A WAVE OF CORPORATE CRIME IS washing over Europe. In Finland last March two directors of a Helsinki-based engineering firm received suspended prison sentences and a $75,000 fine for their misdeeds. Two months later a tip-off led officials to the Intercontinental Hotel in Frankfurt, Germany, where hotel managers confessed to the same unlawful act and were slapped with a stiff financial penalty. Then in July local government offices in the London borough of Tower Hamlets were stung by a raid and forced to pay damages.

What was the dark crime in all these cases? Embezzlement? Fraud? Insider trading? No, it was intellectual piracy--the illegal use, duplication and distribution of such products of the information age as computer programs, videotapes, cassettes and compact discs--a rampant but almost invisible offense that costs the software, film and recording industries billions of dollars in lost revenue each year.

At first glance this seemingly innocent transgression may appear as white as white-collar crime can be. After all, who hasn't casually copied a new word-processing program or video game for a friend? But computer firms, film companies and record labels take a sterner view of intellectual piracy--and for good reason. Europe's software industry loses an estimated $6 billion a year--half of all global losses from illicit duplication and distribution. The recording and film industries in Europe together rack up annual losses of $2 billion because of counterfeit CDs and videotapes. Surprisingly, Europe also holds the dubious distinction of accounting for 50% of worldwide losses from software piracy, more than any other region, including runner-up Asia. And contrary to received wisdom, the major culprits are not rogue hackers in basement lairs but corporate buccaneers in office suites.

The European software industry is so alarmed at the runaway copyright copywrongs that intellectual property protection is one area in which businesses are clamoring for more--rather than less--E.U. legislation. The London-based Business Software Alliance, whose members include industry heavyweights Lotus, Novell, Adobe and Microsoft, has taken matters into its own hands. When the BSA becomes suspicious that a firm is using illicit software, it either shares its information with national police or obtains a search-and-seizure order and descends on the suspected offenders with high-tech tools that examine personal computers for unauthorized duplicates of programs.

Last May the BSA nabbed the Essen-based Thyssen Industrie Group AG, the giant investment-goods and processing firm, for having illegal software in its Huller Hille GmbH affiliate. To its credit, Thyssen admitted culpability, deleted the illicit software, compensated rights holders and issued an apology. "German companies should be setting the standard for the rest of Europe," says Peter Joussen, the corporation's general counsel. "Unlicensed software copying undermines respect for intellectual property, on which many leading German industries depend." Since about half the new software used in Germany is believed to be pirated, Thyssen's public confession was a major victory for the BSA. Says BSA's marketing director Robin Burton: "It was good to get them singing that tune."

The European film and recording industries are also fighting on a second front in the battle against intellectual theft. Video and CD thieves have found especially hospitable waters in Central and Eastern Europe, where a voracious appetite for Western goods combines with a newfound and unregulated entrepreneurial zeal to create an ideal climate for pirates. In cities such as Sofia, Warsaw and Belgrade, computer software, recorded music and videos are likely to be fakes even in the most reputable high-street outlets.

In Poland, for example, where in the early 1990s an estimated 70% of the audio-video market and 90% of the audiocassette market were cornered by pirates, laws protecting intellectual property were implemented only last year. Since their adoption, however, piracy rates have shrunk to 30%. "Intellectual property is still not a comprehensible idea to everybody," says Andrzej Puczynski, managing director of Polygram Polska and chairman of the antipiracy Union of Audio-Video Producers. "In the old days, a creation was the property of the nation. Now it is the property of the creator. This is an enormous transition in mentality."

In war-torn former Yugoslavia, industrious pirates have adjusted deftly to the free-market mentality. "God bless the sanctions!" exclaims Toma, 34, who distributes pirated cassettes, CDs and videos throughout Europe from his home base in Belgrade, a city still smarting under U.N.-imposed trade boycotts. After struggling as an independent alternative-rock-music publisher, he teamed up with Bulgarian and Polish operators to distribute pirated tapes when war broke out in 1991. "We bought an original tape, Xeroxed the sleeve, made copies on good equipment and then sold them for half the price of the original," he explains. Says Marko, 22, a Serbian computer programmer and weekend pirate: "In a country with no laws, piracy can't be controlled, let alone stopped."

As counterfeiting booms, even those European countries with effective copyright laws are focusing more on prevention and prosecution. The British government, for example, recently strengthened the Video Recording Act, which permits stiffer penalties in intellectual property rights cases. "The government has recognized piracy for the serious offense it is, and what it's linked to--organized crime, drugs and pornography," says Reginald Dixon, director general of the Federation Against Copyright Theft (FACT) in London. Law-enforcement officials in Germany, where until recently loopholes in copyright legislation made the country an Eldorado for bootleggers, are also cracking down. Nearly 270,000 CDs, cassettes and LPs, valued at more than $5.7 million, were impounded in Germany between May 1994 and April 1995. In the Ruhr cities of Duisburg, Moers and Kamp-Lintfort alone, customs officials in June seized 7,430 CDs and 27 master tapes--tens of thousands of dollars' worth of plundered pop from the Rolling Stones, Dire Straits and the German rock band Tote Hosen. In Cologne officials seized 14,000 bootleg CDs worth around $357,000 belonging to one local businessman.

But even the best detective work will be no match for pirates trolling the Internet, still terra incognita to would-be enforcers of intellectual property rights. Music can already be broadcast across the virtual airwaves of cyberspace. And as the quality of online images improves, it may soon be possible to download entire films to personal computers. Roving pirates could pre-empt legitimate release--and undercut sales--by distributing copies over the Internet before new CDs reach the racks and movies hit the video stores.

Affected industries are racing to throw up technological roadblocks to this kind of joyriding on the infobahn. Data-encryption techniques, for example, scramble transmissions so that they can't be read by anyone but the intended recipient. So-called smart cards, which contain a microchip that generates a series of unique passwords, can identify legitimate pay-TV clients or Internet users and allow them to download licensed transmissions. Unfortunately smart cards, already in use, can be counterfeited by smarter pirates. Also in development are electronic tags attached to small units of a document--as small as several words--that would enable publishers to identify both legitimate users and pirates of texts transmitted on the Internet. Copyright holders can only hope that facing digital defenses like these, unsuspecting pirates will find the seeds of their own demise buried deep within their stolen treasures.

--With reporting by Alexandra Niksic/Belgrade, Nina Planck/Brussels and Rhea Schoenthal/Bonn

WHERE THE CULPRITS ARE

Regional losses in millions of U.S. dollars

Europe $6,003 Asia $4,350 U.S./Canada $3,131 Latin America $1,335 Africa/Middle East $393

Source: Business Software Alliance