Black Market Billions: How Organized Retail Crime Funds Global Terrorists (Gal Zentner's Library) (7 page)

“What about him?” I squawk. The thought of dashing through the streets again is less than appealing.

“Be cool,” Chris says. “That’s just a traffic cop. They don’t care!”

According to Chris, in the five years he’s been selling counterfeit goods, he’s seen a rise in clients. Prior to the recession in 2007, demand for counterfeit and stolen “real deal” handbags was already high. However, as the job and real estate markets started to sink and uncertainty about everyone’s collective financial future settled in, Chris saw demand for his handbags increase so much that he could barely keep them in stock. “My customers live on Park Avenue but shop down here. 99% of the time you can’t tell the difference between a bag they bought through me and a bag their friends are carrying.”

Dying for a Deal: The Recession Doesn’t Make Aspirations Go Away

According to the Bureau of Economic Analysis, consumer spending dipped to its lowest level in December 2008, the worst year for consumer spending in 47 years. Expenditures on durable goods, such as motor vehicles and parts, furnishings and durable household equipment, and recreational goods and vehicles, hit their lowest points. In the nondurable market (also known as discretionary expenditures), clothing and footwear dipped to a measly negative 8.9%, as the consumer reallocated funds toward purchases such as gasoline and other energy goods.
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The definition of discretionary versus nondiscretionary items was rapidly morphing as the recession pressed on. Prior to the recession, clothing, footwear, and even certain beauty products such as makeup and shampoo were considered nondiscretionary. The “aspirational shopper,” the woman who occasionally splurges on an expensive handbag, pair of shoes, or piece of clothing, no longer had discretionary income to allocate to those purchases. Instead, she turned to merchants like Chris from the Congo and stores like Collette in East Hampton, New York to fulfill her need for designer wear at a less expensive price.

“Luxury merchants can no longer count on the sheer increase in the number of affluent consumers to ensure the (at least near-term) viability of their brands and their companies,” says Richard Baker, chief executive of Premium Knowledge Group, a luxury market research company. “[In 2008] neither could they count on the current number of affluent shoppers to spend the way they did. Current conditions, and the probability that these conditions will last for some time, make the task of the luxury marketer more difficult. No longer will ‘a rising tide lift all yachts.’”
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The Organisation for Economic Co-operation and Development estimated the value of counterfeit and pirated goods that are traded
internationally to be 2% of the world trade in goods, or $176 billion in 2007.
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The U.S. estimated that 14,841 seizures valued at $261 million were made by authorities in fiscal year 2009 alone.
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Although the most pirated and reproduced products are usually electronics, clothing and apparel are a close second. Piracy compromises the rigorous testing for lead, toxic materials, and workmanship, thus creating potential hazards for the consumer. What’s more, counterfeiters often employ sweatshop labor and engage in environmentally unsound manufacturing processes.

Similar to selling pirated items, counterfeit and ORC rings further maximize profits by evading import duties through customs fraud and avoid paying sales taxes by selling items through informal means (vendors, unlicensed and unauthorized retailers, and the Internet). The counterfeit consumer route can be traced from East Asia to Europe and sees two billion pirated and counterfeit articles a year
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being shipped via sea through transit hubs in Dubai. Groups involved with the trafficking of product originate in China, South Asia, and Eastern Europe. The United Nations sees this trend increasing in the next five to ten years.
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Big Takedowns Take Precedence Over Smaller Offenders

In 2005, the NYPD carried out one of the largest takedowns in the city’s history when they raided and removed $40 million worth of merchandise from a warehouse identified as the Epoch USA Trading Company, located in the heart of the city’s wholesale district. Police raided nine floors of the building and removed counterfeit goods that ranged from handbags and wallets to shirts and baseball caps with the Lacoste, Coach, and major league sports team logos emblazoned on them. The warehouse supplied these goods to many of the NYC street vendors. Although many rings exist in urban areas, law enforcement
tends to go for the larger, more “newsworthy” takedowns. The larger the bust, it seemed, the more accolades the detectives, officers, and investigators received said a detective I spoke with.

“We aren’t concerned so much with people like Chris from the Congo and the stuff they sell on the street. What we are concerned with is the warehouse that is importing and distributing and then supplying Chris with his merchandise,” says John Tobon, ICE Unit Chief of Financial Programs at the Cornerstone Unit, a group created within the ICE to investigate financial crimes. “The NYPD has roughly 28,000 to 38,000 cops on the street. ICE has 7,000 worldwide. Unfortunately, we don’t have the manpower to go and get every single vendor who is selling potentially illegal merchandise. But we can get to the heart of the problem, which are these illegal warehouses and distribution centers.”

Counterfeiters and ORC Move Their Operations Online

Keeping a terrorist group going takes money. From 2007 to 2009, traffickers and ORC ringleaders cut costs by selling contraband merchandise on web sites while maintaining high margins. Online, merchandise can be sold seamlessly, anonymously, and with minimal investment on the seller’s behalf. The market for goods also increases, because auction sites have an international reach. The UN estimates that the number of people using the Internet has gone from seven million users in 1992 to almost two billion across 233 countries in 2008.
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Online auction fraud was the most reported crime in 2009, comprising almost 52% of reported complaints, compared to 44.9% in pre-recession 2007.
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The rapid growth of a service that is free and accessible virtually everywhere in the world gave rise to
cyber crime
. This term describes anything from offenses against computer data and systems (hacking and phishing) to content offenses and, in the case of
selling pirated and counterfeit items, copyright offenses. Retail losses due to cybercrime were estimated to be as much as $1 trillion in 2008. 70% specifically focused on the sale of pirated items. What I didn’t realize is that most of these pirated items were items that could be found in my medicine cabinet.

The cybercrime of e-fencing is one of the main ways terrorist cells such as al Shabaab in Somalia obtain funding. Likewise, Lashkar-e-Taiba (LeT) has been known to engage in Internet piracy to fund terrorist cells.
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E-fencing
is a term used to describe the activities of boosters who sell stolen items on Internet sites such as eBay, DHgate, and Alibaba. The process is fairly simple for boosters engaged in ORC. First, items that are stolen are organized and photographed, and then the photos are uploaded to the auction site. In most cases, the boosters have multiple code names to sell items ranging from over-the-counter and counterfeit medicine to razor blades and electronics. They create these code names to throw off regulators and to price the merchandise well below market value and lure the unsuspecting consumer.

In a recent search I did on eBay, more than 300 auctions were dedicated to the sale of over-the-counter drugs originating in India. Three auctions were at wholesale prices (ten boxes minimum, with 42 tablets in each), with a starting price of $1.99. Likewise, there were more than 40 auctions for coupons for Prilosec OTC for up to $3 off, with coupons selling for $0.99 to $7.49.

Shocked and perplexed, I did some research and found that India has become one of the main sources of drugs (both stolen and counterfeit) sold through illegally operating Internet pharmacies, according to a UN report.
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Orders placed with such pharmacies are often dispatched to buyers in other countries using courier or postal services. Since 2002, Indian law enforcement agencies have detected and disbanded several groups that were operating illegal Internet pharmacies. However, many still operate, which can have devastating health effects on consumers.

“The problem arises when e-commerce sites don’t police themselves,” says Jack Gee, a detective and founder of the Coalition of Law Enforcement and Retail (CLEAR), a partnering organization between law enforcement and loss prevention professionals. “Figuring out who is selling this stolen and counterfeit merchandise is within their jurisdiction, despite the fact that their sellers are not centralized—they are from all across the country and the world. They [e-commerce sites] weren’t catching it themselves—they were being reactive instead of being proactive. [We found] someone selling 40 or 50 gift cards, or most recently [we nabbed a] guy who in a year made $60,000 selling GPS devices online, or another guy who made $2.5 million over two years selling razor blades through eBay and another company that was posting on Amazon. When we followed the funds, we found that he was sending money back home through a charitable organization linked to the Harakat al Shabaab.
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If nothing else, it should raise an eyebrow to these e-commerce sites that something more dire is going on here.”
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eBay’s Swift Response

“Whenever stolen property is put on eBay, it is to some extent [a national fence problem],” says Rob Chesnut, former eBay senior vice president of trust and safety. “And there is no question in my mind that eBay gets abused by people who’ve got stolen property.”

Chesnut explains that eBay’s business model is built on trust between buyers and sellers. “If crime happens on the site, and buyers don’t trust the sellers, they will simply go elsewhere,” he says.

Recently (after coming under intense scrutiny from the retail community), eBay created a group within the company to monitor, identify, and report potential criminals and ORC ring members posing as legitimate sellers. The group was formed in 2009 and is headed
by the retail industry’s loss prevention luminary Paul Jones. His long career in loss prevention spans working at Limited Brands to being an executive at the Retail Industry Leaders Association (RILA). Jones knew he had a lot to prove. In the second quarter of 2009, eBay’s reported revenues were $2.10 billion with a profit of $377 million, historically a low point in the company’s run during the “Great Recession.”
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Amazon was quickly encroaching on the company’s market share with its $40 million acquisition of Zappos.com. All departments in eBay’s marketplace division (which includes eBay.com, shopping.com, and ticket resale and exchange site StubHub), PayPal (its payment arm), and the loss prevention team at eBay knew they had to step up their game. “I was scared,” Jones admits to me when I met with him in Atlanta at the 2010 NRF Loss Prevention Conference Expo. “In the past there was a shrouded approach to what eBay was doing in terms of curbing any criminal activity. People (here Paul was referring to those from the Loss Prevention and Retail industries) immediately thought eBay was the place for criminals and crooks to go when they wanted to unload their stuff, and PayPal was facilitating it. I had to let them know we were doing everything in our power to ensure we were monitoring the situation. When people ask to see what we are doing, I am happy to take them through the eBay system, show them exactly who is buying what, and how we flag potential criminals. In order to be effective, we needed to be transparent.”
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To bolster his point, Jones, along with other members of his team, invites me to look at my PayPal account as well as others. He pulls up PayPal accounts of sellers who have been flagged as alleged criminals. Jones and his team look at four primary characteristics when flagging an account as suspicious: selling history, price anomalies, quantities, and information of losses due to theft from eBay’s retail partners. Showing me an account that is selling razor blades, Jones points out, “Usually when a seller is trying to get rid of something they own, it’s not sold in these quantities,” he explains. Pointing to the
eBay report that charts how many bulk items the seller has uploaded to be sold, the report also shows how many times the seller has done so during the year. He goes on to explain that “PayPal adheres to the same regulations a commercial bank must adhere to. We immediately flag accounts that are moving $10,000 or more from one account to another.”

Jones also says that the data mined by eBay and PayPal is shared with the government on request, subpoena, pursuant to banking regulations, or when eBay determines there is a crime. This includes the seller’s name, address, what items are being bought and sold and at what price, and how many transactions the seller participates in within the week, month, year, and five years. “If you think Amazon and Google aren’t sharing the same information with the government, then you are mistaken,” asserts Jones.

Too Little, Too Late

While some loss prevention experts like Jack Gee admit the addition of Jones and the creation of his team have benefited the retail community greatly, some in the industry feel that eBay is still not doing enough to curtail the sale of stolen or counterfeit items. Kris Buckner, private investigator and ORC and counterfeiting consultant to brands such as Deckers, says the problem with auction-based e-commerce sites like eBay is the lack of cooperation and information sharing. Investigators and law enforcement officials agree. “They only give us the information when we ask for it, which is usually after these criminals have not only swindled their buyers, but they’ve made their money and transferred it elsewhere. Their timing in identifying these criminals is ten steps behind everyone else. If they could self-police more, instead of contacting law enforcement to police after the fact, their system would be more effective,” Buckner tells me.
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