Chasing Shadows

Bob Youill describes himself as the kind of guy who likes to "run around with his hair on fire." For 20 years the tall, rangy Englishman did pretty much that, hunting down triad gangs while serving as a police detective in Hong Kong. After retiring from the force in 1997, he found just the job to keep his adrenaline on high burn. The title sounds innocuous enough: regional coordinator for the International Federation of the Phonographic Industry (IFPI). But that obscures the severity of the work: busting illegal CD factories across Asia—and still chasing triad gangsters. One important difference is that now, when Youill gets cornered and needs armed backup, the cops want nothing to do with it.

Like that time last year, when a raid outside Kuala Lumpur went terrifyingly wrong. Malaysia has become the Asian hub of optical disc piracy, and Youill's old enemies, the gangsters from Hong Kong, are heavily involved there. Using established drug- and gun-running routes, they move the discs out of Malaysia and into the rest of Asia, the U.S., Europe and Latin America. On a recent midnight raid of a factory near the Malaysian capital, Youill along with a Hong Kong sidekick, Raymond Chiu, and a few other men suddenly found themselves face-to-face with some baddies. The toughs grabbed the informer who had led Youill to the plant, and started pummeling him. Youill turned to a local policeman, who had come to protect the raiding party with a semiautomatic he could barely lift. "Call for help! Use your radio!" Youill yelled. But the cop just mumbled into his shirt collar that this was apparently a private argument and not really police business at all.

Then one of the gangsters confronted Youill menacingly. "If you try to leave, we'll kill you," he said. "You'll never make it up that path to the road. We know who you are, we know where you live in Hong Kong." Eventually, after sunrise, Youill and his men ventured up the path with their badly injured informant. Youill figures they didn't kill him right then because Malaysian police would have been forced to investigate. The triads wanted to scare him to ensure he didn't take any evidence. For the next few days, Youill and his men were shadowed and photographed wherever they went in Kuala Lumpur. Now back in Hong Kong, Youill is still cautious: an anonymous caller is threatening to firebomb his office. "Guess we shouldn't have raided the place, but we did," he says, grinning. It was definitely a hair-burner of a moment.

Asia is going to see a lot more people like Bob Youill. With governments unable to crack down on epic-scale counterfeiting, big-name companies are going after the pirates themselves, often by relying on umbrella organizations like Youill's. Bringing in the heat is about all these firms can do to protect their brand names—and their hemorrhaging profits. In China alone, some companies are spending upwards of $10 million a year to combat piracy. Says Joseph Johnson, chairman of an anticounterfeiting coalition of foreign companies in China: "We have to aggressively protect our trademarks."

Globally, counterfeiting and piracy have risen to 5-7% of world trade, or about $200 billion to $300 billion in lost revenue, according to recent estimates from the European Union. Most of the fakes originate in Asia, where everything, absolutely everything, is counterfeited. At the top end, piracy is carried out by organized syndicates with powerful patrons in government or armed forces. At the bottom end, counterfeiters can be simple folks, like the Pakistani citizens in Rawalpindi who were recently caught stirring up fake Coca-Cola in bathtubs, or the family in Ulhasnagar, outside Bombay, who collects used Chanel perfume bottles off trash heaps, fills them with a foul amber liquid and packages them in perfect-looking boxes smuggled in from China. You name it, and it can be faked. Asthma medicine, Viagra, peanut butter, shampoo, music and film discs, software, garments, handbags, watches, condoms, brake linings, tires—even entire motorcycles and cars. Every time a company tries to shake off counterfeiters by altering its product by adding tricky new holograms or security encryptions, the fakers are usually just a few days behind them. Says C.K. Phoon, CEO of Hong Kong film company Golden Harvest Entertainment: "We're like a restaurant owner when half the customers eat for free."

Fed up with the inability of governments and police forces to curb the practice, many companies are turning to international detective agencies like Kroll or Pinkerton to chase down the pirates. Other embattled firms are setting up their own security battalions of lawyers, ex-police investigators and former military men skilled in special operations and other dark arts. They wear digital Dick Tracy-style wristwatches with tiny spy cameras, and their rEsumEs are impressively spooky: one American carried out commando raids during the Vietnam War; one of his English colleagues once crept up to the home of some I.R.A. hitmen in Belfast, snooping on their assassination plans with a stethoscope held to the door. Men like Youill are hired to track down the pirates, help authorities destroy their merchandise and the equipment used to produce it, and bring the crooks to justice. "We have 20 minutes to break into a factory—after that, they'll have time to destroy the evidence," says a former U.S. commando. "The steel doors, the cameras, the razor wire on the walls—that stuff slows us down." On one occasion, Youill climbed up the fence at a plant in Indonesia, only to find himself staring at a pit full of snakes.

The pirate-busters are arriving late to battle, and they are up against nearly impossible odds. Most Asian governments have laws against counterfeiting, but they are poorly enforced and the penalties are often no tougher than a wrist slap. Worse, pirates have become far more skilled at their trade. These days, it takes a leather expert with a microscope to spot the difference in stitching between Louis Vuitton's new Alma bag (price: $700) and a copy on sale for $36 in Hong Kong's Mong Kok district. It's also far easier for, say, a sports shoe company in Indonesia to make Nike knockoffs than to compete with its own local brand against the multinational's huge promotional campaign. In a Beijing bar, one investigator eavesdropping on two counterfeiters says he saw one of them glance up at a shampoo ad that flashed on the TV screen and proudly say to his friend, "Look, they're showing our brand."

One in every three recordings sold worldwide is pirated, according to the IFPI. The counterfeiters are exceedingly difficult to nail down. When the Hong Kong Customs and Excise department first began cracking down on fake music and movie CDs in 1992, the triad gangs moved their factories to Malaysia. An illegal optical disc plant pays nearly as well for the triads as smuggling heroin—more than $1 million in profits every month—minus the stiff penalties if they are caught. Says investigator Chiu: "It's like getting the winning lottery ticket week after week." It costs around $5 million to buy machines from Germany or Taiwan that are capable of churning out more than 1 million CDs a month: music, movies, software, video games—whatever the client wants. The pirates usually cover their initial outlay within three months. After that, it's cream. Each CD costs about 15 to make, and it sells for around $5.

It's a business in which secrecy and loyalty are greatly prized; at the disc factory where Youill was ambushed, the staff hired by the triads were Malaysian Chinese from villages outside Kuala Lumpur. Their bosses make them sleep together in the same hostel, and they are escorted by vans under guard to and from their living quarters. Inside the plant, the workers are watched via hidden cameras to make sure they don't steal sample discs. "Anyone who's caught making calls on a cell phone gets heavily bashed up," says an investigator who prefers not to be identified. From there, the discs are shipped by courier or freighter to markets around the world. The Malaysian government is passing new laws to tighten controls on disc makers, but there are just as many pirated discs available in the street stalls.

The pirates have also branched into China, where they initially found willing partners among officers of the People's Liberation Army. "We found CD factories inside garrisons, and counterfeit goods that were being transported in army trucks," says a detective at a U.S. firm. "Our chance of stopping that was exactly zero." Officially, the Chinese military pulled out of its myriad business holdings after orders from President Jiang Zemin in 1998. That edict holds firm in the bigger cities, say foreign executives, but not in the more remote areas, far from Beijing's watchful eye. Says one investigator: "We've gone on raids in remote areas, and the local police sometimes try to stop us."

China probably ranks as the world's No. 1 counterfeiter. After Beijing opened up to foreign investment in the late 1980s, the pirates were among the first to rush through the doors. They came from Hong Kong, Taiwan and South Korea, bringing brand-new tooling equipment. Drawing upon cheap Chinese labor, they began to mass-produce bogus goods that were packaged convincingly enough to fool avid local consumers, who were trying these brands for the first time. They found eager partners among the thousands of government-run factories ordered to switch overnight from socialism to free-marketeering. The Japanese motor company Yamaha says that in its five most recent raids of plants making knocked-off motorcycles, two were government-owned. Alexander Theil, managing director in southern China for Pinkerton, whose 18 offices in China each try to conduct two raids every day, says wearily: "They fake everything, from Rolls-Royce windshields to lemonade whipped up in top-loading washing machines."

The scale of counterfeiting is staggering. In a recent report, Beijing's state-run Development and Research Center valued the amount of fake goods on the Chinese market in 1998 at more than $16 billion. A survey carried out among foreign firms showed that two out of five companies in China were losing more than 20% of their revenue to counterfeiters. For beauty product makers Procter & Gamble, that loss translated into $150 million last year. Says the company's general manager David Taylor: "This isn't an irritant for us. It's a major problem."

Enter Raymond Chiu, again. After that episode in Malaysia with Youill, Chiu joined Pinkerton and moved to southern China, where he conducts raids for P&G. The rumpled ex-Hong Kong cop generally looks like he hasn't slept for days; often, he hasn't. On this day Chiu is trawling Shenzhen, the buzzing border town next to Hong Kong, looking for fake shampoos. His informers are moving through the market stalls, loaded with bogus P&G Rejoice and Head & Shoulders shampoos. They pose as buyers. "It's not easy," says one Kroll operative. "You say you're from South Africa, and they start grilling you. 'How often are the flights from Hong Kong to Jo'burg?' Or, 'What's the ratio of whites to blacks?' You have to be a convincing liar."

Eventually one of Chiu's informers hunts down the source of the fakes in Shenzhen: a husband-and-wife team working out of an apartment in the suburbs. Chiu notifies agents of the Technical Supervisory Bureau—a federal body delegated by Beijing to stamp out counterfeiters—that he wants to raid an underground factory, but he doesn't give the exact location. He remembers the tip-off in Malaysia. That sort of thing happens a lot in China, and Chiu has often found himself raiding an empty building.

It's raining, hard. Chiu meets with the supervisory bureau agents at a freeway junction and leads them to a shabby five-story apartment block. With seeming reluctance, the bureau's chief agent slides from his air-conditioned vehicle, flicks his cigarette into a puddle and trudges upstairs with six men. They bang on the door but nobody responds. "They never do," says Chiu, peering through the iron grating at the entrance. On the door is a poster of the god of fortune; escaping underneath is a nauseating smell of chemicals mixed with shampoo. Nobody has a key, and the agents spend an hour trying to open the iron grating with an umbrella and a ballpoint pen before they give up, smoke a few cigarettes and watch the rain come down. Finally, a locksmith arrives and jimmies the door ajar.

Nobody's there. Were the counterfeiting couple tipped off, or just lucky? Still, Chiu's happy with his catch. The apartment is piled high with industrial vats of cheap shampoo and thousands of bogus bottles of Rejoice. Chiu reckons the operation could easily churn out several thousand bottles a week. "Damn!" he says, holding up a yellow bottle. "This brand only came out last month, and already they're counterfeiting it." The agents cart away the fake stuff to be destroyed, and Chiu invites the supervisory bureau agents for lunch as Pinkerton's treat. At the restaurant, the agents spend several minutes inspecting a bottle of mao-tai liquor to make sure it's the real thing before they begin a round of toasts.

In the past few months, Beijing has started cracking down more seriously on piracy. In March, Premier Zhu Rongji said the growing problem of counterfeiting filled him with "a strong sense of indignation, and I cannot sleep well." No lowly cop wants to be accused of keeping his Premier awake at night. "Before, these enforcement guys found a thousand excuses to turn us down," says Chiu. "Now they're calling me up and saying: 'Raymond, have you got a raid you want us to do?' "

But the fakers don't scare easily. The police are carrying out more raids—more than $48 million in fake foreign-brand goods were seized between October and February—but the crooks are getting away. "We've busted hundreds of illegal factories, but imprisonment is very rare," says Joseph Tsang, chairman of detective agency Fact Finders-Kroll, which has 12 branches in China. The antipiracy lobby wants the lawbreakers to face heavy fines and jail. Tsang's men recently spent months tracking down a town outside Shanghai where nearly everybody counterfeited lightbulbs. Because a flood had swept through the town and wiped out the crops, the mayor refused to carry out a raid, claiming that the townspeople needed the income. "He persuaded us to go away," says Tsang.

Throughout Asia, counterfeiters are a step ahead of the law. When CD pirates began feeling the heat in Malaysia, they moved their factories to Indonesia and the Philippines. It wasn't long before they made influential friends in their new environs. Recalls one investigator: "We'd just raided a disc plant out in the rice paddies in Indonesia when the police hurried us out. Then we understood why—a jeep full of soldiers arrived, mad as hell, and started shooting. The plant was under their protection."

It's enough to make even a fake-buster—even one with a taste for hair-burning—loose a little heart. Back in Hong Kong, in a teeming mall, Youill gestures at shelves laden with fakes. "We'll never win against these pirates," he says. "At most, we can keep them on the run."

With reporting by Hannah Bloch/Rawalpindi, Matthew Forney/Beijing and Wendy Kan and Jennifer Wang/Hong Kong

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