Nightline Fix

Black Market for Counterfeit Goods Rakes in $500 Billion Yearly

Nightline Fix

At a rooftop police parking lot in downtown Los Angeles, a final briefing for a joint task force of the FBI and the LAPD.

When the questions ... and the donuts ... are finished, the agents and officers mount up and fan out. Soon they are racing up the stairs at a nearby building. No, this is not a drug bust. These officers are with the LAPD's Vice Squad searching for something far more profitable than drugs.

Counterfeit goods.

Yves St. Laurent, Gucci, Hermes, Ray Ban ... all of it fake.

Officer Rick Ishitani has been on the counterfeit beat more than a dozen years and does busts 30 to 35 times a year. Counterfeit goods -- from luxury handbags to DVDs -- are a huge problem. Trade groups claim criminals steal copyrighted material worth half a trillion dollars every year. Counterfeit goods account for nearly 10 percent of worldwide trade, an estimated $500 billion annually, according to the World Customs Organization.

While that estimate may be grossly inflated -- like the price of some luxury goods -- the losses to big brand names are big enough to make copyright enforcement a huge priority for the customs service.

The front line in the fight is at the Ports of Los Angeles and Long Beach, the biggest in the United States. More goods come through these ports than all other major American ports combined, approximately 40 percent of all maritime cargo. That's because this is the first stop for almost everything the U.S. imports from China, Japan and Korea.

ABC News “Nightline’ embedded with the U.S. Customs and Border Protection to see how they lead the effort to police counterfeit goods. With the tsunami of goods coming in every day, it’s a significant challenge to find the contraband, like finding a needle in a haystack.

Before a vessel even sets sail from China, a manifest describing the contents of each container arrives here in Los Angeles. Ken Price, a senior import specialist with the CBP, searches for the needle before the haystack even gets here. After 20 years on the job, he has a good eye for things that are out of the ordinary, just on the paperwork. He and other inspectors look for anything amiss and cross-reference the import manifests against patterns they've seen before.

All of which takes place days -- even weeks -- before the ship even ties off. It has to be that way because there's simply too much to search.

Today, as we board this vessel, the customs officers have a pretty good idea where to look. As immigration clears the captain and crew, the inspectors are already doing a preliminary search. They can take their time. A ship this size will take days to unload.

Among the most urgent priorities are things that might pose a health or a safety threat -- radioactive material, for one.

The scanners indicate the presence of radiation on this truck so it will have to go through secondary inspection. In this case, thankfully, apparently not radiation that poses any threat.

Anything flagged, based on the manifest, goes through the RPM scanner -- short for Radiation Portal Monitor, sort of an X-ray device. But if the container is in any way suspicious – anything odd-shaped, for example -- customs agents open it on the spot.

The goods that are impounded for secondary inspection end up in a warehouse a few blocks away from the port. CBP Supervisor Bryan Nahodil shows “Nightline” a shipment of fake Hermes bags, 16,000 of them.

“When the officers go through our targeting system, what they saw was the importer on record was listed as a home and garden store,” said Nahodil. “But the commodity itself was manifested as handbags, so that didn't add up.”

The bags sure add up, though. If they were real, this shipment would be worth more than $210 million. On the black market, the fakes would fetch just $300,000.

It may all seem like a victimless – and perpetrator-less – crime. But the customs guys take umbrage at that suggestion. Or that, through enforcement efforts like this, the U.S. government is helping to prop up the artificially high price of luxury goods targeted by the knock-off artists. They insist it isn't just the makers of $4,000 bags which are harmed by counterfeit imports. These imports are a criminal’s ATM machine.

“I highly doubt the money that the importer or the manufacturer would gain from importing these handbags is gonna go to pay someone's college fund,” explained Nahodil. “More than likely, it's gonna go to finance some other illicit activity, whether it be terrorism, human trafficking, drugs or some such.”

And it isn't just luxury goods that get knocked off. Jonathan Gelfand is general counsel of Beachbody, LLC, makers of P90X, Insanity and other popular workout videos. For every real set of workout videos, there's a fake that's virtually indistinguishable. The company has several full-time employees whose only job is to search constantly online, looking for deals on Beachbody products that are too good to be true.

“It costs us close to $75 million a year,” said Gelfand. “And that's what we can track.”

That's 10 percent of the company's revenues. Money that doesn't go to new products or employees or to investors.

Back at that LAPD bust, the 24-year-old guy who runs this back-alley counterfeit shop pleads for leniency.

“We won’t ever say it’s a losing battle because every step we make is a gain for us,” said the LAPD's Ishitani.

Even a raid like this one is just a drop in the bucket, he says, and there is an ocean of illegal goods to police.

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