The Art of the Steal (22 page)

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 that’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.

He found out it was no simple project. Slot machines are equipped with sophisticated electronic coin comparators. These measure everything about any coin that gets deposited, to make sure it’s a legitimate token. The comparators confirm the outside and inside diameter of the coin, the center of the coin, the magnetic image the coin throws, the number of serrations on the outside of the coin, the weight, and so on. A coin has something known as a “closed collar,” the raised outside border of the coin. For a counterfeit coin to pass muster, it has to have a closed collar that is just the right height. Hence, a counterfeit coin has to be exact. There are a lot of difficult-to-duplicate features.

So this guy got to work, acquiring equipment, and then modifying it for his precise needs. He made coins, tested them at Foxwoods, found they wouldn’t work, made changes, tested the new coins, and on and on. It took him more than a year before he had a counterfeit token that beat the machine. At that point, he became addicted. He made tens of thousands of tokens. To keep from arousing suspicion, he began playing at casinos in Atlantic City and Las Vegas. Different casinos had different tokens, and he had to replicate theirs. But he had become an expert. When he was caught at Caesar’s in Atlantic City in late 1996, he had 750 pounds of coins in the trunk of his car, one of the biggest cases on record of gambling token counterfeiting.

To prevent further counterfeiting, token manufacturers have been offering security alloys, which are metals with very limited availability and unique properties. The latest protection is a code engraved in the token. Slot machines are programmed to read the code, and if it’s not there, the token is rejected.

STICKER SHOCK

Underwriters Labs (UL) has faced one of the more unusual counterfeiting problems. UL, a non-profit organization founded in 1894, doesn’t make any products, a fact which by itself, one would think, would make the company impervious to counterfeiting. What it does do is test and certify the safety of more than 14 billion electrical products a year, things like power supply cords, ceiling fans, night lights, transformers, switches, and surge suppressers. Its testing engineers simulate power surges. They bend wire to see if it breaks. They dunk products in water. If something survives a UL testing, it’s good. Once a product has been certified by the organization, it is allowed to display the UL provided tag. It’s often referred to as the “American Mark of Safety.”

Starting in the early 1990s, UL became aware of untested products bearing counterfeit UL tags that were coming into the United States, primarily from China. It first learned of the counterfeiting when it caught phony seals of approval on Christmas lights. Then they began showing up on other electrical goods. The products were not only inferior, but also dangerous. There were lights, fans, electric surge protectors, and other products that were improperly grounded or wired with incorrect polarity. There were dummy surge protectors that would overload if you turned on a computer, printer, and TV simultaneously. Plugs were so inferior that chunks of them would fall off when you pulled them out of a socket. Extension cords were liable to give a user a shock. Fans were at risk of catching fire. In one tragic case, a young girl was electrocuted by sucking on an incorrectly wired and falsely labeled Christmas candle.

Disturbed by the implications of this counterfeiting, UL in 1994 began using silver, tamper-evident holographic labels for all of its certified Christmas products, and has since required them on an array of electrical products coming out of China. In addition, it’s trained U.S. Customs inspectors to identify counterfeit labels and has put retailers on alert as well. One of the problems for U.S. Customs officials is that there is no legal requirement for electrical equipment to carry the UL labels, though if they do have the labels, it’s a crime for them to be counterfeit. The new label has been doing a good job in controlling the threat, though it hasn’t stopped altogether.

A DIFFERENT KIND OF DRUG PROBLEM

Remember that classic film
The Third Man
based on the haunting Graham Greene thriller? The movie is set in post-World War II Vienna, where Holly Martins, an American, goes in search of his old college buddy, Harry Lime. He discovers that Lime is dead, and hears disturbing stories of how he made a fortune trafficking in fraudulent drugs. One of his schemes was selling counterfeit penicillin. Martins has a hard time accepting some of the bad things he hears about him, until he visits a hospital and sees all the children whose health has been threatened by injections of Lime’s penicillin.

That’s fiction, but there’s plenty of fact in it. It takes at least a decade and upward of $150 to $200 million to bring a new pharmaceutical to market. Counterfeiters, with the assistance of a chemist, can copy it in a matter of days, using equipment that costs a few thousand dollars. But they don’t trouble themselves worrying too much about the safety of their product. Counterfeits that hurt and kill are the dark side of fraud, and it’s the part that really disturbs me. Counterfeit drugs are a threat to public health. They’re very difficult to detect and control, and they’ve led to illnesses and death. In 1997, the World Health Organization estimated that more than five hundred people had died from fake medicines.

In the United States, dozens of deaths and hundreds of adverse reactions have been connected to a counterfeit intravenous antibiotic from China that is used to treat serious blood infections. There were 3,000 deaths in Nigeria in 1995 attributed to fake meningitis vaccines. Counterfeit antibiotics made from talcum powder and counterfeit eye drops made from contaminated water were discovered in Africa. Brazil has suffered deaths from bogus antibiotics and cancer treatments. In southern Vietnam, police raided a gang and found a thousand fake Viagra tablets.

Some counterfeiters ply their trade without even making a product. Criminals regularly go to wholesalers and buy expired aspirin and other ordinary over-the-counter medications that were going to be junked. They pay twenty cents on the bottle, and the wholesalers are happy to get it. The criminals then change the dates on the boxes and resell them to drugstores.

Crooks root through Dumpsters outside of hospitals and look for syringe bottles that have been discarded in hazardous materials bags. The thieves take them, refill them with sugar water, and sell them as medicine. The only way to tell is to turn the bottle over and look for two pinholes. A fraudulent one has to have a second pinhole in it made by the criminal when he inserted a needle to refill it.

DIFFICULT TO DIGEST

It’s not just drugs that can cause harm. So can foods and food supplements, drinks, vitamins, literally anything that you digest. A number of individuals were caught in 1999 for selling expired baby formula and nutritional products for invalids. They had obtained them under the false pretense that the products would be used for animal food. In 1995, two California men intended to distribute a half million cans of counterfeit Similac baby formula. Fortunately, the illegal operation was busted before most of the products were distributed, and there were only a few reports of illnesses. But there have been other instances where counterfeit formula has caused rashes and seizures. In Mexico, fake Tequila and other alcoholic beverages have caused illness and some deaths. “Collectors” pay for empty bottles outside stadiums, and then refill them with other liquids and pass them off as the real thing.

Anything you apply to your skin, if it’s counterfeit, puts you at risk. A phony version of a popular shampoo was found to contain bacteria that could cause infections. Another counterfeit brand has led to hair loss. Counterfeit cosmetics have been found to contain residue of industrial solvents and carcinogens. When you use them, you can suffer severe allergic reactions.

Counterfeit pesticides and fertilizers have decimated crops in developing countries, contributing to famine and death. A counterfeit chemical fungicide containing chalk was said to have been responsible for destroying two-thirds of the coffee crop in Kenya and Zaire. In Kenya, criminals were caught with counterfeit “Super Doom” insecticide. They diluted the weed product with kerosene and other ingredients and resold it, considerably diminishing its effectiveness.