Who’s investigating counterfeit Chinese goods? Fake investigators

SHANGHAI (AP) – The woman called herself Flaming Lee, an English name she picked when she was 10 years old, long before she got into the dirty business of counterfeit goods. Her job as a private investigator sometimes took her to client meetings at Dubai's seven-star Burj Al Arab hotel. Otherwise, she lived in apparent simplicity.

There were few signs of the deception that shaped her life. Officially, Flaming Lee hunted counterfeiters for Swiss power technology giant ABB Asea Brown Boveri Ltd. Unofficially, she herself sold counterfeit ABB circuit breakers for export – the very things ABB was paying her to track down.

It was a classic form of doubledealing in China's murky anti-counterfeiting industry, which is itself plagued with fraud, an Associated Press investigation has found. Some of the cases documented by the AP involved potentially dangerous products: Counterfeit auto parts, pharmaceuticals, personal care products and electrical components.

Investigative fraud is a problem few are willing to discuss publicly. Using previously undisclosed records from court cases in China and internal corporate investigations, as well as interviews with people directly involved in events, the AP documented multiple forms of wrongdoing:

• Western firms paid investigators who were themselves manufacturing or selling counterfeit versions of their clients' own goods.

• Investigators doctored documents, fabricating raids that never took place.

• Investigators colluded with factories to make counterfeit goods they could “seize” and present to their Western bosses for payment.

ABB believed it was a victim of all three varieties of fraud, according to court documents, as well as interviews with people involved in the lawsuit and an internal investigation.

As counterfeiting has flourished in China over decades, a lucrative, parallel industry has blossomed to fight it. Counterfeiting today is a multibillion-dollar business in China, which produces nearly nine of every 10 fake items seized at US borders.

Chinese authorities have been getting better at fining counterfeiters and sending them to jail. But the momentum of reform that has led to the creation of dedicated intellectual property courts, new laws and a crackdown on local corruption has yet to reach the front lines of the fight against fakes. Here, private investigators operate with limited oversight, and powerful vested interests have little motivation to wipe out an illegal but highly profitable industry.

More than 15 investigators, lawyers and law enforcement officials all described a broken system, beset by endemic and underreported fraud, made worse by Western companies that have a poor command over how to successfully fight fraud.

“They think they're spending $10 million a year trying to combat something. That $10 million is going down the drainpipe,” said Kevyn Kennedy, the founder of CBI Consulting, who has run investigations for over two decades. “A lot of times the counterfeiter will turn into the investigator's informant: ‘Don’t get me. I know these other guys down the road.’ It’s a protection racket.”

The story of ABB's battle against counterfeits in China shows how one corporation was undermined by the very firm it hired to fight for it – and then let down by the legal system it turned to for help.

ABB was exceptional in that instead of remaining silent, it took its fight to court in China and sued its investigations firm, China United Intellectual Property Protection Center, commonly referred to by its acronym CUIPPC. ABB lost its case in Beijing, despite the fact that Flaming Lee, a key China United employee, was herself convicted in Dubai of selling counterfeit ABB products. ABB was ordered to pay overdue investigation fees of more than $500,000, despite China United's questionable billing patterns, including a $5,000 charge for a raid that uncovered $1 worth of fakes.

ABB, a $40-billion corporation whose products range from simple circuit breakers to sophisticated industrial robotics and automation, declined to comment for this story. But in Chinese court filings, it said that what it found was “astounding.” The very firm it had entrusted with all its brand protection work in China “directly participated in infringing acts against the ABB trademark.”

China United countered, in court documents, that Lee had acted without the management's knowledge. China United's chairman and its deputy general manager, reached on their mobile phones, declined to comment.

Like ABB, most brands privately hire investigators, either directly or through a law firm, to root out counterfeiters and assist Chinese authorities in running raids against them. Much of the work is then further subcontracted to shifting bands of poorly paid freelance informants on the ground.

Contracts are typically structured on a commission basis. More seizures mean higher fees – and sometimes rewards for in-house staff – creating powerful incentives to cheat. In response to questions from the AP, Shanghai's Public Security Bureau took the unusual step of warning foreign companies to be more watchful.

“Those outsourcing companies are a mixed bunch, with good and bad, which is not conducive to anti-counterfeiting work,” the Public Security Bureau wrote. “Therefore, we very much hope that brand owners will pay attention and devote more manpower and material resources to ensure that the fight against counterfeiting is healthy and orderly.”

But the role of the government itself, particularly on the local level, is not always clear. The same people tasked with fighting counterfeiters – not just investigators but also local officials – sometimes protect them, according to investigators, lawyers, and company employees interviewed by AP.

Wang Hai, founder of Beijing Dahai Business Consultancy, said he once was barred from raiding a company that made counterfeit windows, even though he had a police escort. “The government has a list of protected companies,” Wang said. “They were on that list.”

Wang said he has seen golden government plaques posted at company gates, shiny markers of official untouchability. He pulled out a photo of one on his mobile phone. The red letters spelled out “key protected enterprise.”

A spokeswoman for the State Administration for Industry and Commerce, which helps oversee intellectual property enforcement across China, said that the agency “has investigated and punished a large number of regulation violators,” but declined to elaborate.

Flaming Lee's employer, China United, was no fly-by-night operation. Its roots reached to the highest levels of the Chinese government and it boasted a client list stocked with Fortune 500 companies.

China United seemed like a solid partner back in 1996, when ABB made the agency responsible for all its anticounterfeiting work in the country. By 2009, China was ABB's largest market, accounting for sales of $4.3 billion. But as the market leader for circuit breakers, ABB was plagued by counterfeiting. The company calculated that sales of counterfeit ABB low-voltage circuit breakers – the very product Lee was peddling – topped 2 billion yuan ($314 million), according to ABB's court filings.

Founded in 1994, China United was one of the country's first professional investigations companies and grew to become one of the largest. Corporate filings show that it used to be a stateowned company, supervised by the research and consulting arm of China's State Council, or cabinet. China United's principals were members of a host of international intellectual property associations.

As ABB's sole agent, China United handled everything: It hired investigators, ran cases, and filed complaints and lawsuits with authorities. All ABB asked for in return was an invoice and an investigation report, court filings show.

Like many other Western firms, ABB paid China United based on the number of anti-counterfeiting cases it handled. By that measure, the company's performance was stellar. It provided ABB with a steady stream of successful raids all along the counterfeit supply chain, reporting actions against factories, packagers, warehouses, shops and exporters. China United charged $5,000 to $15,000 per case, court documents show.

But nine years into their partnership, ABB began to doubt that its money was being put to good use. In court filings, ABB said it heard that China United had been falsifying cases for another client, Panasonic, cooperating with a counterfeiter to manufacture fakes, which it then arranged to have seized and billed as a successful raid. Panasonic declined to comment for this article and the allegations were not substantiated in court.

Then, in early 2009, a whistleblower reported that China United was doing the same thing to ABB. The company was conspiring with a plant in Wenzhou, China, called Wenzhou Fulemu Electric Co., to manufacture fakes it could seize and bill to ABB, the informer said, according to allegations in court filings.

Alarmed, ABB began investigating its own investigators. But the head of China United's Shanghai office blocked ABB's independent investigator from raiding the Wenzhou firm and repeatedly threatened the man, who was subsequently attacked, ABB said in court documents.

“The investigator was brutally assaulted and badly beaten up,” said one person involved in the case who was not authorized to discuss it publicly. “Broken bones. He went to the hospital.”

China United denied having anything to do with the attack or the obstruction of the raid. It said in court documents that the firm had “faithfully carried out its duties as agreed.”