China's counterfeiters aided by Western firms' weak response

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Posted: Dec 18, 2015 3:35 AM
China's counterfeiters aided by Western firms' weak response

WENZHOU, China (AP) — Alex Theil walked down a broken, weedy road in Rui'an, an auto-parts counterfeiting hot spot in China. Sweating, he passed a rusted-out truck, then paused before a workshop in a low concrete building. Inside, people worked silently at hulking, grimy machines. A man tossed shiny metal parts on the floor.

"These are probably camshaft tensioners," said Theil, an investigator who has helped Western brands fight counterfeiters in China for two decades. "They are very expensive. They are also quite crucial because if the tensioner breaks, the engine will probably overheat and there is a risk that it will actually end in a burning engine."

Many multinationals are losing the battle to keep potentially dangerous fakes out of Western markets. Companies themselves share the blame, because many choose to fight counterfeits in a way that facilitates widespread fraud, according to Associated Press interviews with more than a dozen lawyers, law enforcement officials and private investigators. One of them is Theil, who has spent years trying to fix the approach Western companies use to pursue counterfeiters.

An AP investigation published last week uncovered systemic fraud in China's anti-counterfeiting industry. Major multinational companies, blind to problems on the ground, unwittingly paid investigators who themselves manufactured or sold counterfeit goods. In other cases, investigators colluded with the very counterfeiters they were supposed to expose.

Many firms treat counterfeiting as a minor cost of doing business in China. Few spend the money required to tackle the powerful, hidden networks that drive China's multibillion-dollar counterfeiting juggernaut. The failure of major Western brands to better manage fraud is not just a waste of money. It also makes it easier for potentially dangerous fakes to slip into global supply chains, and creates more work for U.S. Customs and Border Protection.

"We are not getting any closer to fixing the problem," Theil said. "If our own industry wouldn't be a major part in keeping it going instead of fighting it, counterfeiting would have been eliminated a long time ago."

Over the years, first at Pinkerton detective agency and then as director of Asia-Pacific investigations at General Motors, Theil saw photos of officials, counterfeiters and investigators all toasting each other at a lavish banquet. People he himself hired tried to extort protection money from counterfeiters. He spoke of corrupt investigators, armed with inside information gleaned from their work with in-house brand protection staff, teaching counterfeiters how to make fakes indistinguishable from genuine items.

"I thought we were all the good guys working against the bad guys," he said. "It's not that simple."

By 2008, Theil concluded that he needed to take an entirely new approach.

He left GM and founded an investigations firm called Harvest Moon. He recruited a team of local investigators across China, offering to double, even triple, people's salaries. But he still had trouble recruiting local informants: Eighty percent of the people he approached walked away once he insisted on going on raids himself, he said.

"Once they realized it was too difficult to cheat us, they weren't interested anymore," he said.

Most companies outsource anti-counterfeiting work to investigators who are paid on volume. More cases mean more money, creating powerful incentives to cheat in an industry with little oversight. Theil insists on a fixed salary to break the destructive habit of paying on commission. That allows him to treat raids as tools for gathering intelligence, rather than a way to get paid.

In November, Thiel flew to Beijing to present the findings of over a year of work for a key new client, Siemens AG. He did not present bar graphs showing ever-rising numbers of raids.

Instead, he made a map, which showed 28 shell companies and dozens of distributors controlled by a single, family-run network of counterfeiters. The group produces fake versions of Siemens connectors — key mechanical components in machinery that automate industrial processes, like assembly lines.

"Everybody was quite impressed," said Beat Weibel, Siemens' chief intellectual property counsel, who flew in from Munich for the meeting. Now the challenge is to develop a legal strategy that can "really break them and really hurt them. That's different than just raiding shadow factories and shops."

Theil's approach costs more and success is not certain or even easy to measure. Running raids may cost several hundred thousand euros (dollars) a year. Filing three to five criminal lawsuits in China pushes costs into the millions, Weibel said.

That's one big reason most companies continue to blindly pay investigators to do more raids, fueling a cycle of corruption that has, so far, left the powers behind China's empire of fakes largely untouched.

"Everything is paid by the innocent or stupid Western companies that believe with this activity they will really solve the problem. They don't," Weibel said. "They nourish the system."

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AP photographer Ng Han Guan in Wenzhou, researcher Fu Ting in Shanghai and correspondent Alexandra Olson in New York contributed to this report.

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Follow Kinetz on Twitter: http://twitter.com/ekinetz

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For the past year, AP's investigative reporter in Shanghai, Erika Kinetz, has been examining the illegal economies behind China's global expansion. For other stories in this occasional series, see:

Money laundering investigation stymied by China, Italy says

http://bit.ly/1IVFogK

Chinese counterfeiter finds a comfortable life in California

http://bit.ly/1NcgInW

AP Exclusive: Chinese banks a haven for web counterfeits

http://bit.ly/1lQ02cI

Who's investigating fake Chinese goods? Fake investigators

http://apne.ws/1Q3pbOo