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Investigating Fake Goods: A Story of Lies, Greed & Betrayal

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The woman called herself Flaming Lee, an English name she picked when she was 10 years old, long before she got into the dirty business of counterfeit goods. Her job as a private investigator sometimes took her to client meetings at Dubai’s seven-star Burj Al Arab hotel. Otherwise, she lived in apparent simplicity.

There were few signs of the deception that shaped her life. Officially, Flaming Lee hunted counterfeiters for Swiss power technology giant ABB Asea Brown Boveri Ltd. Unofficially, she herself sold counterfeit ABB circuit breakers for export — the very things ABB was paying her to track down.

It was a classic form of double-dealing in China’s murky anti-counterfeiting industry, which is itself plagued with fraud, an Associated Press investigation has found. Some of the cases documented by the AP involved potentially dangerous products: counterfeit auto parts, pharmaceuticals, personal care products and electrical components.

Investigative fraud is a problem few are willing to discuss publicly. Using previously undisclosed records from court cases in China and internal corporate investigations, as well as interviews with people directly involved in events, the AP documented multiple forms of wrongdoing:

  • Western firms paid investigators who were themselves manufacturing or selling counterfeit versions of their clients’ own goods.
  • Investigators doctored documents, fabricating raids that never took place.
  • Investigators colluded with factories to make counterfeit goods they could “seize” and present to their Western bosses for payment.

ABB believed it was a victim of all three varieties of fraud, according to court documents, as well as interviews with people involved in the lawsuit and an internal investigation.

As counterfeiting has flourished in China over decades, a lucrative, parallel industry has blossomed to fight it. Counterfeiting today is a multibillion-dollar business in China, which produces nearly nine of every 10 fake items seized at U.S. borders.

Chinese authorities have been getting better at fining counterfeiters and sending them to jail. But the momentum of reform that has led to the creation of dedicated intellectual property courts, new laws and a crackdown on local corruption has yet to reach the front lines of the fight against fakes. Here, private investigators operate with limited oversight, and powerful vested interests have little motivation to wipe out an illegal but highly profitable industry.

More than 15 investigators, lawyers and law enforcement officials all described a broken system, beset by endemic and underreported fraud, made worse by Western companies that have a poor command over how to successfully fight fraud.

“They think they’re spending $10 million a year trying to combat something. That $10 million is going down the drainpipe,” said Kevyn Kennedy, the founder of CBI Consulting, who has run investigations for over two decades. “A lot of times the counterfeiter will turn into the investigator’s informant: ‘Don’t get me. I know these other guys down the road.’ It’s a protection racket.”

The story of ABB’s battle against counterfeits in China shows how one corporation was undermined by the very firm it hired to fight for it — and then let down by the legal system it turned to for help.

ABB was exceptional in that instead of remaining silent, it took its fight to court in China and sued its investigations firm, China United Intellectual Property Protection Center, commonly referred to by its acronym CUIPPC. ABB lost its case in Beijing, despite the fact that Flaming Lee, a key China United employee, was herself convicted in Dubai of selling counterfeit ABB products. ABB was ordered to pay overdue investigation fees of more than $500,000, despite China United’s questionable billing patterns, including a $5,000 charge for a raid that uncovered $1 worth of fakes.

ABB, a $40 billion corporation whose products range from simple circuit breakers to sophisticated industrial robotics and automation, declined to comment for this story. But in Chinese court filings, it said that what it found was “astounding.” The very firm it had entrusted with all its brand protection work in China “directly participated in infringing acts against the ABB trademark.”

China United countered, in court documents, that Lee had acted without the management’s knowledge. China United’s chairman and its deputy general manager, reached on their mobile phones, declined to comment.

Like ABB, most brands privately hire investigators, either directly or through a law firm, to root out counterfeiters and assist Chinese authorities in running raids against them. Much of the work is then further subcontracted to shifting bands of poorly paid freelance informants on the ground.

Contracts are typically structured on a commission basis. More seizures mean higher fees — and sometimes rewards for in-house staff — creating powerful incentives to cheat. In response to questions from the AP, Shanghai’s Public Security Bureau took the unusual step of warning foreign companies to be more watchful.

“Those outsourcing companies are a mixed bunch, with good and bad, which is not conducive to anti-counterfeiting work,” the Public Security Bureau wrote. “Therefore, we very much hope that brand owners will pay attention and devote more manpower and material resources to ensure that the fight against counterfeiting is healthy and orderly.”

But the role of the government itself, particularly on the local level, is not always clear. The same people tasked with fighting counterfeiters — not just investigators but also local officials — sometimes protect them, according to investigators, lawyers, and company employees interviewed by AP.

Wang Hai, founder of Beijing Dahai Business Consultancy, said he once was barred from raiding a company that made counterfeit windows, even though he had a police escort. “The government has a list of protected companies,” Wang said. “They were on that list.”

Wang said he has seen golden government plaques posted at company gates, shiny markers of official untouchability. He pulled out a photo of one on his mobile phone. The red letters spelled out “key protected enterprise.”

A spokeswoman for the State Administration for Industry and Commerce, which helps oversee intellectual property enforcement across China, said that the agency “has investigated and punished a large number of regulation violators,” but declined to elaborate.

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“VERY GOOD FOR ME”

Flaming Lee’s employer, China United, was no fly-by-night operation. Its roots reached to the highest levels of the Chinese government and it boasted a client list stocked with Fortune 500 companies.

China United seemed like a solid partner back in 1996, when ABB made the agency responsible for all its anti-counterfeiting work in the country. By 2009, China was ABB’s largest market, accounting for sales of $4.3 billion. But as the market leader for circuit breakers, ABB was plagued by counterfeiting. The company calculated that sales of counterfeit ABB low-voltage circuit breakers — the very product Lee was peddling — topped 2 billion yuan ($314 million), according to ABB’s court filings.

Founded in 1994, China United was one of the country’s first professional investigations companies and grew to become one of the largest. Corporate filings show that it used to be a state-owned company, supervised by the research and consulting arm of China’s State Council, or cabinet. China United’s principals were members of a host of international intellectual property associations.

As ABB’s sole agent, China United handled everything: It hired investigators, ran cases, and filed complaints and lawsuits with authorities. All ABB asked for in return was an invoice and an investigation report, court filings show.

Like many other Western firms, ABB paid China United based on the number of anti-counterfeiting cases it handled. By that measure, the company’s performance was stellar. It provided ABB with a steady stream of successful raids all along the counterfeit supply chain, reporting actions against factories, packagers, warehouses, shops and exporters. China United charged $5,000 to $15,000 per case, court documents show.

But nine years into their partnership, ABB began to doubt that its money was being put to good use. In court filings, ABB said it heard that China United had been falsifying cases for another client, Panasonic, cooperating with a counterfeiter to manufacture fakes, which it then arranged to have seized and billed as a successful raid. Panasonic declined to comment for this article and the allegations were not substantiated in court.

Then, in early 2009, a whistleblower reported that China United was doing the same thing to ABB. The company was conspiring with a plant in Wenzhou, China, called Wenzhou Fulemu Electric Co., to manufacture fakes it could seize and bill to ABB, the informer said, according to allegations in court filings.

Alarmed, ABB began investigating its own investigators. But the head of China United’s Shanghai office blocked ABB’s independent investigator from raiding the Wenzhou firm and repeatedly threatened the man, who was subsequently attacked, ABB said in court documents.

“The investigator was brutally assaulted and badly beaten up,” said one person involved in the case who was not authorized to discuss it publicly. “Broken bones. He went to the hospital.”

China United denied having anything to do with the attack or the obstruction of the raid. It said in court documents that the firm had “faithfully carried out its duties as agreed.”

After an investigation that took over a year, ABB came to a startlingly different conclusion: China United was double-crossing the company and had faked anti-counterfeiting cases. ABB believed China United was protecting Wenzhou Fulemu, whose counterfeit ABB products were then marketed for export by the head of China United’s Dubai office, Flaming Lee, with the knowledge of the company’s top management.

In August 2009, Lee —whose real name is Li Yue — bragged about her position to an undercover investigator in a secretly recorded video reviewed by the AP.

China United, she said, did all of ABB’s anti-counterfeiting work in China. That meant she could sell as many fakes as she wanted and no one would catch her.

“That’s very good for you,” said the investigator.

“Ha, ha, ha, very good for me, ha, ha, ha,” she responded. “But of course my boss also knows…”

Dubai police arrested Lee three months later for counterfeiting ABB products. In May 2010, a Dubai court found her guilty and fined her for selling counterfeit goods, according to a copy of the verdict.

Lee did not respond to requests for comment via her blog or LinkedIn account.

Wenzhou Fulemu went out of business and its legal representative could not be reached for comment.

ABB went back and examined dozens of China United’s cases and said it found evidence of “systematic and large scale falsification.”

ABB said China United had fabricated government documents and targeted bit players to maximize fees. In some cases, China United didn’t report the names and addresses of counterfeiters, ABB said in court filings.

In December 2009, ABB sued China United for breach of contract in a Beijing court, seeking a refund of fees paid between 2007 and 2009 — a total of 5.7 million yuan ($900,000) — and an additional 1 million yuan ($157,000) in compensation. China United countered that it was not guilty of wrongdoing and that ABB owed it 3.4 million yuan ($540,000) in unpaid investigative fees.

China United dismissed ABB’s investigative findings as “groundless conjecture” in court documents and said all the cases it did for ABB were real. In defense of its reputation, China United told the court in Beijing that it had “received silk banners and trophies as gifts from its clients and has established a good reputation abroad.”

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A QUICK VERDICT

The trial did not go well for ABB.

Beijing Municipal No. 2 Intermediate People’s Court gave ABB such short notice of the hearing date it could not secure a visa for a key foreign witness, so his testimony was thrown out. Another witness feared for his safety and refused to appear in court, so his testimony was thrown out too. At the hearing, the chief judge walked out of the courtroom 10 minutes after ABB began delivering evidence, ABB said in court filings.

The three-judge panel decided the case with surprising alacrity. Despite the 1,500 pages of evidence ABB submitted, it took the judges just one working day to deliver their verdict.

Though the court acknowledged Flaming Lee sold fake ABB products while employed by China United, it ruled that “such acts were committed by her alone.” The court said ABB’s claims that China United was covering up for the Wenzhou firm were unsubstantiated, and dismissed its claim that China United had interfered with the work of an independent investigator and faked raids.

The court ordered ABB to pay China United 3.4 million yuan in investigation fees. The ruling was upheld on appeal.

China United’s legal victory, however, proved hollow. Its reputation had been damaged, and it disbanded after the lawsuit. But not for long.

China United chairman Li Changxu, is staging a quiet comeback, once again attracting a Fortune 500 clientele and advertising accolades from the Chinese government.

He and two partners from China United — Li Guorong and Fan Liming — bought stakes in a Shanghai intellectual property protection company called Sinofaith IP Group. Li Changxu registered a 7.9 million yuan ($1.2 million) investment in September 2013, making him the second-largest shareholder, records show. Public filings also show that Li Changxu is chairman of Sinofaith’s board.

None of the men responded to emails seeking responses to more than a dozen questions.

Sinofaith has attracted financing from a number of Chinese investment funds, including one that is owned by Beijing government entities. It has advertised a client list that includes GE, Toyota, 3M, Nike and Schneider Electric.

That was a surprise to GE, said spokesman Geoff Li.

“Normally if they want to put a company’s logo, they should let us know,” he said. GE and 3M said they had no plans to continue using the company. Nike said it has not been a client since 2013, and Toyota said it was no longer working with Sinofaith and had not authorized the firm to use its name. Schneider Electric said it dropped China United because of the ABB lawsuit.

Sinofaith did not respond to requests for comment. After AP began making inquiries, it removed all client names from its website.

 

This article has been written by Erika Kinetz, author at the Associated Press. see more.

Entrepreneurship

Women on Top in Tech – Tara Velis, Growth Hacker and Digital Innovation Strategist

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(Women on Top in Tech is a series about Women Founders, CEOs, and Leaders in technology. It aims to amplify and bring to the fore diversity in leadership in technology.)

I am talking to Tara Velis, Growth Hacker and freelance Digital Innovation Strategist. Tara was selected and recognized by TheNextWeb.com as one of the 500 most talented young people in the Dutch digital scene during the 2017 TNW edition. Tara is known for her creative, entrepreneurial spirit, which she is using to her advantage in leading the change in SMEs and corporates around the globe.

What makes you do what you do?

I tend to see life as a big, complex puzzle. Because of my curious nature, I am in constant development, looking for new angles and new approaches to business problems. Innovation through technology is exploring ideas and pushing boundaries. The most radical technological advances have not come from linear improvements within one area of expertise. Instead, they arise from the combination of seemingly disparate inventions. This is, in fact, the core of innovation. I love going beyond conventional thinking practices. Mashing up different thoughts and components, connecting the dots, and transforming that into something useful to businesses.

How did you rise in the industry you are in?

I consistently chose to follow my curiosity, which has led me to where I am today. If you want to succeed in the digital industry, you need to have a growth mindset. Seen the fact that the industry is evolving in an astoundingly quick rate, it’s crucial to stay current with the trends and forces in order to spot business opportunities. I believe taking responsibility for your own learning and development is key to success.

Why did you take on the role of Digital Innovation Strategist?

The reason for this is twofold. On the one hand, I got frustrated with businesses operating in the exact same way they did a couple of decades ago. Right now we are in the midst of a technology revolution, and the latest possibilities and limitations of cutting-edge technologies are evolving every single day. This means that companies need to stay current and act lean if they want to survive. On a more personal level, I noticed that I felt the need to use my creativity and problem-solving skills to their maximum capacity. In transforming businesses at scale, I change the rules of the game. I love breaking out of traditional, old-fashioned patterns by nurturing innovative ideas. This involves design thinking, extensive collaboration and feedback, the implementation of various strategies and tactics, validated learning, and so on. I get a lot of energy from my work because it is aligned with my personal interests.

Do you have a mentor that you look up to in your industries?

Yes, I look up to Drew Boyd. He is a global leader in creativity and innovation. He taught me how to evaluate ideas in order to select the best ones to proceed with. This is crucial because otherwise,you run the risk of ideas creating the criteria for you because of various biases and unrelated factors. He also taught me a great deal on facilitation of creativity workshops.

How would you describe your leadership style?

I tend to have the characteristics of a transformational leader. People have told me that my enthusiasm and positive energy is motivating and even inspiring to them. Even though I take these comments as a huge compliment, I am not sure how I feel about referring to myself as a leader. To me, it still has a somewhat negative connotation. I guess I associate the concept with being a boss who’s throwing around commands. But if a leader means listening to others and igniting intrinsic motivation in people, then yes, I guess I’m a charismatic leader.

Do you consciously or unconsciously support diversity and why?

Yes, one hundred percent. I believe that creativity and innovation flourish when a highly diverse group of people bounces ideas off each other. Diversity in terms of function, gender,and culture is extremely valuable, especially in the ideation phase of a project, as it can help to see more possibilities and come up with better ideas.

Do you have any advice for others?

Yes, I have some pieces of advice I’d like to share.
First of all: Develop self-awareness. You can do so by actively seeking feedback from the people around you. This will help you understand how others see you, align your intentions with your actions, and eventually enhance your communication- and leadership skills.

Surround yourself with knowledgeable and inspiring people. They might be able to support you in reaching your goals, and help you grow both personally and professionally.

Ask “why?” a couple of times. This simple and powerful method is useful for getting to the core of a problem or challenge. Make sure to often remind yourself and your team of the outcome of this exercise to have a clear sense of direction and focus.

Data is your friend. Whether it’s extensive quantitative market research or a sufficient amount of in-depth consumer interviews (or both!), your data levels all arguments. However, always be aware of biases and limitations of research.

Say “Yes, and…” instead of “No”. Don’t be an idea killer. Forget about the feasibility and budget, at least in the ideation phase. Instead, encourage your team to generate ideas without restrictions. You can compromise certain aspects later.

Prioritization is key. There is just no way you can execute all your ideas, and, quite frankly, there is no point in trying to do so. Identify the high potential ideas and start executing those first.

Encourage rapid prototyping. Don’t wait too long to experiment, launch, and iterate your product or service. Fail fast and fail often. Adopt an Agile mindset.

If you’d like to get in touch with Tara Velis, please feel free to reach out to her on LinkedIn: https://www.linkedin.com/in/taravelis/

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Callum Connects

Marek Danyluk, CEO of Space Ventures

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Marek Danyluk has a talent for assessing the competencies of management teams for other businesses and pulling together exceptional teams for his own businesses!

What’s your story?
I am the CEO of a venture capital business, Space Ventures, which invests in seed and pre-series A businesses. I also own and run Space Executive, a recruitment business focused on senior to executive hires across sales, marketing, finance, legal and change.

My career started as a trainee underwriter in the Lloyds market but quickly moved into recruitment where I set-up my first business in 2002. The business grew to around 100 people. I moved to Asia in 2009 as a board member of a multinational recruitment business with the mandate to help them scale their Asian entities, which helped contribute to their sale this year, in 2017.

My main talent is assessing the competencies of management teams as well as building high performing recruitment boutiques and putting together exceptional management teams for my own businesses.

What excites you most about your industry?
Building the business is very much about attracting the best talent and being able to build a culture which people find invigorating and unique. It’s an exciting proposition to be able to define a culture in that regard and salespeople are a fun bunch, so when you get it right it’s tremendous.

From a VC point of view there is just so much happening. South East Asia is a melting pot of innovation so the ideas and quality of people you have exposure to, is truly phenomenal. The exposure in the VC has taken me away from a career in recruitment. Doing something completely different has given me a new level of focus.

What’s your connection to Asia?
Whilst I came here with work, both my boys were born in Singapore and to them this very much is home. That said, my father in law spent many years in the East so coming and settling here was met with a good degree of support and familiarity.


Favourite city in Asia for business and why?
Possibly Hong Kong. It’s the closest I’ve been to working in London. Whilst there are massive Asian influences people will work with you on the basis you are good at what you do and work hard. I find that approach very honest and straightforward.

What’s the best piece of advice you ever received?
“Always treat people well on the way up!”

Who inspires you?
I like reading about people who have excelled in business such as Jack Ma, James Kahn, Phil Knight, Sir Richard Branson, Elon Musk, all have great stories to tell and they are all inspirational. No-one has inspired me more than my parents and they are well aware as to why…

What have you just learnt recently that blew you away?
Pretty much any technology innovation blows me away.

If you had your time again, what would you do differently?
Whilst it is important not to have regrets I do continually wake up thinking I’m still doing my A’ Levels. So, I’d have probably tried a little harder in 6th form.

How do you unwind?
I like the odd glass of red wine and watching sport

Favourite Asian destination for relaxation? Why?
Japan skiing. I love skiing and Japanese food and it’s a time when I can really enjoy time with the wife and kids. I recently tried the Margaret River which was divine, although not technically Asia.

Everyone in business should read this book:
Barbarians at the Gate

Shameless plug for your business:
Space Executive is the fastest growing recruitment business in Singapore focused on the mid to senior market across legal, compliance, finance, sales and marketing and change and transformation. Multi-award winning with exceptional growth plans into Hong Kong and London this year, and the US, Japan and Europe by the end of 2022. We are building a truly global brand.

Space Ventures is interested in any businesses that require capital or management and financial guidance or any or all of the above. We have, to date, invested in on-line training, food and beverages, peer to peer lending platforms, credit scoring as well as other tech and fintech start-ups. We are always interested in hearing about potential deals.

How can people connect with you?
[email protected]

Twitter handle?
@Spaceexecutive

This interview is part of the ‘Callum Connect’ series of more than 500 interviews

Callum Laing is an entrepreneur and investor based in Singapore. He has previously started, built and sold half a dozen businesses and is now a Partner at Unity-Group Private Equity and Co-Founder of The Marketing Group PLC. He is the author two best selling books ‘Progressive Partnerships’ and ‘Agglomerate’.

Connect with Callum here:
twitter.com/laingcallum
linkedin.com/in/callumlaing
Download free copies of his books here: www.callumlaing.com

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