Blood Profits

by Vanessa Neumann

  Behind that door, there were rows and rows of Hermès Birkin bags, the non plus ultra status symbol of New York society mavens. They were stacked on shelves, floor to ceiling; they covered the walls. I gasped. I was in the presence of many millions of dollars’ worth of counterfeit handbags: a supermarket of counterfeits, in effect. I had Hermès bags at home; these were indistinguishable, right down to the locks, logos, keys, and certificates of authenticity. Their biggest size Birkins sold for $500. So many women back home would have wet themselves with excitement and willingly scooped up several of them.

  Counterfeiting luxury goods is big business. Based on World Customs Organization data, the OECD estimates that in 2013, counterfeit goods accounted for up to 5 percent of imports into the EU, making that trade alone worth 85 billion euros. This is a rising threat in a global economy whose value generation is increasingly driven by intellectual property. And the marketers are savvy: like any well-run business, the counterfeiters target consumers across market segments. The primary market segment is buyers who think they are buying a real car part, a real iPhone charger, a real medicine, and are surprised when they don’t work or (in the case of car parts or medicines) cause serious harm or death.

  The second market segment is represented by my fake Birkin-and Louis Vuitton–buying buddies: the consumers are aware, but think there is no harm being done. The only harm, in their view, is to some major corporation that is overcharging anyway, to pay for all that marketing in glossy magazines and the rent on all those beautiful boutiques sitting on prime real estate. Buying the fake Louis Vuitton or Hermès is, in that construct, a victory for the little guy, against corporate greed.

  In our March 2016 newsletter, my company Asymmetrica featured an analysis of this pattern of consumption. A study conducted by Paris-Sorbonne University Abu Dhabi analyzed why people who can afford genuine luxury goods persist in buying counterfeits. The results reveal the psychological drivers that effective strategic messaging must address if luxury goods producers wish to protect the integrity of their brands, and if law enforcement hopes to stymie illicit financial flows to transnational criminal organizations. In short, the wealthy Emiratis (like those on Mayfair and Park Avenue) buy genuine goods for high-profile events with wealthy peers who will spot the difference; they buy counterfeits for everyday wear-and-tear.

  A third market segment is the aspirational middle class, who can afford the occasional $500-$1,000 bag but not the $15,000 bag.

  Interestingly, when top brands come out with limited editions, they are subject to another phenomenon involving the knowing counterfeit consumer: the fashionista. She wants to be on trend, but knows another trend will replace it next season, so is not willing to (or cannot afford to) invest the money on staying on trend season after season. Furthermore, counterfeits of high-profile but limited-edition goods are the easiest to get away with: not enough people will know the details to spot the difference. In short, the only effective deterrent to buying counterfeit goods is shame: embarrassment among one’s social peers.

  There is plenty of reason for shame. This massive illicit trade transits through the same main hubs as legitimate trade: Hong Kong, China, Singapore, Panama. The large shipments are then broken down in safe havens such as free trade zones, which have lax enforcement, and get sent out from there in small-parcel shipments, through the mail or UPS, creating a huge enforcement headache for private shippers and law enforcement. Other transit points, which we know all too well at Asymmetrica, are chosen—places where there is weak governance or weak enforcement capacity.

  More darkly, counterfeiters also use routes and transit points where there is a strong presence of criminal or terrorist networks, funding serious violence as these handbags move along their routes to the consumer. The production and distribution are heavily controlled by ultraviolent Chinese triads, which, in their diversified criminal portfolios, also traffic in narcotics and women bound for prostitution. The problem is, the society women don’t know they are carrying “blood handbags”; if they did, they might think twice before buying them, either on the sidewalks of Lexington Avenue or in the genteel drawing rooms of Park Avenue.

  The answer lies in making this illicit business bad business. In December 2015, the US Trade Representative (USTR) gave a very stern warning to Chinese online retail behemoth Alibaba (which is much bigger than Amazon) about the sale of pirated and counterfeit products on its online platforms. The USTR very nearly put Alibaba’s Taobao marketplace (a Chinese online shopping Web site similar to eBay and Amazon) and Alibaba.com back on the Notorious Markets List, from which Alibaba.com was removed in 2011 and Taobao in 2012. The USTR has been pressured to relist them as Notorious Markets after complaints from various intellectual property rights holders’ associations.

  The USTR report4 stated: “The Internet traders who use these online markets to offer counterfeit goods are difficult to investigate and contribute to the growth of global counterfeiting.” A relisting as a Notorious Market would adversely affect the Alibaba group, which is now listed on the New York Stock Exchange and is in the midst of complex negotiations with more rights holders, including Disney. Both the stock price and the negotiations would be severely damaged by blacklisting.

  Within days of the USTR’s threat to list Alibaba as a Notorious Market, Alibaba Group Holding Ltd. announced it had hired Matthew Bassiur as vice president, head of global intellectual property enforcement, to reduce the prevalence of counterfeits on its Alibaba and Taobao platforms, which is costing the firm heavily in lost licenses, lawsuits, and fines. Bassiur previously oversaw anticounterfeiting for Pfizer Inc. and Apple Inc., and prior to those private sector positions was a federal prosecutor for the US Department of Justice.

  Whether Bassiur sticks to his enforcement roots and cleans up Alibaba or simply becomes a front man only time will tell, but other online sites are worried about the trouble counterfeits bring. Google had similar concerns about impact to its revenue stream, and on January 22, 2016, it was announced that the company had hired more than a thousand people dedicated to removing advertising of counterfeits5 (particularly pharmaceuticals) and other scams, such as phishing and malware. Google claimed its staff removed over 780 million “bad ads” and suspended more than 30,000 Web sites in 2015.

  TO THE BENEFIT OF STATE AND CRIMINAL

  Fighting illicit trade stemming from China (as an Apple executive and many others have told me) is particularly challenging, because it not only benefits triads, which have an interestingly intertwined relationship with the government, but parts of the Chinese government apparatus as well. Many of China’s largest companies are state-owned enterprises. While all countries have such companies (especially in critically important industries like energy), in China they are particularly concentrated in the hands of the Communist Party elite, or their sons, referred to by policy analysts as “the princelings.”

  One high-ranking member of the British government told me in a private meeting in London in 2015 that he had just returned from senior-level meetings in China and that members of the People’s Liberation Army had boasted that they owned the tobacco industry in China, both for domestic consumption and the illicit brands for export. The Chinese tobacco industry is run as a state monopoly, from production to wholesale distribution.6 In the 1980s and 1990s, Chinese production and distribution could not meet demand and an illegal market emerged7 as Chinese distributors illegally imported all the major brands from Western companies, including Philip Morris and British-American Tobacco. The latter’s Hong Kong executives were caught supplying a smuggling organization (Giant Islands, Ltd.), receiving US$6.5 per box; it amounted to US$257,000 a month. In the 1990s, British-American Tobacco had 50 percent of China’s cigarette black market, which accounted for 20 to 30 percent of the company’s worldwide profits.8

  China has the world’s largest population of smokers: 300 to 400 million. One in three smokers in the world is Chinese, and the entire market is under the exclusive control of the Chinese
government, which derives as much as 60 to 70 percent of local government revenue in cigarette-manufacturing regions from tobacco. The profitability is clearly obvious to corrupt government officials: in 1987, state-run cigarette-marketing agencies illegally sold 11 million cartons (that’s 2.2 billion cigarettes) to 125 traders in the Chinese coastal province of Zhejiang.9 The business is so profitable that military trucks and aircraft have been used in cigarette-smuggling schemes.

  Worryingly for the West, both China and Russia—as well as many other countries—use their intelligence services for commercial espionage. They pass the information to their businesses, stealing innovation from the West to compete more effectively. Security and profit are intertwined objectives in China. A cyber-expert and former spy wrote me in July 2016 that in cyber-attacks, the real question is attribution: who is doing it. The second question is motivation: why they are doing it. China is the world’s greatest cyber-hacker for the theft of intellectual property, but parsing out attribution and motivation (who exactly did it and why) is particularly complicated, even if you know the hack was Chinese: military interests, private corporate interests, nationalistic interests, and general hacking interests are often thickly intertwined in the intrigue of hacking.

  Broadly, though, Beijing’s primary focus in intellectual property theft is military or military-industrial items. The theft is part of its quest to develop twenty-first-century armed forces as quickly and cheaply as possible. China is in a race against time to establish the world’s premier force to replace America in the Pacific by 2030. So it wants to steal all the military information it can in order to retrofit or reverse-engineer it. Cyber-espionage is China’s key to winning the arms race for global domination.

  That use of state power to steal intellectual property (like the counterfeiters do) for power and money puts the West at a disadvantage: we do not operate that way. Intelligence services in the US and almost all European nations are barred from passing information to industry, by laws and codes pertaining to the disclosure of classified information,10 as well as treason, sedition, and subversive activities11—violations of which can carry the death penalty. The un-level playing field in global commerce and the dark money of illicit trade connect to the shadow wars of espionage.

  8

  Up in Smoke

  By the autumn of 2012, I was getting pulled into the circle of subject matter experts (SMEs) who influence policymaking. I had to apply what I had learned from my observations in Venezuela, Colombia, Guatemala, China, and Mongolia and identify the patterns and strategic nodes that policymaking could target to promote peace and prosperity. By then I was focused on the nexuses between transnational crime groups and terrorists—namely, the willful collusion of corrupt government officials. I had started to formulate my position: pro-industry and anticorruption. The industry in which I would become immersed is that of illicit tobacco: how the high taxes on cigarettes become profit margins for criminals and terrorists directly involved in some of the biggest attacks around the world. As long as people continue to smoke and seek discounts for their habit, that dark money will continue to flow from the consumer to the hostile enemy.

  On my return to the US from Guatemala, Mongolia, and China, I was invited to participate in a two-day conference at the National Defense University in Washington, D.C., where I presented my theory and observations of crime-terror pipelines. The conference was cosponsored by the US and UK governments, so at the end of it we were treated to a reception at the UK ambassador’s residence in Washington: a more sprawling and grandiose place than even the special relationship between the two nations would lead you to imagine. I was on my magic carpet ride, my career ascending fast. On my magic carpet, I kept flying to London and Paris.

  The second part of the binational conference series was in London in October 2012. From London I would move on to Paris for my first time at the Organisation for Economic Cooperation and Development, to discuss illicit trade. I always liked Paris (I used to borrow my brother’s apartment on the rue de l’Université when I lived in London), and the follow-on was logical enough. I was invited to both by the US State Department’s Bureau of International Narcotics and Law Enforcement (INL) director of anticrime programs, David Luna.

  LONDON AND PARIS

  At the two-day counterterrorism meeting in London, I gained a bit of notoriety when, with Home Secretary (now Prime Minister) Theresa May in the room, I contradicted a senior British official.

  “Crime-terror pipelines may be a problem for the Americans,” he said, “but we don’t have that problem here in the UK.”

  I stood up.

  “You’ll forgive me, sir, but you have a problem with a huge marginalized and angry Muslim population. You have the highest per capita consumption of cocaine in the world at the highest price per gram in the world. I would say you have a problem. Shouldn’t we look into the connections?”

  The Americans bought me a drink at a local bar that evening.

  The next day, I was thrilled to arrive in Paris, and I was not too disappointed when, at the end of the week, I had to extend my stay because all flights back to the US Northeast were canceled due to Hurricane Sandy. The OECD in Paris is a very different environment from from that of the close-knit meetings and planning sessions in US government buildings or military bases. The Paris headquarters does have more stringent security protocols than some US government buildings, though: airport-style baggage screeners and metal detectors, followed by sliding glass partitions that box you in completely if your magnetic ID card fails. The OECD’s motto is “better policies for better lives,” but it is often disparagingly called the “rich boys’ club”: it encompasses thirty-five of the world’s most advanced economies, as well as global corporations and international organizations. The power of its analytic publications to move markets and government policy is well established.

  Its headquarters in Paris’s 16th arrondissement has two buildings: the Château de la Muette, a gentilhommière mansion, like a lord’s petit château, where its social events are held, and the postmodern minimalist building next door, where the work gets done. The large double-story walls of its lobby are adorned with photos of heads of state beaming as they shake hands and sign accords. Down the escalators and in one of the giant conference rooms—which features booths for the simultaneous interpreters, a giant screen, and very long tables forming a rectangle with a placard at every seat (Interpol, United Kingdom, France, World Customs Organization, Novartis, Diageo, Spain, Philip Morris)—is where I met my first major long-term client.

  “I understand you might be able to help us,” he informed me. David Luna had told him to come talk to me. He was from one of the major tobacco companies. “We have a big problem with the illicit trade in tobacco.”

  No kidding.

  “MR. MARLBORO”

  Quite literally, the explosive consequences of the illicit trade in tobacco hit the world stage three months later, in January 2013, when I was in Dubai. Ambling through the sumptuous and expansive halls of the Palace Hotel on my way to the buffet breakfast, I picked up my usual clutch of newspapers: The New York Times, the Financial Times, and then at least one local one, in this case Abu Dhabi’s The National, which a close friend of mine had been instrumental in setting up. Usually I get a variety of coverage. On that day, they all had the same headline: a terrorist group had besieged a gas facility at In Amenas, Algeria. Eight hundred thirty hostages (both Algerians and foreigners) were trapped inside. The leader of the terrorist group’s nom de guerre: Mokhtar Belmokhtar.

  The remote site, run by BP, Norway’s Statoil, and the Algerian state oil company, accounted for 10 percent of Algeria’s considerable natural gas production. It lay deep in the southern desert: eight hundred miles from the Algerian capital of Algiers, but only thirty-five miles from the Libyan border. Islamist leader Belmokhtar (aka “Mr. Marlboro”) issued a video statement claiming responsibility for the kidnapping. (The moniker Mr. Marlboro refers to the money he made smugglin
g cigarettes across the Sahel, the semi-arid belt that separates the Sahara from greener Africa to its south. “Sahel” in Arabic means “coast,” while “Sahara” means “desert”: the Sahel’s sparse vegetation is the coastline of the Sahara’s ocean of sand.) The authenticity of the video (and therefore the claim) was confirmed by SITE Intelligence Group, the premier monitor of jihadist media. The militants, who numbered around forty, had inside intelligence and detailed plans of the important fifteen-hectare site, according to the Algerian prime minister, Abdelmalek Sellal, but the opening shots of the attack were likely opportunistic.

  On their way to the plant, the terrorists intercepted two buses taking plant workers to In Amenas Airport. Three foreigners who tried to escape the bus attack were shot as they ran through the sand. The terrorists kept driving to their target. At around 5:40 a.m., Toyota Land Cruisers crashed through the entrance of the gas plant and heavily armed militant gunmen headed to the living quarters. As workers were preparing for the start of their shift, some still eating their breakfast, the alarm sounded. An Algerian security officer was shot, but managed to activate the gas facility alarm system before he died.

  Foreigners were rounded up; many had their hands tied behind their backs with rubber cable ties, some had their mouths taped. The hostage-takers, whom Algerian officials said included at least three explosives experts, set about strapping Semtex bombs around the necks and waists of some of the hostages. (Colombia’s FARC have also used this tactic; Colombians call it a “bomb necklace.”) Some survivors said foreigners were shot as they tried to escape. One of the casualties was Liverpool-born Paul Morgan, a former soldier in the French Foreign Legion who fought in the first Gulf War and was working as a liaison between gas field workers and local security staff. The Algerian prime minister later spoke of “numerous foreigners killed with a bullet to the head” in the course of the siege. They were lucky: many terrorist hostages face a fate much worse than a swift death.