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Jane Moir

THERE IS A  stall, tucked away in a Stanley Market side-alley, that used to be home to fake Gucci sunglasses, Louis Vuitton wallets and Burberry handbags: all for the bargain price of HK$150.

If you walk past the stall today, however, the owner will solemnly shake her head, tutting three words: 'Customs and Excise'.

Across the border in Shenzhen, day-trippers to the pirated-goods paradise of Lowu Commercial City have been deprived of the popular activity of window shopping for fake goods.

Bargain-hunters now have to flick through a catalogue of photographs to find the Prada sling-backs of their choice. It is just not quite the same: again the work of Customs officials.

Nearly 6,000 copyright-related cases were handled by Customs officers last year - an increase of 73 per cent since 1999 - and arrests were at the 3,000 mark.

Prosecutions are up, with stiffer sentences imposed on offenders.

New laws have been swiftly implemented to deal with loopholes: for example, to stamp out the rampant use of pirated software. At least 50 per cent of Hong Kong companies were guilty of using the latter.

It all begs the question: is the great Hong Kong fake dead?

Not quite, said Director of Intellectual Property Stephen Selby, but it was on the endangered list. Compared with the rampant infringement days of the 1970s and 1980s, Hong Kong was 'very, very clean'.

Or at least it is clean on the surface. Mr Selby cited an 'enormous enforcement effort by Customs and Excise' over the past five years 'which has pushed a covert market underground'.

'That said,' he continued, 'I know I can go to a number of places and find pirated CDs. The best thing of all is not to have this market at all, but second-best is to have it underground. Hong Kong has managed to drive this production underground.' For 'underground', read 'China'. As Hong Kong's manufacturing industry moved across the border, so did the factories producing pirated garments, toys, household goods and CDs, as well as counterfeit money.

The mainland is seen as one of the greatest intellectual-property (IP) challenges in the world. United States Customs last year billed it as the main source country for seized goods for the fourth time in five years.

Last year alone, US$15 million worth of goods were seized as a result of 700 shipments stopped by US Customs.

Media reports in the mainland put car-parts seizures at US$165 million and the State Tobacco Monopoly Administration estimated that 100 billion counterfeit cigarettes were produced annually.

Levels of piracy in the entertainment software industry are at 90 per cent or higher.

It has provided no end of work for the anti-counterfeiting industry: from private investigators to high-flying lawyers working for a variety of corporations to trace the source of these infringements and shut them down.

They are more cynical of Hong Kong's 'cleaner' image.

At Ken Allan's Kennoway Investigations office in Central, there are stacks of pink toy boxes containing fake versions of Barbie and Ken dolls.

He referred to Hong Kong as the 'seat of the fire'.

'It is where everything is coming in and out. Very few people will go direct to China. There is obviously money to be made,' he said.

'Take the middle man in Hong Kong who has a trading company. He takes something to China, gets a factory to make it. More likely, it is someone in South America or the US who saw an item, brought it here and says 'make it for me'. Then the Hong Kong person goes to China.

'Some people hide behind a business centre and it is very difficult to get caught. Others have an ordinary trading company. In a lot of cases, people are not hiding it,' he said. 'They attend local trade fairs.'

Counterfeiters in Hong Kong often have business registration and are 'quasi-legitimate', according to Simmons & Simmons partner John Slater. 'Seizures have a good impact on stalls rather than the out and out counterfeiters who often run from temporary locations,' he explained.

Catching them is one thing; restitution is another.

Hong Kong's case law on IP is relatively thin due to the small number of civil actions. Most clients come to a settlement after filing an injunction: the case often is not worth pursuing. Often the counterfeiter would not be able to meet the damages out of their assets, making a costly trial redundant.

Even in the US, the legal system is only just starting to get tough on IP infringers - both in criminal terms and on the restitution front.

For the IP victim however, it comes at a high price: software company Cadence Design Systems recently won a key trade-secrets case in Silicon Valley, but the legal costs alone were in the region of US$16 million.

Cadence boss Ray Bingham  - in Hong Kong last week - is still seeking US$700 million in damages from former employees who used a crucial source code to boost the fortunes of competitor Avanti.

This includes an estimate of the loss Cadence incurred as a result of the illicit software being used during the course of the trial, which took six years.

The case highlights another common phenomenon in the counterfeit industry: the infringer is often a present or former employee.

'The real IP problems I have come across are both external and internal,' explained PricewaterhouseCoopers Investigations Asia managing director Steve Vickers. 'Eight out of 10 times it is your own staff or people who used to be very close to the company.'

Mr Vickers dubbed his firm's mix of investigation and typical accounting as a 'brand protection strategy'. In the course of an IP case, it is not uncommon for DNA or satellite photographs to be used for investigations.

'If you look at the balance sheet of a company,' he explained, 'the value of the brand is on there. If the brand is appearing all over China but not going through official channels, two things happen. If the quality is bad, everyone thinks it is a bad product. Even if it is genuine, then that is through someone else's network and you are not in control of your brand.'

Estimates of exactly how much counterfeiting costs corporations put the losses in the region of US$100 billion to US$300 billion annually.

The Counterfeit Intelligence Bureau reported that the market for designer fakes - from Gucci to Chanel, Rolex and Cartier - had cost the industry over 100,000 jobs in recent years.

Between 5 and 8 per cent of all products sold worldwide were believed to be fake, according to the International Anti-Counterfeiting Coalition (IACC).

The IACC recently gave Hong Kong a 'special mention' label when advising the US Trade Representative on the dreaded 'Special 301' list of IP offenders. It cited the cross-border trade in infringed goods: Hong Kong is still an important contributor, serving as a key transshipment point.

'Hong Kong is a major link in the trade in pirate and counterfeit groups,' it told the trade representative.

'IP owners' efforts have shifted to engaging Customs in efforts to stop shipments now that the domestic level of pirate products available in Hong Kong's retail market has declined.'

Mr Selby recognised this, but stressed that it was impossible to check every truck, ship and container passing through the SAR.

It is all part of a prevailing theme in the counterfeit industry: at some point, a pragmatic balance has to be struck.

Software companies for example have received a reality check from Mr Selby: trying to keep a monopoly on support-group services shows 'they are not keeping a grip on reality'.

Mr Vickers echoed this practical approach: 'In an emerging market, we try to look at the big picture, give clients advice.'

Unless there is a sweeping wave of conscience at consumer level, the market for fakes will continue to thrive. Consumers too are a pragmatic bunch.

Mr Selby gave an example: Customs officers targeted a shopping centre which housed pirated software. One shop in particular had an honesty box.

Browsers were forced to pay into it for fear of retribution from unsavoury types outside.

The shop was raided, the honesty box seized by Customs. Officers prized the box open and checked the contents. While counting the cash, they discovered a number of the bank notes were fake.



Fake reality check