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Inside a Chinese Counterfeiting Ring


James T. Hayes, Jr., Special Agent-in-Charge of the New York Customs Enforcement Homeland Security Investigations office, explains what the agency is doing to stem the tide.

The better part of ten years ago, an attorney named Harley Lewin told 60 Minutes that he believed the most profitable criminal venture on Earth to be counterfeiting.

Dan Chow, a law professor at Ohio State University with a focus on Chinese counterfeiting added, "We have never seen a problem of this size and magnitude in world history. There's more counterfeiting going on in China now than we've ever seen anywhere."

Today, some economists believe 8% percent of China's GDP comes from the sales of counterfeit goods. An astoundingly realistic level of fakery is proudly displayed in everything from automobiles, to theme parks (there is an exact replica of Disneyland (DIS) outside Beijing where management insists its "Minnie Mouse" is not a mouse at all, but a "cat with very large ears"), to Apple (AAPL) computers (they've even managed to produce a knock-off Steve Jobs). One can find fake Nike (NKE) shoes and ersatz Duracell (PG) batteries, as well as imitation US silver dollars and even bogus fossils.

Take a look at the following description of -- amazingly enough -- bogus Chinese tea:

Of the Moyune district teas there are eight varieties; they are much prized in the American markets, but not so much so in England. Among the most important curiosities in the collection are the counterfeit teas of Canton. These are made of any refuse, such as moistened tea-leaves from the pot, beat up with gum and rice-water in a mortar, coloured with Prussian blue and gypsum, and curled, twisted, or granulated so ingeniously as to counterfeit the most costly varieties.

If you think counterfeiting in China is a relatively recent phenomenon, consider that the above passage is excerpted from a debriefing report from the Juries to Her Majesty's Commissioners after the Exhibition of the Works of Industry of All Nations, which took place in London – in 1851.

Fast-forward 160 years. One man attempting to stem the tide of counterfeit goods flowing into the United States is James T. Hayes, Jr., Special Agent-in-Charge of the New York Customs Enforcement Homeland Security Investigations office.

I spoke with Hayes, whose team recently broke up an international counterfeiting ring which allegedly shipped almost 40,000 bottles of fake brand-name perfumes into the US from Guangdong Province, China.

"Sometimes people will ask why Homeland Security is involved in something like counterfeit perfume," Hayes told me. "But it's important to point out that criminal organizations, terrorist organizations, need to get their financing from somewhere. And contrary to what a lot of people may hear and read, a lot of these groups are not state-sponsored. There's no endless pot of money provided by the government, so trafficking in counterfeit products is a wonderful way to create one. Here you have products that would fetch $60-$70 a bottle on the legitimate market, the counterfeits sell for a third of that, and they're producing them for a tenth of that."

The money -- as well as all those involved -- can be extremely difficult to track. However, Hayes says that, in this case -- which resulted in a two-count indictment being handed down yesterday by a federal grand jury against Chinese nationals Shaoxia Huang, Shaoxiong Zhou, and Shaowu Zhou -- luck was on the Department's side.

"Let's face it -- it's not easy to get your primary culprits out of a place like China if they don't want to leave," he explains. "This time, we found out our suspects were headed to Las Vegas for a trade show where we had set up a buy. In reality, we were buying their arrest."

According to Hayes, the Chinese counterfeiting industry's robustness is largely structural.

"We hold intellectual property rights in much higher regard than some other countries," he says. "There are governments that may not see something as intellectual property theft because they don't recognize intellectual property."

While China now has IP laws, no trademark law at all existed until 1982 and wasn't brought into compliance with the WTO Agreement on Trade-Related Aspects of Intellectual Property until 2002. Recent reports assert that "despite official crackdowns and successful prosecutions, graft and weak policing means factories continue to churn out fake goods, costing foreign and domestic firms billions of US dollars in lost revenue," and that "China's counterfeit and piracy market is the biggest in the world and employs millions of factory workers, distributors, and shop assistants."

The market is so lucrative that certain areas' economies rely almost exclusively on counterfeiting. A couple of years ago, Slate described the town of Yunxiao as "the center of China's counterfeit cigarette industry."

Cigarette counterfeiting is immensely lucrative, with profits easily rivaling those of the narcotics trade," wrote Te-Ping Chen. "While a pack of fake Marlboros (MO) costs 20 cents to make in China, it can fetch up to 20 times that amount in the United States. And though a drug trafficker might land a life sentence if caught, a cigarette counterfeiter usually receives a comparative slap on the wrist-a handful of years in jail or possibly a fine.

Interestingly, the counterfeit market can impact legitimate industry more permanently than the simple siphoning off of short-term sales.

As one local police officer said, "For a long time now, a lot of Yunxiao's cigarettes have gone to Russia. The feedback from Russian customers is that they've gotten used to the fake flavor, and now they don't want the real ones anymore."

To stay ahead of the authorities -- who don't really seem to be watching very closely to begin with -- cigarette counterfeiters often operate underground... literally:

The product they turn out is even less healthy than the real thing, as tests have found floor sweepings, rat droppings, and human feces mixed in with the tobacco.

This, says Special Agent Hayes, is one of the most important things to consider when buying counterfeit merchandise.

"We hope to educate people about the safety risks involved," he offers. "Even with something like perfume or cologne, these manufacturers could be using toxic chemicals, caustic chemicals, that you're then putting on your skin."

When everything from knock-off Chanel bags to phony Viagra (PFE) available less than five minutes away from any physical point in the New York area, is stemming the tide of Chinese counterfeit goods anything less than an impossible task?

"I would hesitate to say that anything's impossible," Hayes remarks. "The Department of Homeland Security has gotten a lot of things done that people once said were impossible."

As for the strangest fake ever seen coming out of China?

"We had prunes the other day. Fake prunes," Harley Lewin told 60 Minutes' Bob Simon. "Coming from China to Thailand."

Lasting through April 15, 100% of the donations made to The Ruby Peck Foundation for Children's Education will be channeled to the children of Japan as they attempt to find their footing following this natural disaster; and to kick off this drive, we'll pledge $5000 to get it started. Please do what you can, as it will add up, and thanks.
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