The Underground Economy

Kris Buc8067_IC_Kris-powerPoint_img_proof_150kner, President, Investigative Consultants                                                    

Statement before the Little Hoover Commission

23 JANUARY 2014

My name is Kris Buckner and I am the President of Investigative Consultants (IC). IC is a licensed private investigative company based in California that specializes in investigations related to trademark counterfeiting, piracy and other Intellectual Property matters. Our job is to investigate the manufacture, sales and distribution of illicit products on behalf of the brands we represent. IC is one of the nation’s leading investigative firms specializing in these types of cases and investigations.

I have been conducting these types of investigations for over 19 years and my company currently represents over 100 different brands, including some of the world’s largest and most famous brands, along with many smaller brands that are just starting to make an impact in the marketplace.

Our company represents all types of industries including pharmaceutical, consumer goods, electronics, luxury, tobacco, apparel, music, entertainment and many others in their efforts to protect their brands and consumers.

IC conducts training for law enforcement officers all over the United States and we have trained well over 10,000 officers in the methods of conducting counterfeiting and piracy investigations. In the past, our training classes have even been P.O.S.T. approved.

I founded Investigative Consultants in 1994. At that time, IC was a single person operation and over the past several years, we have grown tremendously. We now employ upwards of thirty fulltime employees that are focused solely on battling this ever growing problem of counterfeiting & piracy. The reason for our massive growth is because the problem of counterfeiting and piracy has grown substantially over the years and there are no indications that the problem is going away anytime soon.

The problem has grown and will continue to grow because these crimes are considered by criminals to be very low risk and very high reward. The criminals could not be more accurate in their assessment. This is like no other crime that I am aware of. You can make millions in illicit profits and face very little risk of serving any significant prison time.

Our team conducts investigations all over the state of California and on the internet. We have located counterfeit and pirated goods being sold in all types of establishments. There is no shortage of individuals or companies, who are engaging in the sales and distribution of counterfeit goods. The problem is a major issue for the state of California and the entire country as a whole.

The role of IC is to investigate on behalf of the brand owners we represent to uncover evidence of counterfeiting activities. If we develop solid evidence that some person or group is engaged in the counterfeit goods trade, we will provide the evidence developed to the appropriate law enforcement agency. In the course of law enforcement’s investigation, if counterfeit goods are seized, our company will assist law enforcement on behalf of the brand owner, in the identification, inventory and storage of the counterfeit items. In sum, we represent victim companies and assist law enforcement to ensure that counterfeiters are brought to justice.

We have worked on hundreds of cases with agencies ranging from The LAPD, The Los Angeles County Sheriff’s Department, The Sacramento County Sheriff’s Department, The Placer County Sheriff’s Department, The Riverside County District Attorney’s Office, The FBI, Homeland Security Investigations, The United States Secret Service, California Board of Equalization and many other outstanding agencies.

Our team has encountered difficulties in getting some local agencies involved in working these types of investigations due to budgetary issues or the overall lack of understanding how serious these crimes really are. Many of these cases cross county lines and quite often, the local agencies we are working with are unable to pursue the case into another jurisdiction.

Intellectual Property crimes and the other related crimes associated to the Underground Economy are leading to the Economic Undermining of America. I am very thankful that the commission is looking into the Underground Economy and its ties to Intellectual Property crimes, how it impacts the State of California and how we can better battle these issues.

The Underground Economy – The Current Landscape

Simply stated, the Underground Economy is out of control. Counterfeiting and piracy is just one aspect of the problem. In a study conducted by the Los Angeles Economic Development Corporation (LAEDC) on counterfeiting and piracy, the study showed that Los Angeles County lost 485 million dollars in lost tax revenue and 105,000 jobs in the year 2005 alone.

This study was focused solely on Los Angeles County, so imagine what the lost tax revenue is for the entire state of California. How many jobs is the state of California losing because of the Underground Economy? These numbers are staggering and I believe the problem is only getting worse.

Trademark Counterfeiting is not just limited to the latest designer purse or that high end luxury watch. Counterfeiters will counterfeit anything as long as they are making money and they do not care if anyone gets hurt or killed as long as cash is making it into their pockets.

We have seen cases involving counterfeit cancer medication, as well as other lifesaving pharmaceutical products. There are other cases involving counterfeit brake pads, aircraft parts, electronics, cough syrup, shampoo, bullet proof vests, and tobacco. The manufacturers of counterfeit products have no regard for the public’s health and safety.

Many people think counterfeiting is a victimless crime or its just some “big corporation” losing money. There is a lot more to it than most people realize. Many small legitimate businesses are also suffering, along with numerous other legitimate companies.

In my opinion, the general public has no appreciation for how many retail establishments are driven out of business every year by counterfeiters. As everyone knows, there is great demand for brand name products. How can a legitimate small retailer compete? Consumers are given the option of buying a pair of generic sunglasses for $20 from a legitimate store or going next door and buying a pair of brand name counterfeit sunglasses for the same price. Far too many consumers buy the counterfeit brand name sunglasses and the legitimate business ends up losing a sale.

I receive calls regularly from legitimate small business owners begging me to investigate their “counterfeit competitors.” These legitimate businesses know that they will be quickly driven out of business if the seller of counterfeit goods is allowed to continue to operate next door to them. The legitimate business owner understands that the consumer only has a limited amount of money to spend and if the money is spent on counterfeit goods, the legitimate business loses out.

Counterfeiting and Piracy is a large “cash cow” business. A majority of all transactions are done in cash and these operations rarely charge tax or even provide a receipt. I see this on a daily basis during our investigations, where subjects are selling counterfeit goods and requiring that all payments be made in cash. Many of the operations do not even have the required state and city licenses that are required to do business. The counterfeiters boast that they only accept cash because they do not want to pay taxes and do not want their funds to be traced.

During my 19 years of conducting these types of investigations, I have only come across one counterfeit organization that actually paid all their taxes and accounted for all their sales. This subject did not know it was a crime to sell counterfeit goods. Most of the other operations we see do not appear to be properly reporting their fair share of taxes.

I have interviewed several counterfeiters over the years and have been told time and time again that the counterfeit operations deal in huge sums of cash and that these organizations do not properly report their sales. I have also seen firsthand evidence of this. The counterfeiters advised me that they all take steps to “hide” their money, including wiring their money outside the United States or securing it in safety deposit boxes. The counterfeiters know that if they deposit the funds into a financial institution that they must make deposits under $10,000 and not conduct transactions that will raise the suspicions of banking officials. It has been made very clear to me that counterfeiters are well educated and know how to “play the game” to avoid detection by law enforcement.

We have seen evidence of large scale money laundering and structuring during our investigations, along with ties to other more serious crimes, such as narcotics sales, assaults, human trafficking, robbery, and weapons trafficking.

Organized Crime groups, Gangs and Terrorist Organizations have realized that the Underground Economy is a great way for them to make huge profits for their organizations and face less scrutiny by law enforcement if they were to engage in more traditional criminal activity known to be carried out by their groups. In the past several years, we have seen cases in California involving the 18th Street gang, MS 13, The Bloods, The Crips, Hezbollah and many others.

These groups of criminals know that they can engage in such crimes as trademark counterfeiting and piracy and make millions of dollars in the Underground Economy.

I have spent countless hours interviewing counterfeiters and I have always asked them why they became involved in counterfeiting and the answer is always basically the same, they can make huge amounts of money selling counterfeit goods and face very little risk of going to prison. They always say that the risk is worth the reward.

There are estimates that counterfeiting and piracy costs the global economy in the area of 500 Billion Dollars a year and that up to 8% of goods in the marketplace may be counterfeit. This is just one small aspect of the Underground Economy. It is only logical that California alone is suffering greatly because of the effects of the Underground Economy.

Sales of Counterfeit Goods in California

The sales of counterfeit goods are happening on a daily basis throughout the state. Whether you are at a local swap meet, Fisherman’s Wharf in San Francisco or Santee Alley in Los Angeles, you will find counterfeit goods being sold. Counterfeit goods are being sold in every type of venue you can think of.

You can visit the internet and find endless postings for counterfeit goods and individuals willing to meet you at your local coffee shop parking lot with a trunk full of the latest knock off headphones, jerseys, purses, jewelry, sunglasses or anything you want.

Counterfeiting has evolved in the past several years and we have seen a huge increase in online sales. Counterfeiters can now communicate and arrange their sales and purchasing through various social media outlets and websites.

Counterfeiters can be in instant contact with their suppliers in source countries outside the United States and arrange for counterfeit goods to be shipped to the USA in a matter of minutes. The counterfeit goods will be on a plane headed to the United States within hours of the order being placed. Some counterfeit operations are more efficiently organized than a fortune 500 business.

The reason why counterfeit sales are rampant is simple, the public’s thirst for a brand name item for a cheap price. The consumer demand for counterfeit goods is high and the general public does not understand what is truly behind counterfeiting and piracy.

Many of the counterfeit goods are manufactured outside the United States in countries that do not abide by the same laws as our country does. As a result of this, many of the counterfeit goods are made in factories that expose the workers to unsafe working conditions and in some instances employ child labor.

We need to educate the public about the Underground Economy and the negative impact these crimes have on our communities. The Los Angeles Crime Stoppers program has done an outstanding job to educate the public about counterfeiting and piracy. They have put up billboards and also produced numerous television segments about the issue. More educational efforts like this need to be done to stem the demand for counterfeit goods.

The criminals that are engaged in the Underground Economy are very well educated in the laws and know what exposure they face if they get caught. For instance, a subject that is selling unstamped cigarettes knows that he must get caught with thousands of cartons of unstamped cigarettes before he will face felony charges. The threshold to reach a felony standard is far too high and the perpetrators feel the risk is worth the reward. That is why law enforcement catches the same subjects time and time again being engaged in this activity.

Combatting the Problem in California

There are multiple agencies in the State of California that have done outstanding work to address the problem of counterfeiting and understand the importance of pursuing these cases. The Los Angeles County District Attorney’s Office has been aggressively prosecuting these crimes for several years and has done a great job. The Los Angeles County Sheriff’s Department and The LAPD have dedicated units that are tasked to investigate these crimes and are regularly serving search warrants, making arrests, and seizing large amounts of counterfeit goods. These agencies have done a great job with the limited resources they have been provided to address the problem.

The Riverside County District Attorney Office has a specialized prosecutor that is grant funded to prosecute these cases. This has led to an increase in cases being investigated and additional prosecutions with outstanding resolutions.

Law enforcement in the State of California has been on the forefront of investigating and prosecuting these crimes, however more needs to be done and law enforcement agencies need additional resources to properly attack the issues.

Many law enforcement agencies from around the world have looked to California law enforcement agencies for training when it comes to investigating counterfeiting and piracy matters.

The formation of the statewide taskforce to address the Underground Economy is an outstanding development. However, the taskforce must be properly funded and given all the needed resources in order for them to have the ability to dismantle the massive counterfeit operations that are operating throughout California.

The counterfeit trade is very similar to the drug trade. In order to be fully effective against the organizations, you must dismantle the entire organization. The lower level groups must be addressed along with the higher level subjects. The issue must be addressed from the ground up with a focused plan.

Agencies must coordinate their efforts to maximize their investigative and enforcement efforts.

Improvements needed

There are many additional things that need to be done to properly address the Underground Economy and Counterfeiting. The following items are suggested improvements:

  • Specialized Prosecutors
  • Legislative changes making it easier to seize illicit profits by local law enforcement
  • Mandatory fines to fund additional enforcement efforts
  • Legislative changes making the possession of over 100 cartons of cigarettes a felony
  • Increased Taskforce capabilities to operate throughout California
  • Grant funding for local agencies
  • Public Education and Awareness
  • Creation of a centralized database to track offenders

In order to properly fight the Underground Economy, we must remove the huge financial incentive that these criminals currently have. Law enforcement must have the ability and resources to investigate these cases and seize illicit profits and fruits of the crime. Convicted counterfeiters should have to pay mandatory fines that are used to fund law enforcement’s efforts to combat the Underground Economy.

Too often counterfeiters are arrested and convicted but are allowed to keep their illicit proceeds. In a recent case in Arizona, The Phoenix Police Department worked with the Maricopa County Attorney’s Office and seized over 2 million dollars in assets from a woman who was operating a website selling counterfeit coupons. The woman had made millions of dollars from operating a very simple website selling counterfeit coupons to unknowing consumer throughout the United States.

Many of these counterfeit operations are making millions of dollars off their illicit activity and the coupon case is just one example.

The Underground Economy is a serious threat to the State of California and must be hit head on. The economic stability of our state and country must be protected and should not be allowed to be undermined by those who chose to violate the law and steal from the citizens of California.

 

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ALAMEDA COUNTY SHERIFF’S DEPARTMENT “HOSTS” A PURSE PARTY

The Alameda County Sheriff’s Department has been a driving force in pursuing trademark counterfeiting cases in Northern California. Their efforts have been outstanding over the past few years.

The case all started when an observant Investigator observed a sign on the side of a van asking people to host a replica purse party. Not such a bright idea if you are committing a crime and don’t want to be arrested.

Investigators made contact with the subject and made multiple undercover purchases from her. The subject admitted that all the items she was selling were counterfeit and she also stated that she knew it was against the law to be selling the items.

It was learned during the investigation that the subject was hosting her purse parties at high schools, country clubs, charity events, coffee shops, and wineries. It is amazing that the subject was able to sell her illicit goods in such venues, considering that the venues could also be held civilly liable for the activities conducted on their properties.

There have been multiple civil cases against swap meets, flea markets and other property owners for allowing the sale of counterfeit goods on their properties. Several brand owners have secured multimillion dollar awards. Property owners and landlords need to be very diligent to ensure that counterfeit goods are not sold on their properties.

Investigators arranged to “host” a purse party at a local hotel. The subject whole heartedly agreed and showed up for the party with a cache of counterfeit goods. The Alameda County Sheriff’s Department ended the party by seizing all the counterfeit goods and cutting the “party” short.

The efforts in Alameda County have been outstanding.

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Kris Buckner, Investigative Consultants

Gangs and Counterfeiting

The  problem  continues  to  grow  as  gangs  and  other  criminal  organizations  continue  to  realize  that  trademark  counterfeiting,  piracy  and  other  intellectual  property  crimes  present  great  opportunities  to  make  lots  of  cold  hard  cash.

These  criminals  see  the  opportunities  and  they  quickly  jump  on  them.  There  is  no  shortage  of  willing  consumers  to  buy  the  latest  knock  off  handbag  or  pirated  music  CD  and  the  gangsters  know  it.

The  LAPD  and  FBI  recently  arrested  a  gang  member  from  Florencia  13.  The  gangster,  known  as  “Flaco”    had  already  been  arrested  and  prosecuted  by  local  authorities  once,  but  like  many  others  he  was  lured  back  to  the  counterfeit  trade  because  of  the  large  profits.   

Flaco  was  prosecuted  federally  and  convicted.  He  will  serve  time  in  federal  prison  and  then  he  will  likely  be  receiving  a  free  ride  outside  of  the  United  States  as  he  was  not  in  the  USA  legally.     

The  public  needs  to  be  educated  that  the  profits  from  the  sales  of  counterfeit  goods  are  going  to  gangs,  such  as  Florencia  13,  MS  13,  18TH  Street,  The  Bloods,  The  Crips,  and  the  Mexican  Mafia.

 We  applaud  the  outstanding  efforts  to  address  the  problem  of  intellectual  property  crimes  as  it  is  not  always  seen  as  a  serious  crime,  however  those  that  are  in  the  “know”  understand  how  serious  these  crimes  really  are  and  how  these  crimes  are  a  major  source  to  gangs,  organized  crimes  groups,  and  terrorist  organizations.

 Here is a link to a short clip on our YouTube channel explaining a little bit more about the relationships that gangs and counterfeiters have.

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Fake Electronics

From fake headphones to knock-off chargers, bogus iPods and counterfeit extension cords, Los Angeles police officers say counterfeit electronics are flooding the national market with potentially deadly consequences.  These fake electronics can cause great harm to someone, and even their families and homes.  Counterfeit extension cords have been tested to prove that they can melt through the plastic surrounding the copper cords and start fires in homes very rapidly.  Fake headphones have been proven to have pieces break off in the users ear requiring trips to the emergency room.  The bottom line here is counterfeit electronics are extremely dangerous.  It is not worth saving a couple bucks here and there when in turn it could put you or your whole families health and safety on the line. Here is a link to a short clip from ABC7 news on counterfeit electronics.

If you find someone selling these products please do not hesitate to contact us on our website at http://www.investigativeconsultants.com. 

Kris Buckner, Investigative Consultants