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This article by Kathleen McGinn Spring was prepared for the January 22, 2003 edition of U.S. 1 Newspaper. All rights reserved.

Counterfeiting Epidemic

When people think of counterfeiting, they think of T-shirts,"

says Michael Kessler, who has been investigating counterfeiting

for better than three decades. Faux Gucci bags and $50 Rolex watches

come quickly to mind too, at least for anyone who has spent any time

along Manhattan’s Canal Street, land of $7 Polo shirts, $10 DVDs of

movies still in first-run theaters, and $5 bottles of CK One cologne.

Eavesdropping on Connecticut matrons debating over whether the goods

look real enough to pass is great fun, but, insists Kessler, counterfeiting

is anything but an innocent, victimless crime.

In one scary scenario he asks just how funny it would be if individuals

with nefarious intent slipped poison into boxes of widely-distributed

grey market macaroni and cheese. It wouldn’t be hard to do, he says.

Kessler shares his experiences with every type of counterfeiting when

he speaks on "International Product Distribution: Security, Counterfeiting,

and Diverson" on Tuesday, January 28, at noon at a meeting of

the International Trade Network at the Nassau Club. Cost: $35. Call

609-921-3322.

Kessler is founder of Kessler International (www.investigation.com),

a Manhattan-based forensic accounting, corporate investigation, and

computer forensic firm. A graduate of St. John’s University, he got

his first look at white collar fraud when he went to work as an auditor

for Blue Cross/Blue Shield in the early-1970s. Fraud in heathcare

was rampant, he says, featuring nursing home scandals and doctors

putting in claims for performing abortions on girls who were not pregnant.

Fraud is still a major problem in healthcare, as it is in nearly every

industry.

Former chief of investigations for the New York State Department of

Tax and Finance, Kessler has tracked down fraud in scores of settings.

As a public servant he directed a number of high profile cases, including

the untangling of Leona Helmsley’s accounting irregularities. As president

of Kessler International, which he founded in 1988 and has expanded

across the country and to London and Hong Kong, he has added to his

areas of expertise.

A look at even a partial list of his firm’s specialties suggests the

breadth of possibilities for white collar criminals. The firm’s specialties

include money laundering, trademark investigation, royalty auditing,

anti-counterfeit, product tampering, tracing hostile contact, cyber

evidence, construction review, internal inquiries, and anti-terrorism.

No aspect of business is safe from white collar criminals, and no

industry escapes counterfeiting. While the Guccis of the world are

infuriated to see knock-offs of their handbags being sold on the street

for peanuts, "it is more serious in pharmaceuticals," says

Kessler. Right now, pharmaceutical counterfeiting is rampant. The

most common perpetrator, he says, is the generic drug manufacturer

experiencing a cash flow crunch. It slaps a name brand label on a

bottle, and passes it off as the real thing. And where are these fake

drugs sold? "Your drug store," says Kessler.

Health and beauty aids are commonly counterfeited too. There may not

be a single active ingredient in that bottle of shampoo you just brought

home, and the perfume you gave Aunt Louise for Christmas may have

been sitting in the hold of a ship doing a round-trip grey market

trip to South America for so long that its scent may have completely

evaporated.

Grey market transactions are interesting. They work like this, explains

Kessler. "A company sells the same product at wholesale for different

prices in different countries," he says. "A bottle of shampoo

might sell for $1 in the United States, but for 50 cents in South

America." Knowing this, individuals operating on the grey market

may buy the shampoo in the United States, ship it to South America,

and then ship it back to the United States. Or they might simply buy

it in South America and ship it to the United States. There are numerous

permutations on the scheme. Shipping might add 10 cents a bottle,

but that still brings it in under the United States wholesale price.

This transaction, per se, is not illegal, says Kessler. However, it

is impossible to carry out the scheme without breaking some laws.

For starters, the contracts signed with the manufacturer would state

that the product is going to be sold in South America. Often, shipping

documents would be falsified, and in most cases taxes would not be

paid, and there is a good chance money would be laundered.

But is anyone really hurt? Sure, says Kessler. The company’s salespeople,

attempting to make a living through selling a product to customers

in the United States for $1 are competing against grey market types

offering it for 50 cents. The company — and its shareholders —

lose money because product in countries where the market could bear

a $1 price is fetching half that amount. Consumers, too, are hurt

upon occasion. Grey market operators, whose reputation is not on the

line, do not worry about how the product is stored and transported.

Kessler speaks of shipments of grey market croutons that were held

in storage so long that their boxes filled with worms, repulsing cooks

across the nation, and badly damaging the manufacturer’s reputation.

While grey marketing is a grey area in terms of the law, counterfeiting

is always a crime, and it can have serious consequences. "Lots

of toys are being counterfeited," says Kessler. He also sees counterfeiting

of software, airplane parts, electronics, and brake parts. Consequences

can be serious. In one of his cases, he discovered that steroids,

intended for use only under a doctor’s supervision, were being marketed

to beauty salons in poor, African American neighborhoods as skin lighteners.

Many of these counterfeit pharmaceuticals contained industrial bleach

used primarily as a film developer. Undercover investigators learned

that women using the products thought they were achieving a glow.

Possibly, but they were also setting themselves up for a variety of

side effects, including convulsions, liver and kidney damage, and

heart failure.

But how about that poison mac and cheese scenario? How could that

happen? Simple repackaging, that’s how. In one of Kessler’s cases,

an enterprising criminal in Brooklyn bought restaurant-size boxes

of the sweetener Equal, repackaged it in smaller boxes, and sold it

— at a discount — to stores all over the country for sale

to consumers. "It would be hard to inject poison into Equal packets,"

Kessler concedes. But he says that doing so with something like a

box of macaroni and cheese would be quite easy.

While Kessler’s firm has racked up an impressive number of wins against

counterfeiters and grey market operators, he says bringing these white

collar criminals to justice is not easy. Tracking down these elusive,

chameleon-like traders is difficult, so difficult, he says, that government

agencies often are not interested in trying to do so. In a current

pharmaceutical case, he alleges that FDA inspectors are being paid

off, but even so, he is not able to interest the F.B.I. in going after

the counterfeiters. "Law enforcement is looking for a quick hit,"

he says, adding that it is easier to grab someone with a kilo of street

drugs than to track counterfeiters bringing in grey market goods from

Jordan.

The Internet makes the job even more difficult. The bar to entry into

the counterfeiting game has been lowered significantly now that everyone

has access to cyberspace. "You can get software for $39 that lets

you pull E-mail addressees off a company’s websites," Kessler

says. The Internet’s bulletin boards and chat rooms are full of tips

on how to do so. Trade in child pornography is vastly simplified too.

As for counterfeiting, given the Internet, says Kessler, "you

as a novice could easily set up a business. You could buy all you

want without contacts. You could E-mail, use wire transfers, and drop

shipping." Everything the would-be counterfeiter needs to know

is posted on cyber bulletin boards.

Given the multitude of ever-shifting counterfeiting schemes, how does

Kessler suggest that a company protect itself?

Vigilance. "In one case," he says, "there

was more product in a country than there were people." A tip off.

More vigilance. Monitor stores, he says. Check the prices

of your product. If they dip below your wholesale, it is a good bet

that the product did not get on the shelves through legal channels.

Constant vigilance. Look beyond the price being charged

by retailers for your product. If you sell chocolate and it is covered

with a white film, chances are that it was stored at temperatures

where it was allowed to melt a bit and re-form. This could be a tip-off

that a grey marketer gave your chocolate bunnies a round-trip ticket

to another country.

Act at the first sign that something does not look right. "Trust

your gut," says Kessler.

While catching counterfeiters is always a challenge, it is one

that Kessler relishes. "I love my work," he says. "I don’t

have to watch all of those TV shows." There is plenty of action

in tracking down the bad guys in real lif


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