Fake goods, stolen secrets cost U.S. firms billions

Aug 24 2011 - 1:22pm

An industrial spy tries to steal $20 million in trade secrets from Minnesota-based Valspar paints. The kingpin of a Houston-based drug counterfeiting ring makes millions plugging his fake pharmaceuticals into the pipeline of Britain's socialized medical system. In Washington, the Defense Department unwittingly buys and installs knockoff Cisco computer software to track troop movements.

The theft of intellectual property has grown into an organized crime wave that costs U.S. businesses up to $250 billion a year in lost revenue and pilfered ideas, officials estimate. The problem extends from charade Chanel perfume to pirated movies to bogus cancer drugs. It includes the theft and marketing of chemical formulas and designs for medical devices.

Jobs are lost, innovation is undermined and consumers are left with a line of fraudulent products that range in quality "from inconvenient to deadly," said Steve Tepp, director of intellectual property enforcement at the U.S. Chamber of Commerce.

The phenomenon has reached such levels of sophistication and volume that President Obama recently called for a crackdown on intellectual property theft as part of a new national effort to thwart "transnational organized crime."

"You have very high (profit) margin activity accompanied by penalties that are relatively low if you're caught," said Victoria Espinel, the White House's intellectual property enforcement coordinator. "That's a very attractive combination for any criminal enterprise."

Companies are reluctant to discuss trade-secret theft for fear of affecting their stock prices, law enforcement officials said.

"If the company has any worry of public concerns," its representatives "are not going to participate" in a prosecution, said FBI agent Tamara White, who supervises the economic espionage unit in the bureau's Minneapolis office.

White and agent Chris Golomb say they're convincing more executives to help put away crooks involved in economic espionage.

"If we get the companies on board to prosecute, I think we have a pretty high success rate," Golomb said.

Technology adds to the criminal appeal.

The brand protection company MarkMonitor tracked 100 websites providing counterfeit or pirated items for a year. The study revealed 53 billion visits. Most went to illegal file-sharing websites that let visitors download music or movies for free but left consumers vulnerable to computer viruses and identity theft. Sites selling potentially dangerous fake prescription drugs got 51 million visits a year, MarkMonitor found. And other counterfeit products sites attracted 87 million visits.

"These findings are just the tip of the iceberg," a Mark-Monitor report concluded.

While the FBI works on trade secret theft, the U.S. Immigration and Customs Enforcement enforces trademark and copyright laws.

China was the source of roughly 66 percent of counterfeit goods seized by ICE in 2010. But the merchandise often is sold via websites powered by Internet providers anywhere in the world, said Bill Ross, an ICE unit chief at the multi-agency National Intellectual Property Rights Coordination Center.

Unlike on-the-ground operations of a decade ago, Internet-driven intellectual property crime becomes an international maze fraught with arrest problems.

"Most people are not in the U.S., or they are hiding behind screen names," Ross said.

Trade-secret theft is even more confounding.

"The majority of companies are pretty savvy when it comes to counterfeiting," the FBI's Golomb said. Still, companies often don't understand what their trade secrets are or how to protect them. Golomb counsels companies to limit computer gear that employees carry when traveling and to beware of solicitations for information.

The biggest obstacle may be the ease with which scientific and engineering details can be transferred out of a company.

"Ten or 15 years ago when we were working with these economic espionage cases, they were removing reams of paper," Golomb said. "Today, with the click of a button, you can transfer data to a thumb drive (or) to an outside Gmail or Yahoo account."

The rewards for intellectual property crime far outweigh the consequences.

Kevin Xu's Houston-based empire of fake pharmaceuticals netted the Chinese national a fortune selling potentially deadly heart, cancer and mental health drugs. His arrest led to drug recalls costing $9 million. Xu got only 78 months in prison.

"If you look at the millions he made," said ICE's Ross, "it wasn't much time."

Most fake drug distribution pays as much or more than dealing illegal narcotics, enforcement officials agree. But the sentences for counterfeiting drugs usually run from 12 to 24 months, compared to 20 years for, say, a big cocaine bust, Ross said.

At the White House, Espinel said the Obama administration has asked Congress to pass laws that increase penalties for organized intellectual property crime. The government is trying to tweak its purchasing rules to block counterfeit items from its supply chain.

Federal authorities also have started taking over websites that market counterfeit items, particularly fake prescription drugs. Authorities say they have seized 141 sites since June 2010. Meanwhile, authorities are working with major credit card companies to stop processing payments for all sorts of counterfeit products and pharmaceuticals, Espinel said.

What no one can control is the public's search for a deal, which drives the demand for such piracy.

"Ten years ago, if you bought a knockoff, you knew it," Ross said. "What we see now is high-enough quality that the buyer doesn't know."

(Contact Jim Spencer at Jim.Spencer@startribune.com.)

(Distributed by Scripps Howard News Service, www.scrippsnews.com.)

 

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