Christmas Shopper Alert! How eBay, Amazon and Alibaba Fuel the World's Top Illegal Industry — the Counterfeit Products Market
LAPD Detective Rick Ishitani believes the fakery amounts to $500 billion a year, bigger than the illegal drug trade.
Photo by Ted Soqui
Over the last year, Craig Crosby has bought more than 250 items on eBay. The 6-foot-3 ex-cop with bushy white hair and a white mustache — a cop's mustache — keeps each item in its own Ziploc bag, carefully labeled as if evidence from a crime scene, because in a way it is. At least that's how Crosby sees it.
"This is now the largest criminal enterprise in the world," Crosby says in a baritone drawl, sounding almost like John Wayne if he'd grown up in Reseda. "It actually is more profitable than illegal drug dealing."
All 250 items are counterfeits — counterfeit jeans, counterfeit watches, counterfeit respiratory masks, the kind you might wear if you had to remove asbestos.
"From what I understand, it's likely that it's actually more dangerous to wear the mask, because of the materials it's made out of, than to actually not wear the mask," Crosby says.
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Beats by Dre headphones, Gillette Fusion razor blades, a Gerber Bear Grylls hunting knife, a Rubik's Cube, Head tennis racquets, Apple USB phone chargers, Duracell batteries, Giorgio Armani Acqua di Gio men's cologne, Marc Jacobs DOT perfume. To a layman, they're indistinguishable from the real thing. The packaging is the right colors, the lettering is in the right fonts. There are stickers where there should be stickers, holograms where there should be holograms.
But they're all knockoffs.
One of Crosby's favorites: a pair of Tron headphones from the electronics company Monster Cable Products. They look like the kind of headphones the characters in the 2010 sequel Tron: Legacy might wear: white and shiny with sharp edges and parts that light up aqua blue.
But the headphones on Crosby's desk are actually a step beyond counterfeit, since Monster never made Tron headphones. They're an entirely faked product, illegally and convincingly stamped with Monster's name.
Years ago, Monster thought about making Tron headphones, produced several prototypes and even displayed them at trade shows. But, Dave Tognotti, Monster's general counsel, says the factories "couldn't get the product made to our quality satisfaction." So Monster scratched the idea.
Yet a year or two later, after Tron: Legacy was released on DVD, the headphones started showing up online, as if the idea itself had miraculously engineered its own existence.
The headphones looked real, and the box — especially the box — looked real. They even came with an enticing origin story: that Monster had made the headphones, but when Tron: Legacy tanked at the box office, the company decided to shelve them in a warehouse.
"It's a myth," Tognotti says. "There's the example of the audacity of counterfeiters."
And there's a problem beyond their illegality: Their sound quality is poor, and some of the parts are fragile.
Today's global trade network is awash with knockoffs, and not just electronics and handbags but, frighteningly, such items as air bags and airplane parts. The National Highway Traffic Safety Administration has warned: "While these air bags look nearly identical to certified, original equipment parts — including bearing the insignia and branding of major automakers — NHTSA testing showed consistent malfunctioning ranging from nondeployment of the air bag to the expulsion of metal shrapnel during deployment."
Rob Holmes, Gucci’s private investigator, found suppliers selling $1,000 “Gucci” handbags for $2 apiece — with a minimum order of 2,000.
Photo by Ted Soqui
The Senate Armed Services Committee found 1,800 counterfeit items had wormed their way into the "defense chain," and also cited an example of a private-plane manufacturer that is knowingly letting seven of its airplanes operate with what the committee believes are counterfeit "ice detection modules."
Perhaps most dangerous are the counterfeit pharmaceutical drugs. According to the World Health Organization, more than 50 percent of medicine has been found counterfeit that was bought "on the Internet from illegal sites that conceal their physical address."
And according to Interpol, each year more than 1 million people die from taking knockoff drugs.
Last year in China, a 23-year-old flight attendant was electrocuted to death by what turned out to be a counterfeit iPhone charger. Tognotti says he's seen knockoffs that "contain illegal levels of banned substances like chromium, lead and cadmium."
Estimates of the money changing hands ranges from $350 billion to $1 trillion. LAPD Detective Rick Ishitani guesses $500 billion — still enough to make counterfeit products bigger than the illegal drug trade, worth $321 billion, according to a 2003 United Nations report. The International Chamber of Commerce expects the counterfeit trade to reach $1.7 trillion by next year.
This black market is much harder to assess now, as it migrates online, especially to huge sites such as eBay, Amazon and one of nine sites owned by Alibaba. That Chinese behemoth, which went public in September, is hands-down the easiest way to buy counterfeit items in bulk, according to Crosby and others.
"Two years ago, most of our counterfeit items were coming [in] big shipping containers," Ishitani says, but the cops rarely have a chance to zero in on such physical mother lodes anymore.
"In the last year," Ishitani explains, "most of that stuff transitioned to air mail." Black marketers active on eBay, Amazon and Alibaba are "directly ordering stuff through a Chinese website, and they're delivered directly to their house." From there, the knockoffs are ordered online by people who think they're buying the real thing.
Private investigator Chris Buckner says, "People don't even need to meet their supplier anymore. It's shipped in direct from China, and here a week later. It's completely out of control."
Early in 2013, I bought a Louis Vuitton wallet. I liked the brown, monograph design, and maybe it was sort of an ironic thing. A new Louis Vuitton man's wallet goes for $490. I went straight to eBay and, after losing a few auctions, bought one for $216. It arrived a few weeks later, smelling of new leather.
When Craig Crosby heard this tale, he grinned and said, "Well, where did you buy it? If you didn't buy it from an authorized retailer, you probably got a fake."
But it looked real. So I took it to the Louis Vuitton store inside Bloomingdale's at the Glendale Galleria. There, the "leather expert," Josh, examined it suspiciously.
"They don't allow us to authenticate" items brought in, he said, but he pointed to a few troubling, subtle signs. The wallet is edged with a leather bumper; this one's was a lot thinner than those in the Louis Vuitton store. Some of the inside leather was already worn. Most glaringly, some stitches were fraying.
After only a couple years, a true Louis Vuitton should have held up better. Josh wouldn't say for sure, but it was clear he thought it was a fake — a good fake, maybe, but still fake.
Ebay contends that it has taken a number of steps to cut down on counterfeit products, including its program that allows manufacturers to file reports against entities that are selling counterfeit versions of their products.
"As a result of our efforts, we're currently seeing an all-time low in fraudulent activity on eBay — with fraud down 50 percent over the last seven years (2007-2014)," eBay spokesman Ryan Moore says in a statement.
That's a major reduction, but 50 percent of how big of a problem?
Kevin McPherson is director of brand protection for OtterBox, a company that makes waterproof, drop-proof iPhone cases. He says that this year alone, he's gotten 84,000 listings taken down from eBay, Amazon and Alibaba.
Despite that huge figure, he doesn't mind being in charge of enforcing counterfeit laws — it's the only realistic option.
"To put the onus on eBay or Amazon to try and enforce our brand would be extremely difficult," McPherson says. "They don't have the knowledge or fortitude to find those counterfeits and take them down."
Crosby, who can do a quick search of any number of products on eBay and find a fake within 10 seconds, dismisses this argument.
"My position is [that eBay is] not fulfilling an obligation, legally, morally or ethically, to protect their consumers efficiently," he says. "And the reason I can say that is I have the products."
Many manufacturers and private investigators say that eBay is doing the best it can. The firm claims to annually log more than 60 million disputes between buyers and sellers, only some of which are about counterfeits; millions of disputes are over false item descriptions, broken items, items that don't arrive, failure to accept a return and failure to pay.
"If you let eBay know there's a suspicious auction taking place, they'll take it down," Tognotti says. "The problem is that it becomes a cat-and-mouse game. The counterfeit sellers may have hundreds of accounts" — meaning they are selling things under different names. "It's very difficult — you're playing defense."
As for the fast-rising online marketplace Alibaba: "Their process for eliminating counterfeit is ... let's say cumbersome. They're not making an aggressive effort," Tognotti says.
Rob Holmes made his first undercover buy when he was 12, a counterfeit MTV T-shirt on the Seaside Heights boardwalk (which burned down last year) in New Jersey. His dad, a former state trooper, became a private detective in the early 1980s, busting counterfeiters at swap meets and on street corners. On Canal Street, in New York, they called him "Chief." He got his two sons to help make buys, and paid them in ice cream. Rob still has a clipping from the Philadelphia Inquirer about a raid of fake Guccis in 1983.
"I was on that raid," the PI says proudly. "And I still work for Gucci."
Rob's younger brother, Jason, couldn't wait to join the family business. But Rob was the rebel. He wanted something different. First he went to Bible college in Philadelphia. Then he moved to L.A. to be a stand-up comic, until he made a discovery: He just wasn't funny.
"My father always said he was born to catch bad guys," Rob says. "That's what I was born to do."
In 2001, Rob and Jason started their own firm — first they called it the Holmes Detective Agency, but they later renamed it IPCybercrime, after what had become Rob's specialty.
Since online knockoffs aren't exactly a priority for law enforcement, most companies hire their own private investigators, who then put together a case to either hand off to the cops or take to civil court.
When it comes to online detectives, Rob Holmes is the guy. Louis Vuitton, Gucci, Cartier — they all use him.
Earlier this year, Gucci asked Holmes (whom they keep on retainer) to build a case against Alibaba, whom industry experts say is the undisputed leader of counterfeit product sales. Not only can you find just about anything you want from Alibaba, you can buy thousands of units wholesale to sell on the street or online.
In the past, brands have successfully shut down manufacturers and gotten Internet service providers to take down domain names, such as DiscountGucci.com, that sell counterfeit goods.
What they haven't really been able to do is go after online marketplaces.
In 2004, Tiffany & Co. sued eBay, saying the auction site "simply turned a blind eye" to its many complaints about Tiffany counterfeiters.
A New York District Court in 2008 sided with eBay, saying the company didn't have the means to police its millions of listings. The Court of Appeals agreed, issuing a buyer-beware warning that Tiffany's "About Me" page on eBay clearly warns eBay buyers that "[m]ost of the purported 'TIFFANY & CO.' silver jewelry and packaging available on eBay is counterfeit."
Holmes calls the court ruling "earth-shattering for the third-party liability aspect of counterfeiting. They were not able to prove that eBay was complicit."
In 2011, Tre Milano, which makes electric hair straighteners that are popular with millennials, sued Amazon over knockoffs being sold on the website. Tre Milano had sent Amazon hundreds of takedown notices, some of which were ignored.
LAPD Det. Rick Ishitani, right (in black T-shirt), and his task force perform a raid on a suspect’s San Fernando Valley apartment.
Photo by Ted Soqui
"The court basically said that Tre Milano didn't do enough of its homework, didn't do enough test buys," says Eric Goldman, a professor at Santa Clara University School of Law. "Amazon won the case, even though it had ignored takedown notices, and even though the risk of injury was quite high."
That's what Holmes was up against — case law favoring the marketplaces.
Holmes and his team bought hundreds of products from merchants that had been declared "Gold Suppliers" and "Assessed Suppliers" by Alibaba — that is, merchants whom Alibaba had physically inspected and given its stamp of approval.
Yet these suppliers were selling Gucci bags, in bulk, for preposterously low prices. Thousand-dollar handbags were selling for $2 to $5 a unit, with a minimum order of 2,000 units. Some claimed to be real; others advertised "replica." All carried the famous Gucci logo of two interlocked G's.
When contacted by Holmes' team, the sellers readily admitted they were actually peddling knockoffs. "Are you looking for the Gucci replica watch, right," one wrote. "It happen that our factory have such models as attached picture." Another wrote on his listing: "These items are not so good. Instead, they are as good as the original ones, but not as dear as original ones in your country."
LAPD Det. Rick Ishitani, right, plots a raid on a suspect’s apartment.
Photo by Ted Soqui
The legwork paid off. Two weeks after Gucci sued, in July, Alibaba agreed to cooperate, and Gucci withdrew its lawsuit.
But since this victory never got to court, it won't enter into case law. The common law tilts in favor of eBay, Amazon, Alibaba and others.
"I think we're moving away from the idea that online marketplaces are absolute guarantors that there won't be counterfeit goods," says Goldman, the law professor. "Trademark owners have acquiesced to the fact that marketplaces will help them but won't do everything they ask."
But if the manufacturers and marketplaces are slowly approaching a sort of détente in which consumers have little voice, there's one guy who's still fighting: ex-cop Craig Crosby.
"The investigators and manufacturers are trying to maintain a working relationship with eBay," he says. "Whereas I resigned myself in the beginning — eBay, Amazon and Alibaba are huge proliferators of counterfeits, and I'm not here to be their friend."
Crosby is reluctant to go into his personal history. He refuses to give his age (he's in his late 50s) and doesn't want people to know too much about his LAPD career.
"Life is a series of events that seem important at the time," he says. "Who cares about five years ago? Today is the day."
He's also worried that big counterfeiters might take revenge on him for shutting them down.
"I'm not afraid," he says. "I expect it. I don't know what the fallout is, because no one's ever done this before. I know the Chinese [counterfeiters] hate me, because they try to hack me every day."
One counterfeiter even sent him a rat trap. "This is the mentality you're dealing with," he says. "But what I'm more concerned with is [them] sending stuff that's hazardous. Or dangerous. So the less information someone knows about me, the better."
LAPD Det. Rick Ishitani during a raid on a suspect’s apartment
Photo by Ted Soqui
Crosby grew up in the San Fernando Valley and joined the LAPD when he was 21. He worked in about half a dozen divisions, including juvenile, major crimes — and counterfeiting. In the 1980s, he bought a DEC Rainbow, one of the early home personal computers, for $1,000. That set off an interest in writing software, a hobby born out of restlessness.
"I don't enjoy sitting around," he says. "I'm not a 700-pound computer geek that sits around eating Doritos. It's a mental challenge. I like creating something."
In 1988, Crosby, a field sergeant, designed a program to determine which police officers should be deployed where — back then, officers filled out paper forms, and supervisors compiled spreadsheets and made judgment calls.
After a three-month test run, station captains praised the program, predicting it would save thousands of man-hours and millions of dollars. They recommended it "be adopted on a permanent basis."
Crosby wanted to spend time perfecting his software and then sell it to other police departments. He planned to give it to LAPD for free. But LAPD continued to use it after the initial three-month test run and wouldn't sign a usage agreement, which Crosby needed, in part, for marketing purposes. He warned the department that it was in violation of its agreement, and that he had built into the software a kill switch — which he intended to use.
Still, LAPD top brass dragged their feet. A few weeks later, the screens went dark.
"I wanted to wash my hands of dealing with them," Crosby told the Los Angeles Times in September 1991.
He soon was transferred to a division a long commute from his home, a punishment known as "freeway therapy." Crosby, in turn, sued the police department. Two years later, the department settled in order to avoid a jury trial, paying Crosby $983,000. He remained an LAPD officer for another 11 years, retiring in 2004.
In 2008, Crosby launched Pro Bids, a site that matches workers and contractors with clients. Today, the site has 280,000 customers and essentially runs itself.
So Crosby was looking for another project when, in 2012, he ordered a batch of four cordless phone batteries from a private seller on Amazon.
When the batteries died after less than a week, he did some research and discovered batteries are among the most counterfeited products. The more he read about how the knockoff industry had migrated online, the more shocked he was.
Where were the regulators? Where was the publicity?
"You go to restaurants, drugstores, someone's kind of looking out for you," he says. "You go to eBay or Amazon, who's looking out for you?"
So Crosby began a one-man mission to spread the word about the dangers of buying discount goods online. He bought suspicious items from reputable online marketplaces and published his findings on his website, The Counterfeit Report.
One of the items he bought was a Cardsharp knife, essentially a plastic fold-out knife the size and shape of a thick credit card. It comes in black — not pink. Sometime last year, pink Cardsharp knives showed up on eBay. Crosby bought one, verified it was fake and attempted to leave negative "feedback" on eBay about the seller, warning potential buyers that the seller was peddling phonies.
But Crosby couldn't post the feedback on eBay.
The seller, it turned out, had been deemed a "power seller" by eBay, having sold more than 54,000 items, and was therefore granted special privileges.
Anyone wishing to post negative feedback on eBay about a power seller had to wait a week, in order to give the seller a chance to make things right with the customer.
In most cases, the seller asks for the product back before sending a refund. But Crosby had no intention of mailing back the counterfeit knife — it was, after all, evidence of a crime.
Around that same time, Crosby had an idea: Why not offer, for free, his own product on eBay — a hard-copy printout of his emailed newsletter, The Counterfeit Report, in which he notifies consumers about knockoff products and slams eBay?
His newsletter printouts could be listed on eBay under the same keywords the counterfeiters choose to categorize their own items for sale. That meant that if, for instance, someone searched for "pink cardsharp knife" on eBay, Crosby's newsletter, categorized using the same keywords, also would pop up on the hopeful buyer's computer screen to warn them.
His clever digital-age idea didn't go too well.
First, eBay noticed what Crosby, one of tens of millions of sellers on eBay, was doing. It notified him that he couldn't give anything away for free on its marketplace — it's not Craiglist, after all.
OK, he said, and he changed the price of his free newsletter to 99 cents.
Crosby figured no one would buy his newsletter, but some did buy it — probably some counterfeiters, who then left him negative feedback, which in turn alerts other eBay users not to trust your products for sale.
Then eBay notified Crosby that his listings were in the wrong category — they needed to be sold under the "advertising" category, while he was placing his newsletter in various product categories.
Back and forth they went. Finally, Crosby talked to Alynna Wesley, the spokeswoman for eBay's CEO Jim Donahoe. According to Crosby, she told him that they were taking his listings down and blocking him from putting them up again.
"What's your objection?" he recalls asking Wesley.
"Well, this isn't in the spirit of eBay," she replied.
"I don't understand. Is there a policy?"
"Yes, we have a policy, and this is not in the spirit of eBay's policy."
"Protecting consumers? Or getting transaction fees?" Crosby snapped, referring to the fees eBay charges sellers — the main source of its revenue.
That's not the point," she said, exasperated. "You can't do this."
"Well, reference me a policy I can look at so we can comply."
"Well, there is no ... It's just the spirit of the policy."
Crosby was enraged. A simple search of eBay's site could find products such as the Tron headphones and the pink Cardsharps, which were immediately identifiable as fakes. Yet eBay was, by all appearances, doing nothing to take them down, and was blocking Crosby's attempts to alert buyers.
More recently, Crosby bought counterfeit Bear Grylls hunting knives on eBay, including one from a merchant selling 500 of the knives. Not only did eBay ignore Crosby's efforts to get the listing yanked but the company actually acceded to the counterfeit merchant's request and blocked Crosby from bidding on any more of the knives.
"It defies logic!" he says, finally starting to lose his composure.
Last month, eBay told the news site Business Insider that it was a misunderstanding: eBay had mistaken Crosby for an "abusive buyer" — weirdos who return a lot of products just to make life difficult for sellers.
A spokesman for the site also said that eBay had "reached out to Mr. Crosby to discuss how we can work together in a more formal manner to keep eBay a place where people can shop with trust and confidence."
But it now appears that wasn't true. The company hadn't reached out to Crosby. It did so only after the Business Insider story ran, in an email that Crosby calls "less than minimal."
Perhaps eBay, which is No. 54 on Forbes' list of most valuable brands, and is valued at more than $71 billion, simply doesn't take Crosby seriously.
Maybe it sees him as a gadfly, a nuisance, annoying but ultimately harmless. As long as it mollifies the Monsters, the OtterBoxes, the Guccis of the world, these big firms will stick with eBay.
Even Rob Holmes, who thinks that eBay does about as good a job as it can, says eBay will never be able to fully clean itself up.
The problem isn't just the supply. Today's economy has trained us all to demand a deal — you're practically a sucker if you don't. Whether buying airline tickets from Orbitz, used books from Amazon (some of which sell for a penny, plus shipping), or a Burke Williams spa package from Groupon, we are now a nation — a globe — of bargain hunters.
"People get used to purchasing brand names at discount prices," says Judy Zaichkowsky, professor of marketing at Simon Fraser University in Vancouver. "It doesn't faze them — in fact, they think you're stupid if you're paying full price for a brand name, because you can get it so much cheaper at Walmart."
A few months ago, I bought an Athletico Madrid soccer jersey on Ali Express (an easy-to-use Alibaba site designed for U.S. customers). Normally, they sell for $90. This one was $18.37. I assumed it would be fake. But when it came, it looked real. Even soccer shop employees thought it was real. To this day, I haven't been able to disprove its authenticity.
"Prior to 2009, counterfeits we found were really poor quality," says Monster's Dave Tognatti. "They really didn't fool anyone. Starting in 2009, we saw the level of sophistication of counterfeiters had risen to a new level."
There are a number of explanations for this rise in craftsmanship. As the potential profits from counterfeiting increase, so do the effort and expertise. And, to a certain extent, it's like an arms race: Manufacturers make harder-to-fake verification tools such as holograms, and eventually, the counterfeiters catch up.
But undoubtedly, part of the story lies in China, where more than 70 percent of all counterfeits originate, according to the International Chamber of Commerce.
"There is a concept known as the ghost shift," says Tim Phillips, a journalist and author of Knockoff: The Deadly Trade in Counterfeit Goods. "A company outsources its production, which nearly every company does, to China. It gives the factory [in China] the materials, the instructions and a lot of money. If, as the manufacturer, you can get [extra] materials and you have the machines in place, you can run your factory for three shifts instead of two. The third shift makes fake product."
That's why some of the newly available counterfeits look so good — some of them are made by the same factories, if not with the same materials.
The Chinese call it shanzhai. Literally, the word means "mountain stronghold" or "mountain hideaway," a sort of hidden fortress for bandits. But the modern definition refers to counterfeit, pirated or imitated brands — a sort of Robin Hood–style prank played on global capitalism by a nominally socialist country beginning to emerge from poverty.
"Those famous international brands, those are the super-rich," says Yunxiang Yan, a professor of anthropology at UCLA, who points out that many of the factories in China are small, family-run affairs. "And here, you have ordinary people fighting against the super-giants."
The Chinese government has naturally promised the World Trade Organization it will crack down. Yet, Yan says, "At every single level of the local government, there are close ties to individual merchants."
Holmes explains that no marketplace on Earth will ever admit the underlying reality that "a portion of their business comes from crime."
"When you have shareholders, you don't want any portion of your business to go away. That's the moral problem with enforcing counterfeits. It's like drugs — we want the problem to go away, but we don't want the money to go away."
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