LOST Magazine
December 2008 / January 2009 – No. 29

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The Cost of Counterfeiting

by Dana Thomas

Counterfeiting is about as old as civilization itself. During the last century of the Roman Republic (100 BC), Romans grew rick and socially mobile, and one of the ways the upwardly mobile could gain acceptance by the patrician upper classes was to possess what old-moneyed Romans possessed. "Wealth itself didn't confer status," explains Jonathan Stamp, a classical historical and documentary filmmaker. "You needed wealth plus something else, like objects." The politician and philosopher Cicero, for example, was an outsider who wanted desperately to be accepted by the establishment, so he spent a staggering one million sestertii on a citron wood table at a time when the average annual salary was a 1,000 sestertii. Suddenly Rome's nouveaux riches had to have tables just like it, and since they couldn't afford the real thing, they had carpenters copy it in lower-quality wood. Sculptors reproduced the great statues of the period in cheaper materials for the new moderately rich masses to use in decorating their homes and gardens. "People were spending money like never before and cared about superficial things," Stamp said. "All the old social structures had dissolved, and it was bemoaned by the patrician rick:  'People used to know their place.'"

Counterfeiting has long been a problem for modern luxury, too. Cheap knockoffs of checked and striped canvas Louis Vuitton trunks prompted Vuitton's son Georges in 1896 to design with the company's signature logo print of interlocking LV's and Japanese floral symbols. In 1948, a woman who had paid a small fortune to exclusively own one of Christian Dior's designs arrived at a nightclub only to find another woman wearing an exact copy. "This is no joke," the woman wept, "but a tragedy." The French gendarmes launched an investigation that led six years later to the arrest of a counterfeiting gang. The thieves bribed seamstresses for patterns and models to borrow outfits that they would then copy.

Through much of the 1970s and '80s, counterfeiting was a small-time business. The luxury brand watches, sunglasses, and T-shirts sold by merchants on the street were obviously fake; the quality was lousy, the prices cheap. Luxury brands generally didn't get too worked up over it.

Two things changed the game:  the democratization of luxury and the rise of China. When luxury brands went democratic, they thought they could satisfy the middle market with lower-priced handbags and perfume. What executives didn't count on was middle-market consumers satisfying their craving for higher-end items by buying fake versions that they could pass off as real. At the same time China evolved into a capitalist market economy and the world's manufacturing center, with a new class of entrepreneurs who saw counterfeiting as a viable business. The convergence of the two — big demand and big supply — was cataclysmic. And it took luxury executives — and executives in most other industries — by surprise.

Since 1993, the counterfeiting of all goods — from DVDs to pharmaceuticals — has increased by 1,700 percent, reports Indicam, an anticounterfeiting coalition based in Italy. The International Anti-Counterfeiting Coalition (IACC) in Washington estimates that up to seven percent of today's global trade — $600 billion worth — is counterfeit. In 1982, the International Trade Commission estimated global losses from counterfeiting and piracy to be $5.5 billion; in 1988, it was $60 billion; and in 1996, it was $200 billion. In 2004, the U.S. Department of Commerce estimated that American companies alone lost between $20 billion and $24 billion annually. The loss of tax revenue due to counterfeiting is substantial, too:  New York City police commissioner Raymond Kelly estimates that the city loses up to $1 billion in taxes annually.

While everything from Ferraris to mineral water is counterfeited today, fashion is one of the most popular sectors, because it is easy and cheap to copy and even easier to sell. In 2000, the Global Anti-Counterfeiting Group reported that 11 percent of the world's clothing and footwear was fake, and the World Customs Organization believes the fashion industry loses up to $9.2 billion per year to counterfeiting. In 2002, the European Commission reported that trade in counterfeit clothing, footwear, perfume, and toiletries reduces the European Union's gross domestic product by more than $6 billion each year and costs 10,800 jobs.

The most popular and lucrative fashion knockoffs are those bearing luxury brand logos. You can buy fake Louis Vuitton handbags, Gucci sunglasses, and Burberry knapsacks in shots on Canal Street in New York and Santee Alley in L.A., in the souks of Marrakech and Istanbul, on the beaches of the Cote d'Azur, in flea markets, on the internet, even in the living rooms of suburban America, where housewives host "purse parties" to make some extra cash. And people do buy. As a result, counterfeiting has ballooned from the small-potatoes local business of 20 years ago to a global racket today, one that is run by violent crime syndicates that also deal in narcotics, weapons, child prostitution, human trafficking, and terrorism. The FBI believes that terrorists financed the World Trade Center bombing in 1993 with sales of counterfeit T-shirts in a store on Broadway in New York City, according to the IACC. Interpol secretary general Ronald K. Noble told the U.S. House Committee on International Relations in 2003 that profits from counterfeit good sales have gone to groups associated with the anti-Israel Shi'ite terrorist group Hezbollah, paramilitary groups in Northern Ireland, and Colombia's main rebel army, FARC. One of the suspects in the March 2004 Madrid train bombings is a known counterfeiter, according to the United Kingdom-based Anti-Counterfeiting group.

Investigators even believe that there may be a link between counterfeiting and the September 11, 2001 attacks on New York and Washington. The week after the attacks, 1,500 counterfeit vendor stalls — some purportedly owned and operated by al-Qaeda — at the Tri-Border Market in South America, where $70 million of business is done in cash every day, closed shop. And during a raid in early 2002 on a midtown Manhattan luggage store that was run by a man of Middle Eastern descent and sold fake luxury handbags and watches, New York security expert Andrew Oberfeldt and intellectual property rights lawyer Heather McDonald found a flight manual and simulator program and copies of technical schematics of a bridge. They immediately called the Joint Terrorist Task Force, which took over the case. "Profits from counterfeiting are one of the three main sources of income supporting international terrorism," says Magnus Ranstorp, former director for the Centre for the Study of Terrorism and Political Violence at the University of St. Andrews in Scotland.

Surprisingly, most companies didn't see this coming and didn't do much about it until the late 1990s. Some players still shrug. Louis Vuitton designer Marc Jacobs told me that he thinks counterfeiting is "fantastic," adding, "as long as I've been here, everything that we've done has been copied …. We hope to create a product that is desirable." Prada CEO Patrizio Bertelli calls it part of "the game of fashion," and said, "I would be more worried if my product wasn't copied." They're not the ones who need to worry:  today, most luxury companies have extensive legal departments that focus only on intellectual property theft, as it is called. They also have investigators on the ground, working the markets, chasing down leads on illegal factories, in China as well as in London, New York, Los Angeles, and other distribution centers. Louis Vuitton, one of the world's most copied brands, has 40 lawyers in-house and 250 outside private investigators like Kris Buckner, and spends approximately $18.1 million each year fighting counterfeiting, despite Marc Jacobs's view. In 2004, Vuitton conducted 20 raids a day worldwide and put about a thousand counterfeiters in jail. Companies that are active in raids, that seize merchandise and sue, definitely see a drop in their brand's fakes on the market. But the minute they ease up, the fake products, like a red tide, come right back. "This is a cost of business," McDonald told me. "Advertising is working. You'll never see something counterfeited of a brand you've never heard of."

From Deluxe:  How Luxury Lost its Luster by Dana Thomas. Reprinted by arrangement of Penguin Press, a member of Penguin Group (USA), Inc. Copyright © 2007 by Dana Thomas.

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Dana Thomas has been the fashion writer for Newsweek in Paris since 1995. She writes about style for The New York Times Magazine and contributes to a number of publications including The New Yorker and Harper's Bazaar.

Buy Dana Thomas's books through Amazon at the LOST Store.

Articles in this Issue

Economics, by Robert Sullivan
A Nation Cannot Grow Rich by Fighting, by Henry Loomis Nelson
Bad Money, Bursting Bubble, by Kevin Phillips
Liquid Assets, by Mark Kingwell
What's in the Bank These Days?, by Bunny Crumpacker
The Cost of Counterfeiting, by Dana Thomas
How to Profit from the Coming Rapture, by Steve and Evie Levy
Auntie Blessy and Yamashita's Treasure, by Robin Hemley