The Purse-Party Blues

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    The luxury-brand companies' dragnets are pulling in folks who don't fit the usual criminal profile. In March, three women in suburban Detroit were arrested for selling fake Vuitton, Gucci and Burberry bags at posh purse parties.

    Authorities recognize that counterfeit trafficking is part of a broader, organized-crime problem. In June, U.S. immigration and customs-enforcement agents busted 17 people for smuggling tens of millions of dollars' worth of bogus Louis Vuitton, Prada, Coach, Chanel, Christian Dior and Fendi merchandise in thirty 40-ft. containers through Port Elizabeth, N.J. According to the customs officials, 15 of the defendants are Chinese nationals who are part of two separate crime networks that use shell companies to import counterfeit luxury goods from China and distribute them through storefronts on Canal Street. Each organization paid undercover agents $50,000 a container to look the other way. These might be run-of-the-mill crime rings, but both customs and Interpol have warned in recent months that counterfeit merchandising is also being used to fund terrorist groups.

    So far, the bad publicity has hardly put a dent in the trade, largely because China's factories are getting so good at churning out nearly perfect fakes. (Discounter Daffy's, for example, claims it was duped into buying high-quality fake Gucci bags — and promptly took them off the shelves when Gucci complained.) China's counterfeiters have a system for classifying their reproductions. Bags that are virtually indistinguishable from the originals are class AA. This merchandise is exported almost exclusively to the West. Grade-A or -B fakes sell for less in the bazaars of China — although some make their way to U.S. street stalls. Hong Kong residents stock up on fakes across the border, at Shenzhen's multi-story mall, where fluorescent-lit shops sell pirated Chinese-made DVD players, sneakers and top-quality knock-offs of the latest brand-name bags.

    The global trail of bogus goods generally begins in workshops in the Chinese provinces of Guangdong, near Hong Kong, and Zhejiang, south of Shanghai. Both regions are centers for legitimate manufacturing of leather goods, so getting raw materials and other supplies is relatively easy. (Some luxury companies, like Coach, manufacture in China, while others, like Louis Vuitton, are manufactured only in Europe and the U.S.) "The machines that companies use as legitimate manufacturers are also available to the bad guys," says Timothy Trainer, president of the International AntiCounterfeiting Coalition. The factories disguise the contents of containers with foodstuffs or other consumer products like lingerie. For those brave enough to risk it, it's a spectacular investment, with as much as a 1,000% return — better than drug trafficking. A 40-ft. container filled with fake bags can turn a profit of $2 million to $4 million. And counterfeiters save the roughly 50% of that revenue that luxury houses would invest in innovation and marketing.

    On the Chinese end, the luxury-goods companies try to take legal action against the big production centers and close them down. But crackdowns on the fake factories are complicated by widespread official corruption and a general disrespect for copyrights that extends far beyond the luxury goods industry. More than 90% of all CDs, DVDs and computer software sold in China are pirated, according to various trade groups. Trade restrictions have loosened since Beijing joined the World Trade Organization in 2001, making it easier for Chinese manufacturers to escape government scrutiny. At the ports, investigators say, the counterfeiters who get caught can often buy their freedom by bribing Chinese customs agents.

    Once the goods hit the U.S., there's little deterrent. "In narcotics, they get 20 years to life," says Pat Stella, U.S. customs assistant special agent in charge of New York City. "But a guy caught on Canal Street in the morning is back on the street by the afternoon." Customs officials have been working to increase the penalties, tacking on other charges like money laundering, which can increase a sentence to 10 to 20 years.

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