China’s losing battle
Even investigators can be clever fraudsters
SHANGHAI: Multinational corporations doing business in China face a losing battle when it comes to keeping copies of their products off the market: The anti-counterfeiting industry they rely on is plagued with fraud, making it that much easier for potentially dangerous fake goods from airbags to Christmas lights to reach consumers, an Associated Press investigation has found.
Most Western companies subcontract anti-counterfeiting work to private investigators paid on commission. More seizures mean higher fees, creating powerful incentives to cheat in an industry with little oversight. As a result, money spent fighting counterfeiting often doesn’t make things better, and sometimes makes them worse.
The AP found instances of investigative fraud involving products that could be hazardous: counterfeit auto parts, pharmaceuticals, personal care products and electrical components.
The wrongdoing took many forms. 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.
Counterfeiting 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 has yet to reach the front lines of the fight against fakes, according to previously undisclosed material from legal cases and internal corporate investigations in China reviewed by the AP, lawsuits and interviews with 16 private investigators, lawyers and law enforcement officials.
All described a broken system, beset by endemic and under-reported fraud, made worse by Western companies that have a poor command over how to successfully fight fraud.
Shanghai’s Public Security Bureau took the unusual step of warning foreign brand owners to be watchful of the investigators they hire. “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,” the bureau said.
One of the world’s largest consumer goods companies hired an investigator to track down counterfeit anti-dandruff shampoo. But instead of finding real counterfeiters, investigator Wang Yunming set up a factory to produce counterfeit shampoo himself, which he then “seized” and billed to the firm as a successful raid, according to two employees involved in the investigation.
It wasn’t the first such factory Wang founded. It was the fourth. Wang was convicted of fraud and is due to be released from prison in 2023.
Swiss power technology giant ABB Asea Brown Boveri found that one of the investigators it was paying to hunt counterfeiters was herself selling fake ABB circuit breakers.
ABB sued the firm she worked for, the China United Intellectual Property Protection Center, which was one of China’s oldest and largest investigations companies. ABB lost its case in Beijing despite the fact that the investigator, Flaming Lee, was convicted of selling ABB counterfeits by a court in Dubai, where she lived.
ABB, whose products range from simple switches to sophisticated industrial robotics, declined to comment. But in court filings the company said it was astounded to learn that its exclusive brand protection agent in China had itself “directly participated in infringing acts against the ABB trademark”.
The company accused China United of protecting a factory that produced ABB fakes and of engineering its work to maximise billing. In one case, ABB said it ended up paying China United US$5,000 for a raid that uncovered $1 worth of fakes.
China United denied wrongdoing. Chinese judges acknowledged Flaming Lee’s double-dealing but exonerated upper management and dismissed the rest of the accusations. They ordered ABB to pay China United over $500,000 in back investigation fees.
In the end, China United’s legal victory proved hollow. Its reputation damaged, the firm closed.
Now, three top China United executives — Li Changxu, Li Guorong and Fan Liming — are staging a quiet comeback. They bought stakes in and hold executive positions at the Shanghai intellectual property protection company Sinofaith IP Group.
Sinofaith advertised an impressive client list including GE, Toyota, 3M, Nike and Schneider Electric.
That was a surprise to GE, said spokesman Geoff Li. “Normally, if they want to put a company’s logo, they should let us know,” he said.
GE and 3M said they had no plans to continue working with the company. Nike said it has not been a client since 2013. Toyota said it was no longer working with Sinofaith and had not authorised the firm to use its name. Schneider Electric said it stopped working with China United because of the ABB litigation.