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Welcome to the ACAMS Live Chat

Emerging Trends in Financial Crime: Counterfeit Trade

October 26, 2011 – Noon to 1:00 PM EST

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Welcome to the ACAMS Live Chat

Emerging Trends in Financial Crime: Counterfeit Trade

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Moderator:

Robert S. Pasley, CAMS Consultant

Speakers:Kim ReihmanAnalystFederal Bureau of Investigation

Roger Cyr, CAMS Regional AML / OFAC OfficerTD Securities (USA) LLC

Definitions

• Intellectual Property

− Products and information that derive most of their value from the creative and intellectual ideas that lead to their creation

• Intellectual Property Rights

− Rights bestowed on owners of ideas, inventions and creative expressions so that they will have the same legal status as tangible property

− Like tangible property, intellectual property rights give owners the right to exclude others from access or use of their property

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Types of Intellectual Property

• Copyright - right to copy, multiply and sell (limited time)

• Trademarks – a distinctive logo, mark, sign, symbol, emblem, word or phrase which a manufacturer or merchant attached to goods or services

• Patent – right to make, use and sell an invention for a term of years

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Definitions of IPR Infringement

• Piracy – unauthorized copy of material (original packaging or graphics are not duplicated)

• Counterfeiting – reproduction and distribution of merchandise (duplicating the genuine packaging of the product)

• Bootlegging – unauthorized recording of a performance broadcast on radio, television or live concert and internet digital recordings

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Counterfeit: A copy or imitation of something that is intended to be taken as authentic and genuine in order to deceive another.

Items being counterfeited Include:• Consumer Goods• Pharmaceuticals• Aircraft Parts Including Military• Electronics Including Military• Automobile Parts

“Imitation is sincerest form of flattery” ?10

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Intellectual Property

British Parliamentary Records from 1785 record angry complaints about intellectual property re: patterns

• The OECD estimates that infringements of intellectual property traded internationally excluding domestic production and consumption account for more than €150 billion per year, higher than the GDP of more than 150 countries.

• 79 million articles were seized at EU borders in 2007, in over 43.000 customs actions.

• Recording Industry Association of America –− Practically all counterfeit CDs sold in New York− 2.5 million sound recordings sold in 2003

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Intellectual Property Seizures In NY – One Month in 2004

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Difficulties

The Anti-Counterfeiting Trade Agreement (ACTA)Proposed international legal framework to establish international

standards for intellectual property• Developed by US & Japan in 2006• Canada, EU & Switzerland joined in 2007• Official negotiations started 2008• 1st Public draft “leaked” in April 2010

The Free Software Foundation claims that ACTA will

“profoundly restrict the fundamental rights of European citizens –freedom of expression and communication privacy”

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Difficulties

Aaron Shaw, Berkman Center for Internet & Society, Harvard University

“ACTA would create unduly harsh legal standards that do not reflect contemporary principles of democratic government”

Both the Bush and Obama Administrations

Rejected requests to make the text of ACTA public – “disclosure would damage national security”

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Size of the Problem – Difficult to Precisely Dimension

Estimated 5% to 7% of global world tradeOECD Estimate $250 Billion in 2009

Numbers Difficult to PegLarger than the GDP of 150 countries

International Chamber of Commerce Est= $650 Billion in 2007

“Most counterfeit goods are produced in China, making it the counterfeit capital of the world. In fact, the counterfeiting industry accounts for 8% of China's GDP.”

(China’s GDP in 2009 = $4.985 Trillion X 8% = $398.8 Billion)

It’s BIG

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Consumer Goods

Growth in seizures of fakes dangerous to health and safety 2006 -2007.

• Cosmetics and personal care products (+264%), toys (+98%), foodstuff (+62%), computer (+62%)

• Largest component of counterfeit trade• Automotive – disc brakes, clutch plates, oil filters• Cameras, pressure cookers• Electrical – fuses, extension cords, Christmas lights• Food – baby food, butter, powdered milk,

alcoholic drinks, candy

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Consumer Goods

“Buying a counterfeit perfume may seem harmless...until you discover what's really inside that bottle could be toxic chemicals — or worse.”

Harpers Bazar, December 2009

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Pharmaceuticals

There is continual growth in seizures of fakes dangerous to health and safety• Fake medicines are reckoned to account for almost 10% of world trade in

medicines. • Items include cancer drugs, HIV, malaria, diabetes, cholesterol,

cardiovascular drugs, etc.• Most of these fake drugs are headed for the world’s poorest countries• Many pharmaceuticals traded over the internet• US FDA – warning in 2010 about fake Tamiflu vaccine and weight loss drug

Alli being sold over the internet• Fake surgical mesh used to reinforce soft tissue finding its way into

operating rooms• WHO – 1 in 4 drugs sold in developing world are counterfeit

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Sources For Counterfeit Goods

During 2004 – 2009 China accounted for 77% of aggregate value of goods seized in the US

Hong Kong, India and Taiwan followed at 7%, 2% and 1%

91% of items seized from India were pharmaceuticals and perfume

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Threats / Impact

• Fake Nike sneakers with chromium in the inner soles – harmful to skin• Perfume containing antifreeze – carcinogenic• Faulty electrical cords / fans / Christmas lights causing fires

− Young boy in England bought counterfeit Nintendo charger while on vacation - electrocuted

• Counterfeit pharmaceuticals including toxic or non-active ingredients• Substandard counterfeit automobile parts including brakes, timing belts

Motor and Equipment Manufacturers Association estimate US automotive industry lost $3 Billion in sales

• Counterfeit electronic parts infiltrating the US defense and industrial supply chains

• FAA – 520,000 counterfeit parts entering the airline industry threaten safety of commercial aircraft

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Threats / Impact

Los Angeles County

− Estimated $1 Billion to $4.6 Billion in counterfeit goods in 2005

− $483 Million loss in tax revenue

− 106,000 lost jobs

− “They are making more money selling pirated CDs and DVDs than they would selling narcotics.” – Officer Randy McCain, LAPD

− “We’ve found it tied to murder, extortion, human trafficking, insurance frauds” –Kris Buckner, former L.A. County Sheriff

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Threats / Impact

New York City− $23 Billion spent on counterfeit goods in 2003− $1 Billion loss in tax revenue

• Unpaid sales tax = $380 Million• Unpaid business tax = $290 Million• Unpaid personal income tax = $360 Million

Source Country− Sweat shops using child labor− Much counterfeit product sold domestically− 2008 Chinese milk scandal – By November an estimated 300,000 victims, with

six infants dying from kidney stones and other kidney damage and a further 860 babies hospitalized

− Shenzhen Evening News – Est. 192,000 Chinese men, women, children poisoned annually

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Threats / Impact

• Counterfeiting undermines innovation• Threatens health and safety• Economic impact to governments• Resources diverted to criminal networks• Damage to brand / reputation• Profit margin loss to makers of genuine article

ICE estimates 750,000 American jobs lost due to counterfeiting

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Characteristics

Highly organized supply chain

Asia has lowest enforcement rate for intellectual property rights in the world

US remains preferred destinationPrice of goods typically higher Imported more than 8 million 40-foot containers in 2003NY generates approx. 4% of US GDP

Accounts for estimated 8% of counterfeitingPort of NY/NJ accounts for 13.4% of all containers in US

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Characteristics

FATF Example:

• Criminal group imports counterfeit goods from Asia into Belgium using LC –sells goods for cash

• Deposits cash into Belgian bank and arranges subsequent LC

• Group purchases additional counterfeit goods using new LC

• Cycle continues

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Cases

• May 2009 – Money Laundering & Trafficking in Counterfeit Goods charges against 5 individuals - $8 Million counterfeit luxury goods seized by U.S. Immigration & Customs Enforcement (ICE)

• March 2010 – Baltimore, MD 9 defendants accused of importing 500,000 counterfeit Coach handbags, 10,000 pairs Coach & Gucci shoes, 500 counterfeit Cartier watches

− Max sentence 5 yrs. conspiracy, 20 yrs. smuggling goods, 10 yrs. trafficking in counterfeit goods, 20 yrs. for money laundering.

• June 2010 – Italian Financial Police arrest 24 and seize tens of millions of Dollars worth of counterfeit goods

Why We Care• Low risk, high return

− IP Crimes extremely profitable− Low perceived law enforcement security− Low barriers to entry

• IP Crimes cross many jurisdictions− Discourage state and local enforcement from working IP crime

• IP Crime is not a victimless crime− Public Health Risks− Critical Infrastructure Risks

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Cyber Crime

• Intellectual Property Rights Unit

− Established as a full unit in 2009

− PRO IP Act – provided funding for 51 dedicated IPR Field Agents and five FBI Headquarters personnel to oversee program and funding for non-personnel costs (ie training, travel, equipment, etc)

− Priority: Counterfeit Goods – Health and Safety

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Health and Safety Case Study

• Illegal export of controlled items to People’s Republic of China (PRC)

− Integrated Circuit (IC) chips as well as Cisco and Sony products valued at over $3.3 million

− Same IC chips used in DOD aircraft

− Indictment of subjects in 2009 and 2010

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Counterfeit Software Case Study

• Company identified as significant distributor of counterfeit software

− Admitted to selling $1 million in counterfeit software as well as certificates of authenticity

− Estimated $2.6 million worth of software seized

− Defendant pled guilty to trafficking in counterfeit goods, trafficking in counterfeit labels, mail fraud and willful failure to file tax returns

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Potential Danger

• Complaint received from MPAA for illegal distribution and streaming of movies still in theaters

− Subject also sold counterfeit cancer medications to at least 65 victims

− Admitted to selling more than 800 pirated copies of business software valued at over $435,000

− Sentenced to 33 months in prison in August 2010

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Thank you for joining us today!

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Next Web Seminar:

Conducting Internet Investigations to Support Customer Due Diligence

Processes

November3, 2011 – Noon to 2:00 PM EST