Fake Busters

Federal agencies, local police and industry are teaming up to stop the sale of counterfeit goods.

On a spring-like Thursday in early January, two long-haired teenage girls walk quickly down Canal Street in lower Manhattan. A short man with an accent calls after them. "You want to buy a purse?" he asks. One of the girls whips around. "Yeah," she says. He asks her what kind she wants. "Coach," she says with a shy smile. He tells her to wait, and he walks down the street.

He comes back with options in white cardboard boxes, wrapped in tissue paper. The girls get cash out and buy one of the purses from him for about $40, hundreds of dollars less than a real Coach handbag costs at a retail store.

A couple of blocks away, Lt. Brian Verwoert and Sgt. Ramon Rivera, two senior officers in the New York Police Department's trademark infringement unit, sit in Rivera's SUV. They come to Canal Street only occasionally; they've traced most of the fake goods sold here to the Flatiron District, just north of Union Square. They focus their energy on wholesale distributors rather than street vendors. Today, they're dressed in jeans and jackets so they can drive around and casually check out storefronts without being noticed. They both carry concealed guns, but they won't tell you where.

As they drive around Flatiron, Rivera points to an abandoned-looking building with large glass windows on every floor. "We hit this place," he says. They found the 10th floor rented out to counterfeit distributors. As he stops to look around, two men inside, who had been sitting on boxes watching out the front windows, stand up to look at the car. "They know my car," Rivera says. One of them locks the front door. If a door isn't open, the officers need a warrant to go inside.

Verwoert points to buildings with upper-level windows that are covered up with brown cardboard and newspaper. "When someone's doing something wrong, like prostitution or narcotics, the windows are blocked," he says. If he had time, he might check out more buildings that fit that description. As it is, with nine officers assigned to the trademark infringement unit, Verwoert has to ration his resources.

That's why a federal task force and the U.S. Chamber of Commerce are meeting with Verwoert and Rivera the next day. They want to help NYPD coordinate with other law enforcement groups and companies to track down, identify and prosecute counterfeiters. The Chamber of Commerce has offered private investigators, storage facilities for seized goods and the cooperation of their member companies. The federal task force, which includes the Commerce Department and the Homeland Security Department's Immigration and Customs Enforcement and Customs and Border Protection bureaus, can provide law enforcement and diplomatic contacts that span borders. The Justice Department, another task force member, prosecutes federal counter-feit crimes.

After the Government Accountability Office reported that federal efforts to address counterfeiting were lagging, President Bush appointed Chris S. Israel at Commerce to head the Office for International Intellectual Property Enforcement in July 2005. Since that time, Israel's team has launched pilot projects in New York City and Los Angeles in an effort to expand coordination among the multiple government organizations that protect intellectual property rights.

That collaboration has led to some confusion: Privately and publicly, the groups wonder who's really in control of the initiative and who gets credit for putting criminals behind bars. They struggle to navigate the rules on whether the government can accept donations from private companies, including investigative services. Some even wonder why they need to collaborate at all; they think they're doing just fine on their own. Despite the lingering questions, task force participants are united in their desire to put counterfeiters behind bars and their need to stretch limited resources. "We're looking for any help we can get," says Rivera.

'Thieves and Criminals'

The first question is why counterfeiting is such a bad thing. To the average person, seeing a street vendor selling fake watches probably generates more sympathy toward the vendor than toward Rolex. But to members of the federal task force, that street vendor-and anyone who buys from him-is undermining the American economy. "Whether it's pharmaceuticals or biotech or IT software, all these industries that are really thriving and growing . . . are based on [intellectual property]," says Israel. He says he learned the importance of capitalism growing up: His father owned a small business, a cosmetology school in Topeka, Kan. Small business, he says, "can't compete with thieves and criminals."

Federal agencies estimate that counterfeiting costs U.S. businesses $250 billion and 750,000 jobs annually, figures published by the Chamber of Commerce, which attributes them to a variety of organizations and reports. A study commissioned by the entertainment company NBC Universal found that in 2005 industries based on intellectual property were responsible for one-fifth of the private sector contributions to the gross domestic product and paid their 18 million workers 40 percent more than the average U.S. worker. These companies, which include software, entertainment and publishing enterprises, and the aerospace industry were among the largest contributors to U.S. export revenues, the report found.

Counterfeiters also bear a shadowy connection to terrorism: "There are enough examples to show that terrorists have understood counterfeiting is a good way to make money," says David Hirschmann, senior vice president at the Chamber of Commerce and leader of its anti-piracy and counterfeiting initiative. He's referring to reports that the first World Trade Center bombing was partially funded by sales of counterfeit T-shirts and that some al Qaeda manuals explain how to raise money through counterfeiting. (Administration officials will not confirm that there is a connection between terrorism and counterfeit activity, only that the potential exists.)

In the meantime, the Chamber of Commerce wants to emphasize another danger, and one that's easier to prove: the threat to health and safety. The organization began a 2005 report with an Associated Press story about a 13-year-old boy who was injured by a counterfeit cell phone that exploded next to his head and a story about a woman who unintentionally bought fake Lipi- tor, a cholesterol-lowering drug.

The largest categories of counterfeit goods seized by Customs and Border Protection are luxury items: Clothes, handbags, wallets and backpacks made up a third of seizures, or $31.1 million. Pharmaceuticals accounted for 2 percent, or $2.1 million. In total, CBP seized a record amount of counterfeit goods last year, adding up to $93.2 million.

CBP recently added three programs to fight counterfeiting, including a new model that identifies high-risk shipments based on historical information and country reports from the Office of the U.S. Trade Representative. CBP added an auditing program that inspects companies' internal processes to see what steps they're taking to avoid importing counterfeit goods. The bureau also made it easier for companies to register their trademarks by creating a link between its Web site and the Patent and Trademark Office's site. Trademarks registered with CBP go into computer databases at each port, so agents can check what they find against the registered image of a product.

Counterfeiters usually sneak their goods into the United States through traditional shipping methods. Shippers at a Chinese port might put fake Louis Vuitton bags in a container marked furniture, or slip a box of counterfeit CDs into a container otherwise full of legitimate shirts. Counterfeiters also use express shippers such as DHL and FedEx because they can get into the country quickly, says Arif Alikhan, vice chairman and executive director of Justice's task force on intellectual property and deputy coordinator for the Office of International Intellectual Property Enforcement. Small stores sometimes order the fake products by accident, he says, and as counterfeiters get more sophisticated, it gets more difficult to tell the difference.

'You Need a Victim'

In a way, attacking counterfeiting is the ideal project for a public-private partnership. Private companies need the government's law enforcement and prosecutorial powers, and the government needs companies' cooperation to track down criminals and testify against them. "You always need a victim," says Alikhan. The victim-a company whose goods have been counterfeited-identifies the counter- feit products for investigators, provides expert testimony in court and sometimes alerts law enforcement to crime rings in the first place.

Entertainment and luxury goods companies often hire their own investigators to track down counterfeiters and then pass on the information to law enforcement officials. The Chamber of Commerce, with funding from companies such as Gillette and others, is hiring detectives to help local police forces in New York and Los Angeles track down counterfeiters of their members' products.

Hiring private investigators to work with government agents requires some delicate maneuvering around normal government-private sector roles. "We're just sensitive to it," says Hirschmann of the boundaries. "So far we found enormous willingness to cooperate, but we want to make sure that at the end of the day these cases stand up in court." That means understanding the rules the federal government faces when pursuing investigations. "We're working closely with [the Chamber of Commerce] to help them develop that program so they understand the limitations we're under," Alikhan adds.

Brian Moskowitz, special agent in charge for ICE in Detroit, where he oversees investigations in Michigan and Ohio, often relies on information provided by companies. "They do a lot of the legwork for us. . . . There's nothing to prohibit them from telling us things their investigators have uncovered," he says. Bureau agents, however, must abide by limits on what they can disclose to the private investigators.

Luxury goods companies and the Motion Picture Association are among the most experienced in hiring their own investigators, while auto companies are starting to ramp up their efforts. Underwriters Laboratories Inc., a global not-for-profit organization responsible for safety testing and certification for electrical and other products, has investigators working in 93 countries and participates in several government task forces.

Boston-based Gillette, the arm of Procter & Gamble responsible for Gillette and Braun razors, Duracell batteries and Oral-B dental care products, also hires its own investigators. Along with other companies, Gillette developed supply chain guidelines to avoid purchasing counterfeit goods. Those guidelines recommend random audits to verify the authenticity of supplies and that companies make it known that they don't buy illegal products.

Alikhan says he reaches out to smaller, less prosperous trade groups to make sure they know how to report counterfeit crimes, too. He spoke to the Washington-based Art Copyright Coalition last year and learned that members' designs for items like tablecloths were being counterfeited overseas. Alikhan's 2004 Justice task force report on intellectual property includes a checklist for companies outlining what they need to tell the department to get their cases pursued. "The decision to move forward on a criminal investigation is purely under the sound judgment of law enforcement agencies along with prosecutors. Just because a case is referred doesn't mean it will be prosecuted," Alikhan says. Justice prioritizes health and safety cases, as well as those with high-market value, he says.

Going Local

To stimulate more collaboration between local and federal law enforcement, Alikhan is heading up pilot projects in New York City and Los Angeles. While he won't relate the specifics of ongoing operations, Alikhan says working groups in each city will use "all the different tools available to them, which could be undercover, which could be crackdowns, which could be all sorts of things." District attorneys, NYPD and ICE agents are participating.

As with any diverse group, cultural differences emerge during the planning stages. For example, the organizations have different policies on the help they're allowed to accept from the private sector. States and the federal government have different judicial systems and different ways of calculating the value of counterfeit goods. Some participants want to know who will control investigations and who will get credit for them.

While this is one of the biggest coordination efforts against counterfeiting, federal-local collaboration is nothing new. In 2004, New York police and ICE worked together under Operation Panda, which resulted in the arrests of 51 people in a Chinese organized crime group. In addition to counterfeiting charges, the defendants were charged with attempted murder, extortion and conspiracy to smuggle illegal aliens. At Super Bowl XL, Detroit police worked with ICE and seized $535,690 worth of goods in what they dubbed Operation Gridiron.

Moskowitz and his team already had practice since Detroit hosted the Ryder Cup golf tournament, NBA finals and Major League Baseball's All-Star Game over the past two years. In the weeks leading up to the Super Bowl, Senior Special Agent Ronald Horsley and Supervisory Special Agent John Deaton organized outreach efforts to hotels and businesses. ICE officials distributed 3-by-5-inch cards announcing a 24-hour hot line number and rewards for information, which can reach $250,000.

As fans arrived at Ford Field in Detroit, agents prowled the area around the stadium in groups of four to eight. Each team included Detroit police officers, ICE investigators and National Football League officials who could identify counterfeit NFL items. When a group spotted a suspicious vendor, the NFL official approached the seller noting the presence of law enforcement agents and wielded a court order to seize counterfeit merchandise. The local police or the ICE officials then seized the goods and provided the vendor with a receipt.

ICE did not make arrests during the Super Bowl, but focused on collecting information for future investigations. "We're looking for a large conspiracy," says Deaton, who was ICE's field commander during Super Bowl XL.

While local police can choose to investigate low-volume counterfeit sales, Moskowitz says ICE focuses on higher-level schemes that cross borders. Federal agencies also hit the streets in other countries. Customs and Border Protection trains foreign governments, especially in developing countries, to help them design their own enforcement programs. Alikhan recently traveled to China with Attorney General Alberto Gonzales, who talked to Chinese officials about the importance of protecting intellectual property. CBP statistics show that 69 percent of counterfeit goods seized at ports come from China.

The Chamber of Commerce meets regularly with 250 provincial leaders in China to brief them about intellectual property enforcement. "Provincial leaders understand that their economy will be built not on stealing intellectual property but on building it," says Hirschmann. In Brazil, where Hirschmann says people generally think of counterfeiting and piracy as "Robin Hood crimes"-stealing from the rich to give to the poor-the Chamber of Commerce conducted and publicized a survey showing that the loss of tax revenue to counterfeiters hurt the poor by depleting money for social services. "That data made a huge difference," he says.

The U.S. Trade Representative measures how well other countries are protecting intellectual property rights in its annual Special 301 Report, which is based on information collected from other federal agencies, industry and embassies. USTR also can grant trade preferences and negotiate free trade agreements based, in part, on countries' commitment to protecting intellectual property rights. Ukraine, home to large-scale DVD and CD counter- feiting operations, was singled out as a problem country. In July 2005, Ukraine passed laws to reduce counterfeiting, and in January, USTR upgraded the country's watch status.

Too Much Stuff

Brad Huther, senior coordinator for intellectual property enforcement at the Chamber of Commerce, met Verwoert, Rivera and another police officer for breakfast at a diner in Chelsea before a January interagency task force meeting. Verwoert and Rivera looked like businessmen in sharp suits. "You tell us what your needs are, and we'll try to solve them," Huther, former associate commissioner of the Patent and Trademark Office, told the officers, who are so tall and big they needed two four-person tables to accommodate them.

Over his hash browns and eggs, Rivera described one of NYPD's biggest problems: a lack of storage space. "It's too much stuff for us," he says. The police department's property clerk has to keep seized goods until cases go to trial and sometimes for years afterwards. One search warrant can result in two trailers filled with counter- feit goods. With one to two search warrants a week, the goods stack up quickly.

Huther offered a potential solution. The Chamber of Commerce counts trucking companies among its members; perhaps they would donate their services. Huther said he'll see what he can do to get the collaboration under way.