sale
of counterfeit goods,” Senator Patrick
Leahy, chairman of the Senate Judiciary
Committee, said.
The legislation would also empower
the Justice Department to go after third
parties, such as Internet service providers, payment processors and online ad
and network providers.
“These third parties, which are critical
to the financial viability of the infringing
website’s business, would then be required to stop doing business with that
website by, for example, blocking online
access to the rogue site or not processing the website’s purchases,” Leahy said.
U.S. lawmakers recessed for the November 2 elections without taking action
on the bill, but supporters hope it could
still be passed later this year.
However, Internet rights advocates
say the bill poses a threat to free expression and would mark a “sea change” in
U.S. policy toward the Internet.
The Washington-based Center for Democracy & Technology said the bill imposes a “prior restraint” on speech that
is contrary to the protections American
enjoy under the first amendment and
also argued the bill threatens global Internet freedom.
Steve Tepp, senior director of Internet
Counterfeiting and Piracy for the U.S.
Chamber of Commerce’s Global Intellectual Property Center, said critics are
exaggerating negative aspects of the
bill.
“The assertion that this legislation
equates to foreign political censorship
is erroneous and does not accurately
reflect this bill. Effective action against
criminals whose products can kill and
whose illicit profits steal American jobs
is vastly different from foreign political
censorship,” he said.
(Reporting by Doug Palmer, editing by
Bill Tarrant)
A China based website displays fake Louis Vuitton
bags as seen on a Reuters computer screen in
Washington, September 10, 2010.
REUTERS/Hyungwon Kang
Cover Photo: Counterfeit goods ranging from shoes to software seized by the U.S. government are shown on display at the National Intellectual Property
Rights Coordination Center in northern Virginia, October 7, 2010. REUTERS/Jason Reed
For comments, queries or tips:
Bill Tarrant
Enterprise editor, Asia
+65 6870 3835
william.tarrant@thomsonreuters.com
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