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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

Is There A Coworking Space Bubble?

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An annual growth rate of nearly 100%, almost five years in a row? More than 60 coworking spaces in a city like Berlin? Are these the characteristics of a bubble? Nope, these are characteristics of a lasting change in our world of work, which has been further catalyzed by the recent economic crises in many countries. But what makes this change different to a bubble? We’ve summarized some arguments of why the coworking movement is based on a sustainable change. However, that doesn’t mean it’s an easy job to open a good working coworking space.

Five reasons why the growth of coworking spaces is based on organic and sustainable growth: 

1. Coworking spaces invest their own money and create real wealth

Already, there is a convincing argument supporting why coworking spaces are not developing in a bubble: the fact that they create real wealth.

Whether referring to the dotcom bubble a decade ago or the real estate crisis in Spain or the United States, the crisis originated in a glut of cheap money, in an environment in which the sender and the recipient were unacquainted. From funds and banks, money flowed in steady streams to investments which offered little resistance and the most promising returns – which only a little while later turned into delusions and ruined investments.

Redistributed risks create illusions. Those people who distributed the money rarely wore the risk of investment decisions. The risk was mainly taken by small shareholders or people who bought parts of those investments. This was because either both parties’ (better) judgement was drowned out by the noise of the market, or because shareholders were unaware of the risk, and were at the mercy of banks and funds for reliable information.

Another fundamental condition for the creation of bubbles are the sheer amounts of money that flow from various locations globally and are concentrated, by comparison, in much fewer places.

Most coworking spaces, however, receive their funding from local or nearby sources and do not operate within this financial system. In fact, the founders mainly inject the bulk of the required investment, and turn to friends or relatives for additional support. They wear the full brunt of the risks that are involved in small-time investment.

They have access to much more information, because it is their own project, rather than a foreign one thousands of miles away. This also includes failures and mistakes that are encountered along the way, but the risk is less redistributed, thereby decreasing the probability of failures.

2. Labor market changes demand on certain office types lastingly

Most users of coworking spaces are self-employed. The proportion of employees is also on the rise, in many cases simply because they work for small companies that increasingly opt to conduct their business in coworking spaces rather than in traditional offices. The industry of almost all coworkers fall within the Internet-based creative industries.

With flexibilisation of work markets, new mobile technologies that are changing work patterns, and the increase of external services purchasing from large and medium-sized enterprises (outsourcing), the labor market has changed radically in many parts of the world.

The long-term financial and emotional security of becoming an employee no longer exists, especially for younger generations of workers. Bigger companies are quicker to fire than hire, and precarious short-term contracts are on the rise. Promising options on the labor market are more often recuded to freelancer careers and starting your own company.

And that’s possible with less money to invest. All you need is a laptop, a brain and a good network. For years, the number of independent workers and small businesses has been growing worldwide – particularly in internet-based creative industries. Anyone who has sufficient specialized skills and the willingness to take risks may adapt more quickly to market conditions if they own a small business or are self employed; more so than if they were to work in a dependent position in an equally volatile market.

Coworking spaces provide an environment in which to do this. Once they have joined a (suitable) coworking space, these factors become apparent to coworkers, who will remain in their space for years to come.

Furthermore, independent workers rarely fire themselves in crises, and even small companies are less likely to give their employees the boot – compared to their large counterparts. This combination enables more sustainable business models – and less business models à la Groupon.

3. Coworking spaces don’t live on crises

Global economic growth is waning while the number of coworking spaces is continually growing. Do coworking spaces thus benefit from this crisis?

The current crises accelerate the formation and growth of coworking spaces, because they offer solutions and space for the resulting problems. Coworking spaces are therefore not a result of a crisis, but the product of change that pre-dates their existence. A crisis is simply the most visible expression of change.

The first coworking spaces emerged in the late 1990s; the movement’s strong growth started six years ago – before the onset of economic downturns in many countries.

4. Coworking spaces depend on the needs of their members

Most coworking spaces are rarely full. Does this mean they are unsuccessful? On average, only half of all desks are occupied. But the average occupancy rate of 50% refers only to a specific date.

In fact, coworking spaces generally serve more members than they can seat at any given time, since members do not use the spaces simultaneously. Coworking spaces are places for independents who want to work on flexible terms. Smaller spaces rely more on permanent members. Larger spaces can respond more flexibilty to the working hours of its members, and, can rent desks several times over.

If a coworking space is always overcrowded or totally empty, the purpose of said space would be defeated. Firstly, it is rather impossible to work in an overcrowded room. Second, it’s impossible to cowork in an empty room. Given the nature of flexible memberships, a coworking space only can survive if they fit the needs of their members. Members would otherwise be quick to leave, and membership would be much more transient.

5. The coworking market is far from saturation

Less than 2% of all self-employed – and even fewer employees – currently work in coworking spaces. Reporting on coworking may increase, but inflated reporting on the coworking movement in the mainstream media is still far away.

Coverage of coworking space are most likely to be found in the career or local sections in larger publications – front cover coverage remains the dream of many space operators. This is because the whole coworking movement can’t be photographed in one picture. What appears to be a disadvantage, however, is actually a beneficial truth: niche coverage allows the industry to grow organically, and avoid over inflation.

Conclusion

Coworking spaces don’t operate in parallel universes – like the financial market. Demand and supply are almost exclusively organic and operate in the real world economy.

For the same reason, there is no guarantee that opening a coworking spaces will be automaticly successful. Anyone who fails to learn how to deal with potential customers in their market, or is unfamiliar with how coworking communities function, will have a difficult time of making one work. In the same way that business people in other industries will fail if they do not understand their market.

Those who simply tack on the word ‘coworking’ to their space’s facade will need to work harder. The structure of most coworking spaces is based on real work, calculated risk, and real-world supply and demand.

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About the Author

This article was produced by Deskmag. Deskmag is the magazine about the new type of work and their places, how they look, how they function, how they could be improved and how we work in them. They especially focus on coworking spaces which are home to the new breed of independent workers and small companies. see more.

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Callum Connects

Dextre Teh, Founder of Rebirth Academy

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Dextre Teh is a consultant and marketing guru, helping F&B businesses to tighten their operations and grow their businesses.

What’s your story?
I help frustrated F&B business owners stuck in day to day operation transform from a glorified operator into a real business owner. I’m a 27 year old Singaporean second generation restaurant owner and a F&B business consultant. Entering the industry at 13 years old, I have always been obsessed with operations and systemisation. At the age of 25, I joined the insurance industry and earned a six figure yearly income. However, I left the high pay behind because it was not my passion and returned to the F&B industry. Now I help other F&B companies to tighten operations and grow their businesses with my consulting and marketing services.

What excites you most about your industry?
The food. I’m a big lover of food and even have a YouTube show on food in development. But that aside, it is really about impacting people through food. Creating moments and memories for people, be it a dating couple or families or friends. Providing that refuge from the daily grind of life. So in educating my consulting clients and training their staff to provide a better experience for their customers, I aim to shift the industry in the direction of creating memories instead of just selling food.

What’s your connection to Asia?
I was born and bred in Singapore. I love the culture, the food and travelling in Asia.

Favourite city in Asia for business and why?
Singapore hands down. The environment here is built for businesses to thrive. The government is pro business and the infrastructure is built around supporting business growth. Not to mention the numerous amount of grants available in helping people start and even grow business. If I’m not mistaken, the Singaporean government is the only government in the world that offers grants to home grown businesses for overseas expansion.

What’s the best piece of advice you ever received?
Learning to do things you do not intend to master is a BIG mistake in business. Focus on what you are good at and pay others to do the rest.

Many business owners including myself are so overwhelmed by the 10,000 things that they feel they need to do everyday. We try to do everything ourselves because we think it saves us money. The only thing that, that does for us is overload our schedules and give us mediocre results. Instead we should focus on what we do best and bring in support for the rest.

Who inspires you?
Christopher M Duncan.

At 29, Chris has built multiple 7 figure businesses. He opened me to the possibility of building a business on the thing that I loved and gave me a blueprint of how to do it. He also showed me that being young doesn’t mean you cannot do great things.

Imran Mohammad and Fazil Musa
They are my mentors and inspire me every single day to pursue my dreams, to focus on celebrating life and enjoying the process of getting to where I want to be.

What have you just learnt recently that blew you away?
Time is always more expensive than money. Money, you can earn over and over again but time, once you spend it, will never come back.

If you had your time again, what would you do differently?
I am a firm believer that your experiences shape who you are. I am grateful for every single moment of my life be it the highs or the lows, the successes and the failures because all these experiences have led me to become the person I am and brought me to the place that I’m at so I will probably do things the same way as everything was perfect in its time.

How do you unwind?
Chilling out in a live music bar with a drink in hand, listening to my favourite live band, 53A. Other than that I’m big on retail therapy, buying cool and geeky stuff.

Favourite Asian destination for relaxation? Why?
Bangkok. It feels like a home away from home where the cost of living is relatively low, the food is good and the people are friendly.

Everyone in business should read this book:
Everything you know about business is wrong by Alastair Dryburgh. It is a book that challenges commonly accepted business “truths” and inspires you to go against the grain, think different, take risks and stand your ground in the face of the challenges that will come your way as a business owner.

Shameless plug for your business:
I’m the creator of the world’s first Chilli Crab Challenge. It gained viral celebrity earlier this year with 3 major newspaper features and more than a dozen blog and online publications featuring it in the span of two weeks. In the span of the two weeks, the campaign reached well over a million people in exposure without a single cent spent in ads.

Now I help F&B companies to tighten operations, increase profits and grow their businesses with my consulting and marketing services. Chilli Crab Challenge (https://www.chillicrab.com/nationalday)

How can people connect with you?
You can connect with me on Facebook (www.facebook.com/djtehkh) or visit www.rebirthacademy.sg for more information or book a 10 minute call with me @ www.tinyurl.com/dexclar

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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