Counterfeiters, Pirates and Organized Crime

July 2, 2009 by ADMIN

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By Richard Power and Christopher Burgess

Secrets Stolen, Fortunes Lost: Part III

Read Secrets Stolen, Fortunes Lost: Part I

Read Secrets Stolen, Fortunes Lost: Part II

The counterfeiting and piracy of products, activities often sponsored by organized criminals, make up the most insidious intellectual property threat, and certainly the most pervasive threat to the global economy as a whole.

The U.S. Chamber of Commerce estimates that counterfeit and pirated products account for 5 percent to 7 percent of the global economy, and results in the loss of more than 750,000 jobs and approximately $250 billion in sales to the United States alone.

Via trade missions and educational programs, the chamber has directed its efforts at China, Brazil, South Korea and Russia, and toward the goal of encouraging enhanced enforcement of intellectual property protection laws within these countries.

In addition, it offers an intellectual property protection toolkit for each of these countries. And in 2005, working with various law enforcement entities, the chamber initiated Strategy Targeting Organized Piracy (STOP).

In the United Kingdom, the Alliance Against IP Theft has produced a 40-page primer, Proving the Connection: Links Between Intellectual Property Theft and Organised Crime, detailing the deleterious effect on the U.K. economy, and the clear and unambiguous involvement of organized criminal elements.

It cites case studies identifying organizations with points of origin in Russia, South Asia, China and Ireland, which serve as points of origin for either the financial backing to achieve the manufacture, distribution and sale of pirated and counterfeit goods in the United Kingdom, or as points of origin for the counterfeit goods themselves.

The alliance puts the value of these illegal items at more than 9 billion pounds.

Software

According to a December 2005 global study commissioned by the Business Software Alliance, piracy rates in 50 countries have increased over the prior year.

Leading the list is Vietnam, where it is estimated that 92 percent of all software purchased is pirated. But while the top 20 countries with a high rate of software piracy include mostly developing nations, the list also includes China with a rate of 90 percent and Russia not far behind at 87 percent.

By comparison, the United States has the lowest rate at 21 percent. The study opines that a 10-point drop in piracy in Asia-Pacific alone would generate $135 billion worth of additional economic growth and create approximately 2 million new jobs.

Law enforcement is the critical issue, and the biggest problem. For example, in October 2005, two people were arrested in Cebu City, Philippines, for attempting to sell pirated software valued at approximately 9 million Filipino pesos (more than US$160,000).

If convicted, they face fines from 50,000 to 1.5 million Filipino pesos (approximately US$900 to $25,000) and prison terms from one to nine years.

However, according to the Filipino press, no one has ever been convicted of software piracy in the Philippines. It appears that these are token arrests and enforcement efforts, and are not directed at the large wholesale piracy efforts.

Technology

Counterfeiting isn’t limited to software, of course. Samsung, for example, has been repeatedly targeted.

Crimes perpetrated against the Korean technology manufacturer range from outright theft of its intellectual property to the counterfeiting of its cutting-edge product lines. In November 2005, four people, who were all current or former Samsung employees, pilfered blueprints and other documents related to a new mobile phone design.

They were caught by the National Intelligence Service (NIS), South Korea’s counterespionage organization, which discovered the group attempting to deliver the files to Chinese mobile phone manufacturers.

(Note that the Korean NIS exercises its counterespionage capabilities within the economic espionage milieu and in support of Korea’s industrial base.)

According to Samsung, its investment in the design project was 25 billion won (approximately US$25 million). If the quartet of thieves had been successful, Samsung could have taken a market hit of approximately 500 million won (US$500,000) in the handset market.

It also stood to lose almost 8.8 trillion won (approximately US$8.8 billion) worth of intellectual property on its entire line of technology products, which were included in the data trove. What company could withstand a fiscal loss valued at more than $8 billion due to blueprints and documents being stolen?

One of the perpetrators was discovered sharing approximately four gigabytes of computer files, including documents, blueprints, program source code and circuit diagrams for mobile phones.

This individual used multiple technological avenues to successfully transfer data to his co-conspirators outside of Samsung, such as DVDs, e-mail and wireless connectivity between laptops.

Of course, Samsung had a “policy” in place, which prohibits employees from sharing data outside the company, or retaining or copying such data for personal retention.

So what? Policies without enforcement programs are relatively meaningless.

A study conducted by Samsung’s own Economic Research Institute indicates that 39 percent of all technology stolen from Korea is destined for China. Korean manufacturers of mobile phones and other electronic devices, such as MP3 players, say that approximately 70 percent of LG Electronics and Samsung products available in the Chinese marketplace are counterfeit products.

Working closely with the Chinese law enforcement entities in efforts to thwart counterfeit activity, Marksman Consultants, a Hong Kong-based company, has conducted surveys and investigations.

“One big problem,” according to Joseph Tsang, chairman of Marksman, is that “too many scammers have ties to local officials, who see counterfeit operations as a major source of employment and pillars of the local economy.”

According to Tsang, two or three of their raids have failed because of local protection.

Shoes and Apparel

Counterfeit shoes are commonplace in the open markets of Southeast Asia.

Adidas, the German sports clothing conglomerate, recently filed a lawsuit against three separate Chinese companies for intellectual property violations. Adidas has requested 3 million yuan (approximately US$370,000) in compensation from the three companies for violating its logo and trademarks.

The apparel and fashion goods industries have also proven to be juicy targets. In early November 2005, the assistant U.S. attorney for the District of Massachusetts, the U.S. Immigration and Customs Enforcement in New England (ICE) and the U.S. Internal Revenue Service announced the arrest and indictment of four people charged with trafficking in more than US$1.4 million worth of counterfeit goods.

The 10-count indictment details how the four people used 13 separate self-storage units within a storage facility as their base of operations. (Ten of the units were for storage, two were showrooms, and one was the manufacturing facility.)

When raided, the units contained: 12,231 counterfeit handbags, 7,651 counterfeit wallets, more than 17,000 generic handbags and wallets, and counterfeit labels and medallions in sufficient quantity to turn more than 50,000 generic handbags and wallets into copies of the “originals.”

Trademarked brands that were “copied” included Louis Vuitton, Kate Spade, Prada, Gucci, Fendi, Burberry and Coach, and those of other manufacturers.

Other items contained in the storage units included scarves, belts, umbrellas, sunglasses, duffle bags, hats, visors, garment bags, coats, shoes, necklaces, bracelets, rings and earrings bearing counterfeit marks.

The indictment places the value of the counterfeit goods at approximately $1.4 million and $6 million had the goods been authentic.

The sales methodology used by this group of counterfeiters, according to the indictment, was to sell the items at flea markets or “purse parties.”

Indeed, it is alleged that they held more than 230 purse parties throughout Massachusetts.

According to an ICE statement:

The public needs to know that when they buy a counterfeit purse at a house party or on the street, their dollars are ultimately helping to finance large-scale counterfeiting organizations. And every time they buy a knock-off purse, they are contributing to legitimate companies losing billions of dollars in revenue to counterfeiting every year.

Entertainment

In November 2005, a judge in Hong Kong sentenced Chan Nai-ming to three months in jail for the copying and distribution of three motion pictures via the Internet.

Chan operated under the Internet alias “Big Crook,” utilized BitTorrent software to conduct the file sharing, and apparently did not charge for the films.

The Chan case was the first in Hong Kong to result in a jail sentence for the online piracy of motion pictures. Customs investigators determined that 30 to 40 individuals accessed Chan’s computer to obtain illicit copies. The fact that Chan did not charge for the films was not found to be material.

Meanwhile, Antipiratbyran, the Swedish anti-piracy group, was disciplined by the country’s Data Inspection Board for breaking privacy data rules in its hunt for illegal file sharers. In its exuberance to locate and identify individuals who were illegally sharing music and film files over the Internet, it hired a paid informant within Bahnof, a Swedish ISP, to provide the IP addresses of “file sharers” within the network.

The Data Inspection Board noted that an individual’s IP address is considered private, and the manner in which the information was collected illegal.

In August 2005, the Motion Picture Association of America (MPAA) declared Internet-driven film piracy losses to be approximately $1.9 billion, and that the overall piracy of films in other formats was estimated to be $3.5 billion.

And yet, instead of expending its energy searching out wholesale pirates, the MPAA, on behalf of the major studios, filed 286 lawsuits against individuals whose names were provided by 30 BitTorrent site operators who were shut down earlier in 2005.

These prosecutions, although appropriate, are insignificant. Of course, the suits against individuals aren’t difficult to win, since most individuals don’t have the fiscal resources to compete with the MPAA or the motion picture industry itself.

But it would certainly be more effective for the MPAA to invest its investigative funds in identifying those organizations with robust infrastructure producing thousands of copies.

According to the DOPIP Security Counterfeit Intelligence Report, in October 2005 alone, there were more than 341 separate incidents involving goods valued at more than U.S. $1 billion, and involving more than 54 separate countries.

Not surprisingly, the top 10 brands counterfeited included Adidas, Nike, Louis Vuitton, Microsoft, Chanel, Gucci, Prada, Fendi, Manchester United and Puma.

The report also highlighted the evidence of links between copyright and trademark infringements and more serious crimes.

In 37 percent of the cases, counterfeiters were involved in drug trafficking; in 20 percent of cases, they carried weapons; in 11 percent they committed other frauds, and in 26 percent they carried out other crimes such as assault, extortion, murder, theft, immigration violations, money laundering, identity theft and robbery. Increasingly, violent criminals are becoming involved because the profit margins are higher, and penalties and chances of being arrested are relatively low.

Conclusion

Today, the U.S. economy faces many threats, including spiraling energy costs, corporate governance abuses, huge federal deficits, foreign ownership of the national debt, the loss of jobs to offshore outsourcing and the impact of disasters (whether terrorist related or environmental).

And of course, there is the looming possibility of a bird flu pandemic or other global health emergency that could result in the closing of borders, the interruption of business, the cessation of travel and the deaths of many thousands.

But as you can see from this overview, there is another threat, difficult to quantify or even detect, one that has not yet grabbed the headlines or captured the imagination, and yet is relentlessly and efficiently looting, pillaging and plundering the U.S. and global economies of the magic ingredient—i.e., trade secrets.

Economic espionage is as real a threat as terrorism or global warming.

But it is subtle, insidious and stealthy. Even if the United States finds the will to come to grips with the many threats it faces, this silent, invisible hemorrhaging of intellectual know-how and trade secrets could deliver the death blow to our pre-eminent place in the global economic world before we even wake up to the magnitude of the danger.

According to the U.S. Commerce Department, intellectual property theft is estimated to top $250 billion annually (equivalent to the impact of another four Katrinas), and also costs the United States approximately 750,000 jobs, while the International Chamber of Commerce puts the global fiscal loss at more than $600 billion a year.

But both estimates appear to be woefully underestimated; by some other estimates, there was over $251 billion worth of intellectual property lost or illegal property seized in August 2005 alone.

The United States, like other great nations, stands on three legs: military power, political power and economic power.

Arguably, economic power is the most vital of the three.

Without economic power, the political elite would be bereft of the consultants and lawyers who insulate it; it would have nothing to bargain with at the geopolitical roulette table, and it would lack the bureaucratic muscle to impose its will domestically.

Without economic power, the military would be unable to deploy advanced weapons systems, spy on its enemies from space, span the globe with bases or even raise an army.

Secrets are the magic ingredient of power.

When state secrets—i.e., political and military secrets—are stolen, governments fall and wars are lost, people are disgraced and people die. When trade secrets, such as scientific or engineering secrets, are stolen, corporations lose their competitive edge, small entities cease to exist, and whole sectors of the economy weaken and fall behind in the global marketplace; people lose their livelihood and their children’s futures.

In other words, the United States could win the war on terrorism, overcome the challenges of global warming, balance the federal budget, strengthen the United Nations, end global armed conflict and restore our edge in science and engineering, and still end up behind China, India, Japan, Russia or Brazil in several vital sectors of the economy, and at a serious, if not fatal, disadvantage within the global marketplace.

The threats of economic espionage, intellectual property theft, counterfeiting and piracy are global, dangerous and increasingly common.

It is within your power to decide for yourself if your enterprise is going to be a hard target or soft target. The time for action is now. You can be prepared.

Preparation Tips

Remember, it is important to invest in protective measures commensurate to the value of the asset being protected. Here are some recommendations for a comprehensive program:

Organization .

Where security reports within an organization is perhaps the most vital issue of all. Consider appointing a chief security officer, who reports to either the chief executive office or the chief financial officer. This person should hold the reins of personnel security, physical security and information security, and should not be a stranger to the board room.

Awareness and Education

Educate your workforce on an ongoing basis about the threats of economic espionage, intellectual property theft, counterfeiting and piracy. Help them understand your expectation that they will protect the enterprise’s intellectual property and, by extension, their own livelihood. Provide general education for the entire workforce, and specialized education for executives, managers, technical personnel, etc.

Personnel Security

Implement a “Personnel Security” program that includes both background investigations and termination procedures. You need policies that establish checks and balances, and you need to enforce them. Know the people you are going to hire. Don’t lose touch with them while they work for you. Consciously manage the termination process if and when they leave the enterprise.

Information Security

Recruit certified information security professionals (e.g., CISSP, CISM, etc.) Adopt best practices, and establish a baseline. Utilize appropriate information security technologies, such as firewalls, intrusion detection, encryption, strong authentication devices, etc. Pay attention to data retention and data destruction as well as data access.

Physical Security

Do not overlook the “Duh” factor. It is pointless to invest in information security, or commit to background investigations, if agents of an unscrupulous competitor or a foreign government can simply walk away with what they covet.

Intelligence

You need both business and security intelligence. Know your competition, your partners and your customers. Research the market environment. Keep abreast of the latest trends in hacking, organized crime, financial fraud and state-sponsored economic espionage. You can outsource this expertise. But someone must be looking at both streams of intelligence, with the particulars of your enterprise in mind.

Industry Outreach

Actively participate in industry working groups appropriate to your sector and environment. Talk with your peers about the types of attacks or threats they are encountering.

Government Liaison

Leverage your tax dollars. Avail yourself of threat information from law enforcement, foreign ministries, elected officials, regulatory and trade organizations in your enterprise’s country, and in those countries where you conduct business.

Legal Strategies

Realize that even when right is on your side, a market may be lost to you, and protecting a portion of the global market is sometimes a viable survival strategy. Litigation is not the solution; it is confirmation that intellectual property theft has occurred. Work to protect your intellectual property and avoid the costs associated with litigation. Don’t let a small legal mind make decisions about big legal issues. Get expert legal advice on intellectual property issues.

In sum, your security is in your hands. Employees tend to apply effort and intellect to the issue in portions commensurate with management attention to the topic of intellectual property protection. Employees line up smartly behind the leader providing direction, guidance and support.

Providing that leadership is essential to your own continued economic viability in the global economy of the 21st century.

Read Secrets Stolen, Fortunes Lost: Part I Here

Read Secrets Stolen, Fortunes Lost: Part II Here

Christopher Burgess is a Senior Security Adviser for a Fortune 100 firm, and is a retire of the U.S. Central Intelligence Agency, with 30 years of experience in the clandestine services. He can be reached via e-mail: cburgess@att.net and his website is www.secretsstolen.com

Richard Power (www.wordsofpower.net) is an internationally recognized authority on cybercrime, information age espionage and other threats. He can be reached via e-mail: richardpower@wordsofpower.net.

NOTE: Portions of this study were reviewed, and cleared without objection, by the Publication Review Board of the U.S. Central Intelligence Agency. Originally published June 2006 by CSO Magazine - www.csoonline.com.

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