WASHINGTON/GUANGZHOU, China, (RTRS): Anybody 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 a consumer in Washington D.C. 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, US 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 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.

Pervasive
“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 US 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 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, US customs and other law enforcement agents made nearly 15,000 seizures of counterfeit goods, 80 percent of which came from 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,” US 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 US trade deficit, which Washington blames on China’s undervalued currency, rampant piracy is stoking economic tensions between two of the world’s biggest economies.
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 neighbourhoods 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 three-storey shop-house factories and watching men and women pound metal hardware into leather in the back alleys, it feels like we are in a pirates’ lair.

Triads
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.
In the basement of the stores are the 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.
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.
Back in Washington, I handed over the fake Louis Vuitton bag down 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 accept the bag. They said it 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 US 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, US 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 US 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 theatres.
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 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 US law enforcement to go after them. So often the most viable option is to close the site, another agent said.
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 US government’s second-largest criminal investigation agency after the FBI.

Unscrupulous
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 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 US Chamber of Commerce and the Business Software Alliance, Congress is preparing legislation giving the US Justice Department broad new powers to take down “rogue websites,” both at home and overseas.
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.
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.
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 US 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 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 US 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.”