Black Market Billions: How Organized Retail Crime Funds Global Terrorists (Gal Zentner's Library) (6 page)

Prior to Hamdan’s arrest, three men in Miami were also arrested for selling stolen Sony PlayStation 2 consoles, cameras, and other
electronics to the Galeria Page mall in Cuidad del Este in Paraguay, which we will delve into later in the book. The men, Khaled T. Safadi, Ulises Talavera, and Emilio Gonzalez-Neira, created a sophisticated ring that involved buyers, sellers, and freight forwarders, as well as people who could create fake documents and invoices.

“While engaging in criminal activity often increases a group’s vulnerability by further exposing them to scrutiny of law enforcement authorities, Hezbollah’s reliance on fellow sympathizers and members of local expatriate communities minimizes that potential exposure,” says Levitt. “Hezbollah is very criminally oriented for its fundraising in the U.S., including legitimate and illegitimate business activities.”
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These cases are just the tip of the iceberg. With such a large portion of money from ORC theft up for grabs and because of the federal government’s unwillingness to prosecute these criminals as felons, the problem continues to grow at an astronomical rate. Retailers and government officials have one option—step up their game, or keep putting their country at risk.

And as if the state of national security weren’t enough, another group is also being severely affected by ORC—the consumer.

2. When a Deal Isn’t a Deal

On one of the hottest days of the year in 2009, a line of women clad in Louboutin heels and thousand-dollar outfits wait patiently in the 100-degree heat. The doors to the much-anticipated Fendi warehouse sale in New York City are about to open. Women have come from as far away as Australia to stand in the sweltering sun to get first dibs on the best merchandise. The estimated wait time is well over four hours. The markdowns on the prior year’s ready-to-wear shoes and accessories will be “well worth the wait” according to one well-heeled customer, who insists that this year will be way better than past years.
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“No one was shopping this year [2009], so unlike years past, there is going to be an abundance of merchandise,” squeals one customer who has brought extra bags in anticipation of carrying out a larger-than-usual haul. “Most retailers were hesitant to mark anything down last season, and those that did still priced out pieces way too high. For all those girls who stifled their inner Carrie Bradshaw, this [sale] is our way of getting back at those retailers!”

In 2009, Fendi, whose parent company is LVMH, like most other brands had seen declining profits due to the global recession in markets that included the U.S. and Europe. In fact, it wasn’t until February 2010 that Fendi chief executive Michael Burke announced in an interview that for the first time in a long time, the company had grown in all geographic zones around the world.
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However, the plummet in demand the company experienced up until that point had to do with a general sentiment that consumption of luxury items was seen as
uncouth in the wake of a sinking economy, Ponzi schemes, a crashing housing market, and employment uncertainty. This was according to Milton Pedraza,
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principal at the Luxury Institute, a luxury consulting company in New York City. Fendi tried to regain a foothold in the retail space by launching new products such as the chic handbag the Fendi Peekaboo that enjoyed robust sales around the world during the spring of 2010. However, this means of generating profits also gave way to sinister practices—counterfeit merchandise and the resale of stolen handbags.

China’s economic boom was fueled by overseas companies looking to take advantage of the low costs and high productivity of China’s factories. Companies that outsourced were able to retain most of the retail value of their products, while Chinese manufacturing firms retained a smaller share, according to a report from the United Nations Office on Drugs and Crime (UNODC). However, manufacturers and designers living in two different countries had a hard time policing design fraud. That fact, combined with a high demand for luxury goods and the ability to produce large quantities at a cheaper price along with a cut in manufacturing costs, made the illicit production and sale of goods an attractive proposition. Sales of accessories such as shoes and ready-to-wear from legitimate luxury brands suffered tremendously in the U.S. because the market was saturated with fake and stolen merchandise. What’s more, the rise in unlicensed street vendors, web sites, and illegitimate discount stores selling contraband merchandise made these products readily available with little consequence if they were purchased.

And terrorist cells such as al Shabaab and Hezbollah took note.

I learned from two sources who are close to LVMH, that during the global recession Fendi executives met with their design teams, management consultants, and manufacturers on a regular basis to figure out how to decrease their exposure to organized retail crime. All the while, Chong Lam and Siu Yung Chan, aka Joyce Chan, a middle-aged pair who looked more like my best friend’s parents, were
importing and selling more than $100 million of counterfeit goods by way of China to the U.S.

In fact, Lam and Chan controlled 13 different companies in the U.S. and China and operated “at least eight separate factories dedicated to producing handbags, including large quantities of counterfeit bags,” according to an ICE investigator.
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Investigators raided the offices of Coco USA (Chan and Lam’s primary storage warehouse and shell company), located in Manhattan close to the wholesale district of Broadway and 28th. On a blustery January day in 2008, they executed search warrants and seized approximately 1,500 cartons of alleged counterfeit and other illegal items. The total value of the corresponding luxury goods (meaning items that are real and not fakes) manufactured by Burberry, Louis Vuitton, Gucci, Coach, Fendi, Chanel, and others was estimated to be more than $100 million.
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In addition to housing counterfeit items, Lam and Chan’s warehouse contained crates full of stolen merchandise, including iPhones, high-end clothing, and beauty products. It also contained handbags that would be purchased by smaller warehouses that were known Hezbollah and Hamas sympathizers, said an investigator close to the case.
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(When I pressed the NYPD for details about with whom Lam and Chan were doing deals, they mentioned that many of their “buyers” were in the same neighborhood. What’s more, a detective working on the case confirmed that a percentage of the money made was being sent to overseas accounts in the Middle East.)

But it wasn’t just the smaller retailers and vendors who were in on the illegal activity.

Starting in 2005, Fendi tried to address the problem with a very public lawsuit against retailers such as Filene’s Basement (which was once owned by Retail Ventures Inc. [RVI] and subsequently went bankrupt) and Burlington Coat Factory. The lawsuit alleged that the retailers were selling counterfeit and stolen Fendi items including handbags, shoes, and clothes. After close to five years,
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Fendi received a $2.5 million settlement against Retail Ventures Inc. in June
2010, resolving allegations that the former Filene’s chain bought and sold counterfeit Fendi goods with RVI involvement. The settlement also provided an injunction that permanently barred RVI from selling Fendi products without prior permission. The settlement came after a $4.7 million contempt judgment against Burlington Coat Factory that cited the company for willfully selling counterfeit and previously sold merchandise. In October 2010, Fendi settled with Burlington Coat Factory for an estimated $10 million after a judge ordered Burlington to pay Fendi $5.6 million in “treble damages, attorneys’ fees, and costs for willful counterfeiting.”
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These settlements sent a strong message. As Michael Burke, Chairman and CEO of Fendi said at the time of the settlement, “It’s particularly reassuring that the district court made clear in its rulings in this case that the retailer is responsible for making sure that the trademarked products sold to the public are authentic, and that the consequences when a retailer sells counterfeit goods are serious.”
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Despite the retail industry’s success with the Burlington Coat Factory verdict, its efforts in trying to curtail the problem from the loss prevention side, not to mention the millions of dollars LVMH spent on legal fees, its actions were in vain. The problem went far beyond the walls of this high-end retailer.

Going after big-box retailers when it comes to selling fake and stolen merchandise was just the beginning.

Getting a Slice of Luxury the Cheapest Way Possible

The consumer, desperate to get luxury items at a discounted cost, saw no harm in using alternative channels to obtain merchandise. Loss prevention executives soon realized that big-box retailers selling counterfeit and stolen merchandise accounted for only a very small percentage of their profit loss. Smaller discount stores, storefronts,
and street vendors (such as warehouses and stores that purchased from the Lam/Chan operation in New York, Los Angeles, or Boston) set up stands on large avenues with a glut of tourists. By selling counterfeit and stolen items, they (street vendors) made $500 million a month. What’s more, government agencies estimated at least $25 million was going to fund terrorist cells overseas.

Back in New York, I’m standing out of breath with Chris from the Congo minutes after we’ve dodged NYPD cops. He begins to explain how much Chinatown alone is profiting from the sale of stolen and fake merchandise. “I need some water,” I gasp, while noticing that the strap on my four-inch heel is broken. Convinced I will pass out from heatstroke, I look for an awning where I can fix my shoe, replenish electrolytes, and come to terms with the fact that we are two seconds away from getting arrested. The temperature is Hades hot; it is a sweltering 98 degrees. “A couple of blocks from here is Wall Street,” says Chris, pointing in the direction of the Statue of Liberty. (Chris looks just as calm as he did when we were in Starbucks 10 minutes earlier, despite our 400-meter dash through Chinatown.) “Down there they made more than half a trillion dollars last year. The black market for counterfeit and stolen goods is making billions, and that’s just in Chinatown alone! If we added up how much each city was generating in sales of black market items, it would be a lot more than half a trillion dollars [he estimates].”

It seems that Fendi and LVMH Group weren’t the only ones to be affected by pirated and counterfeit merchandise (in addition to the global recession). The streets of Manhattan were filled with all manner of discounted high-end items. But the problem isn’t isolated to the Big Apple.

In May 2010, Coach sued the city of Chicago for allowing fake handbags to be sold on Maxwell Street—a bustling tourist thoroughfare filled with vendors selling knockoff bags, leather goods, perfumes, and toiletries. The public company claimed that by allowing these
handbags to be sold, the city of Chicago was costing Coach (whose annual global sales exceed $3 billion) millions. Coach also alleged that the city did nothing to prevent these bags from being sold, which was a trademark violation of nearly 50 logo copyrights, according to the lawsuit filed in federal court. The total cost of this breach was close to $98 million.
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But copyright infringement, corporate lawsuits, and city-wide crackdowns on fake handbags are the furthest thing from the minds of the sample salegoers in New York. And, as the women wait patiently in line to make their annual purchases of legitimate merchandise, Chris from the Congo sets up his selection of counterfeit and stolen Fendi and Coach handbags. He expects to rake in three times the profit that the Fendi sample sale will bring selling handbags alone. When pressed about the authenticity of his bags, he admits that most of what he sells is fake.

“The fake ones are the less expensive ones,” he says, pointing to modified versions of logos for Coach, Fendi, and Louis Vuitton handbags. “If you want the ‘real’ ones, well, those are going to cost you some money.”

Nearly $400, to be exact.

The “Real Deal”

Most vendors selling counterfeit goods have the “real deal” (another name for a counterfeit bag that’s made more properly) in the back room. Chris from the Congo gives out his cell phone number, with a New York area code. “If you call me, I can make sure I have all the items with me and will meet you wherever you like,” he says. This personal delivery of merchandise ensures that Chris and his cohorts remain virtually anonymous, says a detective with the NYPD when I asked why the vendors do business like that. Not only does this make
him virtually indispensable to his customers, it also makes him hard to catch. “If a store is selling something fake or stolen out of a back room for an extended amount of time, they create a transactional trail that makes it easier for us to bust the store. When vendors move around, obtain merchandise from different wholesalers, or sell stolen items, it’s virtually impossible to trace.”
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A couple days later on a Sunday, I visit Chris again. This time, when we walk along Lispenard Street, vendors openly display designer (albeit fake or stolen) handbags, accessories, and electronics on the sidewalk. Swarms of women surround them, haggling over prices with two or three bags dangling from each arm.

“What is going on here?” I ask, befuddled. Surely a cop would come bounding out of nowhere, and I was ready to bolt—this time in the appropriate footwear.

“No cops on Sundays; therefore, the environment is more relaxed,” says Chris. His speech has a slight, clipped British overtone I hadn’t noticed before. Meanwhile, I spot the all-too-familiar NYPD uniform across the street. The officer is directing traffic.