Fake goods, stolen secrets cost Minnesota businesses billions

  • Article by: JIM SPENCER , Star Tribune
  • Updated: August 24, 2011 - 4:43 PM

Intellectual property thieves find ever-growing payday in Minnesota.

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Fake jerseys, pirated movies and counterfeit perfume, drugs and brand-name goods filled the evidence vault at the Immigration and Customs Enforcement office in Minnesota after several busts in 2009.

An industrial spy tries to steal $20 million in trade secrets from Minnesota-based Valspar paints. A crew of counterfeiters wants to move a million bucks worth of knockoff cellphone equipment through St. Paul. In a five-day Twin Cities sweep, federal agents seize 17,000 counterfeit items, everything from faux football jerseys to charade Chanel perfume.

The theft of intellectual property has grown into an organized crime wave that is costing businesses in Minnesota and across the country billions of dollars in lost revenue and pilfered ideas. The problem extends from fake Minnesota Twins gear to fake cancer drugs to fake Cisco computer software sold to the U.S. military.

Nationally, up to $250 billion is stolen from U.S. companies through such chicanery. Jobs are lost, innovation is undermined and consumers are left with a line of fraudulent products that range in quality "from inconvenient to deadly," said Steve Tepp, director of intellectual property enforcement at the U.S. Chamber of Commerce.

The phenomenon has reached such levels of sophistication and volume that President Obama recently called for a crackdown on intellectual property theft as one of the pillars of a new national effort to thwart "transnational organized crime."

"You have very high [profit] margin activity accompanied by penalties that are relatively low if you're caught," said Victoria Espinel, the White House's intellectual property enforcement coordinator. "That's a very attractive combination for any criminal enterprise."

Trade secret theft in Minnesota may run in the "hundreds of millions of dollars," Minneapolis FBI agent Chris Golomb said. He noted "a lot of activity" in areas such as medical devices, industrial coatings and films, electronic circuits and advanced microprocessors.

Still, companies are reluctant to discuss how intellectual property crime has affected them for fear of affecting their stock prices, law enforcement officials said. Indeed, half a dozen of Minnesota's leading electronics, medical technology and retail businesses declined or didn't respond to requests for comment.

"If the company has any worry of public concerns [or] that their shareholders might suspect something's wrong with the company, they are not going to participate [in a prosecution]," said FBI agent Tamara White, who supervises the economic espionage unit in the bureau's Minneapolis office.

White and Golomb, whose job is to explain economic espionage to private companies, say they are making progress in their efforts to get executives to help put away the crooks.

"If we get the companies on board to prosecute, I think we have a pretty high success rate," Golomb said. "The bigger hurdle has always been and will continue to be to get the company to feel comfortable enough to come to us to pursue prosecution."

Piracy and the Internet

Technology adds to the criminal appeal.

The brand protection company MarkMonitor tracked 100 websites providing counterfeit or pirated items for a year. The study revealed 53 billion visits. Most went to illegal file- sharing websites that let visitors download music or movies for free but left consumers vulnerable to computer viruses and identity theft. Sites selling potentially dangerous fake prescription drugs got 51 million visits a year, MarkMonitor found. And other counterfeit products sites attracted 87 million visits.

"These findings are just the tip of the iceberg," a MarkMonitor report concluded. "The true scope of the problem is exponentially higher in terms of user traffic, lost revenue and risks to public health and safety."

While the FBI works on trade secret theft, the U.S. Immigration and Customs Enforcement (ICE) enforces trademark and copyright laws. It was ICE that in July seized $1 million worth of counterfeit cellphones, cellphone batteries and accessories in St. Paul.

China was the source of roughly 66 percent of counterfeit goods seized by ICE in 2010. But the merchandise can -- and often is -- sold via websites and powered by Internet providers anywhere in the world, said Bill Ross, an ICE unit chief at the multi-agency National Intellectual Property Rights Coordination Center. Unlike on-the-ground operations of a decade ago, Internet-driven intellectual property crime becomes an international maze fraught with arrest problems.

"Most people are not in the U.S., or they are hiding behind screen names," Ross said.

Trade-secret theft is even more confounding.

"The majority of companies are pretty savvy when it comes to counterfeiting," Golomb said. Still, companies often don't understand what their trade secrets are or how to protect them. Golomb counsels companies to limit computer gear employees carry when traveling and to be aware of solicitations for information.

In the end, the biggest obstacle may be the ease with which scientific and engineering details can now be transferred out of a company.

"Ten or 15 years ago when we were working with these economic espionage cases, they were removing reams of paper," Golomb said. "Today, with the click of a button, you can transfer data to a thumb drive [or] to an outside Gmail or Yahoo account. It's very fast, and it's large amounts of data."

Big money, little risk

The rewards for intellectual property crime far outweigh the consequences.

David Yen Lee, a technical director at Valspar, got caught trying to steal $20 million worth of chemical formulas to give to a Chinese company in exchange for a high-ranking job. Lee got 15 months in jail.

The bust of a group led by a Minnesotan named Charles Thompson led to the arrests of eight people accused of selling $500,000 worth of counterfeit items, said Mike Feinberg, a Minnesota-based agent with ICE. The suspects pleaded guilty and got probation.

"The profit margin is almost as good as selling drugs," Feinberg said.

The penalties for getting caught don't come close to those for dealing dope.

At the White House, Espinel said the Obama administration has asked Congress to pass laws that increase penalties for organized intellectual property crime in hopes of keeping more organized criminals and terrorists from getting involved. The government is trying to tweak its purchasing rules to keep counterfeit items out of its supply chain.

Federal authorities also have started taking over websites that market counterfeit items, particularly fake prescription drugs. Authorities say they have seized 141 sites since June 2010. The sites now carry federal warnings about intellectual property crime. Meanwhile, authorities are working with major credit card companies to stop processing payments for all sorts of counterfeit products and pharmaceuticals, Espinel said.

What no one can control is the public's search for a deal, which drives the demand for such piracy.

"Ten years ago, if you bought a knockoff, you knew it," Ross said. "What we see now is high-enough quality that the buyer doesn't know."

Jim Spencer • 202-408-2752

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